NORTH CAROLINA CORPORATE TAX UPDATE

NORTH CAROLINA CORPORATE TAX UPDATE By Michael J. Wenig (mwenig@tuggleduggins.com) Tuggle Duggins P.A. 100 North Greene Street, Suite 600 Greensboro, NC 27401 (336) 271-5216

CORPORATE TAX CHANGES IRC CONFORMITY DATE Moved the IRC conformity date from January 2, 2013 to December 31, 2013. Applies for both personal and corporate income tax purposes. Don t forget the Extenders Tuggle Duggins P.A. 2

NET OPERATING LOSS. (effective 2015 tax year) 1. Replaces the Net Economic Loss 2. Closer to Federal NOL deduction computation method. 3. Applies IRC 381 and 382 to determining what loss survives a merger or an acquisition. 4. Losses no long need to be offset against nontaxable income to determine the losses claimed or carried over. 5. State NOL deduction = amount that allowable deductions, other than prior year losses, exceed Federal gross income adjusted for state adjustments. 6. Corporations with both NC and Non NC based income must allocate and apportion to NC in the year of loss according to NC s allocation and apportionment provisions. 7. NC s zero-year carryback and 15-year carryover period are retained. Tuggle Duggins P.A. 3

DEPRECIATION CHANGES - 2013 Changes " 105-153.6. Adjustments when State decouples from federal accelerated depreciation and expensing. (a) Special Accelerated Depreciation. (b) 2009 Depreciation Exception. (c) Section 179 Expense. A taxpayer is allowed to deduct twenty percent (20%) of the add-back in each of the first five taxable years following the year the taxpayer is required to include the add-back in income. Taxable Year o f Dollar Limitation Invest Limit 85% 2010 $250,000 $800,000 2011 $250,000 $800,000 2012 $250,000 $800,000 2013 $25,000 $125,000 (d) Asset Basis. The adjustments made in this section do not result in a difference in basis of the affected assets for State and federal income tax purposes. TUGGLE DUGGINS PA 4

IRC 179 2014 -Expense Change. The new law increases the IRC 179 investment limit for the 2013 tax year from $125,000 to $200,000, correcting a drafting error that was made in 2013 legislation. Tuggle Duggins P.A. 5

REMINDER BONUS DEPRECIATION AJMTS TRANSFERRED ASSETS Post 2012 carryover basis transactions - add back any remaining bonus depreciation deductions allowed to the basis of the transferred asset and depreciate the adjusted basis over any remaining life of the asset. If a bonus depreciation deduction was claimed on the federal return - must add back to federal AGI 85% of the deduction claimed and then subtract from federal AGI 20% of the addback amount each year for a 5-year period beginning with the year following the addback adjustment. A transferor cannot claim any remaining future bonus depreciation deductions associated with the transferred asset if the transferor certifies in writing to the transferee that the transferor will not take any remaining future bonus depreciation deduction associated with the transferred asset. The prohibition applies to owner(s) in a transferor as well as the actual transferor. TUGGLE DUGGINS PA 6

BONUS DEPRECIATION AJMTS -TRANSFERRED ASSETS Transfers occurring prior to 2013 may qualify for similar treatment if the transferor and transferee elect to make the basis adjustment on the transferee s 2013 tax return, but only if the transferor has not taken the bonus depreciation deduction on a prior return, is not allowed any remaining future bonus depreciation deductions associated with the transferred asset, and certifies in writing that the transferor will not take any remaining allowable bonus depreciation deductions associated with the transferred asset. The amount of the basis adjustment is limited to the total remaining future bonus depreciation deductions forfeited by the transferor a at the time of the transfer. The amendments clarify that taxpayers involved in such transactions must increase or decrease their AGI to account for any difference in the amount of depreciation, amortization, or gains or losses applicable to property that has been depreciated or amortized by use of a different basis or rate for state income tax purposes than that used for FTI purposes prior to August 23, 2013. TUGGLE DUGGINS PA 7

CORPORATE RATE CHANGE 2014. 105-130.3. Corporations. A tax is imposed on the State net income of every C Corporation doing business in this State. State at the rate of six percent (6%). An S Corporation is not subject to the tax levied in this section. The tax is a percentage of the taxpayer's State net income computed as follows: Income Years Beginning Tax In 1997 7.5% In 1998 7.25% In 1999 7.0% After 1999 6.9% Tuggle Duggins P.A. 8

TAX RATE CHANGES EFFECTIVE 2015. 105-130.3. Corporations. A tax is imposed on the State net income of every C Corporation doing business in this State at the rate of five percent (5%). An S Corporation is not subject to the tax levied in this section. Tuggle Duggins P.A. 9

105-130.3A. RATE REDUCTION TRIGGER. The 2013 CHANGES. 1. If the net General Fund tax collected in FY 14-15 or FY 15-16 exceeds the anticipated General Fund tax collections for each FY, the tax rate may be decreased effective for the taxable year that begins on the following January 1. 2. The net General Fund tax collected equals the amount reported by the State Controller in the State's Comprehensive Annual Financial Report. The Secretary must monitor the net General Fund tax collections and notify taxpayers if the rate decreases under this section. A. The rate is decreased by 1% if net General Fund tax collections for FY 2014-2015 exceeds $20,200,000,000. B. The rate is decreased by 1% if net General Fund tax collections for FY 2015-2016 $20,975,000,000. Tuggle Duggins P.A. 10

"NET GENERAL FUND TAX COLLECTED"??? Trigger. If the net General Fund tax collected in FY 14-15 or FY 15-16 exceeds the anticipated General Fund tax collections targeted amount for that FY, the rate of tax may be decreased. The amount of net General Fund tax collected for a fiscal year is the amount reported by the State Controller in the State's Comprehensive Annual Financial Report, required to be prepared under G.S. 143B- 426.39. The Secretary must monitor the net General Fund tax collections and notify taxpayers if the rate decreases under this section. The rate is decreased by 1% if net General Fund tax collections for FY 14-15 exceed the targeted amount.$20,200,000,000. The rate is decreased by 1% if net General Fund tax collections for FY 15-16 exceed the targeted amount of $20,975,000,000. Effective for taxable years beginning on or after January 1, 2017. Tuggle Duggins P.A. 11

REVISIONS TO RATE REDUCTION TRIGGER MODIFICATION GENERAL FUND AMOUNT FYE 2014 (Cont.). Tax Collections. The amount of net General Fund tax collected for a FY equals net revenue reported by the NCDOR June Statement of Collection as "Total General Fund Revenue" for the 12-month period that ended the previous June 30, modified as follows: (1) Less any large one-time, nonrecurring revenue as reported to the Fiscal Research Division of the General Assembly by the Department and verified by the Fiscal Research Division of the General Assembly. (2) Adjusted by any changes in net collections resulting from the suspension or termination of transfers out of General Fund tax collections." Tuggle Duggins P.A. 12

CHANGES IN CORPORATE STATUTES NON TAX ISSUES. Changes made to the North Carolina Business Court revised the merger statutes under Chapter 55 amending 55-11-11 revising the statute in the case of requirements necessary for merger to affect a holding company reorganization. MODERNIZATION OF E-FILING SYSTEM FOR CORPORATE TAXPAYERS. NCDOR was been required by the statute to report to the Joint Legislative Oversight Committee on General Government no later than November 1, 2014, detailing the amount of funds needed and the progress achieved in the project to modernize the e-filing system for corporate taxes. Tuggle Duggins P.A. 13

ALLOCATION AND APPORTIONMENT ISSUES - 2015 Proposals 4- Factor (double weighted sales) vs. Sales Only NC Only vs. Multistate Businesses? What is going on in neighboring states? The fate of incentives? Other things to be aware of multistate concerns IBM & Michigan Gillete & California TUGGLE DUGGINS PA 14

CORPORATE TAX AND THE CONSTITUTION Due Process Clause Issues Daimler AG v Bauman 134 S. Ct. 746 (2014) Walden v Fiore 134 S. Ct. 1115 (2014) Commerce Clause Issues Comptroller v. Wynne (MD - cert granted 2014) Economic Nexus TUGGLE DUGGINS PA 15

LLC ACT CHANGES The North Carolina Limited Liability Company Act was repealed and reenacted without substantive effect for corporate franchise and income tax purposes. (S.B. 439), effective January 1, 2014. Lack of a Signed Operating Agreement - repeals requirements that certain portions of an operating agreement be in writing to be enforceable. - no limitations on the enforceability of oral or implied-in-fact agreements. - continues to allow the parties to agree on the form that the operating agreement must take to be enforceable, (e.g. requiring a written agreement signed by all the parties) TUGGLE DUGGINS PA 16

LLC ACT CHANGES Manager Duties - Prior Act managers required to exercise due care and be loyal to the company. Duties that could not be modified by the terms of the operating agreement. - New Act makes those duties may be modified or eliminated. Operating agreements that state that duties are limited only to the extent required by law should be reviewed Members who wish to modify or eliminate default duties may now more confidently do so by amending the limited liability company s operating agreement to correspond with their preferred standards of duty and liability. TUGGLE DUGGINS PA 17

LLC ACT CHANGES Other Default Provisions of the Act that the owners may want to alter or replace: - equal management rights regardless of economic interests; - economic interests based on contributions of, and promises to contribute; - the right of managers to delegate responsibilities; - transferability of entire interests (governance, information and litigation rights as well as economic rights) to other members but only economic rights to non-members; - what information will be provided or made available to members; - the ability to bring derivative actions or proceedings; and - the manner in which disputes are to be resolved. TUGGLE DUGGINS PA 18

LLC ACT CHANGES Member or Manager Management No longer need to state member managed or manager managed. The New Act accommodates traditional corporate board of directors and officer management arrangements and other non- manager management structures. Limited liability companies being managed by boards of directors and officers are becoming increasingly common as limited liability companies displace corporations for privately-held businesses. TUGGLE DUGGINS PA 19

LLC ACT CHANGES Review of Existing Operating Agreement Provisions - tax distributions provisions - set at the highest marginal income tax rate for individuals. may need to be adjusted. The new 3.8% federal NII tax technically is not a marginal income tax. Responsibilities of LLCs to Keep Filings Current and Correct - 3rd parties may rely on public filings even when they conflict with the company s operating agreement. - Between LLC owners and company managers, the New Act provides that the articles of organization are treated as a part of the operating agreement and, therefore, general principles of contract law will apply to resolve any conflict between those two documents. TUGGLE DUGGINS PA 20

LLC ACT CHANGES Responsibilities of LLCs to Keep Filings Current Third parties may rely on public filings even when they conflict with the company s operating agreement. However, as between the owners of the limited liability company and those who manage the company, the New NC LLC Act provides that the articles of organization are to be treated as a part of the limited liability company s operating agreement and, therefore, general principles of contract law will apply to resolve any conflict between those two documents. TUGGLE DUGGINS PA 21

FRANCHISE TAX NO 2014 CHANGES. NO 2013 CHANGES. CHANGE IN FRANCHISE TAX BASE - 2012. New legislation changed the franchise tax base by allowing reserves for amortization of intangible assets as permitted for income tax purposes to be deducted from the capital stock base for purposes of determining a taxpayer s corporate franchise tax liability. This is effective retroactively to post-2006 tax years. Previously, the statute only authorized the deduction of reserves for depreciation of tangible assets in the capital stock base.

SUMMARY OF RECENT TAX CREDIT CHANGES The technology development credit is renamed the research and development credit, and the credit is extended for two years (through 2015). The following credits were repealed in 2013: construction of dwelling units for handicapped persons credit; child care and certain employment-related expenses credit; certain real property donations credit; charitable credit for nonitemizers; conservation tillage equipment credit; gleaned crops credit; disabled persons credit; credit for tax paid on certain federal retirement benefits (credit or partial refund); credit for property taxes paid on farm machinery; poultry composting facility construction credit; interactive digital media credit; education expenses credit; savings association supervisory fee credit; and credit for reduced telephone charges for low-income users. TUGGLE DUGGINS PA 23

FILM AND ENTERTAINMENT GRANT FUND. In 2013 the state created a special, non-reverting account to be known as the Film and Entertainment Grant Fund to provide funds to encourage the production of motion pictures, television shows, and commercials and to develop the film-making industry within the state. The fund is to be used to provide grants to qualified production companies and is to be administered by the Department of Commerce.

SUNSET DATES EXTENDED FOR VARIOUS INCENTIVES The work opportunity tax credit against North Carolina personal income and corporation franchise and income taxes is reinstated for the 2012 and 2013 tax years. The sunset dates for the following credits against personal and/or corporate income taxes are also extended from January 1, 2013, to January 1, 2014: - the credit for constructing renewable fuel facilities; - the credit for biodiesel producers; - the Article 3J credits for creating jobs investing in real property and investing in business property; - the credit for recycling oyster shells; - the credit for premiums paid on long-term care insurance; - the earned income tax credit; - the credit for adoption expenses; and - the business investment credits against personal income and the utilities taxes. TUGGLE DUGGINS PA 25

SUNSET DATES EXTENDED FOR VARIOUS INCENTIVES (CONT.) The sunset dates for the historic rehabilitation credits and the mill rehabilitation credits are extended from January 1, 2014, to January 1, 2015. Ch. 36 (H.B. 1025), Laws 2012, effective June 20, 2012 Production Company Qualifying Expenditure Credit The sunset dates for refundable credits against corporate and personal income tax for qualifying expenses of film production companies are extended from January 1, 2014, to January 1, 2015. Ch. 194 (S.B. 847), Laws 2012, effective June 17, 2012 TUGGLE DUGGINS PA 26

ADMINISTRATIVE CHANGES NEW STUDIES. Revenue Laws Study Committee is directed to study and report its findings on the following: - benefits and fiscal impact of allowing corporations to deduct net operating losses as opposed to net economic losses. - simplification of the franchise tax base calculation and the elimination of the franchise tax. - feasibility of expanding the sales tax base to include additional services. - application of the corporate income tax rate reduction trigger formula. - low-income housing tax credit. TUGGLE DUGGINS PA 27

EXTENSION OF STATUTE OF LIMITATIONS FOR REFUNDS Contingent Event. If a taxpayer is subject to a contingent event and files notice with the Secretary, the period to request a refund of an overpayment is six months after the contingent event concludes. Contingent event" means litigation or a State tax audit initiated prior to the expiration of the statute of limitations, the pendency of which prevents the taxpayer from possessing the information necessary to file an accurate and definite request for a refund of an overpayment under this Chapter. Notice to the Secretary" means written notice filed prior to expiration of the statute of limitations for a return or payment in which a contingent event prevents a taxpayer from filing a definite request for a refund of an overpayment. TUGGLE DUGGINS PA 28

EXTENSION OF STATUTE OF LIMITATIONS FOR REFUNDS The notice must identify and describe the contingent event, identify the type of tax, list the return or payment affected by the event, and state in clear terms the basis for and an estimated amount of the overpayment. A taxpayer who contends that an event has occurred allowing a claim under this section may submit a written request to the Secretary seeking an extension of the statute of limitations allowed under this subdivision. The request must establish by clear, convincing proof that the event or condition is beyond the taxpayer's control and that it prevents the taxpayer's timely filing of an accurate and definite request for a refund of an overpayment. The request must be filed within the period under subsection (a) of this section. The Secretary's decision on the request is final and is not subject to administrative or judicial review." TUGGLE DUGGINS PA 29

TAX INTERPRETATIONS BY SECRETARY OF REVENUE The Legislature revised NCGS 105-264(c) to provide that while the Secretary may change an interpretation regarding the application of a tax statute, any interpretation that revises a prior interpretation by expanding the scope of a tax or increasing the amount of tax due may not become effective soon than the following: 1. for a tax that is payable on a monthly or quarterly basis, the first day of a month that is at least ninety days after the date the revised interpretation is issue. 2. for a tax that is payable on an annual basis, the first day of a tax year that begins after the date the revised interpretation is issued. This provision is to become effective July 1, 2010. TUGGLE DUGGINS PA 30

DIRECTIVES AND OTHER INFORMATION CORPORATE AND INDIVIDIUAL INCOME TAX: POLICY CHANGE ANNOUNCED FOR PARTNERSHIP APPOINTMENT (October 10, 2014). Partnership returns for 2014 will be revised to - (1) remove provisions for reporting income from segregated activities and (2) include a line for reporting nonapportionable income from North Carolina sources and a line for reporting apportionable income subject to North Carolina s apportionment factor. Effective for tax years beginning after 2013, a partnership that is doing business in NC and at least one other state and has corporate or nonresident individual partners must determine the portion of the partners shares of the partnership s distributive net income subject to NC tax by using the statutory allocation and apportionment provisions. The partnership will no longer account separately for income from segregated activities that are part of the partnership s unitary business unless the department has authorized the use of an alternative apportionment formula. For tax years that begin before January 1, 2014, after the date of this directive may use either policy to complete the return. Partnerships cannot request an alternative apportionment formula for tax years beginning before 2014. If a partnership has already filed a return for a tax year that begins before 2014, the partnership may file an amended return. Tuggle Duggins P.A. 31

DIRECTIVES & OTHER INFORMATION Corporate Income Tax: Regulations - results of public comment - provide a definition of "economic position"; - modified the reasonable business purpose rule eliminating a requirement that 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 from the transaction exceed the additional cost associated with the transaction; - clarified 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 initiated and that there was an actual material benefit other than state income tax benefits; - specified the economic substance doctrines on which NCDOR may rely in evaluating whether the two-prong economic substance test is satisfied; - eliminated the Secretary s authority to adjust the an apportionment factor if it is found that a transaction lacked economic substance or was not at fair market value; - eliminated the joint and several liability clause combined reporting procedures; and - allowed taxpayers to propose the use of an alternative apportionment formula when filing a combined report provided certain conditions are satisfied. TUGGLE DUGGINS PA 32

DIRECTIVES AND OTHER INFORMATION Where to begin - Economic Substance A transaction will be considered to have economic substance if a two-pronged test is met: (1) the transaction has a reasonable business purpose and (2) the transaction has economic effects beyond the creation of North Carolina income tax benefits. The taxpayer has the burden of proof for the economic substance test. In addition, the regulations further clarify the 5 factors used to determine whether a transaction has economic substance. TUGGLE DUGGINS PA 33

DIRECTIVES AND OTHER INFORMATION The 5 factors include the following: Is there any material benefit from the transaction other than state income tax benefits not allowable as inconsistent with legislative intent. Can you demonstrate material business activity of the entities involved in the transaction. Are the state income tax benefits resulting from the deal consistent with legislative intent? If so the are to be considered in determining whether a transaction has business purpose and economic substance. Centralized cash management of an affiliated group does not constitute evidence of an absence of economic substance. Achieving a financial accounting benefit is not a reasonable business purpose for entering into a transaction if the origin of such financial accounting benefit is a reduction of state income tax. TUGGLE DUGGINS PA 34

DIRECTIVES AND OTHER INFORMATION 24 factor facts and circumstances test - which include the following: The reasons for the transaction; Whether the transaction was a reasonable means to accomplish the asserted purposes; Expectations of benefits obtained from the transactions; The effects the transaction had on the taxpayer s profits; The existence of a reasonable or realistic potential for profit from making the transaction; The objective economic impact of the transaction other than state income tax savings; The transaction s effect on the taxpayer s state/federal income tax liability; Whether the method of determining the amount of payment is an industry practice; The change in the business operations of the parties, if any, after the transaction; Whether assets were transferred between or among related parties; The party or parties who created, developed or presented the ideas; Whether the contemporaneous documentation explaining the transaction discussed profit potential in addition to tax benefits; The party or parties that drafted the agreements relating to the transaction; Cost-benefit analyses or other studies conducted related to the transaction; Non-tax benefits obtained by the taxpayer as a result of the transaction; and TUGGLE DUGGINS PA 35

DIRECTIVES AND OTHER INFORMATION In determining IF a transaction had a reasonable business purpose, the regulations state that the taxpayer must show that: The business purpose asserted was valid and realistic; The transaction was a reasonable and realistic means to accomplish the asserted business purpose; Evidence exists that shows the taxpayer took steps to achieve the asserted business purpose; and The value of the non-state income tax benefits reasonably anticipated by the taxpayer from the transaction exceeds the additional cost associated with the transaction. TUGGLE DUGGINS PA 36

DIRECTIVES AND OTHER INFORMATION If you can t prove a Business Purpose - what happens Adjustments to State Net Income Specific adjustments that may be made when a transaction is deemed to lack economic substance or not to be at fair market value. The adjustments include: Disallowing deductions in whole or in part; Attributing income to related corporations; Disregarding transactions; and Reclassifying income as apportionable or allocable. Beyond these adjustments, the Secretary may also require or allow a combined return if the Secretary determines the adjustments fail to capture the taxpayer s true earnings from the state. TUGGLE DUGGINS PA 37

DIRECTIVES AND OTHER INFORMATION DOR Releases 2012 Combined Corporate Income Tax Worksheet (Jun. 3, 2013) The North Carolina Department of Revenue has released a new form CD-405, CW, Combined Corporate Income Tax Worksheet, to be completed by taxpayers required to file a corporate income tax return on a combined reporting basis. The form instructions remind taxpayers that a taxpayer may only file a combined income tax return if required or authorized to do so by the Secretary of Revenue. The combined income tax return is due on the 15th day of the fourth month following the close of the income year, although a six-month extension to file the return may be granted if the extension application is received timely. TUGGLE DUGGINS PA 38

DIRECTIVES AND OTHER INFORMATION Authority to Require a Combined Return. Directive CD-12-01 G.S. 105-130.6 authorizes the Secretary to eliminate amounts paid by a corporation to an affiliated corporation in excess of fair compensation. The Secretary can also require a corporation doing business in NC to file a combined corporate return with some or all of its affiliated corporations if the separate entity income tax return filed does not disclose the true earnings of the corporation on its NC business. G.S. 105-130.15(a) allows the Secretary to require a corporation to use a different method of accounting if the method being used does not clearly reflect the corporation's net income. G.S.105-130.16(b) provides that if a corporation conducts business in a manner that distorts its net income attributable to NC, the Secretary can correct that distortion. The application of these statutes may result in a forced combination or the disallowance or reduction of deductions for amounts paid by a corporation to an affiliated corporation. TUGGLE DUGGINS PA 39

DIRECTIVES AND OTHER INFORMATION Directive CD 12-02 Explains the Secretary's authority to redetermine a corporate net income by adjusting the corporation's intercompany transactions or requiring the filing of a combined return if the Secretary finds as a fact that a corporation's intercompany transactions either (i) lack economic substance or (ii) are not at fair market value, the net income may be redetermined. Sections I and II explain when transactions have economic substance. Net income may be redetermined by adding back, eliminating or otherwise adjusting intercompany transactions. Section IV explains various adjustments that the Secretary is authorized to make. A combined return may be required only if other adjustments are not adequate to redetermine net income. Section V explains how the Secretary may require a combined return, the entities included in and excluded from the combined return and the procedures and methodology for filing a combined return. TUGGLE DUGGINS PA 40

DIRECTIVES AND OTHER INFORMATION Authority to Adjust Net Income or Force Combination, (Jun. 25, 2012) The Secretary may not redetermine the state net income of a corporation properly attributable to its business or require a combined return until a rule is adopted, except for voluntary redeterminations. After such rule becomes effective, the Secretary may issue a proposed denial of a refund or a proposed assessment for any taxable year beginning on or after January 1, 2012, subject to the applicable statute of limitations. The new law also provides an expedited process for rule-making and requires a fiscal note for a proposed new rule or a change to a rule that has a substantial economic impact. The law supersedes Directive No. CD-12-02; however, a taxpayer who relied upon that Directive and whose state taxable income for 2012 is less under the Directive than under the new rule is entitled to rely on the interpretation under the Directive for the 2012 taxable year. TUGGLE DUGGINS PA 41

CASES Deduction Disallowed for U.S. Bond Market Discount Income. Fidelity Bank v. NC Department of Revenue, NC Office of Administrative Hearings, 12/10/2013. A deduction for U.S. bond market discount income was disallowed, and, the department s motion for partial summary judgment was granted. To be deductible U.S. bond interest under NC law, the 2 tests must be satisfied: (1) the income must be interest upon the obligations of the United States; and (2) the interest on NC bonds must be exempt from federal income taxes. Because market discount income on NC bonds is includable in federal taxable income, the second prong of the test is not satisfied so market discount income from U.S. bonds is not deductible for NC corporate income tax purposes. A the motion for partial summary judgment as to whether the department properly acted within its discretion in denying the taxpayer s request for interest abatement was remanded for further review. It took 4-yrs from the time taxpayer filed its protest to the time the department initially acted on its protest. As NCDOR was unable to explain its inactivity during this 4-yr period. the OAH remanded the case back to the department for further review.

CASES Taxpayer Not Excluded Corporation Midrex Technologies, Inc. v. Department of Revenue, Office of Administrative Hearings, October 10, 2014, 202-646. OAH ruled that because a taxpayer was not engaged in business as a building or construction contractor, it was not entitled to use the single sales factor apportionment formula for excluded corporations to calculate its corporate income and franchise tax liability. Midrex s patented process converted iron ore into direct reduced iron, which was used as an alternative feed for steel. It operated three business segments: engineering and procurement services, plant sales, and after market sales. Midrex assigned itself NAICS code 541330, which is not within the classification system s construction sector. NC law allows excluded corporations, including corporations engaged in business as building or construction contractors, to apportion income using a single sales factor. OAH found that Midrex failed to meet the statutory requirements and was not entitled to use the special apportionment formula and could not claim a refund. TUGGLE DUGGINS PA 43

RECENT COURT CASES A. Personal Income Tax: S Corporation Shareholders Ineligible for Bonus Depreciation Subtraction Adjustment, (May 1, 2013) B. Nurses Aides Improperly Classified as Independent Contractors, Assured Care Inc. v. Department of Revenue, North Carolina Department of Revenue, 11 REV 02148, December 8, 2011, released January 17, 2012 TUGGLE DUGGINS PA 44