Arkansas Supreme Court Reinforces That the Only Law Relevant in a Refund Is Arkansas Law

On December 12, 2024, the Arkansas Supreme Court affirmed a grant of summary judgment for a taxpayer seeking a refund of nearly $4 million for nonbusiness interest expenses related to a corporate spinoff. The case is Hudson v. Murphy Oil USA, Inc., 2024 Ark. 179, No. CV-24-8, No. 70CV-20-84 (December 12, 2024).

Murphy Oil USA (Murphy) was engaged in the business of selling retail motor fuel and convenience store items. Prior to 2013, it was a subsidiary of Murphy Oil Corporation (Murphy Corp.). In 2013, Murphy took on $650 million in debt to finance a transaction where it would spin off from Murphy Corp and become a subsidiary of a new parent company, Murphy USA, Inc. (Murphy USA). Murphy incurred about $70 million in interest expenses on this debt. It originally apportioned and deducted these interest expenses in all states where it conducted business. In 2018, Murphy amended its Arkansas tax returns to deduct the full amount of the interest expenses in Arkansas, its state of domicile. This resulted in a refund claim of almost $4 million.

The court ruled in favor of the taxpayer that the expenses were in fact nonbusiness items. In doing so, the court rejected the Department of Finance and Administration’s (DFA’s) fairness arguments. The DFA argued that if a refund is granted in Arkansas, other state returns must be amended to reflect the treatment of the income/expenses as nonbusiness items. The court appropriately held simply that its job was to apply Arkansas law, and it is not concerned with the treatment of the items in other states. Other states would have to deal with the resulting tax implications. Murphy had made the strategic decision to begin amending its returns in its state of domicile and was entitled to judgment based on Arkansas law. Thus, Murphy was entitled to its refund of nearly $4 million.

Greg Rottjakob, leader of Ryan’s State Income and Franchise Tax practice, reminds taxpayers that “in controversy situations, particularly audits, the only relevant information is the information and law related to the state at issue. It is NOT incumbent upon the taxpayer to provide information or treatment of a tax item in other states.”

If you find yourself in a situation in which an auditor is asking for information related to the tax treatment of an item of income or expense in a state other than the one represented, please contact Ryan’s state income tax leader listed below.

TECHNICAL INFORMATION CONTACT:

Greg Rottjakob
Principal
Ryan
813.568.9085
greg.rottjakob@ryan.com

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.