North Carolina ~ Corporate Income Tax: Regulations Governing Secretary’s Authority to Adjust Net Income or Require Combined Reporting Adopted

The North Carolina Department of Revenue (DOR) has adopted regulations outlining the Secretary’s authority to adjust a corporation’s net income or to require the filing of a combined return for corporation income tax purposes as was mandated by 2012 legislation. An earlier story outlined the rules as originally proposed (see TAXDAY, 2012/10/29, S.18 ). After public comment, the DOR made changes that:

  • provide a definition of “economic position” ;
  • modify the proposed rule governing what a taxpayer must demonstrate to establish that a transaction had a reasonable business purpose by eliminating the provision that would have required a taxpayer to prove that the asserted business purpose was commensurate with the tax benefits claimed and replacing it with a provision that requires a taxpayer to demonstrate that the value of the non-state income tax benefits reasonably anticipated by the taxpayer from the transaction exceed the additional cost associated with the transaction;
  • clarify that a taxpayer must demonstrate through objective evidence that there was a reasonable likelihood that a material benefit (rather than an economic benefit), other than state income tax benefits, from the transaction at the time it was initiated and that there was an actual material benefit other than state income tax benefits;
  • specify the economic substance doctrines on which the department may rely in evaluating whether the two-prong economic substance test is satisfied;
  • eliminate the Secretary’s authority to adjust the computation of an apportionment factor if he or she finds that a transaction lacked economic substance or was not at fair market value;
  • eliminate the joint and several liability clause from the rule governing combined reporting procedures; and
  • allow taxpayers to propose the use of an alternative apportionment formula when filing a combined report provided certain conditions are satisfied.

17 NCAC 05F.0101 et seq. , North Carolina Department of Revenue, effective January 31, 2013


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