- Wednesday, July 25, 2012
This North Carolina corporate income tax alert discusses developments from the recently concluded short session of the General Assembly.
General Assembly passes new statute governing rule making under G.S. 105-130.5A.
Perhaps in response to these recent criticisms of Directive CD-11-01, the Department published two new corporate income tax directives on April 17, 2012. The first directive, CD-12-01, restates without substantive changes the discussion in Directive CD-11-01 that addresses the Department’s authority to require the filing of a combined return or adjust net income for tax years beginning before January 1, 2012.
The second directive, CD-12-02, addresses the Department’s authority under G.S. 105-130.5A (eff. for tax years beginning on or after Jan. 1, 2012). Directive CD-12-02 generally restates the discussion of G.S. 105-130.5A in Directive CD-11-01 but includes several changes from the earlier directive. These changes respond to some of the concerns that taxpayers raised about Directive CD-11-01.
However, most of the problems raised by taxpayers about Directive CD-11-01 remain. (See letter and memorandum jointly submitted by the Council on State Taxation, the North Carolina Retail Merchants Association, and the North Carolina Chamber of Commerce to the co-chairs of the Revenue Laws Study Committee on January 30, 2012, and available on the committee’s website.)
New procedure for adopting rules under G.S. 105-130.5A
In response to taxpayer concerns, the Revenue Laws Study Committee adopted a report on May 2 recommending that the General Assembly require the Department to undergo an expedited procedure in order to adopt rules pertaining to G.S. 105-130.5A. Based on this report, the General Assembly passed Senate Bill 824 (codifying G.S. 105-262.1), which requires the Department to follow an expedited rule-making procedure in promulgating interpretations of G.S. 105-130.5A.
The expedited procedure in G.S. 105-262.1 is based on the procedure for adopting a temporary rule under the APA. G.S. 105-262.1(d). The Department is required to provide electronic notification of the adoption of the rule and accept written comments according to the timetable provided for the adoption of temporary rules in G.S. 150B-21.1(a3). If the Department receives a written comment objecting to the proposed rule and requesting review by the Rules Review Commission, the proposed rule must proceed through the rules review process provided in G.S. 105-262.1(e) through (j).
SB 824 also “supersedes” Corporate Directive CD-12-02. 2012 N.C. Sess. Laws ch. 43 § 5.
Private Letter Rulings fee schedule and guidance
The Department of Revenue has published guidance on requesting private letter rulings under G.S. 105-264(b).
The fee structure for requests mailed on or after February 1, 2012 is $500 per tax type, per tax issue for a non-expedited private letter ruling; $5,000 per tax type, per tax issue for an expedited ruling; and $5,000 for a “redetermination private letter ruling.” A “redetermination private letter ruling” is written advice “regarding whether a redetermination of a corporation’s State net income or a combined return would be required by the Secretary” pursuant to G.S. 105-130.5A.
The Department does not accept requests for expedited redetermination private letter rulings.
A private letter ruling is distinguishable from a “Letter of General Applicability,” which is “general information about a tax issue of general applicability.” Letters of General Applicability may be requested by a tax professional or association of taxpayers in addition to a taxpayer. The Department does not charge a fee for issuance of a Letter of General Applicability, but, unlike private letter rulings, Letters of General Applicability are not binding on the Department.
The guidance on letter rulings is available on the Department’s website at http://www.dornc.com/practitioner/plr_policy.pdf.
General Assembly passes legislation prohibiting the use of contingent fee auditors.
The General Assembly has enacted legislation that prohibits the use of contingent fee auditors by the State Treasurer and by counties and cities for the purpose of determining tax liability. The broadly worded prohibition applicable to the Department prohibits the use of any “agent who is compensated in whole or in part by the State for services rendered on a contingent basis or any other basis related to the amount of tax, interest, or penalty assessed against or collected from the person.” 2012 N.C. Sess. Laws ch. 152 § 1 (adding new G.S. 105-243.1(a1)).
The legislation prohibits the State Treasurer from contracting with an auditor to perform an unclaimed property audit “on a contingent fee basis or any other similar method that may impair an auditor’s independence or the perception of the auditor’s independence by the public.” 2012 N.C. Sess. Laws ch. 152 § 3 (amending G.S. 116B-8). There is a limited exception allowing the State Treasurer to conduct audits of life insurance companies for the purpose of identifying unclaimed death benefits or for audits of holders of unredeemed bond funds on a contingent fee basis.
The legislation contains similar prohibitions applicable to the hiring of auditors by counties and cities for property tax and other local tax purposes. 2012 N.C. Sess. Laws ch. 152 § 2 (amending G.S. 105-299); 2012 N.C. Sess. Laws ch. 152 § 4 (amending G.S. 153A-146); 2012 N.C. Sess. Laws ch. 152 § 5 (amending G.S. 160A-206).
Per a revision to the effective date provision in Senate Bill 847, the Technical Corrections bill, the provisions in the act that prohibit contingent fee audits by the Department and the Treasurer are effective on October 1, 2012. The provisions that prohibit contingent fee audits by counties and cities are effective on July 1, 2013 and expire on July 1, 2015.
For the period in which new legislation is in effect, counties and cities are prohibited not only from entering into new contingent fee contracts, but also from renewing contingency fee-based contracts for services covered by the legislation. These governmental entities are also prohibited from assigning further audits on a contingency fee basis to an auditing firm under a contract that (i) would have been prohibited by the act had the contract been entered into after the relevant effective dates, and (ii) allows the assignment of audits on a discretionary basis. Senate Bill 847 § 61.5(b).
For more information about this topic, please contact the authors or any member of the Williams Mullen State & Local Tax Team.