Court Opinion

ID: 9583006
Source: CourtListenerOpinion
Date Created: 2023-08-21 22:33:53.925777+00
Date Added: 2024-06-11T13:38:48.707282
License: Public Domain

Justice Parker
dissenting.
Less than three years ago in Polaroid Corp. v. Offerman, 349 N.C. 290, 507 S.E.2d 284 (1998), this Court in an exhaustive opinion interpreted Section 105-130.4(a)(1) of the North Carolina Corporate Income Tax Act which defines business income. In that opinion, the Court concluded that under the plain language of the statute the definition of business income for corporate income tax purposes *669included both a transactional test and a functional test. Id. at 301, 507 S.E.2d at 293. In Polaroid the Court stated that under the functional test, “once a corporation’s assets are found to constitute integral parts of the corporation’s regular trade or business, income resulting from the acquisition, management, and/or disposition of those assets constitutes business income regardless of how that income is received.” Id. at 306, 507 S.E.2d at 296. The Court further stated that under the functional test, “the extraordinary nature or infrequency of the event is irrelevant.” Id. at 296, 507 S.E.2d at 289.
The majority acknowledges that applying the above language, defendant is correct in its determination that the income generated from the sale of ArtCarved’s assets would necessarily be classified as business income inasmuch as the assets associated with ArtCarved were integral to plaintiff’s regular trade or business operations. The majority then disavows this language from Polaroid on the basis that the language “is a cause of confusion” and is “in direct contravention of the functional test of our statute.” The majority then states that “[t]he source of corporate income cannot be disregarded, as extraordinary or infrequent transactions may well fall outside a corporation’s regular trade or business. Again, the focus must be on the asset or property that generated the income and its relationship to the corporation’s regular trade or business.”
The majority then purports to apply the functional test to the facts of this case. The majority emphasizes that (i) a liquidation is an extraordinary, not a recurring transaction, and is thus not a sale in the regular course of trade or business; and (ii) the proceeds of the sale were distributed to the sole stockholder and were not reinvested in plaintiff’s business. The majority finds support for this analysis in footnote 6 in the Polaroid opinion, which suggested that liquidations are not within the purview of the functional test. Id. at 306, n.6, 507 S.E.2d at 296, n.6.
In my view the majority has misread the functional test as set forth in the statute and interpreted in Polaroid. The functional test focuses on whether the asset is found to be an integral part of the corporation’s regular business, not whether the transaction is found to be a part of the regular business. The critical question is whether the property or asset produced business income while it was owned by the taxpayer.
In Polaroid, this Court noted the administrative rule in effect since 1976 which provides
*670“(2) A gain or loss from the sale, exchange or other disposition of real or personal property constitutes business income if the property while owned by the taxpayer was used to produce business income.”
Id. at 302, 507 S.E.2d at 293 (quoting 17 NCAC 5C .0703(2) (June 1998)).
Further, in my view the footnote to Polaroid is obiter dictum and is not a basis for disavowing the language in Polaroid. Even if the footnote were pertinent, a partial liquidation of a business division is not a “true liquidation.” Moreover, in this case the sole shareholder to whom the proceeds were distributed was the parent corporation of plaintiff. Hence, the question remains as to whether the proceeds were used in furtherance of the unitary business.
Finally, the interpretation of our tax laws has widespread ramifications, and under the principle of stare decisis this Court should not lightly abandon or modify its interpretation of a tax statute. Both the Secretary of Revenue and the taxpayer are entitled to a measure of stability and constancy in the interpretation and application of our tax statutes.
Applying the functional test as set forth in Polaroid, I am of the opinion that ArtCarved as an asset of plaintiff was an integral part of plaintiffs regular trade or business, namely, manufacturing and selling various consumer goods, and that the sale of ArtCarved produced business income pursuant to N.C.G.S. § 105-130.4(a)(l).
For the foregoing reasons, I respectfully dissent and vote to reverse the opinion of the Court of Appeals.
Justice Martin joins in this dissenting opinion.