Monarch Tax Credits, LLC v. North Carolina Department of Revenue
| Decision Date | 25 January 2021 |
| Docket Number | 19 CVS 12647 |
| Court | Superior Court of North Carolina |
| Parties | MONARCH TAX CREDITS, LLC, formerly known as STATE TAX CREDIT EXCHANGE, LLC, Plaintiff-Petitioner, v. NORTH CAROLINA DEPARTMENT OF REVENUE and RONALD G. PENNY, SECRETARY, in his official capacity, Defendants-Respondents. |
Kilpatrick Townsend & Stockton LLP, by Joseph S. Dowdy and Phillip A. Harris, Jr., and Nelson Mullins Riley & Scarborough LLP, by Reed J. Hollander and D. Martin Warf, for Plaintiff-Petitioner Monarch Tax Credits, LLC.
North Carolina Department of Justice, by Terence D. Friedman, David D. Lennon, and Matthew H. Sommer, for Defendants-Respondents North Carolina Department of Revenue and Ronald G. Penny Secretary in his official capacity.
1. THIS MATTER is before the Court on Defendants North Carolina Department of Revenue ("NCDOR" or the "Department") and Ronald G. Penny's (collectively "Defendants") Motion to Dismiss (the "Motion") seeking to dismiss the Petition for Judicial Review and Complaint for Declaratory Relief and Damages Arising From Constitutional Violations (the "Petition") filed by Plaintiff Monarch Tax Credits, formerly known as State Tax Credit Exchange, LLC ("Monarch").
2. The Motion presents challenges both to the Court's jurisdiction pursuant to Rules 12(b)(1) and 12(b)(2) of the North Carolina Rules of Civil Procedure ("Rules") and to the merits of the Petition pursuant to Rule 12(b)(6). This Order and Opinion addresses only the Department's jurisdictional challenges, deferring consideration of the merits. The Court, having considered the Motion, materials of record, briefs, and arguments of counsel, for the reasons stated below, concludes that it has jurisdiction and DENIES the Motion to the extent it is brought pursuant to Rule 12(b)(1) or Rule 12(b)(2).
3. Monarch claims that it has suffered damages because the Department has unconstitutionally administered North Carolina tax law in a manner that has caused Monarch business damages and has denied North Carolina taxpayers, including but not limited to Monarch customers, investment tax credits to which they are entitled.
4. Monarch formed structured investment partnerships to encourage investment by North Carolina taxpayers related to renewable energy, mill restoration, and historic redevelopment. Its business model contemplates using these partnerships to aggregate investments necessary to fund such projects, and to then allocate to investors the tax credits those projects yield, thereby achieving the opportunities and benefits North Carolina's legislative acts were intended to promote.
5. Monarch has not itself claimed any of the relevant investment tax credits against its own North Carolina tax liability. It, then, has not pursued the traditional statutory administrative remedies provided to taxpayers who challenge the imposition of an income tax or penalty. Rather, Monarch contends that it is entitled to proceed directly in this Court for either of two reasons. First, Monarch contends that the damage it has suffered flows from the Department's enforcement of its September 10, 2018 publication of an Important Notice: Tax Credits Involving Partnerships (the "Notice"), which constitutes a Rule[1] as to which Monarch is entitled to have the Department issue an administrative declaration ruling as to its validity, and that the Department's refusal to consider or issue such a declaration constitutes a final denial subject to immediate judicial review. As to this ground, the Department contends that neither was the Notice a Rule nor is Monarch a party aggrieved by the application of a Rule. Second, Monarch contends that it is otherwise entitled to pursue a direct constitutional claim for the damage it has suffered unaffected by any invocation of sovereign immunity, otherwise known as a Corum claim.[2] The Department contends that the Corum claim cannot proceed, first, because Monarch does not have standing to present it and, second, because Monarch has an available administrative remedy as a North Carolina taxpayer which it has chosen not to pursue. Monarch responds that the Department invokes only an administrative remedy that is theoretical and impractical at best and that should not bar the Corum claim, which it has standing to pursue.
6. The parties have presented extensive arguments as to the underlying merits of the manner in which the Department has administered the relevant incentive tax program. Those merits, at least in part, are now before the Court in a separate proceeding arising from a taxpayer appeal, N.C. Farm Bureau Mut. Ins. v. N.C. Dep't of Revenue, No. 2020-CVS-10244 (Wake County), with a suggestion that there are several other such appeals that may follow.
7. After consideration of the pleadings, briefs, arguments of counsel, and related authorities, the Court concludes first that Monarch is not entitled to seek an administrative declaration pursuant to N.C. G.S. § 150B-4 ("Section 150B-4"), and therefore the matter is not properly before the Court for judicial review on that basis. The Court further concludes that Monarch does not have an available adequate remedy as a North Carolina taxpayer pursuant to N.C. G.S. § 105-241.19 ("Section 105-241.19") and therefore has standing to allege, and has adequately alleged, its Corum claim. Again, the Court defers for later determination any merits determination and whether those merits should be addressed either separately or in combination with issues that may be presented in related proceedings.
8. Following informal meetings, on August 1, 2019 Monarch, pursuant to Section 150B-4, requested that NCDOR issue a declaratory ruling that the Notice is an unconstitutional Rule. NCDOR responded on August 29, 2019 that it was not required to issue such a declaratory ruling without otherwise addressing Monarch's legal claims. (Petition ¶¶ 101-05, ECF No. 2.)
9. Monarch filed its Petition on September 26, 2019. The Petition includes four counts: the first count seeking judicial review of NCDOR's refusal to issue a declaratory ruling when requested, (Petition ¶¶ 113-20); the second count seeking a declaration that the refusal was a wrongful denial on the merits, (Petition ¶¶ 121- 30); the third count seeking a declaratory judgment that NCDOR has acted unconstitutionally, (Petition ¶¶ 131-42); and the fourth count seeking damages caused by NCDOR's alleged constitutional violations, (Petition ¶¶ 143-49).
10. Monarch filed its Notice of Designation as a Complex Business Case or, in the Alternative, Motion for Designation as an Exceptional/Complex Business Case on September 29, 2019. (ECF No. 3.) The case was designated as a Complex Business Case and assigned to the undersigned on the same day. (ECF No. 1.)
11. Defendants filed their Motion on December 2, 2019. (ECF No. 14.)
12. The Motion was fully briefed, (ECF Nos. 15, 20, 21), including the submission of supplemental authorities, (ECF Nos. 22-24). The Court then heard oral argument on March 5, 2020.
13. On March 24, 2020, a number of insurers jointly requested leave to file a brief as amici. (ECF Nos. 25-26.) NCDOR filed a response which did not oppose the filing of the brief but also presented arguments which raised new positions in support of the Department's Motion to dismiss the Petition, particularly its contention that Monarch has an available administrative remedy pursuant to Section 105-241.19. (ECF No. 27.) The Court allowed the amici brief to be filed of record and then granted the parties' requests for leave to submit additional briefing related to the issue of whether Monarch has such an administrative remedy. Those supplemental briefs have been filed. (ECF Nos. 38-43.)
14. The Motion is ripe for ruling.
15. The Court recites only facts relevant to the challenge to Monarch's standing or the Court's jurisdiction. While the Court may consider matters beyond the pleadings to resolve those challenges, affidavits and documentary materials submitted by the parties primarily address the merits of the Petition and are therefore largely not relevant to the Court's consideration of the personal and subject matter jurisdictional issues.
16. North Carolina enacted tax credit programs to encourage investment in renewable energy, historic property renovation, and mill restoration. See, e.g., N.C. G.S. § 105-129.16A, -129.35-39, -129.70-75A, -129.105-110. Certain credits have now expired, and others may soon expire. (Petition ¶¶ 38, 41, 43.)
17. Monarch is a limited liability company organized and maintaining its principal place of business in Georgia, but also maintaining an office and employees in North Carolina. (Petition ¶ 11.)
18. Monarch developed certain structures designed to aggregate investments from North Carolina taxpayers, which were used to construct projects that would yield tax credits. (Petition ¶ 54.) Monarch established partnerships including an "Annual Fund-Master Fund Structure," pursuant to which a Master Fund would fund a project and initially receive tax credits for the life of a project, referred to as the "Credit Period," and separate Annual Funds would be created for each of the years within the Credit Period to which the Master Fund would assign tax credits on a particular year. The Annual Fund would allocate those credits to investors in the Annual Fund. (Petition ¶¶ 56, 60.)
19. These various partnerships were organized under Georgia law. Some or all of the funds have filed North Carolina partnership returns but generally Monarch does not have North Carolina taxable income and has not utilized the credits against its own tax liability. (Petition ¶ 62...
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