North Carolina May Not Redetermine Income Or Force Combination Until Administrative Rule Is Adopted

On June 20, North Carolina Governor Bev Perdue signed legislation providing that, except for a voluntary redetermination, the Secretary of the North Carolina Department of Revenue may not redetermine the state net income of a corporation properly attributable to its business carried on in the state until an administrative rule is adopted and becomes effective.1 The legislation provides an expedited procedure for adopting the rules needed to administer the statute that allows the Secretary to redetermine income and force combination.2 The Secretary is no longer allowed to interpret the statute in the form of a directive or bulletin.

Background

On June 30, 2011, North Carolina enacted legislation3 that repealed the Secretary's existing statutory authority4 to adjust a corporation's net income or require a combined return and replaced it with new statutory authority.5 On April 17, 2012, the Department published a directive, CD212202, that explains the Secretary's statutory authority to redetermine a corporation's net income by adjusting the corporation's intercompany transactions or requiring a corporation to file a combined income tax return for tax years beginning on or after January 1, 2012.6 The recent legislation supersedes this directive.

Expedited Rulemaking

The legislation adds a new statute that provides expedited procedures for the Department to adopt an administrative rule to exercise its statutory authority to adjust net income or require a combined return.7 The new statute explains that it is the policy of the state to provide necessary guidance on a timely basis to corporate taxpayers subject to the Secretary's income redetermination and forced combination authority.8 Due to the expedited procedures, the Secretary is exempt from the general statutory procedures for adopting a rule as well as the standard effective date and fiscal note statutes for rules.9

Also, the Secretary is exempt from the general statutes providing for the review of rules by the Rules Review Commission.10

The Secretary may adopt the rule under the statutory provisions for adoption of a temporary rule.11 However, the statute provides special expedited procedures concerning adoption,12 review,13 manner of review,14 objection,15 changes,16 approval,17 return of rule18 and effective date.19

Reliance on Prior Directive

A taxpayer who relied on Directive CD212202 and whose North Carolina taxable income for the 2012 taxable year is less under the Directive's...