Case Title: In re Summons of Ernst & Young

Citation: 363 N.C. 612

Docket Number: 424PA08

State: north-carolina

Court: North Carolina Supreme Court

Date: 2009-10-09T00:00:00Z

Document:
IN THE SUPREME COURT OF NORTH CAROLINA
No. 424PA08 
FILED: 9 OCTOBER 2009
IN THE MATTER OF THE SUMMONS ISSUED TO ERNST & YOUNG, LLP AND ALL
SUBSIDIARIES, AFFILIATED AND ASSOCIATED ENTITIES
On discretionary review pursuant to N.C.G.S. § 7A-31 of
a unanimous decision of the Court of Appeals, ___ N.C. App. ___,
663 S.E.2d 921 (2008), affirming an order denying a motion to
dismiss entered on 21 June 2007 and remanding an order to comply
entered on 15 June 2007, both by Judge Donald W. Stephens in
Superior Court, Wake County.  On 5 February 2009, the Supreme
Court allowed intervenor’s conditional petition for discretionary
review as to additional issues.  Heard in the Supreme Court 5 May
2009.
Roy Cooper, Attorney General, by Gregory P. Roney,
Assistant Attorney General, for petitioner-
appellant/appellee Secretary of the North Carolina
Department of Revenue.
Alston & Bird LLP, by Jasper L. Cummings, Jr., for
intervenor-appellee/appellant Wal-Mart Stores, Inc.
TIMMONS-GOODSON, Justice.
The dispositive issue in this appeal is whether the
Rules of Civil Procedure apply to summons enforcement proceedings
under N.C.G.S. § 105-258(a).  We hold that the Rules of Civil
Procedure do not apply to such proceedings, and we therefore
modify, affirm in part, and remand the decision of the Court of
Appeals.
-2-
 Section 105-258 states in pertinent part:
1
(a) Secretary May Examine Data and
Summon Persons.— The Secretary of Revenue,
for the purpose of . . . determining the
liability of any person for a tax, or
collecting any such tax, shall have the power
to examine . . . any books, papers, records,
or other data which may be relevant or
material to such inquiry, and the Secretary
may summon the person liable for the tax . .
. or any person having possession, custody,
care or control of books of account
containing entries relevant or material to
the income and expenditures of the person
liable for the tax . . . to appear before the
Secretary, or his agent, at a time and place
named in the summons, and to produce such
books, papers, records or other data, and to
give such testimony under oath as may be
relevant or material to such inquiry . . . . 
If any person so summoned refuses to obey
such summons or to give testimony when
summoned, the Secretary may apply to the
Superior Court of Wake County for an order
requiring such person or persons to comply
with the summons of the Secretary, and the
failure to comply with such court order shall
be punished as for contempt.
N.C.G.S. § 105-258(a) (2007). 
I. Background
Beginning in 1995 Ernst & Young, LLP (“Ernst & Young”),
a global professional-services firm, sold to Wal-Mart Stores,
Inc. (“Wal-Mart”) a number of tax shelters designed to reduce
Wal-Mart’s income tax liability to various states, including
North Carolina.  In 1996, with the assistance of Ernst & Young,
Wal-Mart underwent corporate restructuring to implement these tax
shelters and placed substantially all of its real estate
interests in real estate investment trusts (“REITs”).  In 2001
Ernst & Young assisted Wal-Mart in restructuring to implement
additional tax shelters. 
On 6 February 2007, pursuant to N.C.G.S. § 105-258,1
the Secretary of Revenue (“the Secretary”) issued a summons
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directing a representative of Ernst & Young to appear before the
Secretary or his designee to provide testimony under oath and
produce books, papers, records, and other data relevant to the
Secretary’s inquiry regarding Wal-Mart.  The Secretary requested,
inter alia, the following:  (1) all documents regarding the
creation or existence of certain subsidiaries and affiliated
companies, including certain REITs; (2) all documents created
between 1 January 1990 and 31 December 2000 “which either are not
directed to a specific client or involve Wal[-]Mart discussing
the . . . tax savings of [REITs], regulated investment companies,
trusts, and/or holding companies owning trusts”; and (3) all
documents created between 1 January 1990 and 31 January 2005
relating to “the creation, elimination, and/or restructuring of
entities within Wal[-]Mart . . . that would produce federal
and/or state tax savings.”  The summons also directed that if
Ernst & Young withheld any documents on the basis of a claim of
privilege, Ernst & Young must provide a complete list of
documents withheld and a statement of the grounds upon which each
document was considered privileged.
Although it partially complied with the summons, Ernst
& Young withheld thousands of pages of documents.  Moreover,
Ernst & Young produced an incomplete list of the withheld
documents, asserting only that the withheld documents were “work
product.”
On 11 April 2007, the Secretary filed in the Superior
Court, Wake County, a verified “Application for an Order for the
Production of Certain Books, Papers, Records, and Other Data”
(“the application”).  The Secretary sought a court order
compelling Ernst & Young to withdraw all objections and fully
-4-
 While Wal-Mart’s 4 May 2007 motion referenced only Rule
2
12(b)(6), in a 5 June 2007 filing, Wal-Mart clarified that its
motion was based on subdivisions (1), (2), (4), (5), and (6) of
Rule 12(b).
comply with the summons.  The Secretary asserted that Ernst &
Young and Wal-Mart failed “to establish the applicability of the
work product privilege” to the withheld documents and therefore
waived the privilege.  In the alternative, the Secretary sought a
court order directing Ernst & Young “to produce a complete and
detailed privilege log for all of its withheld documents” and an
in camera review by the court of the withheld documents to
determine the applicability of the work product privilege.
On 11 April 2007, the superior court, Judge Donald W.
Stephens presiding, conducted a hearing on the Secretary’s
application.  By an order dated 30 April 2007, the superior court
continued the matter until 5 June 2007 and directed the Secretary
to give Wal-Mart and its subsidiaries notice of the upcoming
hearing.  The court ordered Wal-Mart to deliver a complete list
of the withheld documents to the Secretary and to support any
asserted privileges with details sufficient for the court to
evaluate the claims.
On 4 May 2007, Wal-Mart filed motions to intervene and
to dismiss the application for failure to comply with the North
Carolina Rules of Civil Procedure.   Wal-Mart argued that the
2
Secretary violated the Rules of Civil Procedure “in multiple
respects, including:  (1) fail[ing] to . . . fil[e] a complaint;
(2) fail[ing] to identify and serve process upon defending
parties; (3) fail[ing] to provide defending parties with an
opportunity to answer a complaint; and (4) fail[ing] to provide a
mechanism for discovery and proper issue development.”  Wal-Mart
-5-
also sought dismissal for failure to state a claim under Rule
12(b)(6).  Wal-Mart argued that the Rules of Civil Procedure
apply to summons enforcement proceedings and that application of
the Rules of Civil Procedure was “the only way to assert its due
process rights under the North Carolina and United States
Constitutions.”  On 23 May 2007, Wal-Mart filed a brief in
support of its work product privilege claim.
Although the superior court allowed Wal-Mart’s motion
to intervene on 6 June 2007, the court denied Wal-Mart’s motion
to dismiss pursuant to subdivisions (1), (2), (4), (5), and (6)
of Rule 12(b).  By order dated 14 June 2007, the superior court
rejected Wal-Mart’s work product privilege claim and ordered
Ernst & Young to comply fully with the summons within thirty days
of the order.  The superior court stayed execution of the order
on the condition that Ernst & Young deposit the contested
documents under seal.  On 2 July 2007, Wal-Mart filed its notice
of appeal.
The Court of Appeals affirmed the trial court’s order
denying Wal-Mart’s motion to dismiss and remanded the trial
court’s order rejecting Wal-Mart’s work product claim.  In re
Summons Issued to Ernst & Young, LLP, ___ N.C. App. ___, ___, 663
S.E.2d 921, 929 (2008).  With regard to Wal-Mart’s motion to
dismiss, the Court of Appeals opined that summons enforcement
proceedings under N.C.G.S. § 105-258(a) are civil actions and are
therefore subject to the Rules of Civil Procedure.  Id. at ___,
663 S.E.2d at 926.  However, because N.C.G.S. § 105-258(a)
confers jurisdiction on the superior court upon application by
the Secretary, the Court of Appeals concluded that the
Secretary’s failure to file and serve a complaint by civil
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process was a non-jurisdictional defect and did not warrant
dismissal.  Id. at ___, 663 S.E.2d at 927.  Further, because the
application contained facts sufficient to inform Ernst & Young of
the nature of the claim, the Court of Appeals determined that the
application stated a claim for relief.  Id. at ___, 663 S.E.2d at
928.
With regard to Wal-Mart’s work product privilege claim,
the Court of Appeals concluded that it was unclear from the
record on appeal whether the withheld documents were created in
anticipation of litigation.  Id. at ___, 663 S.E.2d at 929. 
Consequently, the Court of Appeals remanded for the trial court
to review the documents in camera.  Id.  On 5 February 2009, we
allowed the Secretary’s petition for discretionary review to
determine whether the Rules of Civil Procedure apply to summons
enforcement proceedings under N.C.G.S. § 105-258(a) and Wal-
Mart’s conditional petition for discretionary review to determine
whether the Court of Appeals erred in failing to dismiss the
Secretary’s application pursuant to Rule 12(b).
II. Analysis
On appeal, the Secretary argues that the Court of
Appeals erred in holding that the Rules of Civil Procedure apply
to summons enforcement proceedings under N.C.G.S. § 105-258(a). 
According to the Secretary, N.C.G.S. § 105-258(a) establishes an
expedited procedure for summons enforcement proceedings and gives
the superior court jurisdiction to take any actions reasonably
necessary to adjudicate summons enforcement applications.  In its
response, Wal-Mart contends that the Rules of Civil Procedure
apply to summons enforcement proceedings under N.C.G.S. § 105-
258(a), because the statute does not prescribe “a ‘differing
-7-
procedure’ that completely replaces” the Rules of Civil
Procedure.
Questions of statutory interpretation are ultimately
questions of law for the courts and are reviewed de novo.  Brown
v. Flowe, 349 N.C. 520, 523, 507 S.E.2d 894, 896 (1998) (citing
Wood v. J.P. Stevens & Co., 297 N.C. 636, 642, 256 S.E.2d 692,
696 (1979)).  “The primary rule of construction of a statute is
to ascertain the intent of the legislature and to carry out such
intention to the fullest extent.”  Burgess v. Your House of
Raleigh, Inc., 326 N.C. 205, 209, 388 S.E.2d 134, 137 (1990)
(citing Buck v. U.S. Fid. & Guar. Co., 265 N.C. 285, 290, 144
S.E.2d 34, 37 (1965)).  
In interpreting a statute, we first look
to the plain meaning of the statute.  Where
the language of a statute is clear, the
courts must give the statute its plain
meaning; however, where the statute is
ambiguous or unclear as to its meaning, the
courts must interpret the statute to give
effect to the legislative intent. 
Frye Reg’l Med. Ctr., Inc. v. Hunt, 350 N.C. 39, 45, 510 S.E.2d
159, 163 (1999) (citations omitted).
With these principles of statutory interpretation in
mind, we address whether the Rules of Civil Procedure apply to
summons enforcement proceedings under N.C.G.S. § 105-258(a).  As
set forth in Rule 1, the Rules of Civil Procedure apply “in all
actions and proceedings of a civil nature except when a differing
procedure is prescribed by statute.”  N.C.G.S. § 1A-1, Rule 1
(2007).  When the legislature has prescribed specialized
procedures to govern a particular proceeding, the Rules of Civil
Procedure do not apply.  See id. § 1A-1, Rule 1; see also id.
Rule 1 cmt. (2007) (“In general it can be said that to the extent
-8-
a specialized procedure has heretofore governed, it will continue
to do so.”).  Thus, the dispositive question on this appeal is
whether N.C.G.S. § 105-258(a) prescribes a specialized procedure.
On its face, N.C.G.S. § 105-258(a) sets forth the
following three-step procedure for summons enforcement
proceedings:  (1) upon a person’s failure to obey a summons, the
Secretary applies to the Superior Court, Wake County, for an
order requiring compliance; (2) upon a satisfactory showing by
the Secretary of a failure to obey the summons, the court issues
an order directing the person summoned to comply; and (3) the
failure to comply is punishable as for contempt.  Id. § 105-
258(a). 
In filing an application for the enforcement of an
administrative summons, the Secretary seeks merely to question
persons and examine records in the course of an investigation. 
The Secretary’s inquiry does not involve filing a civil complaint
or otherwise initiating a civil action as defined in the General
Statutes governing civil procedure.  See id. § 1-2.  Indeed, it
is only after conducting the investigation that the Secretary is
able to identify any violations of the tax laws, as well as the
persons potentially liable for such violations, and determine
whether to pursue civil or criminal penalties. See id. §§ 105-
236(c) & -236.1(b) (2007) (vesting the Secretary with authority
to make civil assessments and issue notices, orders, warrants or
demands in criminal law enforcement proceedings).
Notably, the task before the court in a summons
enforcement proceeding is summary in nature and relatively
uncomplicated.  The court does not extensively weigh or resolve
-9-
any significant conflicts in the evidence.  Furthermore, the
statute expressly gives the Superior Court of Wake County
jurisdiction over summons enforcement proceedings.  Id.  Pursuant
to this express grant of jurisdiction, the superior court has the
inherent authority to take all actions reasonably necessary to
properly administer its duties under N.C.G.S. § 105-258(a).  In
re Investigation of Death of Miller, 357 N.C. 316, 321-22, 584
S.E.2d 772, 778-79 (2003) (“‘[I]t has been long held that courts
have the inherent power to assume jurisdiction and issue
necessary process in order to fulfill their assigned mission of
administering justice efficiently and promptly.’”  (quoting In re
Albemarle Mental Health Ctr., 42 N.C. App. 292, 296, 256 S.E.2d
818, 821 (1979), disc. rev. denied, 298 N.C. 297, 259 S.E.2d 298
(1979))).  Thus, in rare instances such as the case at bar, the
court may rely on its inherent authority to give third parties
notice and an opportunity to assert privileges.  Accordingly, we
conclude that section 105-258(a) prescribes a “proceeding[] of a
civil nature” with its own specialized procedure.  N.C.G.S. § 1A-
1, Rule 1 (2007).  This self-contained, specialized procedure
supplants the Rules of Civil Procedure. 
Engrafting the Rules of Civil Procedure onto N.C.G.S. §
105-258(a) would eviscerate the statute’s function.  Since the
enactment of North Carolina’s first income tax laws in 1921, the
legislature has expressly authorized the Secretary to take
testimony under oath and examine books and records to ensure
compliance with the revenue laws.  Act of Mar. 8, 1921, ch. 34,
sec. 801, 1921 N.C. Sess. Laws 147, 221 (authorizing the Tax
-10-
Commission to examine books and papers, require attendance of
persons, take testimony and administer oaths, and designate “any
agent or representative” to conduct such examinations).  The
procedures for summons enforcement predate enactment of the Rules
of Civil Procedure and have remained essentially unchanged for
fifty years.  These specialized procedures are vital to the
effectiveness of the Secretary’s summons power.  Act of June 27,
1967, ch. 954, sec. 1, 1967 N.C. Sess. Laws 1274 (enacting the
North Carolina Rules of Civil Procedure); Act of 1959 Amending
and Supplementing “The Revenue Act,” being Subchapter 1 of
Chapter 105 of the General Statutes, ch. 1259, sec. 8A, 1959 N.C.
Sess. Laws 1416, 1452 (rewriting N.C.G.S. § 105-258(a) to include
the summons enforcement proceeding).  In describing the authority
of the Commissioner of Internal Revenue under a similar federal
statute, the United States Supreme Court has stated that the
summons power is
"a power of inquisition . . . which is not
derived from the judicial function.  It is
more analogous to the Grand Jury, which does
not depend on a case or controversy for power
to get evidence but can investigate merely on
suspicion that the law is being violated, or
even just because it wants assurance that it
is not."
United States v. Powell, 379 U.S. 48, 57, 13 L. Ed. 2d 112, 119
(1964) (quoting United States v. Morton Salt Co., 338 U.S. 632,
642-43, 94 L. Ed. 401, 411 (1950)).  This description applies
with equal force to the Secretary’s summons power under N.C.G.S.
§ 105-258(a).  
Furthermore, applying the Rules of Civil Procedure to
summons enforcement proceedings under N.C.G.S. § 105-258(a) would
-11-
all but eliminate the Secretary’s use of that power.  At the
earliest possible juncture, the investigative phase, the
Secretary would be required to file a complaint and serve process
under Rule 4; plead matters with sufficient particularity to
survive a Rule 12(b)(6) motion to dismiss; join necessary parties
pursuant to Rule 19; and be subject to the deposition and
discovery provisions of Article 5.  See N.C.G.S. § 1A-1, Rules 4,
12(b)(6), 19, 26-37 (2007).  Notably, while the Secretary is
entangled in protracted procedural litigation for the purpose of
merely conducting the investigation, the applicable statutes of
limitations would continue to run.  See id. § 105-241.8(a) (2007)
(stating that the statute of limitations for proposing an
assessment is three years); id. § 105-241.9(b) (2007) (“The
Secretary must propose an assessment within the statute of
limitations for proposed assessments unless the taxpayer waives
the limitations period in writing.”).  We therefore hold that the
Rules of Civil Procedure do not apply to summons enforcement
proceedings under N.C.G.S. § 105-258(a).
In concluding to the contrary, the Court of Appeals
relied in part on N.C.G.S. § 105-246, which states that “[a]ll
actions or processes brought . . . under provisions of this
Subchapter[] shall have precedence over any other civil causes
pending in such courts, and the courts shall always be deemed
open for trial of any such action or proceeding brought therein.” 
Id. § 105-246 (2007); In re Ernst & Young, ___ N.C. App. at ___,
663 S.E.2d at 926.  The Court of Appeals misapprehended N.C.G.S.
§ 105-246 in holding that all actions or processes under
-12-
Subchapter I of Chapter 105 are civil actions.  In re Ernst &
Young, ___ N.C. App. at ___, 663 S.E.2d at 926.  Subchapter I
encompasses criminal actions, civil actions, and special
proceedings.  See, e.g., N.C.G.S. § 105-236(a)(7)-(10b)
(providing criminal penalties for violations of Subchapter I). 
When interpreting a statute, “‘[i]ndividual expressions must be
construed as a part of the composite whole and be accorded only
that meaning which other modifying provisions and the clear
intent and purpose of the act will permit.’”  State v. Buckner,
351 N.C. 401, 408, 527 S.E.2d 307, 311 (2000) (quoting State v.
Tew, 326 N.C. 732, 739, 392 S.E.2d 603, 607 (1990)).  Section
105-246, which was first enacted nearly thirty years before the
Rules of Civil Procedure, provides merely that revenue actions
have priority over other matters.
The Court of Appeals also analogized to federal law,
under which the Federal Rules of Civil Procedure apply to I.R.S.
summons enforcement proceedings.  In re Ernst & Young, ___ N.C.
App. at ___, 663 S.E.2d at 926-27 (citing Powell, 379 U.S. at 58
n.18, 13 L. Ed. 2d at 119 n.18).  However, Federal Rule 81
expressly states that the Federal Rules of Civil Procedure apply
to federal summons enforcement proceedings.  Fed. R. Civ. P.
81(a)(5).  In contrast, North Carolina’s Rules of Civil
Procedure, which were modeled after the Federal Rules, Sutton v.
Duke, 277 N.C. 94, 99, 176 S.E.2d 161, 164 (1970), contain no
similar provision.  Because “changes in words and phrasing in a
statute adopted from another state or country will be presumed
deliberately made with the purpose to limit . . . the adopted
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rule,” id. at 101, 176 S.E.2d at 165, the Court of Appeals erred
in relying on federal law for its holding.  
In sum, we hold that N.C.G.S. § 105-258(a) establishes
a proceeding of a civil nature with its own specialized procedure
that supplants the Rules of Civil Procedure.  Although the Court
of Appeals erred in holding to the contrary, it correctly
affirmed the order of the trial court denying Wal-Mart's motion
to dismiss.  Accordingly, we modify and affirm the decision of
the Court of Appeals as to this matter.  The decision of the
Court of Appeals remanding the trial court's order to comply with
the administrative summons for an in camera review of the
documents at issue is not before this Court and therefore remains
undisturbed.  This case is remanded to the Court of Appeals for
further remand to the Superior Court, Wake County, for additional
proceedings not inconsistent with this opinion.
MODIFIED AND AFFIRMED IN PART AND REMANDED.