Taxation – Corporate – Constitutional — Procedural Due Process – Notice – Corporate Combination for Income Tax – Penalties

Delhaize America, Inc. v. Lay (Lawyers Weekly No. 12-07-0868, 40 pp.) (Cressie Thigpen, J.) Appealed from Wake County Superior Court, Special Superior Court for Complex Business Cases. (Ben F. Tennille J.) N.C. App.

Holding: The state Department of Revenue did not violate plaintiff’s procedural due process rights by forcing a combination of plaintiff and its subsidiary’s earnings, pursuant to G.S. § 105-130.6.

This case involved a dispute between Food Lion and its subsidiaries and the N.C. Department of Revenue, which accused the company of underreporting its income through something the company termed its “Vision Project.” The project was aimed at reducing the company’s tax exposure by, among other things, combining earnings in North Carolina with subsidiaries in other states.

Plaintiffs alleged that their procedural due process rights were violated by the Department of Revenue’s failure to give notice that the definition of “true earnings,” for purposes of corporate combination with their affiliates for state taxation, had changed.

Wal-Mart Stores East v. Hinton, 197 N.C. App. 30, 676 S.E. 2d 634 (2009), governs this appeal. The Secretary of Revenue had discretionary authority to force combination of entities on a finding that a report does not disclose true earnings in North Carolina.

The company understated its tax by more than 87 percent as a result of improper deductions. As a result, the company also owes a large tax deficiency penalty, due when a taxpayer understates its tax by more than 25 percent.

Affirmed in part. Remanded for assessment of additional penalties.