North Carolina ~ Corporate Income Tax: DOR’s Authority to Adjust Net Income and Force Combination Specified

North Carolina Gov. Bev Perdue has signed legislation outlining the Secretary of the Department of Revenue’s authority and procedures to be followed prior to redetermining a corporation’s net income for corporate income tax purposes by eliminating intercompany transactions between affiliated corporations and/or requiring a corporation and its affiliates to file a combined return. Forced combination with affiliates may be required regardless of whether the affiliates are doing business in North Carolina. The new procedures are applicable to assessments proposed for taxable years beginning after 2011.

The Secretary must make a written request to the corporation to supply within 90 days any information reasonably necessary to determine whether the corporation’s intercompany transactions with its affiliates have economic substance and are at fair market value for the accurate computation of the corporation’s net income properly attributable to its business carried on in North Carolina. The legislation outlines the items to be considered in determining whether a transaction has economic substance. If the Secretary determines that the applicable requirements are not met, the Secretary may use any reasonable method proposed by the corporation for redetermining its net income attributable to its business carried on in North Carolina and is authorized to

— add back, eliminate, or otherwise adjust intercompany transactions to accurately compute the corporation’s North Carolina net income properly attributable to its business carried on in North Carolina; or

— if the above adjustments are not adequate under the circumstances to redetermine North Carolina net income, require the corporation to file a return that reflects the net income on a combined basis of all members of its affiliated group that are conducting a unitary business, unless specified exceptions to unitary group members apply. Exceptions include, but are not limited to, S corporations, pass-through entities, and insurance companies.

The Secretary must make an independent determination that the corporation’s reported income does not accurately reflect the corporation’s income attributable to its business income in North Carolina each individual tax year and must provide a written statement to the corporation outlining the facts, circumstances, and reasons for the Secretary’s determination and the proposed method for computing the corporation’s North Carolina net income. The statement must be provided within 90 days following the issuance of a proposed assessment.

A corporation is required to submit a combined return within 60 days of the Secretary’s request. The Secretary or the corporation may propose a combination of fewer than all members of the unitary group, and the Secretary is authorized to determine whether the proposed combination is a reasonable means of redetermining North Carolina net income. However, the Secretary may not require a combination of fewer than all unitary group members without the corporation’s consent. Furthermore, the submission of the combined return may not be deemed to be a return or construed as an agreement by the corporation that an assessment based on the combined return is correct or that additional tax is due by the Secretary’s deadline for submitting the combined return. Appeals of a Secretary’s final determination to the Office of Administrative Hearings in a contested tax case will be reviewed de novo.

A corporation may request in writing from the Secretary specific advice regarding whether a redetermination of the corporation’s net income or a combined return would be required under certain facts and circumstances. The Secretary is required to provide the specific advice within 120 days and is authorized to charge a fee of between $100 and $5,000 to cover the Department’s cost in preparing the advice.

Ch. 390 (H.B. 619), Laws 2011, effective January 1, 2012, and applicable as noted above


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