Session Law 2011-390 “effective 1/1/2012” generally repealed the sections of the corporate tax laws on which the Secretary has relied up to now for forced combinations and replaced them with a new regime. It appeared that the new regime would apply to tax years beginning on or after 1/1/2012 and that the old regime would apply to tax years beginning before that date, regardless of when an assessment was proposed. That approach should have suited the Secretary very well, because he has been very successful in forcing combinations under the existing regime.
However, the Secretary evidently did not read the Session Law that way. The Notice states that all assessments proposed before 1/1/2012 will be handled under the existing regime. All assessments proposed on or after 1/1/2012 for tax years beginning on or after that date will be handled under the new regime. All assessments proposed on or after 1/1/2012 for years beginning before that date will be handled under neither the old nor the new regimes, but will be subject to “other authority.” Other authority is said to include IRC section 7701(o) and the “economic substance doctrine” and IRC section 482.
This Notice raises questions:
- Will the Secretary rush up proposed assessments under the existing regime to beat the year end deadline?
- Does the Secretary view one regime more favorable to the fisc than the other, or does he view the “other authority” as more favorable than the new regime?
- Why did the Secretary make this interpretation and what does it mean for other statutory changes?
Many years will pass before tax years beginning on or after 1/1/2012 are (a) completed, (b) returns are filed, (c) returns are audited, and (d) proposed assessments issued. Therefore, unless the Secretary drains the audit pipeline between now and 1/1/2012, the DOR will make a lot of proposed assessments under “other authority” in 2012, 2013 and 2014.
“Other Authority.” It may be that the Secretary made this interpretation because of subsection (n) of the new statute that will be effective next year for forced combinations. It says “nothing in this section shall be construed to limit or negate the Secretary’s authority to make tax adjustments as otherwise permitted by law, …” Its refers to the same sort of “other authority” that the Notice says the Secretary will have to rely upon for post 2011 proposed assessments with respect to pre 2012 years.
Perhaps the Secretary decided it might be a good time to tune up his powers under that “other authority.” After all, the Secretary has won the only two reported forced combination cases in the courts (although the N.C. Supreme Court has yet to speak). The Secretary believed he could do pretty much anything he wanted under existing law, and perhaps the Secretary is not so happy with the new regime. Therefore, developing his economic substance doctrine jurisprudence and section 482 skills might be a way to effect an end run around the new regime.
Many will wonder how the economic substance doctrine or section 482 can be applied by a state to do anything other than adjust federal taxable income. However, indications are that the NCDOR believes they provide generalized authority to make state specific adjustments.
Long Term Grief? However, the short term gain, if it is a gain, for the DOR may cause long term grief. Statutory changes like the one at issue here occur in every legislature, with prospective effective dates and frequently with repealers. Sometimes such changes are even more dramatic than this one, such as when North Carolina replaced its own unique corporate tax regime with one piggybacking on the federal return. Sometimes there are more detailed transition rules, sometimes not, as in this case.
It has never before been thought that as a general proposition on the effective date of a repealer the prior statute was wiped off the earth for purposes of events occurring in the pre-change period (except perhaps in the criminal law area, which should be differentiated). For example, Cape Hatteras Elec. Mbrshp. Corp. v. Lay, 708 S. E. 2d 399 (NC App 2011) ruled that section 105-267 continued to govern the dispute about a tax even though the judgment was rendered after the section was repealed and replaced by another dispute regime.
That opinion cited Powell v. County of Haywood, 15 N.C. App. 109 (1972), which stated: “The tax assessment involved in this case was for the year 1970; therefore, the applicable statutes are those in existence prior to the extensive revision of Chapter 105 by the 1971 General Assembly.” The law on this subject bears more research, but it is not clear that the DOR has conducted such research.
Conclusion. If repeal and replacement of one statutory regime with another always means the prior regime disappears from the world as to prior years once the new regime is effective, havoc could prevail in statutory enforcement unless each and every change is accompanied by a very carefully worded transition rule. Perhaps the practical meaning of the Secretary’s Notice is that the Secretary is counting on no taxpayers complaining about the Secretary abandoning the old regime prematurely (a good bet).
The Secretary probably also is counting on no taxpayer being able to successfully combat an economic substance doctrine or section 482 approach to a proposed assessment. As to this bet, the Secretary may be in a riskier position. Be on the lookout for a clarifying amendment.