N.C. Dep't of Revenue v. Graybar Elec. Co.
| Decision Date | 09 January 2019 |
| Docket Number | 17 CVS 13902 |
| Parties | N.C. DEPARTMENT OF REVENUE, Petitioner, v. GRAYBAR ELECTRIC COMPANY, INC., Respondent. |
| Court | North Carolina Supreme Court |
Filed 28 February 2020
NORTH CAROLINA DEPARTMENT OF REVENUE
v.
GRAYBAR ELECTRIC COMPANY, INC.
Appeal pursuant to N.C.G.S. § 7A-27(a)(2) from an order and opinion on petitioner's petition for judicial review entered on 9 January 2019 by Judge Louis A. Bledsoe III, Chief Special Superior Court Judge for Complex Business Cases, in Superior Court, Wake County, after the case was designated a mandatory complex business case by the Chief Justice under N.C.G.S. § 7A-45.4(a). Heard in the Supreme Court on 6 January 2020.
Parker Poe Adams & Bernstein LLP, by Kay Miller Hobart, for respondent-appellant.
Joshua H. Stein, Attorney General, Matthew W. Sawchak, Solicitor General, Ronald D. Williams II, Assistant Attorney General, James W. Doggett, Deputy Solicitor General, and Caryn Devins Strickland, Solicitor General Fellow, for petitioner-appellee.
AFFIRMED.
STATE OF NORTH CAROLINA WAKE COUNTY
IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION
1. THIS MATTER presents for decision whether dividends deducted on a corporation's federal corporate income tax return under the dividends-received deduction ("DRD") of section 243 of the Internal Revenue Code (the "Code") constitute "income not taxable" for purposes of calculating the corporation's net economic loss ("NEL") deduction under N.C. Gen. Stat. § 105-130.8(a) (repealed 2014)1 for North Carolina corporate income tax purposes. Secondary to this issue is whether reducing NEL deductions by subtracting deducted dividends violates either the United States or North Carolina Constitution.
2. Petitioner North Carolina Department of Revenue (the "Department") filed its Petition for Judicial Review (the "Petition") on November 17, 2017 seeking reversal of the Office of Administrative Hearings' ("OAH") Final Decision (the "Final Decision") entering summary judgment in favor of Respondent Graybar Electric Company, Inc. ("Graybar").
3. The Court held a hearing on the Petition on April 19, 2018, at which both parties were represented by counsel. After considering the Petition, the parties' briefs in support of and in opposition to the Petition, the relevant evidence of record, and the arguments of counsel made at the April 19, 2018 hearing, the Court, for the reasons set forth below, hereby REVERSES the Final Decision and REMANDS to the OAH with instructions to enter summary judgment in favor of the Department.
North Carolina Attorney General, by Special Deputy Attorney General Tenisha S. Jacobs, for Petitioner N.C. Department of Revenue.
Parker Poe Adams & Bernstein LLP, by James Greene, Kay Miller Hobart, and Ray Stevens, for Respondent Graybar Electric Company, Inc.
4. The material facts of this matter are not in dispute.
5. Graybar is a New York corporation headquartered in St. Louis, Missouri. (R. at 8, ECF No. 20.) The company distributes electrical, communications, and data networking products throughout the United States and is authorized to do business in North Carolina. (R. at 8; see R. at 218-19, ECF No. 22.) Graybar files as a "C" corporation for both federal and North Carolina state income tax purposes. (R. at 8.)
6. Graybar is the parent corporation of several wholly owned subsidiaries, including Graybar Services, Inc. ("Graybar Services"), an Illinois corporation, and Commonwealth Controls Corporation ("Commonwealth"), a Missouri corporation. (R. at 8.) Both Graybar Services and Commonwealth are taxed as "C" corporations forfederal income tax purposes. (R. at 8.) Graybar Services has filed North Carolina corporate income tax returns since 1998. (R. at 329, ECF No. 25.)
7. In 2007, Graybar Services paid Graybar a dividend of $400,000,000. (See R. at 172.) In 2008, Commonwealth paid Graybar a dividend of $1,000,000. (See R. at 173.) Both of these dividends (each a "Dividend," and collectively, the "Dividends") were paid from the respective subsidiary's earnings and profits. (R. at 8.)
8. In 2007 and 2008, the years it received the Dividends, Graybar filed for federal corporate income tax purposes as a consolidated group that included Graybar Services and Commonwealth. (See R. at 782.) North Carolina generally does not allow consolidated tax returns but instead requires a corporation to determine its State net income as if it filed a federal return as a separate entity. (R. at 782.) These "as if" federal returns are commonly referred to as pro forma federal corporate income tax returns. (R. at 782.)
9. Graybar included the Dividends on its 2007 and 2008 pro forma federal corporate income tax returns and deducted the Dividends from the amounts it reported as federal taxable income. (See R. at 188, 192, 203, 209.) Specifically, Graybar claimed a DRD under section 243 of the Code for the Dividends it had received from its subsidiaries and deducted 100 percent of the Dividends on Line 29(b), "Special Deductions," in its federal corporate income tax returns. (See R. at 182, 192, 203, 209.)
10. Because Graybar was doing business in North Carolina in the tax years 2007 and 2008, it filed a series of North Carolina "C" corporation tax returnsreporting its liability for State corporate income and franchise taxes. (R. at 603-04; see R. at 648-66.) North Carolina levies a corporate income tax on "State net income," which is based on a corporation's federal taxable income. (R. at 36, ECF No. 21.) Graybar's calculation of its corporate income tax for each of its North Carolina corporate income tax returns reflected the amount of federal taxable income after the Dividends were deducted on Line 29(b) of the federal tax returns. (R. at 603-04; see R. at 648-66.) Ultimately, Graybar reported its State net income as zero for 2007 and 2008 because it offset its taxable income with substantial NELs it sustained in prior years dating back to 2001. (R. at 605; see R. at 648-66.)
11. The Department audited Graybar in 2015. (R. at 605.) After the audit, the Department determined that Graybar underreported its corporate income tax liability for the tax years 2008, 2012, and 2013 because it improperly calculated its NEL deductions. (R. at 35.) The Department concluded that Graybar had failed to reduce the NEL it carried forward to the tax years 2007 and 2008 by the income attributable to the Dividends received. (R. at 605.) The Department reasoned that "[b]efore a [NEL] brought forward may be deducted, . . . [the NEL] must be reduced by any current-year nontaxable income[.]" (R. at 9.) Because the Dividends were deducted from Graybar's federal gross income to derive its federal taxable income, the Department concluded that the Dividends constituted "current-year nontaxable income." (R. at 9.)
12. The Department accordingly reduced the NELs that Graybar reported in 2007 and 2008 by the apportioned amount of the Dividends received,2 and as a result, concluded that Graybar did not have a NEL for those two years. (R. at 605.) The elimination of the NEL for tax years 2007 and 2008 increased Graybar's State corporate income tax liability for 2008, 2012, and 2013. (R. at 605-06.) Based on the new NEL calculation, the Department proposed assessments against Graybar for the tax years 2008, 2012, and 2013, (R. at 6), in the total amount of $380,835.97, inclusive of additional State taxes, penalties, and interest, (R. at 35).
13. On September 16, 2015, Graybar timely filed with the Department a request for review concerning the proposed assessment of additional State taxes, penalties, and interest. (R. at 6.) In June 2016, the Department issued a Notice of Final Determination upholding the assessment, (R. at 35-39), citing N.C. Gen. Stat. § 105-130.8(a)(3), which provides that a NEL from a prior year can be deducted from income in a succeeding year, "only to the extent that the loss carried forward from the prior year exceeds any income not taxable" received in the succeeding year. The Department found that the Dividends received constituted "income not taxable," and thus that Graybar was required to reduce its NEL deductions by the amount of the Dividends apportioned to North Carolina. (R. at 37-38.)
14. Following receipt of the Notice of Final Determination, Graybar filed a contested case with the OAH on August 10, 2016, alleging that "the Department improperly reduced [Graybar's] net economic loss carryovers" by the amounts attributable to the Dividends. (R. at 27-34.) Graybar argued that its Dividend income was not "income not taxable" and that a reduction of its NELs was unconstitutional under both the North Carolina and United States Constitutions. (R. at 30-33.) Both parties moved for summary judgment on June 9, 2017. (R. at 4.)
15. By a Final Decision issued on October 16, 2017, the OAH entered summary judgment for Graybar, holding that the Dividends were "taxable as a matter of law" and were "not income not taxable.'" (R. at 4-23, 14.) The OAH further noted its agreement with Graybar's contention that "the Department's position created a double taxation on the same income" in violation of the North Carolina Constitution. (R. at 21.)
16. On November 14, 2017 the Department filed the Petition in Wake County Superior Court, seeking reversal of the OAH's Final Decision and the entry of summary judgment in favor of the Department. The matter was subsequently designated as a complex business case by the Chief Justice of the Supreme Court of North Carolina and assigned to the undersigned. The Department and Graybar each submitted briefs in support of and opposition to the Petition, each seeking the entry of summary judgment in its favor. On April 19, 2018, the Court held a hearing on the Petition, at which both parties were represented by counsel. The Petition is now ripe for resolution.
17. When the trial court ...
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