This morning, the North Carolina Court of Appeals released its decision in Delhaize America, Inc. v. Lay, No. COA11-868 (N.C. Ct. App. 2012). Delhaize, formerly known as Food Lion, formed an intangible holding company as part of a restructuring in the late 1990s. The Secretary of the North Carolina Department of Revenue sought to combine Delhaize with its intangible holding company on the ground that combination was necessary to reflect Delhaize’s “true earnings,” which is a North Carolina statutory standard used to justify the application of forced combination. The Department assessed Delhaize approximately $20.6 million in tax, interest, and penalty, which Delhaize challenged primarily on procedural due process grounds.
The definition and application of “true earnings” has been a controversial issue. In Wal-Mart Stores East, Inc. v. Hinton, 676 S.E.2d 634 (N.C. Ct. App. 2009), the North Carolina Court of Appeals held that the Secretary of Revenue has discretionary authority to apply forced combination, and the court will not disturb the Secretary’s findings absent an abuse of discretion. Moreover, the Wal-Mart court defined “true earnings” to include income up to the limit found in the U.S. Constitution.