{
  "id": 8527756,
  "name": "IN THE MATTER OF: THE PROPOSED ASSESSMENT OF ADDITIONAL FRANCHISE TAX AGAINST R. J. REYNOLDS TOBACCO COMPANY FOR THE TAXABLE YEARS 1981 AND 1982",
  "name_abbreviation": "In re the Proposed Assessment of Additional Franchise Tax Against R. J. Reynolds Tobacco Co. for the Taxable Years 1981 & 1982",
  "decision_date": "1991-01-15",
  "docket_number": "No. 9021SC191",
  "first_page": "382",
  "last_page": "385",
  "citations": [
    {
      "type": "official",
      "cite": "101 N.C. App. 382"
    }
  ],
  "court": {
    "name_abbreviation": "N.C. Ct. App.",
    "id": 14983,
    "name": "North Carolina Court of Appeals"
  },
  "jurisdiction": {
    "id": 5,
    "name_long": "North Carolina",
    "name": "N.C."
  },
  "cites_to": [],
  "analysis": {
    "cardinality": 330,
    "char_count": 6715,
    "ocr_confidence": 0.773,
    "sha256": "74387b9bf9ff65bbf5e94d38ead01c839af936acac35c6852420728454fbbd61",
    "simhash": "1:33518666fd990e20",
    "word_count": 1089
  },
  "last_updated": "2023-07-14T19:54:53.681770+00:00",
  "provenance": {
    "date_added": "2019-08-29",
    "source": "Harvard",
    "batch": "2018"
  },
  "casebody": {
    "judges": [
      "Judges WELLS and COZORT concur."
    ],
    "parties": [
      "IN THE MATTER OF: THE PROPOSED ASSESSMENT OF ADDITIONAL FRANCHISE TAX AGAINST R. J. REYNOLDS TOBACCO COMPANY FOR THE TAXABLE YEARS 1981 AND 1982"
    ],
    "opinions": [
      {
        "text": "LEWIS, Judge.\nThis case strikes us as somewhat unique in that neither party has cited any case law nor direct statutory authority for their positions. We also note that the subject of this appeal, G.S. \u00a7 105463.03(a) has been repealed so that this case will not be seen again.\nThe issue in this case is the proper inventory accounting method to be used for certain tax purposes. R.J. Reynolds Tobacco Company (\u201cReynolds\u201d) utilized two inventory accounting methods in the computation of their various state taxes: (1) LIFO (last in/ first out) and (2) FIFO (first in/ first out). The LIFO method disregards the actual flow of goods through inventory and assumes that the items first withdrawn from inventory are those most recently acquired. The effect of the LIFO method is to increase the cost of goods sold and to decrease taxable income and the amount at which Reynolds\u2019 ending inventory is shown on its books. FIFO assumes that the items first withdrawn from the inventory are the oldest.\nThe method of inventory accounting used by Reynolds is significant for a number of state tax purposes. First, inventory is a component of the \u201cfranchise tax base,\u201d from which Reynolds\u2019 franchise tax liability is determined. Second, inventory is also a component of the \u201cproperty factor,\u201d which is used to determine the amount of Reynolds\u2019 income which is to be apportioned to and taxed by the state of North Carolina. Finally, Reynolds is entitled to a credit, referred to as the \u201cinventory tax credit,\u201d against its corporate income tax liability based on the amount of local property taxes it pays.\nFor the years 1981 and 1982, Reynolds used the LIFO method of inventory accounting consistently in these state tax computations. Pursuant to \u00a7 471 of the Internal Revenue Code, Reynolds also elected to use the LIFO method of inventory valuation for its federal income tax purposes. (This necessarily resulted in an identical election to use LIFO for North Carolina income tax purposes because North Carolina\u2019s corporate income tax law piggybacks onto the federal code at the net taxable income level. See G.S. \u00a7 105-163.02(1).)\nIn its Notice of Tax Assessment, the Secretary of Revenue proposed adjustments to Reynolds\u2019 franchise and income tax liabilities. The Secretary proposed that Reynolds use the FIFO method of inventory accounting to determine its franchise tax base for franchise tax purposes. The Secretary used the same accounting method to compute Reynolds\u2019 property factor for income tax apportionment purposes. The Secretary refused, however, to use the FIFO method to compute Reynolds\u2019 inventory tax credit, using the LIFO method instead. The cumulative effect of these adjustments was an assessment of franchise tax underpayment of $1,978,027 and an income tax overpayment of $278,837 for a net franchise and income tax underpayment of $1,699,190. This underpayment was paid by Reynolds under protest.\nReynolds appealed the Final Decision of the Secretary to the Tax Review Board which sustained the Secretary\u2019s position in Administrative Decision No. 246. Reynolds paid the assessment under protest and appealed to the Superior Court. From an order reversing Administrative Decision No. 246, the Secretary appeals.\nWe find it important to clarify from the outset that the only issue before us is the inventory method that Reynolds must use to determine the amount of Reynolds\u2019 inventory tax credit. Reynolds successfully argued below that in the interest of equity and uniformity, if the Secretary of Revenue uses the FIFO method to determine franchise tax and income tax apportionment, the Tax Board must also use the FIFO method for determining its inventory tax credit.\nThe focus of this dispute centers around the language contained in G.S. \u00a7 105-163.03(a), the inventory tax credit statute which specifies that the \u201cbook value of the manufacturer\u2019s qualifying inventories\u201d are used to determine the inventory tax credit. \u201cBook value\u201d is defined as \u201c[t]he net amount at which qualifying inventories are valued for North Carolina income tax purposes,. . . .\u201d G.S. \u00a7 105-163.02(1) (emphasis added). Because Reynolds uses the LIFO accounting method for state income tax purposes, the Secretary of Revenue argues that qualifying inventories for the purposes of the inventory tax credit must also be valued using the LIFO method. Reynolds contends that it values its inventories at cost for income tax purposes; once valued at cost, the accounting method used to track these inventories is irrelevant. The term \u201cvalued\u201d as used in G.S. \u00a7 105-163.02(1) is not defined in the Code. It is not clear from the statute whether the term \u201cvalued\u201d includes both the cost of the goods and materials reported on the state income tax form as well as the inventory method used to track the flow of those goods through inventory for state income tax liability.\nThe inventory tax credit statute does not set forth explicitly which accounting method is to be used in determining the inventory tax credit. Both the FIFO and the LIFO methods are standard, generally accepted accounting theories of inventory valuation. Both parties advance interesting, well-reasoned contentions as to which method the legislature intended the taxpayer to use in computing the credit. In the absence of any authority directing which method is to be used, we hold that the right to elect which inventory method to use in the computation of the tax credit rests with the taxpayer. Reynolds elected to use FIFO in the interest of uniformity, and we uphold the decision of the trial court, allowing Reynolds to elect that method for the purpose of computing its inventory tax credit.\nAffirmed.\nJudges WELLS and COZORT concur.",
        "type": "majority",
        "author": "LEWIS, Judge."
      }
    ],
    "attorneys": [
      "Attorney General Lacy H. Thornburg, by Assistant Attorney General Marilyn R. Mudge, for appellant Helen A. Powers, Secretary of Revenue of the State of North Carolina.",
      "Hendrick, Zotian, Cocklereece & Robinson, by John A. Cocklereece, Jr. and William A. Blancato, for appellee R.J. Reynolds Tobacco Company."
    ],
    "corrections": "",
    "head_matter": "IN THE MATTER OF: THE PROPOSED ASSESSMENT OF ADDITIONAL FRANCHISE TAX AGAINST R. J. REYNOLDS TOBACCO COMPANY FOR THE TAXABLE YEARS 1981 AND 1982\nNo. 9021SC191\n(Filed 15 January 1991)\nTaxation \u00a7 29 (NCI3d)\u2014 inventory tax credit \u2014election of inventory method by taxpayer\nIn the absence of any authority directing which inventory method is to be used in the computation of the inventory tax credit, the right to elect the method rests with the taxpayer.\nAm Jur 2d, State and Local Taxation \u00a7 212.\nAPPEAL by the Secretary of Revenue of the State of North Carolina from a judgment entered 17 November 1989 by Judge Howard R. Greeson in Superior Court, FORSYTH County. Heard in the Court of Appeals 20 September 1990.\nAttorney General Lacy H. Thornburg, by Assistant Attorney General Marilyn R. Mudge, for appellant Helen A. Powers, Secretary of Revenue of the State of North Carolina.\nHendrick, Zotian, Cocklereece & Robinson, by John A. Cocklereece, Jr. and William A. Blancato, for appellee R.J. Reynolds Tobacco Company."
  },
  "file_name": "0382-01",
  "first_page_order": 410,
  "last_page_order": 413
}