Wal-Mart Stores East, Inc. v. Hinton

• Decision Date: 19 May 2009
• Docket Number: No. COA08-450.,COA08-450.
• Citation: 676 S.E.2d 634
• Parties: WAL-MART STORES EAST, INC., a/k/a, Wal-Mart Stores East I, Inc., Plaintiff, v. Reginald S. HINTON, Secretary Of Revenue of the State of North Carolina, Defendant.
• Court: North Carolina Court of Appeals

676 S.E.2d 634

WAL-MART STORES EAST, INC., a/k/a, Wal-Mart Stores East I, Inc., Plaintiff, v. Reginald S. HINTON, Secretary Of Revenue of the State of North Carolina, Defendant.

No. COA08-450.

Court of Appeals of North Carolina.

May 19, 2009.

Appeal by plaintiff Wal-Mart Stores East, Inc. from order entered 4 January 2008 by Judge Clarence E. Horton, Jr. in Wake County Superior Court. Heard in the Court of Appeals 22 October 2008.

Alston & Bird, LLP, by Jasper L. Cummings, Jr., Raleigh, for plaintiff-appellant.

Attorney General Roy A. Cooper, III, by Special Deputy Attorney General Kay Linn Miller Hobart, for defendant-appellee.

Wilson & Coffey, LLP by G. Gray Wilson and Stuart H. Russell, Winston-Salem, for amicus curiae.

STROUD, Judge.

Plaintiff Wal-Mart Stores East, Inc. appeals from an order entered 4 January 2008 granting summary judgment in favor of defendant. We affirm.

I. Background

Viewed in the light most favorable to plaintiff, the evidence tended to show the following facts:¹

Plaintiff Wal-Mart Stores East, Inc. ("W-M SEI") operates Wal-Mart retail stores in North Carolina and in 29 other states. At all times relevant to this action, plaintiff was wholly owned by Wal-Mart Stores, Inc. ("W-M SI"), a publicly traded corporation listed on the New York Stock Exchange.

At the beginning of 1996, all of the Wal-Mart stores in North Carolina operated by plaintiff during the tax years relevant to this appeal were owned and operated by W-M SI. In the fall of 1996 W-M SI reorganized its corporate structure. As a result of the corporate reorganization, plaintiff became the sole owner of WSE Management, LLC and WSE Investment, LLC. WSE Investment, LLC was the 99% owner and limited partner of Wal-Mart Stores East, LP. WSE Management, LLC was the 1% owner and general partner of Wal-Mart Stores East, LP. Wal-Mart Stores East, LP owned 100% of Wal-Mart Property Company ("W-M PC"). W-M PC owned all of the voting units of Wal-Mart Real Estate Business Trust ("W-M REBT"), a Delaware business trust with its principal place of business in Bentonville Arkansas. On 31 October 1996 all real property pertaining to Wal-Mart store premises, including both freeholds and leaseholds, was transferred from W-M SI to W-M REBT.

On or about 31 January 1997, plaintiff entered into a ten-year agreement with W-M REBT to lease land and buildings owned by W-M REBT for plaintiff's store premises. The lease agreement included at least 12 store premises owned in fee by W-M REBT in North Carolina. Plaintiff also executed a sub-lease agreement with W-M REBT to sub-let store premises, including at least 70 store premises in North Carolina.

Plaintiff filed a North Carolina Corporation Income Tax Return² for the tax year ended 31 January 1999 ("1998-99 Tax Return"), disclosing $3,173,869,445 in Total State Net Income. Total State Net Income included a deduction for $1,657,646,765 for rent paid to W-M REBT pursuant to the lease and sub-lease agreements noted above. From the $3,173,869,445 in Total State Net Income, plaintiff classified as nonbusiness income³ and subtracted $1,270,259,076 that it received in dividends from W-M PC, to yield a total business income of $1,903,610,369. Of the total business income, 4.1625% was apportioned to North Carolina per N.C. Gen. Stat. § 105-130.4: $79,237,782. Plaintiff adjusted the apportioned amount for contributions to North Carolina donees, resulting in a Total Net Taxable Income of $78,638,377. On this Total Net Taxable Income, plaintiff calculated tax at 7.25% in the amount of $5,701,282.

W-M REBT filed a North Carolina Corporation Tax Return for the tax year ended 31 December 1998 ("1998 Tax Return"). On its 1998 Tax Return, W-M REBT reported total income of $1,208,178,874. From its total income, it deducted $1,207,831,069 for dividends paid to W-M PC, resulting in a net taxable income of $347,805. W-M REBT apportioned 3.1185% of this income to its business in North Carolina per N.C. Gen. Stat. § 105-130.4, resulting in Total Net Taxable Income of $10,846.⁴ On this Total Net Taxable Income, W-M REBT calculated tax at 7.25% in the amount of $786. W-M PC did not file a corporation income tax return in the state of North Carolina for any of the years at issue in this appeal.

Defendant (or "the Secretary") audited plaintiff's tax return for the tax year ended 31 January 1999. As a result of the audit, defendant determined that the earnings of plaintiff must be combined with Wal-Mart Property Company and Wal-Mart Real Estate Business Trust in order to present true earnings in the State of North Carolina. Accordingly, defendant prepared workpapers⁵ showing an additional $4,183,704.00 tax payable by W-M SEI if the results of W-M SEI were combined with those of W-M PC and W-M REBT.

Based on the tax payable as calculated on the audit workpapers, on 14 April 2005 defendant issued a notice of proposed assessment pursuant to N.C. Gen.Stat. § 105-241.1 in the amount of $4,184,490.00⁶ for the tax year ending 31 January 1999. Defendant further assessed interest of $1,675,694.77 and a penalty of $1,045,926.00.

Defendant also audited plaintiff's tax returns for the years ending 31 January 2000, 2001 and 2002.⁷ As a result of those audits, defendant made similar adjustments, issuing notices of proposed assessments in the amounts of $4,847,198.00, $5,680,383.00, and $5,148,500.00 respectively. The proposed assessments for 2000, 2001, and 2002 also included interest of $1,552,583.51, $1,364,010.85, and $935,635.98 respectively and penalties of $1,211,608.25, $1,418,417.50, and $1,310,933.00 respectively.

On 2 May 2005, the Secretary notified plaintiff, pursuant to N.C. Gen.Stat. § 105-130.6, to file combined returns within 60 days to include W-M SEI, W-M PC and W-M REBT. There is no evidence in the record that plaintiff filed the combined returns, but on 12 May 2005, Wal-Mart Stores, Inc., plaintiff's sole owner, issued a check to the North Carolina Department of Revenue for $26,564,516.25 in payment of an assessment against W-M SI which is not at issue in this appeal; the assessment against plaintiff for the tax years ending 31 January 1999, 2000, and 2001; and an assessment against Sam's Club, the subject of related appeal No. COA08-453 for which an opinion will be filed simultaneously with this opinion.

On 17 March 2006 plaintiff filed a complaint pursuant to N.C. Gen.Stat. § 105-267 demanding refund of taxes paid. Plaintiff filed an amended complaint on or about 31 March 2006 to more fully set forth its reasons for demanding refund in the amount $30,230,338.89.⁸ The gravamen of the complaint was that defendant had no authority to force combination of plaintiff with W-M REBT and W-M PC for the purpose of reporting taxable income.

Plaintiff filed a motion for summary judgment on 1 September 2006. Defendant filed a cross-motion for summary judgment on 12 September 2007. An order granting defendant's motion for summary judgment was entered on 4 January 2008. Plaintiff appeals.

II. Standard of Review and Questions Presented

The standard of review for an order granting summary judgment is well established:

The trial court must grant summary judgment upon a party's motion when there is no genuine issue as to any material fact and any party is entitled to a judgment as a matter of law. Summary judgment is appropriate if: (1) the non-moving party does not have a factual basis for each essential element of its claim; (2) the facts are not disputed and only a question of law remains; or (3) if the non-moving party is unable to overcome an affirmative defense offered by the moving party. On appeal, an order granting summary judgment is reviewed de novo, with the evidence in the record viewed in the light most favorable to the [non-moving party].

Carter v. West American Ins. Co., ___ N.C.App. ___, ___, 661 S.E.2d 264, 268 (2008) (citation, quotation marks, ellipses and brackets in original omitted). In the instant appeal, there is no dispute about the material facts and only questions of law remain, making the case ripe for summary judgment.

Plaintiff presents three questions of law to this Court: (1) whether N.C. Gen.Stat. § 105-130.6 (or "the statute") provides defendant with authority to combine the three entities for the purpose of reporting taxable income, (2) whether, if Section 105-130.6 provides defendant with authority to combine the three entities for the purpose of reporting taxable income, the statute is unconstitutional, and (3) whether defendant's administration of Section 105-130.6 was unlawful.

III. Statutory Authority to Combine

Plaintiff's chief argument is that defendant had no statutory authority to combine the three entities for the purpose of reporting taxable income. The statute reads, in pertinent part:

The net income of a corporation doing business in this State that is a parent, subsidiary, or affiliate of another corporation shall be determined by eliminating all payments to or charges by the parent, subsidiary, or affiliated corporation in excess of fair compensation in all intercompany transactions of any kind whatsoever. If the Secretary finds as a fact that a report by a corporation does not disclose the true earnings of the corporation on its business carried on in this State [("true earnings")], the Secretary may require the corporation to file a consolidated return of the entire operations of the parent corporation and of its subsidiaries and affiliates, including its own operations and income. The Secretary shall determine the true amount of net income earned by such corporation in this State.

N.C. Gen.Stat. § 105-130.6 (1999).⁹

Plaintiff argues that the first sentence of N.C. Gen.Stat. § 105-130.6 must be construed as a limit on the authority granted to the Secretary in the second sentence. Specifically, plaintiff argues that this construction is required because "true net income" or "true earnings" must be defined as "what the taxpayer's income would be if it...