NC Tax Appeals to Change

Written by and

Senate Bill 781. The procedural change is part of a major overhaul of North Carolina administrative law in a bill that the Governor vetoed. The General Assembly overrode the veto on July 25, 2011. Other parts of the bill make it harder for North Carolina to adopt regulations particularly under state and federal environmental laws and under the 2010 federal healthcare act, and in general.
Administrative Law and the DOR. The General Statutes set up procedures for the adoption of administrative rules (called regulations at the federal level) and for contested cases involving agencies. Originally the DOR was exempted from the notice and hearing requirements for administrative rules and from the contested case rules entirely. Prior to 2008 appeals from the DOR went to a Tax Review Board, or to court if the taxpayer paid the tax and sued for refund.
Beginning in 2008 both tax assessment disputes and refund disputes must proceed through an appeal to the Office of Administrative Hearings, which is staffed with several full time administrative law judges. Appeals from an ALJ decision go to the Superior Court on the record. Tax appeals are heard by the NC Business Court judges, which are special Superior Court judges.
For a long time it was difficult to ascertain how the new system was working for tax appeals because neither the OAH nor the DOR posted contested case decisions on their websites, despite the fact that all manner of other decisions (from the Board of Cosmetology, etc.) were posted on the OAH website. Ostensibly the reason was confusion over how and whether to redact the taxpayer information from the opinions.
Eventually, after complaints were made, the DOR found a way to post redacted opinions beginning in 2011. It then became apparent that the Secretary was exercising wide authority to revise ALJ opinions, as allowed generally by the statutes in place through 2011. The General Assembly was probably not motivated to eliminate the power of the agency to change the ALJ decisions on account of the DOR actions, but rather by the general concerns that (a) such second bites at the apple for agencies unnecessarily delay the decision process, and (b) it also gives the agencies too much power.
Post 2011 Appeal Procedure. For contested cases begun after 2011 (meaning the notice of appeal to the OAH from the DOR is filed after 2011), the ALJ’s decision will be final. No longer can the Secretary of Revenue reject the decision or rewrite the opinion. The appeals on the record to the Business Court will continue to operate in basically the same way as now. The result should be speedier appeals and a fairer result for taxpayers.
Other Changes. The bill enacted over the Governor’s veot is extensive, but most of the changes do not affect the DOR. However, these changes could affect the DOR:
• “An agency shall not seek to implement or enforce against any person a policy, guideline, or other nonbinding interpretive statement that meets the definition of a rule contained in G.S. 150B-2(8a) if the policy, guideline, or other nonbinding interpretive statement has not been adopted as a rule in accordance with this Article.” Even though the DOR is exempted from the notice and hearing requirements for adopting administrative rules, it is subject to other requirements, including this one. However, the DOR rarely adopts a rule, and in fact many DOR rules adopted in the past have been repealed by the Rules Commission in the theory that they merely repeated the statute (which was not true in some cases). But the DOR has since the 1950s issued massive “bulletins” for corporate income and franchise taxes and for individual income taxes (which includes partnership rules), and sales and use taxes. The DOR has used the bulletins to state policy and broadly interpret the statutes, although not nearly all currently applied interpretations are in the bulletins. The purpose of the language quoted above in the new act probably was to curtail pronouncements such as the DOR bulletins. However, the definitions in G.S. 150B-2(8a) have several loopholes and it remains to be seen whether the DOR will feel constrained by this language. It is likely that the DOR simply will leave the existing bulletins in place and proceed as in the past, without announcing its “new” interpretations. Nevertheless, the new language will give taxpayers subject to a new “secret” interpretation by the DOR a new argument. This could have helped taxpayer who opposed forced corporate combinations.
• The law contains several requirements for agency rules designed to implement federal law. As explained in a recent blog here, the DOR has announced that it intends to apply IRC section 482 to forced combination cases. It may be required to follow the new requirements as to such rules, if treated as rules.
Conclusion. As explained in the July 19 blog post below, the DOR may have a reason to accelerate audits and assessments based on forced combinations prior to year end 2011, due to another bill enacted in this General Assembly. Now it may have a second reason to get contested cases started before 2012 so that ALJ decisions can be modified by the Secretary of Revenue.