N.C. Dep't of Revenue v. Graybar Elec. Co.

IN THE SUPREME COURT OF NORTH CAROLINA

No. 153A19

Filed 28 February 2020

NORTH CAROLINA DEPARTMENT OF REVENUE

v.

GRAYBAR ELECTRIC COMPANY, INC.

Appeal pursuant to N.C.G.S. § 7A-27(a)(2) from an order and opinion on

petitioner’s petition for judicial review entered on 9 January 2019 by Judge Louis A.

Bledsoe III, Chief Special Superior Court Judge for Complex Business Cases, in

Superior Court, Wake County, after the case was designated a mandatory complex

business case by the Chief Justice under N.C.G.S. § 7A-45.4(a). Heard in the Supreme

Court on 6 January 2020.

Parker Poe Adams & Bernstein LLP, by Kay Miller Hobart, for respondent-
appellant.

Joshua H. Stein, Attorney General, Matthew W. Sawchak, Solicitor General,
Ronald D. Williams II, Assistant Attorney General, James W. Doggett, Deputy
Solicitor General, and Caryn Devins Strickland, Solicitor General Fellow, for
petitioner-appellee.

PER CURIAM.

AFFIRMED.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
WAKE COUNTY 17 CVS 13902

N.C. DEPARTMENT OF REVENUE,

Petitioner,

v.
ORDER AND OPINION ON PETITION
GRAYBAR ELECTRIC COMPANY, FOR JUDICIAL REVIEW
INC.,

Respondent.

1. THIS MATTER presents for decision whether dividends deducted on a

corporation’s federal corporate income tax return under the dividends-received

deduction (“DRD”) of section 243 of the Internal Revenue Code (the “Code”) constitute

“income not taxable” for purposes of calculating the corporation’s net economic loss

(“NEL”) deduction under N.C. Gen. Stat. § 105-130.8(a) (repealed 2014)1 for North

Carolina corporate income tax purposes. Secondary to this issue is whether reducing

NEL deductions by subtracting deducted dividends violates either the United States

or North Carolina Constitution.

2. Petitioner North Carolina Department of Revenue (the “Department”) filed

its Petition for Judicial Review (the “Petition”) on November 17, 2017 seeking

reversal of the Office of Administrative Hearings’ (“OAH”) Final Decision (the “Final

Decision”) entering summary judgment in favor of Respondent Graybar Electric

Company, Inc. (“Graybar”).

1 The provisions of this statute were in effect during the years at issue here. The General
Assembly has since modified the statute, effective for the tax years beginning on and after
January 1, 2015.
 3. The Court held a hearing on the Petition on April 19, 2018, at which both

parties were represented by counsel. After considering the Petition, the parties’ briefs

in support of and in opposition to the Petition, the relevant evidence of record, and

the arguments of counsel made at the April 19, 2018 hearing, the Court, for the

reasons set forth below, hereby REVERSES the Final Decision and REMANDS to

the OAH with instructions to enter summary judgment in favor of the Department.

North Carolina Attorney General, by Special Deputy Attorney General
Tenisha S. Jacobs, for Petitioner N.C. Department of Revenue.

Parker Poe Adams & Bernstein LLP, by James Greene, Kay Miller
Hobart, and Ray Stevens, for Respondent Graybar Electric Company,
Inc.

Bledsoe, Chief Judge.

I.

FACTUAL AND PROCEDURAL BACKGROUND

4. The material facts of this matter are not in dispute.

5. Graybar is a New York corporation headquartered in St. Louis, Missouri.

(R. at 8, ECF No. 20.) The company distributes electrical, communications, and data

networking products throughout the United States and is authorized to do business

in North Carolina. (R. at 8; see R. at 218–19, ECF No. 22.) Graybar files as a “C”

corporation for both federal and North Carolina state income tax purposes. (R. at 8.)

6. Graybar is the parent corporation of several wholly owned subsidiaries,

including Graybar Services, Inc. (“Graybar Services”), an Illinois corporation, and

Commonwealth Controls Corporation (“Commonwealth”), a Missouri corporation. (R.

at 8.) Both Graybar Services and Commonwealth are taxed as “C” corporations for
federal income tax purposes. (R. at 8.) Graybar Services has filed North Carolina

corporate income tax returns since 1998. (R. at 329, ECF No. 25.)

7. In 2007, Graybar Services paid Graybar a dividend of $400,000,000. (See R.

at 172.) In 2008, Commonwealth paid Graybar a dividend of $1,000,000. (See R. at

173.) Both of these dividends (each a “Dividend,” and collectively, the “Dividends”)

were paid from the respective subsidiary’s earnings and profits. (R. at 8.)

8. In 2007 and 2008, the years it received the Dividends, Graybar filed for

federal corporate income tax purposes as a consolidated group that included Graybar

Services and Commonwealth. (See R. at 782.) North Carolina generally does not

allow consolidated tax returns but instead requires a corporation to determine its

State net income as if it filed a federal return as a separate entity. (R. at 782.) These

“as if” federal returns are commonly referred to as pro forma federal corporate income

tax returns. (R. at 782.)

9. Graybar included the Dividends on its 2007 and 2008 pro forma federal

corporate income tax returns and deducted the Dividends from the amounts it

reported as federal taxable income. (See R. at 188, 192, 203, 209.) Specifically,

Graybar claimed a DRD under section 243 of the Code for the Dividends it had

received from its subsidiaries and deducted 100 percent of the Dividends on Line

29(b), “Special Deductions,” in its federal corporate income tax returns. (See R. at

182, 192, 203, 209.)

10. Because Graybar was doing business in North Carolina in the tax years

2007 and 2008, it filed a series of North Carolina “C” corporation tax returns
reporting its liability for State corporate income and franchise taxes. (R. at 603–04;

see R. at 648–66.) North Carolina levies a corporate income tax on “State net income,”

which is based on a corporation’s federal taxable income. (R. at 36, ECF No. 21.)

Graybar’s calculation of its corporate income tax for each of its North Carolina

corporate income tax returns reflected the amount of federal taxable income after the

Dividends were deducted on Line 29(b) of the federal tax returns. (R. at 603–04; see

R. at 648–66.) Ultimately, Graybar reported its State net income as zero for 2007

and 2008 because it offset its taxable income with substantial NELs it sustained in

prior years dating back to 2001. (R. at 605; see R. at 648–66.)

11. The Department audited Graybar in 2015. (R. at 605.) After the audit, the

Department determined that Graybar underreported its corporate income tax

liability for the tax years 2008, 2012, and 2013 because it improperly calculated its

NEL deductions. (R. at 35.) The Department concluded that Graybar had failed to

reduce the NEL it carried forward to the tax years 2007 and 2008 by the income

attributable to the Dividends received. (R. at 605.) The Department reasoned that

“[b]efore a [NEL] brought forward may be deducted, . . . [the NEL] must be reduced

by any current-year nontaxable income[.]” (R. at 9.) Because the Dividends were

deducted from Graybar’s federal gross income to derive its federal taxable income,

the Department concluded that the Dividends constituted “current-year nontaxable

income.” (R. at 9.)
 12. The Department accordingly reduced the NELs that Graybar reported in

2007 and 2008 by the apportioned amount of the Dividends received,2 and as a result,

concluded that Graybar did not have a NEL for those two years. (R. at 605.) The

elimination of the NEL for tax years 2007 and 2008 increased Graybar’s State

corporate income tax liability for 2008, 2012, and 2013. (R. at 605–06.) Based on the

new NEL calculation, the Department proposed assessments against Graybar for the

tax years 2008, 2012, and 2013, (R. at 6), in the total amount of $380,835.97, inclusive

of additional State taxes, penalties, and interest, (R. at 35).

13. On September 16, 2015, Graybar timely filed with the Department a request

for review concerning the proposed assessment of additional State taxes, penalties,

and interest. (R. at 6.) In June 2016, the Department issued a Notice of Final

Determination upholding the assessment, (R. at 35–39), citing N.C. Gen. Stat. § 105-

130.8(a)(3), which provides that a NEL from a prior year can be deducted from income

in a succeeding year, “only to the extent that the loss carried forward from the prior

year exceeds any income not taxable” received in the succeeding year. The

Department found that the Dividends received constituted “income not taxable,” and

thus that Graybar was required to reduce its NEL deductions by the amount of the

Dividends apportioned to North Carolina. (R. at 37–38.)

2 It is undisputed that the Dividends constituted North Carolina apportionable income under
the then current version of N.C. Gen. Stat. § 105-130.4 during the tax years at issue. While
the Dividends totaled $400,000,000 in 2007 and $1,000,000 in 2008, the amount apportioned
to North Carolina for state income tax purposes was $14,194,000 and $34,465, respectively.
(R. at 9.)
 14. Following receipt of the Notice of Final Determination, Graybar filed a

contested case with the OAH on August 10, 2016, alleging that “the Department

improperly reduced [Graybar’s] net economic loss carryovers” by the amounts

attributable to the Dividends. (R. at 27–34.) Graybar argued that its Dividend

income was not “income not taxable” and that a reduction of its NELs was

unconstitutional under both the North Carolina and United States Constitutions. (R.

at 30–33.) Both parties moved for summary judgment on June 9, 2017. (R. at 4.)

15. By a Final Decision issued on October 16, 2017, the OAH entered summary

judgment for Graybar, holding that the Dividends were “taxable as a matter of law”

and were “not ‘income not taxable.’” (R. at 4–23, 14.) The OAH further noted its

agreement with Graybar’s contention that “the Department’s position created a

double taxation on the same income” in violation of the North Carolina Constitution.

(R. at 21.)

16. On November 14, 2017 the Department filed the Petition in Wake County

Superior Court, seeking reversal of the OAH’s Final Decision and the entry of

summary judgment in favor of the Department. The matter was subsequently

designated as a complex business case by the Chief Justice of the Supreme Court of

North Carolina and assigned to the undersigned. The Department and Graybar each

submitted briefs in support of and opposition to the Petition, each seeking the entry

of summary judgment in its favor. On April 19, 2018, the Court held a hearing on

the Petition, at which both parties were represented by counsel. The Petition is now

ripe for resolution.
 II.

LEGAL STANDARD

17. When the trial court “exercises judicial review over an agency’s final

decision, it acts in the capacity of an appellate court.” Meza v. Div. of Soc. Servs., 364

N.C. 61, 75, 692 S.E.2d 96, 105 (2010) (quoting N.C. Dep’t of Env’t & Nat. Res. v.

Carroll, 358 N.C. 649, 662, 599 S.E.2d 888, 896 (2004)).

18. Chapter 150B of the North Carolina General Statutes provides that “[t]he

court reviewing a final [agency] decision may affirm the decision or remand the case

for further proceedings.” N.C. Gen. Stat. § 150B-51(b). “In reviewing a final decision

in a contested case, the court shall determine whether the petitioner is entitled to the

relief sought in the petition based upon its review of the final decision and the official

record.” Id. § 150B-51(c).

19. The Department appeals the Final Decision of the OAH granting summary

judgment in favor of Graybar. “Appeals arising from summary judgment orders are

decided using a de novo standard of review.” Midrex Techs. v. N.C. Dep’t of Revenue,

369 N.C. 250, 257, 794 S.E.2d 785, 791 (2016). Under the de novo standard of review,

the Court will “consider[] the matter anew and freely substitute[] its own judgment”

for that of the OAH. Carroll, 358 N.C. at 660, 599 S.E.2d at 895 (quoting Mann

Media, Inc. v. Randolph Cnty. Planning Bd., 356 N.C. 1, 13, 565 S.E.2d 9, 17 (2002)).

“In reviewing a final decision allowing . . . summary judgment, the court may enter

any order allowed by . . . Rule 56” of the North Carolina Rules of Civil Procedure.

N.C. Gen. Stat. § 150B-51(d).
 20. Under Rule 56, summary judgment is appropriate “if the pleadings,

depositions, answers to interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any material fact and that

any party is entitled to . . . judgment as a matter of law.” N.C. R. Civ. P. 56(c). A

genuine issue is “one that can be maintained by substantial evidence.” Dobson v.

Harris, 352 N.C. 77, 83, 530 S.E.2d 829, 835 (2000). A material fact is one that “would

constitute or would irrevocably establish any material element of a claim or defense.”

Abner Corp. v. City Roofing & Sheetmetal Co., 73 N.C. App. 470, 472, 326 S.E.2d 632,

633 (1985). Summary judgment is appropriate if “the facts are not disputed and only

a question of law remains.” Wal-Mart Stores E. v. Hinton, 197 N.C. App. 30, 37, 676

S.E.2d 634, 638 (2009) (quoting Carter v. W. Am. Ins. Co., 190 N.C. App. 532, 536,

661 S.E.2d 264, 268 (2008)). Thus, where, as here, the material facts are undisputed

on appeal, “a summary disposition of the claims is proper and

appropriate.” Technocom Bus. Sys. v. N.C. Dep’t of Revenue, 2011 NCBC LEXIS 1, at

*12 (N.C. Super. Ct. Jan. 4, 2011).

21. Graybar, as the “taxpayer claiming a deduction,” must bring itself “within

the statutory provisions authorizing the deduction.” Wal-Mart Stores E., 197 N.C.

App. at 54–55, 676 S.E.2d at 651 (quoting Ward v. Clayton, 5 N.C. App. 53, 58, 167

S.E.2d 808, 811 (1969)).
 III.

ANALYSIS

22. North Carolina imposes a tax on the “State net income of every C

Corporation doing business in this State[.]” N.C. Gen. Stat. § 105-130.3. “State net

income” is based on a “taxpayer’s federal taxable income as determined under the

Code, adjusted as provided in G.S. 105-130.5[.]” Id. § 105-130.2(15). Under the Code,

federal taxable income “means gross income minus the deductions allowed by [the

Code].” I.R.C. § 63(a). Although the Code identifies dividends as an item of gross

income, id. § 61(a)(7), the DRD allowed under section 243 of the Code authorizes a

corporation to deduct “100 percent” of the dividends it receives from “a member of the

same affiliated group[,]” id. § 243(a)(3), (b)(1)(A). Because dividends deducted under

the DRD are not included in a corporation’s federal taxable income, such dividends

are likewise not included in a corporation’s State net income.

23. As noted, a corporation’s State net income is subject to certain adjustments

set forth in section 105-130.5. N.C. Gen. Stat. § 105-130.2(15). One such adjustment

authorizes a deduction for “[l]osses in the nature of net economic losses sustained by

the corporation in any or all of the 15 preceding years pursuant to the provisions of

G.S. 105-130.8.” Id. § 105-130.5(b)(4). In turn, the now-repealed section 105-130.8

provided that a corporation that sustained a NEL in any or all of the preceding fifteen

income years was permitted to apply the NEL as a deduction from income in a

succeeding taxable year. Id. § 105-130.8(a). Such deductions, however, were limited

by section 105-130.8(a)(3), which provided in relevant part as follows:
 Any net economic loss of prior years brought forward and claimed as a
deduction in any income year may be deducted from net income of the year
only to the extent that the loss carried forward from the prior years exceeds
any income not taxable under this Part received in the same year in which the
deduction is claimed[.]

Id. § 105-130.8(a)(3) (emphasis added). The purpose of this NEL provision was to

provide “some measure of relief to the corporation that has incurred economic

misfortune.” Id. § 105-130.8(a)(1).

24. Here, Graybar deducted from its gross income the Dividends received

pursuant to the DRD and claimed those deductions to arrive at the amounts reported

on Line 30 of its 2007 and 2008 federal corporate income tax returns as its federal

taxable income. For purposes of its North Carolina corporate income tax returns,

Graybar reported the amounts reflected on Line 30 of its federal returns as its

“federal taxable income,” and this figure became the starting point for the calculation

of Graybar’s State net income. As a result, the Dividends, deducted from gross income

to determine federal taxable income, were not included in the amounts that

comprised Graybar’s State net income. Graybar ultimately reported its State net

income as zero for 2007 and 2008 because Graybar’s substantial NELs from prior

years were greater than Graybar’s apportioned federal taxable income as reflected on

its North Carolina corporate income tax returns. In calculating its NELs, Graybar

did not reduce its losses by the amount of the Dividends received (i.e., it did not treat

the Dividends as “income not taxable” under section 105-130.8(a)(3)).
 A. Income Not Taxable

25. In the proceeding below, the OAH concluded that the Dividends were not

“income not taxable” for purposes of the NEL provision then in effect. The OAH

specifically concluded, and Graybar argues here, that the Dividends were not “income

not taxable” because they do not fall within either of the two categories of income

specifically referenced in N.C. Gen. Stat. § 105-130.8(a)(5):

For purposes of this section, any income item deductible in determining State
net income under the provisions of G.S. 105-130.5 and any nonapportionable
income not allocable to this State under the provisions of G.S. 105-130.4 shall
be considered as income not taxable under this Part. The amount of the
income item considered income not taxable under this Part is determined
after subtracting related expenses for which a deduction was allowed under
this Part.

Id. § 105-130.8(a)(5) (emphasis added).

26. The OAH agreed with Graybar’s contention that section 105-130.8(a)(5)

must be read as limiting “income not taxable” to include only the two categories of

income specifically identified therein. Because it is undisputed that the Dividends

fall into neither category, Graybar contends that summary judgment was

appropriately entered in its favor.

27. “In matters of statutory construction, our primary task is to ensure that the

purpose of the legislature, the legislative intent, is accomplished.” Elec. Supply Co.

v. Swain Elec. Co., 328 N.C. 651, 656, 403 S.E.2d 291, 294 (1991). The General

Assembly’s intent “is first ascertained from the plain words of the statute.” Id.

28. Applying this standard, the Court concludes that section 105-130.8(a)(5) is

exemplary—not exclusive or exhaustive. As noted by the OAH, “the language of
§ 105-130.8(a)(5) does not contain any indicia that the General Assembly intended

that section to be an exhaustive list of all types of income that would be considered

as ‘income not taxable.’” (R. at 11.) Indeed, the statute’s plain words do not purport

to provide a complete list or otherwise limit “income not taxable” to only the types of

income referenced therein. It does not use words or phrases like “means,” “shall

mean,” “exclusively,” “solely,” “only,” or “limited to,” and instead simply declares that

two types of income “shall be considered as income not taxable.” N.C. Gen. Stat.

§ 105-130.8(a)(5); see Pipe Line Cases, 234 U.S. 548, 559–60 (1914) (interpreting

statutory phrase “shall be considered” as not narrowing statute’s reach); Lynch v.

PPG Indus., 105 N.C. App. 223, 225, 412 S.E.2d 163, 165 (1992) (“The statutory

language, ‘include but not be limited to,’ clearly indicates, however, that the

legislature did not intend an exclusive list.”); cf. Evans v. Diaz, 333 N.C. 774, 779–80,

430 S.E.2d 244, 246–47 (1993) (finding “a long and specific list” that was “obviously

intended to be” exhaustive to constitute a complete list).

29. Moreover, had the legislature intended the statute to be exclusive, it could

have done so.3 This is especially true in light of the North Carolina Supreme Court’s

3 The language chosen in other subsections within section 105-130.8 suggests that the
General Assembly did not intend for section 105-130.8(a)(5) to contain an exhaustive list.
“When a legislative body includes particular language in one section of a statute but omits it
in another section of the same Act, it is generally presumed that the legislative body acts
intentionally and purposely in the disparate inclusion or exclusion.” N.C. Dep’t of Revenue
v. Hudson, 196 N.C. App. 765, 768, 675 S.E.2d 709, 711 (2009) (internal quotation marks,
alteration, and citation omitted). While the General Assembly provided a clearly exhaustive
definition for “net economic loss,” see N.C. Gen. Stat. § 105-130.8(a)(2) (“The net economic
loss for any year means the amount by which allowable deductions for the year other than
prior year losses exceed income from all sources in the year including any income not taxable
under this Part.” (emphasis added)), the same cannot be said of section 105-130.8(a)(5).
decision in Dayco Corp. v. Clayton, 269 N.C. 490, 153 S.E.2d 28 (1967), a decision

issued four months before section 105-130.8 was enacted that addressed the meaning

of “income not taxable” for purposes of the substantially similar NEL provisions in

the predecessor statute. Id. at 497–98, 153 S.E.2d at 33; see Kornegay Family Farms

LLC v. Cross Creek Seed, Inc., 370 N.C. 23, 29, 803 S.E.2d 377, 381 (2017) (“[T]he

legislature is always presumed to act with full knowledge of prior and existing law

and . . . where it chooses not to amend a statutory provision that has been interpreted

in a specific way, we may assume that it is satisfied with that interpretation.”

(quoting Polaroid Corp. v. Offerman, 349 N.C. 290, 303, 507 S.E.2d 284, 294 (1998))).

30. In Dayco, our Supreme Court considered whether dividend income allocable

to states other than North Carolina constituted “income not taxable” for State income

tax purposes under N.C. Gen. Stat. § 105-147(9)(d) (repealed 1967), the substantially

similar predecessor statute to section 105-130.8.4 Dayco Corp., 269 N.C. at 497, 153

S.E.2d at 32–33. The Supreme Court concluded that because such income is not

allocable to North Carolina, it is not subject to tax by North Carolina. Id. at 498, 153

4 N.C. Gen. Stat. § 105-147(9)(d) provided, in relevant part, as follows:

Any net economic loss of a prior year or years brought forward and claimed as a
deduction in any income year may be deducted from taxable income of the year only
to the extent that such carry-over loss from the prior year or years shall exceed any
income not taxable under this article received in the same year in which the
deduction is claimed, except that in the case of taxpayers required to apportion to
North Carolina their net apportionable income, as defined in this article, only such
proportionate part of the net economic loss of a prior year shall be deductible from
the income taxable in this State as would be determined by the use of the
apportionment ratio computed under the provisions of G.S. 105-134 or of subsection
(c) of G.S. 105-142, as the case may be, for the year of such loss.

N.C. Gen. Stat. § 105-147(9)(d)(3) (repealed 1967).
S.E.2d at 33. The taxpayer argued that even though this income was not taxed by

North Carolina, it was subject to tax in other states and thus was taxable income. Id.

at 497, 153 S.E.2d at 33. The Supreme Court disagreed, concluding that “‘taxable

income’ clearly means income on which the State of North Carolina, by the Revenue

Act, levies a tax” and that “[a]ll other income is ‘income not taxable.’” Id. at 498, 153

S.E.2d at 33; see also Aberfoyle Mfg. Co. v. Clayton, 265 N.C. 165, 171–73, 143 S.E.2d

113, 118–19 (1965) (holding that a liquidating distribution, while not taxable income,

was nonetheless “income not taxable” because it increased the corporation’s assets

and was not taxed by the State).

31. Applying the definition set forth in Dayco, the Court concludes that the

Dividends Graybar received are “income not taxable” under section 105-130.8(a)(3).

Graybar deducted the Dividends from its gross income pursuant to the Code’s DRD,

and the Dividends were thus excluded from Graybar’s federal taxable income and,

consequently, its State net income. As a result, the Dividends were not income upon

which the State levied a tax.

32. In its Final Decision, the OAH distinguished Dayco on the ground that it

applied to dividend income allocable to other states, not, as here, dividend income

apportioned to North Carolina. The Court disagrees with the OAH’s interpretation

of Dayco. By clearly defining “income not taxable” under a substantially similar

statute as income on which the State does not levy a tax, the Supreme Court has, at

a minimum, offered persuasive authority and forecast its view of the proper
interpretation of “income not taxable” under section 105-130.8(a)(3) and, at most,

provided the rule of decision in this case.

33. When interpreting tax statutes, any “ambiguities . . . are resolved in favor

of taxation.” Home Depot U.S.A., Inc. v. N.C. Dep’t of Revenue, 2015 NCBC LEXIS

103, at *19 (N.C. Super. Ct. Nov. 6, 2015) (quoting Aronov v. Sec’y of Revenue, 323

N.C. 132, 140, 371 S.E.2d 468, 472 (1988)). Although the Court does not find section

105-130.8 to be ambiguous, should the Supreme Court decide otherwise, this Court

notes that its statutory interpretation limiting “income not taxable” to the two

categories listed in subsection 105-130.8(a)(5) will permit a broader range of income

to offset NEL deductions, a result in favor of taxation. See Bodford v. N.C. Dep’t of

Revenue, 2013 NCBC LEXIS 18, at *13 (N.C. Super. Ct. Apr. 10, 2013) (“The court is

to construe strictly any statute providing for a deduction and resolve ambiguities in

favor of taxation.”).

34. The OAH also rested its conclusion on the fact that the Dividends were

“deductions,” rather than “exclusions,” stating that because “[n]o exemption or

exclusion prevented the Dividends from being included in income on either the federal

or North Carolina returns[,] . . . the Dividends are not ‘income not taxable.’” (R. at

19.) The OAH concluded, and Graybar argues here, that “income not taxable” under

section 105-130.8 should be read to mean income items excluded from gross income

altogether (i.e., items that were never within the State’s authority to tax) and does

not include income that the State had the authority to tax, including items first
included in, and then removed from, gross income by the claiming of a deduction (like

the Dividends here).

35. The OAH’s focus on the Dividends’ status as “deductions” and not

“exclusions” is misplaced. Under Dayco, the determinative issue is whether the State

actually levied a tax on the item of income, not whether the State had the authority

to do so. The Dividends were deducted from Graybar’s federal taxable income

pursuant to the DRD and were not included in its State net income. Because the

Dividends are income on which the State did not levy a tax, the Dividends were

“income not taxable” under section 105-130.8(a)(3).

36. The Court finds further support for its conclusion in the stated policy aims

motivating the passage of section 105-130.8. See Elec. Supply Co., 328 N.C. at 656,

403 S.E.2d at 294 (“Courts also ascertain legislative intent from the policy objectives

behind a statute’s passage and the consequences which would follow from a

construction one way or another.” (internal quotation marks omitted)). As expressed

in the statute, the NEL provisions were intended to address a corporation’s “net

economic situation” in order to provide relief to corporations that “incurred economic

misfortune.” N.C. Gen. Stat. § 105-130.8(a)(1). The Court concludes that the

legislature likely did not intend for over $14,000,000 in allocable income to be

disregarded in determining a corporation’s “net economic situation” for purposes of

providing relief based on a corporation’s “economic misfortune.” See Aberfoyle Mfg.

Co., 265 N.C. at 172, 143 S.E.2d at 119 (reducing NEL deduction where liquidating

distribution increased taxpayer’s assets by over $4,000,000).
 37. The Court’s conclusion is also buttressed by the Department’s published

guidance. The Department is required to administer the State’s tax laws. N.C. Gen.

Stat. § 143B-219. The Secretary of Revenue (the “Secretary”) is authorized to publish

guidance and bulletins interpreting the laws administered by the Department. N.C.

Gen. Stat. § 105-264. The Supreme Court of North Carolina has explained that “[a]n

interpretation by the Secretary is prima facie correct” and that the Secretary’s

interpretation of “the relevant statutory language is important and must be given

‘due consideration.’” Midrex Techs., 369 N.C. at 260, 794 S.E.2d at 793; see Carolina

Photography, Inc. v. Hinton, 196 N.C. App. 337, 339, 674 S.E.2d 724, 725 (2009) (“A

rule, bulletin, or directive promulgated by the Secretary of Revenue which interprets

[laws administered by the Department] is prima facie correct[.]” (emphasis added)).

38. During the years at issue here, the Secretary published a series of bulletins

interpreting section 105-130.8 and, in particular, the meaning of “income not taxable”

under the statute (the “Bulletins”). (See R. at 735–52.) In particular, the Bulletins

for taxable years 2007 and 2008 define “income not taxable” as “any income that has

been deducted in computing State net income under G.S. 105-130.5, any

nonapportionable income that has been allocated directly to another state under G.S.

105-130.4, and any other income that is not taxable under State law. (See Dayco

Corporation v. Clayton.).” (R. at 738 (emphasis added).) Thus, in addition to
referencing the two categories of income identified in section 105-130.8(a)(5), the

Bulletins also explicitly referenced, and adopted the holding in Dayco.

39. Although the OAH found that the Bulletins were “entitled to some

deference,” the OAH concluded, and Graybar argues here, that the Bulletins are not

controlling and misinterpret section 105-130.8.5 (R. at 11.) Graybar contends that

the Court should instead rely upon a 1965 opinion of the North Carolina Attorney

General. That opinion, which was issued two years before the Supreme Court’s Dayco

decision, opined that the interpretation of “income not taxable” depended on the

“distinction between income excludable from gross income and income deductible

from gross income.” (Resp’t’s Br. Ex. 1 [hereinafter “AG Opinion”], ECF No. 30.) The

Attorney General concluded:

[s]ince interest and dividends are both items of gross income subject to
taxation . . . , all such income would be considered TAXABLE INCOME
notwithstanding the fact that a portion of such interest and dividends may
qualify as deductions from gross income . . . in determining the taxpayer’s net
taxable income.

(AG Opinion 3.) As Graybar points out, other states have followed this same

approach. See Rosemary Props., Inc. v. McColgan, 177 P.2d 757, 763 (Cal. 1947)

(“Since the gross income and specified deductions are the factors included in arriving

at the net income, the conclusion is unavoidable that it is gross income that is

included in the measure of the tax.”); Yaeger v. Dubno, 449 A.2d 144, 147 (Conn. 1982)

5 The OAH concluded that the Department’s reliance on the Bulletins was misguided because
(i) the Dividends were not “income not taxable” under Dayco (i.e., because Dayco involved
dividend income allocable to other states), (ii) in any event, section 105-130.8(a)(5) provided
a “statutory definition” of “income not taxable” that does not encompass the Dividends, and
(iii) the Bulletins did not give notice that a DRD deduction “converts taxable dividends into
‘income not taxable.’” (R. at 11–12.)
(concluding “‘dividends taxable for federal income tax purposes’ means gross

dividends as defined under Code, without regard to federal adjustments”).

40. Upon careful review, however, the Court concludes that the Attorney

General’s opinion is of limited value here, particularly when compared to the

Department’s Bulletins, because the opinion was issued before the Supreme Court’s

decision in Dayco. Indeed, the Court’s research has not disclosed, and Graybar has

not cited, any judicial or administrative decisions relying upon the Attorney General’s

opinion. Moreover, while the Department’s Bulletins are presumed to be prima facie

correct, see Carolina Photography, Inc., 196 N.C. App. at 339, 674 S.E.2d at 725, the

Attorney General’s opinion on tax matters is merely advisory, see In re Va.-Carolina

Chem. Corp., 248 N.C. 531, 538, 103 S.E.2d 823, 828 (1958), and our appellate courts

have admonished that “[w]hile opinions of the Attorney General are entitled to

‘respectful consideration,’ such opinions are not compelling authority[,]” McLaughlin

v. Bailey, 240 N.C. App. 159, 167–68, 771 S.E.2d 570, 577 (2015) (quoting Williams v.

Alexander Cty. Bd. of Educ., 128 N.C. App. 599, 602, 495 S.E.2d 406, 408 (1998)). As

a result, the Court concludes that, as between the two, the Department’s guidance,

rather than the Attorney General’s opinion, is the more persuasive and further

supports the Court’s conclusion that the Dividends Graybar received constituted

“income not taxable” for purposes of section 105-130.8.

41. Finally, the OAH found, and Graybar argues here, that the Bulletins did not

provide the public with notice of the Department’s interpretation that dividends

deducted under the DRD are “income not taxable” for purposes of section 105-
130.8(a)(3). The Court disagrees. The Department’s Bulletins interpreting the NEL

provision explicitly state that “income not taxable” includes “any other income that

is not taxable under State law” and cite Dayco for support. Because Dayco provides

that “income not taxable” includes any income on which the State does not levy a tax,

the Court concludes that the Bulletins afforded the public, including Graybar,

adequate notice of the Department’s interpretation.6

42. For each of these reasons, therefore, the Court concludes that the Dividends

deducted pursuant to the DRD, I.R.C. § 243(a)(3), are “income not taxable” under

section 105-130.8(a)(3), that Graybar has failed to bring itself within the statutory

provisions authorizing the NEL deduction calculation it seeks, and that the OAH’s

contrary conclusion should be reversed.

B. Constitutionality

43. In light of the OAH’s determination that the Dividends were not “income not

taxable” for purposes of section 105-130.8, the OAH concluded that it was “not

necessary to rule on [Graybar’s] constitutional argument.” (R. at 18.) Nevertheless,

6 Graybar also points to case law holding that where the only authority for an agency’s
interpretations of the law is its litigation position in a particular case, “that interpretation
may be viewed skeptically on judicial review.” See Cashwell v. Dep’t of State Treasurer, Ret.
Sys. Div., 196 N.C. App. 80, 89, 675 S.E.2d 73, 78 (2009) (quoting Rainey v. N.C. Dep’t of Pub.
Instruction, 361 N.C. 679, 681, 652 S.E.2d 251, 252 (2007)). The Bulletins at issue here,
however, were published for the 2007 and 2008 tax years, seven years before the Department
conducted its audit and seven years before Graybar formally requested a review of the
Department’s proposed assessments. In fact, this same interpretation appears in Bulletins
dating back to at least 1999. (See R. at 751–52.) Graybar’s argument on this point is thus
unpersuasive. See Cashwell, 196 N.C. App. at 89, 675 S.E.2d at 78 (“[I]f the agency’s
interpretation of the law is not simply a ‘because I said so’ response to the contested case,
then the agency’s interpretation should be accorded . . . deference[.]” (quoting Rainey, 361
N.C. at 681, 652 S.E.2d at 252–53)).
the OAH noted its agreement with Graybar’s contention that “the Department’s

position creates a double taxation on the same income” in violation of the North

Carolina Constitution’s Just and Equitable Clause. (R. at 18.) Graybar agrees with

this conclusion and argues in addition that this alleged double taxation violates the

Law of the Land Clause in the North Carolina Constitution and the Due Process

Clause contained in the Fourteenth Amendment of the United States Constitution.

(See Resp’t’s Br. 20–22.) The Court concludes that these applied constitutional

challenges are properly before the Court for determination. See N.C. Gen. Stat.

§ 150B-51(d) (“In reviewing a final decision allowing . . . summary judgment, the court

may enter any order allowed by . . . Rule 56.”).

44. As an initial matter, our appellate courts have held that “[a] law is presumed

constitutional until the contrary is shown and the burden is on the party claiming

that the law is unconstitutional to show why it is unconstitutional as applied to him.”

Perry v. Perry, 80 N.C. App. 169, 176, 341 S.E.2d 53, 58 (1986).

45. The Just and Equitable Clause of the North Carolina Constitution provides

that “[t]he power of taxation shall be exercised in a just and equitable manner[.]”

N.C. Const. art. V, § 2(1). The provision operates to limit the State’s taxing power

and protects the public against abusive tax policies. IMT, Inc. v. City of Lumberton,

366 N.C. 456, 461–62, 738 S.E.2d 156, 159 (2013). The tension between the State’s

constitutional authority to tax and the Just and Equitable Clause “must be resolved

in a manner that protects the citizenry from unjust and inequitable taxes while

preserving legislative authority to enact taxes without exposing the State or its
subdivisions to frivolous litigation.” Id. at 461, 738 S.E.2d at 159. In determining

whether a tax is just and equitable, courts should look to factors such as, among

others, whether the tax was uniformly applied, exemptions from alternative taxes,

and the size of the taxing jurisdiction. Id. at 461–62, 738 S.E.2d at 159–60 (citing

Nesbitt v. Gill, 227 N.C. 174, 179–80, 41 S.E.2d 646, 650–51 (1947)).

46. Challenges under the Just and Equitable Clause must be determined on a

case-by-case basis, id. at 463, 738 S.E.2d at 160, and legislative action “will not be

held invalid as violative of the Constitution unless it so appears beyond a reasonable

doubt[,]” Nesbitt, 227 N.C. at 181, 41 S.E.2d at 651. “And when there is reasonable

doubt as to the validity of a statute, such doubt will be resolved in favor of its

constitutionality.” Id. “The ‘power of taxation is very largely a matter of legislative

discretion’ and . . . ‘in respect to the method of apportionment as well as the amount,

it only becomes a judicial question in cases of palpable and gross abuse.’” Smith v.

City of Fayetteville, 220 N.C. App. 249, 256, 725 S.E.2d 405, 411 (2012) (quoting E. B.

Ficklen Tobacco Co. v. Maxwell, 214 N.C. 367, 372, 199 S.E. 405, 409 (1938)).

47. The Law of the Land Clause provides that “[n]o person shall be denied the

equal protection of the laws,” and shall not be “taken, imprisoned, or disseized of his

freehold, liberties, or privileges, or outlawed, or exiled, or in any manner deprived of

his life, liberty, or property, but by the law of the land.” N.C. Const. art. I, § 19. Our

courts have held that the clause is “interpreted to be analogous with the [United

States Constitution’s] Fourteenth Amendment ‘due process of law’ clause.” City of

Asheville v. State, 192 N.C. App. 1, 44, 665 S.E.2d 103, 133 (2008). “These clauses
have been consistently interpreted to permit the state, through the exercise of its

police power, to regulate economic enterprises provided the regulation is rationally

related to a proper governmental purpose.” Id. Accordingly, the Court’s analysis of

the Law of the Land Clause and the Due Process Clause for present purposes diverges

into a two-fold inquiry: “(1) Does the regulation have a legitimate objective? and (2)

If so, are the means chosen to implement the objective reasonable?” Id.

48. Here, the OAH concluded, and Graybar argues now, that the substantial

Dividend paid to Graybar by Graybar Services was subject to double taxation because

Graybar Services paid taxes on the earnings and profits from which it paid the

Dividend to Graybar and thereafter the State taxed these same monies by

determining the Dividend to be “income not taxable” under the NEL provision.7

7 It is worth noting that Graybar, Graybar Services, and Commonwealth are all structured
as “C” corporations for federal income tax purposes and that “double taxation” is a common,
widely accepted, and permissible feature of this form of business organization. As explained
by one federal circuit court:

A C corporation is a corporate entity that is required to pay taxes on the income it
earns. If a C corporation decides to issue dividends to its shareholders, the
shareholders must pay income tax on these dividends. This arrangement exposes
shareholder dividends to double taxation—a C corporation’s income is taxed at the
corporate level and the portion of the C corporation’s income that is passed on to
shareholders is taxed again at the shareholder level.

Crumpton v. Stephens, 715 F.3d 1251, 1253 n.2 (11th Cir. 2013); see Crowder Constr. Co. v.
Kiser, 134 N.C. App. 190, 194, 517 S.E.2d 178, 182 (1999) (“As a ‘C’ corporation, the Company
paid corporate income tax on its earnings, and its shareholders paid income taxes on any
dividends received by them.”).

The DRD permits a corporation to deduct the dividends it receives from a subsidiary to avoid
double taxation in this context. The policy considerations motivating the DRD deduction,
however, are different from those justifying an NEL deduction. Compare H.R. Rep. No. 708,
72d Cong., 1st Sess., 12 (1932) (legislative history of 26 U.S.C. § 243(a)(1) reflecting a
Congressional policy against double taxation of income by permitting dividends
received deductions to corporations on “the theory that a corporate tax has already been paid
 49. Notably, it has long been held that nothing in either the United States

Constitution or the North Carolina Constitution prevents the State from imposing

double taxation, provided the tax is imposed without arbitrary distinctions. See, e.g.,

Illinois C. R. Co. v. Minnesota, 309 U.S. 157, 164 (1940) (“[T]he Fourteenth

Amendment no more forbids double taxation than it does doubling the amount of a

tax; short of confiscation or proceedings unconstitutional on other grounds.” (internal

quotation marks omitted)); Jamison v. Charlotte, 239 N.C. 682, 693–94, 80 S.E.2d

904, 913 (1954) (citing North Carolina cases to similar effect); see also, e.g., Swiss Oil

Corp. v. Shanks, 273 U.S. 407, 413 (1927) (“[T]he Fourteenth Amendment does not

require uniformity of taxation, nor forbid double taxation.” (citations omitted));

Charlotte Coca-Cola Bottling Co. v. Shaw, 232 N.C. 307, 309, 59 S.E.2d 819,

821 (1950) (“Double taxation, as such, is not prohibited by the Constitution, and is

not invalid if the rule of uniformity is observed.”); Sabine v. Gill, 229 N.C. 599, 603,

51 S.E. 2d 1, 3 (1948) (“[D]ouble taxation, even within the State, is not ipso

upon the earnings out of which the dividends are distributed”), with N.C. Gen. Stat. § 105-
130.8(a)(1) (affording relief for corporations suffering “economic misfortune” based on “net
economic situation of the corporation”), and Aberfoyle Mfg. Co., 265 N.C. at 171, 143 S.E.2d
at 118 (“The General Assembly was under no constitutional or other legal compulsion to
permit a net economic loss or losses deduction for a corporation from taxable income in a
subsequent year or years. It enacted the carry-over provisions of [the predecessor statute]
purely as a matter of grace, gratuitously conferring a benefit but limiting such benefit to the
net economic loss of the taxpayer after deducting therefrom the allocable portion of such
taxpayer’s nontaxable income.” (internal quotation marks omitted)).
facto necessarily obnoxious to the Constitution when the intention to impose it is

clear and it is free from discriminatory features, however odious to the taxpayer.”).

50. Here, assuming without deciding that the State’s determination concerning

“income not taxable” results in double taxation,8 the Court concludes that Graybar

has failed to show that its tax burden resulting from the State’s determination—i.e.,

the reduction of Graybar’s NEL deductions by the apportioned amount of the

Dividends received—is the product of discriminatory or arbitrary taxation or

otherwise derives from an abusive or unreasonable taxation scheme in violation of

the North Carolina or United States Constitution. The Department’s interpretation

of “income not taxable” is based on the Supreme Court’s holding in Dayco, a holding

the legislature elected not to overturn or modify in its 1967 statutory amendment,

and a position the Department has publicly announced and implemented for at least

twenty years, including during the taxable years at issue. There is no evidence that

the Department’s interpretation has been applied inconsistently, arbitrarily, or

discriminatorily or that the Department has identified Graybar for adverse treatment

relative to other similarly situated taxpayers. Moreover, the Department’s

interpretation is reasonable and consistent with section 105-130.8’s legitimate and

stated purpose “to grant some measure of relief to the corporation that has incurred

8 The parties dispute whether the Department’s treatment has resulted in double taxation.
Graybar argues that the income from which the larger Dividend was paid was taxed twice,
first when it was earned by Graybar’s subsidiary, Graybar Services, and again when the
Graybar could not offset its NEL deduction by that Dividend. The Department argues that
the Dividend income was not initially taxed to Graybar because Graybar Services, which filed
separately from Graybar, paid corporate income tax on the Dividend, not Graybar, and that
the Dividend, once received by Graybar, was not taxed. The Court need not resolve this
dispute to determine Graybar’s constitutional challenges.
economic misfortune” and to afford that relief based on the “net economic situation of

the corporation.” N.C. Gen. Stat. § 105-130.8(a)(1).

51. In short, the Department’s interpretation does not cause section 105-130.8

to be unfair, unreasonable, arbitrary, or abusive, and Graybar’s constitutional

challenges must therefore be rejected. See Aronov, 323 N.C. at 136–39, 371 S.E.2d at

470–72 (holding that requiring a taxpayer to reduce North Carolina carryover losses

by non-North Carolina income did not violate the Due Process Clause or the Law of

the Land Clause, in part, because “[d]eductions are privileges, not rights”); cf. IMT,

Inc., 366 N.C. at 462, 738 S.E.2d at 160 (holding unconstitutional a 59,900%

minimum tax increase for promotional sweepstake companies).

IV.

CONCLUSION

52. Based on the foregoing, the Court hereby REVERSES the Final Decision

and REMANDS with instructions to the OAH to enter summary judgment in favor

of the Department.

SO ORDERED, this the 9th day of January, 2019.

/s/ Louis A. Bledsoe, III
Louis A. Bledsoe, III
Chief Business Court Judge