On June 20, North Carolina Governor Bev Perdue signed legislation providing that, except for a voluntary redetermination, the Secretary of the North Carolina Department of Revenue may not redetermine the state net income of a corporation properly attributable to its business carried on in the state until an administrative rule is adopted and becomes effective.1 The legislation provides an expedited procedure for adopting the rules needed to administer the statute that allows the Secretary to redetermine income and force combination.2 The Secretary is no longer allowed to interpret the statute in the form of a directive or bulletin.
Background
On June 30, 2011, North Carolina enacted legislation3 that repealed the Secretary's existing statutory authority4 to adjust a corporation's net income or require a combined return and replaced it with new statutory authority.5 On April 17, 2012, the Department published a directive, CD212202, that explains the Secretary's statutory authority to redetermine a corporation's net income by adjusting the corporation's intercompany transactions or requiring a corporation to file a combined income tax return for tax years beginning on or after January 1, 2012.6 The recent legislation supersedes this directive.
Expedited Rulemaking
The legislation adds a new statute that provides expedited procedures for the Department to adopt an administrative rule to exercise its statutory authority to adjust net income or require a combined return.7 The new statute explains that it is the policy of the state to provide necessary guidance on a timely basis to corporate taxpayers subject to the Secretary's income redetermination and forced combination authority.8 Due to the expedited procedures, the Secretary is exempt from the general statutory procedures for adopting a rule as well as the standard effective date and fiscal note statutes for rules.9
Also, the Secretary is exempt from the general statutes providing for the review of rules by the Rules Review Commission.10
The Secretary may adopt the rule under the statutory provisions for adoption of a temporary rule.11 However, the statute provides special expedited procedures concerning adoption,12 review,13 manner of review,14 objection,15 changes,16 approval,17 return of rule18 and effective date.19
Reliance on Prior Directive
A taxpayer who relied on Directive CD212202 and whose North Carolina taxable income for the 2012 taxable year is less under the Directive's interpretation than under the new rules is entitled to rely on the interpretation under the Directive for the 2012 tax year.20
Authority Following Promulgation of Rule
After the rule becomes effective, the Secretary may issue a proposed denial of a refund or a proposed assessment under the statutory authority for any taxable year beginning on or after January 1, 2012, subject to the applicable statute of limitations.21
Commentary
In North Carolina, there has been considerable controversy surrounding the Secretary's authority to redetermine income and require combined returns. In an effort to provide better guidance to taxpayers, this legislation prohibits the Secretary from requiring a forced combination under the statutory provisions enacted last year for any tax years beginning after January 1, 2012 until a rule is enacted. However, the Secretary has authority to require forced combination under the repealed statutory provisions for tax years beginning prior to January 1, 2012. This means that the Secretary can still require forced combination of taxpayers who are under audit for years beginning prior to January 1, 2012.
Under both the old and the new forced combination statutes, the Secretary is permitted to enter into mutual agreements with taxpayers. This legislation does not disturb any agreements entered into under the old or new forced combination laws.
This legislation creates some uncertainty for taxpayers booking reserves for uncertain tax positions on their 2012 financial statements. Taxpayers historically booking reserves for their uncertain separate company return filing positions in North Carolina will have to evaluate whether the regulations mandated by the legislation are likely to be enacted by the time their 2012 tax returns are due. Taxpayers should consider whether they want to risk a forced combination assessment without the appropriate reserve. Under the procedures required to enact new rules, it is likely that the Secretary will submit a rule for public commentary before the end of 2012, but should the rule receive written objection, the expedited rule may be delayed in the review process, causing confusion for financial reporting purposes.
Footnotes
1 Ch. 43 (S.B. 824), Laws 2012.
2 This authority is provided to the Secretary by N.C. GEN. STAT. § 1052130.5A.
3 Ch. 390 (H.B. 619), Laws 2011.
4 The legislation repealed N.C. GEN. STAT. §§ 1052130.6, 1052130.15, 1052130.16.
5 The new statutory authority is provided by N.C. GEN. STAT. § 1052130.5A.
6 Directive No. CD1202, North Carolina Department of Revenue, April 17, 2012. This directive was issued pursuant to N.C. GEN. STAT. § 1062264.
7 N.C. GEN. STAT. § 1052262.1.
8 N.C. GEN. STAT. § 1052262.1(a).
9 Id. The Secretary is exempt from N.C. GEN. STAT. §§ 150B221.1 to 150B221.4.
10Id. The Secretary is exempt from N.C. GEN. STAT. §§ 150B221.8 to 150B221.14.
11 N.C. GEN. STAT. § 1052262.1(d). The procedures for adopting a temporary rule are provided by N.C. GEN. STAT. § 150B221.1(a3).
12 Id.
13 N.C. GEN. STAT. § 1052262.1(e).
14 N.C. GEN. STAT. § 1052262.1(f).
15 N.C. GEN. STAT. § 1052262.1(g).
16 N.C. GEN. STAT. § 1052262.1(h).
17 N.C. GEN. STAT. § 1052262.1(i).
18 N.C. GEN. STAT. § 1052262.1(j).
19 N.C. GEN. STAT. § 1052262.1(k). The rule is effective on the last day of the month the Codifier of Rules enters the rule in the North Carolina Administrative Code.
20 Ch. 43 (S.B. 824), § 5.
21 Ch. 43 (S.B. 824), § 6.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
