N.C. Dep't of Revenue v. Clifton
| Decision Date | 28 April 2022 |
| Docket Number | 21 CVS 11892 |
| Citation | 2022 NCBC 20 |
| Parties | N.C. DEPARTMENT OF REVENUE, Petitioner, v. GRETA ANN CLIFTON, Respondent. |
| Court | Superior Court of North Carolina |
North Carolina Department of Justice, by Special Deputy Attorney General Ashley Hodges Morgan, for Petitioner North Carolina Department of Revenue.
Greta Ann Clifton, Pro se.
1. THIS MATTER is before the Court upon Petitioner North Carolina Department of Revenue's (the "Department" or "Petitioner") Petition for Judicial Review ("Petition," ECF No. 3), of the Final Decision and Amended Final Decision (except when referred to separately, "Final Decision") issued by the North Carolina Office of Administrative Hearings ("OAH") in the above-captioned matter on 5 August and 6 August 2021, respectively.
2. The Department contends in its Petition that the OAH erred when it reversed the Department's assessment of a "large individual income tax deficiency" penalty against Respondent Greta Ann Clifton ("Clifton" or "Respondent") under N.C. G.S. § 105-236(a)(5)(b) for understating her income on her 2015 North Carolina individual state income tax return by more than 25%. (Petition ¶ 1.)
3. After reviewing the Petition, the related briefing, relevant supporting materials, and the arguments of counsel and Clifton at the hearing on the Petition, the Court hereby REVERSES the Final Decision of the OAH for the reasons set forth below.
4. The Department is an agency of the State of North Carolina responsible for collecting the State's tax funds and administering the tax laws set forth in Subchapter I of Chapter 105 of the North Carolina General Statutes. N.C. G.S. § 143B-218.
5. Respondent was a citizen and resident of North Carolina at all relevant times in 2015. She was also one of three members of a limited liability company called GD&T Enterprises, LLC ("GD&T") and an employee of Acme Plumbing. (
6. Respondent timely filed her 2015 North Carolina individual income tax return ("Tax Return") along with a federal Schedule C, "Profit or Loss from Business"-a form allowing individuals to claim deductions from proprietorships. (R. 879.) On her Schedule C, Respondent claimed business income and deductions for GD&T. (R. 879.)
7. On 21 December 2018, the Department's Examinations Division, which conducts initial tax audits, informed Respondent that her Tax Return was being audited. (R. 201.) The Department submitted an information document request to Clifton requesting that she provide documentation to support her claimed business expense deductions. (R. 203-04.) As a result of the audit, the Department disallowed the entire amount of business loss and business expenses that Respondent claimed on Schedule C of her 2015 federal income tax return and adjusted Respondent's federal adjusted gross income from $14, 426 to $40, 232, an increase of $25, 806, or roughly 64%. (R. 51, 210.) On 25 March 2019, the Department proposed a tax assessment against Respondent consisting of $1, 484 in additional North Carolina individual income tax, a $371 large individual income tax deficiency penalty under section 105-236(a)(5)(b) for understating her income by 25% or more, and $230.74 in interest (collectively, the "Proposed Assessment"). (R. 881.)
8. Respondent timely requested that the Department review the Proposed Assessment. (R. 881.) During the Department's review, the Personal Taxes Division sent Respondent's case back to the Examination Division to request documentation so the Department could substantiate Respondent's claimed deductions. (R. 882.) Respondent refused the Division's subsequent request, "writing that she was not providing any more documentation[.]" (R. 882.) Following its review, the Department issued a Notice of Final Determination ("Final Determination") on 30 March 2020 that affirmed the Proposed Assessment and increased the interest owed to account for the passage of time since the Proposed Assessment was issued. (R. 884, 49.)
9. On 4 May 2020, Respondent timely filed a Petition for a Contested Case Hearing with the OAH, Case No. 20 Rev 01932, requesting that the OAH review the Department's Final Determination. (R. 7-18.) OAH Administrative Law Judge Michael C. Byrne heard Respondent's petition on 11 May 2021. (R. 878.)
10. Following the hearing, the OAH issued a Final Decision on 5 August 2021 upholding the Department's denial of Respondent's claimed business expense deductions but reversing the Department's assessment of a large individual income tax deficiency penalty against Respondent. (R. 887-891.) On 6 August 2021, the OAH issued an Amended Final Decision, revising two Conclusions of Law regarding the penalty. (R. 894.)
11. Primarily at issue here is the OAH's amended conclusion stating:
[A]n improper deduction and an insufficiently documented deduction, otherwise proper under the evidence submitted, are two different things. At no time did [the Department], by clear and convincing evidence or otherwise, prove that the deductions themselves were improper. The purpose of the statute appears to be penalizing improper deductions, not otherwise proper deductions that fail to meet [the Department's] somewhat subjective standards of being "sufficiently" documented. Given the subjectivity of [the Department's] "insufficient documentation" findings under the evidence presented, the Tribunal cannot conclude that [the Department] met its "clear and convincing" burden to demonstrate that [Respondent] "understated" her taxable income as opposed to merely failing to support, again under a subjective standard of determination, an otherwise lawful deduction.
(R. 894 ¶ 21 ().)
12. Relying on this conclusion, the OAH further concluded:
(R. 889-90 ¶ 22 (emphasis added).)[1]
13. On 7 September 2021, the Department timely filed its Petition pursuant to N.C. G.S. §§ 150B-43, -45, and -46 in Wake County Superior Court seeking judicial review of the OAH's Final Decision.[2] (R. 898.)
14. This action was designated as a mandatory complex business case by order of the Chief Justice of the Supreme Court of North Carolina dated 16 September 2021, and the case was assigned to the undersigned the following day. (Designation Order, ECF No. 1.)
15. Respondent filed a motion to dismiss the Petition as a mandatory complex business case on 7 September 2021, [3] which the Court denied on 28 September 2021.[4]Respondent filed a second motion to dismiss the Petition without an accompanying brief in January 2022, (Mot. Dismiss, ECF No. 29), which the Court summarily denied on 30 March 2022, (Order Summarily Denying Respondent's Mot. Dismiss, ECF No. 35).
16. The Department timely submitted a brief in support of its Petition.[5]Respondent did not file a response brief.
17. On 5 April 2022, the Court held a hearing on the Petition at which the Department was represented by counsel and Respondent appeared pro se. This matter is now ripe for resolution.
18. When the trial court "exercises judicial review over an agency's final decision, it acts in the capacity of an appellate court." Meza v. Div. of Soc Servs., 364 N.C. 61, 75 (2010) (quoting N.C. Dep't of Env't & Nat. Res. v. Carroll, 358 N.C. 649, 662 (2004)).
19. Pursuant to N.C. G.S. § 150B-51(b), this Court may affirm the decision of the OAH, remand the case for further proceedings, or, as set forth herein, reverse or modify a final agency decision:
20. "The nature of the error asserted by the party seeking review dictates the appropriate manner of review[.]" Dillingham v. N.C. Dep't of Human Res., 132 N.C.App. 704, 708 (1999). "[I]f the appellant contends the agency's decision was affected by a legal error, N.C. G.S. § 150B-51(b)(1), (2), (3), & (4), de novo review is required; if the appellant contends the agency decision was not supported by the evidence, N.C. G.S. § 150B-51(b)(5), or was arbitrary or capricious, N.C. G.S. § 150B-51(b)(6), the whole record test is utilized." Duke Univ. Med. Ctr. v. Bruton, 134 N.C.App. 39, 41 (1999).
21. Because the Department alleged in its Petition that the OAH erroneously construed state law regarding the Department's burden of proof and otherwise committed errors of law in assessing a large individual income tax deficiency penalty under N.C. G.S. § 105-236(a)(5)(b) this Court's standard of review is de novo. Under the de novo standard of review, the Court...
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