N.C. Dep't of Revenue v. Graybar Elec. Co., 373 N.C. 382

Background

Graybar, a Missouri-headquartered C corporation, received large dividends from wholly owned C‑corporation subsidiaries in 2007 and 2008 and claimed the dividends‑received deduction (DRD) on its pro forma federal returns, removing those dividends from federal taxable income.
North Carolina computes State net income from federal taxable income (with statutory adjustments); Graybar reported zero State net income in 2007–08 by offsetting taxable income with substantial net economic loss (NEL) carryforwards.
The N.C. Department of Revenue audited Graybar, concluded the DRD‑deducted dividends were "income not taxable" under former N.C.G.S. § 105‑130.8(a)(3), and reduced Graybar’s NEL carryforwards by the apportioned amount of those dividends, assessing additional tax.
Graybar challenged the assessment at the Office of Administrative Hearings (OAH); OAH granted summary judgment for Graybar, holding the dividends were not "income not taxable" and expressing concern about double taxation.
On judicial review the Business Court reversed the OAH, holding the DRD‑deducted dividends are "income not taxable" under § 105‑130.8(a)(3) (relying on Dayco), deferring to the Department’s published bulletins, and rejecting Graybar’s constitutional challenges.

Issues

Issue	Plaintiff's Argument (Department)	Defendant's Argument (Graybar)	Held
Whether dividends deducted under the federal DRD are "income not taxable" for reducing NEL carryforwards under N.C.G.S. § 105‑130.8(a)(3)	DRD‑deducted dividends are current‑year nontaxable income and must reduce NELs	§ 105‑130.8(a)(5) lists specific categories; dividends do not fit and are deductions (not exclusions) from income	Held for Department: § 105‑130.8(a)(5) is illustrative, Dayco controls, and DRD‑deducted dividends are "income not taxable"
Whether the Department’s treatment violates the N.C. Constitution (Just & Equitable, Law of the Land) or U.S. Constitution (Due Process) by imposing "double taxation"	Application is reasonable, uniformly applied, and consistent with statute, precedent, and guidance; NEL relief is a statutory privilege	Reduction causes double taxation on the same earnings, violating constitutional protections	Held for Department: Even if labeled double taxation, it is permissible absent arbitrary/discriminatory treatment; Graybar failed to show unconstitutional application
Whether the Department’s published guidance gave adequate notice and is entitled to deference	Bulletins (citing Dayco) publicly stated that "income not taxable" includes income not taxed by the State and are prima facie correct	An earlier Attorney General opinion took a contrary view; bulletins insufficient to convert federal deductions into "income not taxable"	Held for Department: Bulletins are persuasive, provided notice, and entitled to deference over the prior AG opinion

Key Cases Cited

Dayco Corp. v. Clayton, 269 N.C. 490, 153 S.E.2d 28 (N.C. 1967) (defining "income not taxable" as income on which the State does not levy a tax)
Aberfoyle Mfg. Co. v. Clayton, 265 N.C. 165, 143 S.E.2d 113 (N.C. 1965) (treating certain non‑taxed distributions as "income not taxable" for NEL calculation)
Midrex Techs. v. N.C. Dep’t of Revenue, 369 N.C. 250, 794 S.E.2d 785 (N.C. 2016) (de novo review standard for agency summary‑judgment appeals)
Meza v. Div. of Soc. Servs., 364 N.C. 61, 692 S.E.2d 96 (N.C. 2010) (trial court acts in appellate capacity on agency review)
Aronov v. Sec’y of Revenue, 323 N.C. 132, 371 S.E.2d 468 (N.C. 1988) (tax deductions are privileges, not rights; ambiguities resolved for taxation)
Pipe Line Cases, 234 U.S. 548 (U.S. 1914) (statutory phrase "shall be considered" is not limiting)
Carolina Photography, Inc. v. Hinton, 196 N.C. App. 337, 674 S.E.2d 724 (N.C. Ct. App. 2009) (Secretary of Revenue bulletins interpreting tax law are prima facie correct)
Illinois Central R. Co. v. Minnesota, 309 U.S. 157 (U.S. 1940) (double taxation is not per se prohibited under the Fourteenth Amendment)