{ "id": 11711004, "name": "BELLSOUTH TELECOMMUNICATIONS, INC., d/b/a Southern Bell Telephone and Telegraph Company, Petitioner v. NORTH CAROLINA DEPARTMENT OF REVENUE, Respondent", "name_abbreviation": "BellSouth Telecommunications, Inc. v. North Carolina Department of Revenue", "decision_date": "1997-06-03", "docket_number": "No. COA96-558", "first_page": "409", "last_page": "415", "citations": [ { "type": "official", "cite": "126 N.C. App. 409" } ], "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": [ { "cite": "290 N.C. 586", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8562783 ], "year": 1976, "opinion_index": -1, "case_paths": [ "/nc/290/0586-01" ] }, { "cite": "172 S.E.2d 531", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1970, "opinion_index": 0 }, { "cite": "276 N.C. 411", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8561596 ], "year": 1970, "opinion_index": 0, "case_paths": [ "/nc/276/0411-01" ] }, { "cite": "167 S.E.2d 808", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1969, "pin_cites": [ { "page": "811" } ], "opinion_index": 0 }, { "cite": "5 N.C. App. 53", "category": "reporters:state", "reporter": "N.C. App.", "case_ids": [ 8548033 ], "year": 1969, "pin_cites": [ { "page": "58" } ], "opinion_index": 0, "case_paths": [ "/nc-app/5/0053-01" ] }, { "cite": "443 S.E.2d 89", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1994, "pin_cites": [ { "page": "92" } ], "opinion_index": 0 }, { "cite": "114 N.C. App. 711", "category": "reporters:state", "reporter": "N.C. App.", "case_ids": [ 8527957 ], "year": 1994, "pin_cites": [ { "page": "716" } ], "opinion_index": 0, "case_paths": [ "/nc-app/114/0711-01" ] }, { "cite": "123 S.E.2d 582", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1962, "pin_cites": [ { "page": "589", "parenthetical": "holding that inability of vending machine retailer to collect taxes upon small sales does not relieve it from remitting proper amount of taxes upon total gross receipts" } ], "opinion_index": 0 }, { "cite": "256 N.C. 155", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8571604 ], "year": 1962, "pin_cites": [ { "page": "166", "parenthetical": "holding that inability of vending machine retailer to collect taxes upon small sales does not relieve it from remitting proper amount of taxes upon total gross receipts" } ], "opinion_index": 0, "case_paths": [ "/nc/256/0155-01" ] }, { "cite": "N.C. Gen. Stat. \u00a7 105-130.9", "category": "laws:leg_statute", "reporter": "N.C. Gen. Stat.", "opinion_index": 0 }, { "cite": "227 S.E.2d 562", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 10, "year": 1976, "pin_cites": [ { "page": "566-67" }, { "page": "569-570" }, { "page": "606" }, { "page": "574" }, { "page": "569" }, { "page": "575" } ], "opinion_index": 0 }, { "cite": "290 N.C. 586", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8562783 ], "weight": 5, "year": 1976, "pin_cites": [ { "page": "592-93" }, { "page": "598" }, { "page": "598" }, { "page": "607" } ], "opinion_index": 0, "case_paths": [ "/nc/290/0586-01" ] } ], "analysis": { "cardinality": 607, "char_count": 15361, "ocr_confidence": 0.749, "pagerank": { "raw": 2.0446031217563963e-07, "percentile": 0.7487453901752573 }, "sha256": "736bf4eccd123ec6424ec6b966eef6ccd56233c80964ed8cfe5d4a6e1d7b7ee9", "simhash": "1:7f5d8552d7f00a78", "word_count": 2475 }, "last_updated": "2023-07-14T19:11:14.463583+00:00", "provenance": { "date_added": "2019-08-29", "source": "Harvard", "batch": "2018" }, "casebody": { "judges": [ "Judges WALKER and MARTIN, Mark D. concur." ], "parties": [ "BELLSOUTH TELECOMMUNICATIONS, INC., d/b/a Southern Bell Telephone and Telegraph Company, Petitioner v. NORTH CAROLINA DEPARTMENT OF REVENUE, Respondent" ], "opinions": [ { "text": "LEWIS, Judge.\nRespondent the North Carolina Department of Revenue (\u201cDOR\u201d), pursuant to N.C. Gen. Stat. \u00a7\u00a7 150B-52 and 7A-27, appeals from an order of the trial court reversing Administrative Decision No. 287 of the Tax Review Board.\nPetitioner BellSouth Telecommunications, Inc. (\u201cSouthern Bell\u201d) was incorporated in Georgia on 12 August 1983. On 10 January 1984, the Federal Communications Commission (\u201cFCC\u201d) issued the \u201cBOC Separation Order.\u201d Under this order, if Southern Bell wanted to sell or lease customer premises telephone equipment (\u201cCPE\u201d) to its customers after 1 July 1984, it would be required to do so through a separate subsidiary corporation. Consequently, ASI, a wholly-owned subsidiary of Southern Bell, was incorporated on 26 October 1984 to market and sell CPE. ASI incurred net economic losses during taxable years 1985 through 1988, all the years of its operation.\nIn 1987, the FCC issued the \u201cStructural Relief Order,\u201d which permitted Southern Bell to market and sell CPE directly. On 31 December 1988, ASI merged into Southern Bell. Southern Bell\u2019s 1989 tax return reflected profits from its operations. The record does not indicate whether the assets of ASI posted any post-merger profits. Southern Bell deducted the net economic loss incurred by ASI during the taxable years 1985 through 1988 on its 1989 return.\nOn 3 February 1992, DOR issued a proposed notice of assessment for additional corporate income taxes for years 1988, 1989 and 1990 against Southern Bell. Southern Bell protested the assessment and requested an administrative hearing, which was held on 29 June 1993, before Michael A. Hannah, Assistant Secretary (\u201cSecretary\u201d). At the hearing, the only issue was whether N.C. Gen. Stat. section 105-130.8 (1995) permitted Southern Bell to deduct the losses incurred by ASI prior to its merger into Southern Bell. The Secretary held that Southern Bell was not entitled to deduct the net economic losses incurred by ASI prior to the merger since the group of ASI assets which produced the net economic loss, the CPE assets, failed to generate a profit after the merger against which the earlier losses could be offset.\nIn addition, the Secretary rejected Southern Bell\u2019s argument that but for its compliance with FCC rulings, Southern Bell would not have formed a subsidiary to sell CPE and would have therefore been able to deduct losses suffered by the CPE business as ordinary business expenses. Southern Bell filed a petition for administrative review by the Tax Review Board. The Tax Review Board, by Administrative Decision No. 287 issued 20 January 1995, confirmed the Secretary\u2019s decision.\nSouthern Bell petitioned for judicial review of the Tax Review Board\u2019s decision. The superior court ruled that the Tax Review Board acted arbitrarily and capriciously in failing to take into account the fact that ASI was only created in response to FCC rulings and that Southern Bell would have derived a tax benefit from the losses sustained by ASI had they been permitted to conduct the CPE operations directly. The court also found that the merger of Southern Bell and ASI satisfied the \u201ccontinuity of business enterprise\u201d test under G.S. \u00a7 105-130.8 because the merger satisfied the \u201cbut for\u201d and the \u201csubstantially the same business\u201d test enunciated in Fieldcrest Mills, Inc. v. Coble, 290 N.C. 586, 227 S.E.2d 562 (1976).\nThe trial court reversed the Tax Review Board and held that Southern Bell was entitled to deduct the net economic losses sustained by ASI prior to the merger. DOR appeals.\nDOR asserts multiple assignments of error, but we find merit in their appeal by addressing only two issues.\nFirst, we address DOR\u2019s argument that the trial court erred in determining that the Secretary and Tax Review Board acted arbitrarily and capriciously in failing to consider that ASI was only created as a result of FCC rulings.\nThere is ample evidence in the record that the Secretary considered the effect of the FCC rulings. Specifically, the Secretary found:\nLack of choice is not a consideration in determining whether a net economic loss is allowed as a deduction to a surviving corporation [under N.C. Gen. Stat. \u00a7 105-130.9]. There is simply no authority, statutory or judicial, for taxpayer\u2019s position. The Secretary of Revenue is responsible for applying the tax laws as written by the legislature and as interpreted by the courts. The law is clear that Southern Bell is not permitted to deduct the net economic losses incurred by ASI. An exception such as taxpayer claims is not supported by any statute or law.\nThe trial court concluded that Southern Bell was entitled to claim the disputed tax deduction because it \u201cwould have derived a tax benefit from the losses sustained by ASI had Southern Bell been permitted to conduct the CPE operations directly.\u201d However, Southern Bell was unable to conduct the CPE operations directly pursuant to an FCC ruling. There is absolutely no basis for the court to ignore the effect of the \u201cBOC Separation Order\u201d and instead treat ASI and Southern Bell as if they had always been one company. The two companies were created in response to a federally ordered divestiture or separation. As the North Carolina Supreme Court has recognized, \u201cIf the accidents of trade lead to inequality or hardship, the consequences must be accepted as inherent in government by law instead of government by edict.\u201d Piedmont Canteen Service, Inc. v. Johnson, 256 N.C. 155, 166, 123 S.E.2d 582, 589 (1962) (holding that inability of vending machine retailer to collect taxes upon small sales does not relieve it from remitting proper amount of taxes upon total gross receipts). In this case, the FCC rulings regulating CPE and requiring that a separate subsidiary be created if Southern Bell wished to continue selling CPE is an incident of trade and a circumstance which has absolutely no bearing on whether Southern Bell qualified for the tax deduction. The trial court erred in finding otherwise.\nNext, we address DOR\u2019s argument that the trial court erred as a matter of law in determining that the merger of ASI and Southern Bell satisfied the \u201ccontinuity of business enterprise\u201d test under Fieldcrest so as to qualify to deduct pre-merger losses under G.S. \u00a7 105-130.8.\nDOR argues that it was error for the court to deem that the merger satisfied the \u201ccontinuity of business enterprise\u201d test when the merger failed to satisfy the \u201cassets\u201d test under Fieldcrest. The court ruled that the merger satisfied the \u201cbut-for\u201d and the \u201csubstantially the same business\u201d tests and therefore qualified for the tax deduction. Because we find the merger did not satisfy any of the tests under Fieldcrest, we agree.\nPursuant to N.C. Gen. Stat. Section 150B-51(b), we apply de novo review of administrative agency decisions in reviewing claims alleging errors of law. Brooks v. Ansco & Associates, 114 N.C. App. 711, 716, 443 S.E.2d 89, 92 (1994). At issue here is whether the merger of ASI into Southern Bell qualifies as a continuity of business enterprise so as to enable Southern Bell to deduct the pre-merger losses of ASI against Southern Bell\u2019s post-merger gains. G.S. \u00a7 105-130.8 provides:\nNet economic losses sustained by a corporation in any or all of the five preceding income years are allowed as a deduction to such corporation. . . . the purpose in allowing the deduction of a net economic loss ... is that of granting some measure of relief to the corporation which has incurred economic misfortune. . . .\nG.S. 105-130.8(1) (emphasis added).\nOriginally, a carryover deduction was only available for \u201cthe corporation\u201d which had actually suffered the economic loss. See Fieldcrest, 290 N.C. at 592-93, 227 S.E.2d at 566-67. Courts eventually expanded their interpretation of \u201cthe corporation\u201d and allowed companies to deduct the losses of corporations they had subsumed or joined with through merger, under certain conditions. Id. The North Carolina Supreme Court, in Fieldcrest, explained in detail the evolution of three tests for determining whether the resultant corporation of a merger could be treated as merely continuing the business enterprise of the former corporation and therefore eligible to deduct its losses. Both parties agree that Fieldcrest controls this case.\nThe three tests enunciated by the Court in Fieldcrest are as follows: (1) the \u201cbut-for\u201d test, which allows the deduction, if but for the merger, the corporation suffering the loss would have been able to utilize the deduction; (2) the \u201cassets\u201d test, which requires that the pre-merger assets which suffered the loss must have post-merger gains against which to offset the loss; and (3) the \u201csubstantially the same business\u201d test which allows the deduction if the business of the acquired corporation which sustained the loss has not been materially altered or enlarged by the merger. Fieldcrest, 290 N.C. at 598, 227 S.E.2d at 569-570.\nThe lower court found that the Southern Bell/ASI merger satisfied the \u201cbut-for\u201d and \u201csubstantially the same business\u201d tests under Fieldcrest. However, integral to the court\u2019s finding was its reasoning that \u201cbut-for\u201d the FCC separation requirements, Southern Bell would have conducted CPE services directly and therefore would have been able to deduct any losses as business expenses. Since we find that it was error for the court to consider the effect of the FCC rulings, we hold that the merger does not satisfy any of the tests under Fieldcrest.\nFirst, under the \u201cbut-for\u201d test, Southern Bell is entitled to claim the tax deduction if, \u201cbut-for\u201d the merger, ASI would have been able to claim the deduction. Id. at 606, 227 S.E.2d at 574. In order for ASI to have qualified for the tax deduction, ASI would have to prove that it had income in 1989 against which to offset the losses of 1985-88. Id. In this case, there is no evidence in the record that ASI experienced any gain or income in 1989. Southern Bell appears to have offered no evidence that the ASI assets posted any gain in 1989. The burden of proof is on the taxpayer to establish a deductible loss and its amount. Ward v. Clayton, 5 N.C. App. 53, 58, 167 S.E.2d 808, 811 (1969), aff'd, 276 N.C. 411, 172 S.E.2d 531 (1970). Thus, without any evidence that ASI would have been able to claim the tax deduction \u201cbut for\u201d the merger, Southern Bell also fails to qualify for the deduction.\nThe merger also fails to qualify as a continuity of business enterprise using the \u201cassets\u201d test. Under the assets approach,\nthe pre-merger losses generated by the physical assets of the acquired corporation may be used to offset the post-merger profits of the resulting corporation which are generated by those assets but such losses may not be offset against the resulting corporation\u2019s post-merger profits attributable to the acquiring corporation\u2019s pre-merger physical assets.\nFieldcrest, 290 N.C. at 598, 227 S.E.2d at 569. As stated supra, Southern Bell has not offered any evidence that the assets of ASI experienced any post-merger gains against which to offset pre-merger losses. Southern Bell argues that the Tax Review Board\u2019s rule requiring that a corporation seeking to deduct pre-merger losses prove by evidence of accounting records that clearly show the income and expenses attributable to such group of assets is not required by Fieldcrest or any other authority. Assuming this argument to be true, nevertheless, the record reveals that the Tax Review Board offered Southern Bell other, less stringent alternatives to demonstrate that ASI had post-merger gains. It appears that Southern Bell did not offer any evidence on the issue. The only evidence Southern Bell submitted was of the gains experienced by Southern Bell as a whole. Under the assets test, evidence regarding Southern Bell\u2019s overall gains was insufficient. Thus, we conclude that Southern Bell also failed to demonstrate that its merger was a \u201ccontinuity of business enterprise\u201d under the \u201cassets\u201d test.\nFinally, Southern Bell fails under the \u201csubstantially the same business\u201d test. In Fieldcrest, the court indicated that the assets of the merged corporation must not be materially altered or enlarged by the merger. 290 N.C. at 607, 227 S.E.2d at 575. If the merged company\u2019s assets are materially altered or enlarged, there is no continuity of business enterprise under this test and the resulting corporation is not \u201cthe corporation\u201d which sustained the loss. Id. The deduction is therefore not available. In this case, it is clear that the merger materially altered and enlarged the assets of the former ASI. ASI, pre-merger, had only one principal line of service, CPE. Southern Bell offered a myriad of other services, excluding CPE. The merged company offering CPE and a host of other telecommunication services clearly enlarged the assets of the former ASI. Thus, Southern Bell can claim no continuity of business enterprise and cannot deduct ASI\u2019s losses.\nWe hold that the trial court erred in finding that the Tax Review Board acted arbitrarily and capriciously by not considering the effect of the FCC rulings in the formation of ASI and in finding that the merger of ASI into Southern Bell qualified as a \u201ccontinuity of business enterprise\u201d so as to enable Southern Bell to deduct the pre-merger losses of ASI on its 1989 corporate tax return. Accordingly, the order is\nReversed.\nJudges WALKER and MARTIN, Mark D. concur.", "type": "majority", "author": "LEWIS, Judge." } ], "attorneys": [ "Keith G. Landry and Robert E. Thomas, Jr. for petitioner-appellee.", "Attorney General Michael F. Easley, by Assistant Attorney General Kay Linn Miller Hobart, for respondent-appellant." ], "corrections": "", "head_matter": "BELLSOUTH TELECOMMUNICATIONS, INC., d/b/a Southern Bell Telephone and Telegraph Company, Petitioner v. NORTH CAROLINA DEPARTMENT OF REVENUE, Respondent\nNo. COA96-558\n(Filed 3 June 1997)\n1. Taxation \u00a7 118 (NCI4th)\u2014 merger of corporation and subsidiary \u2014 deduction of subsidiary\u2019s pre-merger losses \u2014 FCC ruling irrelevant\nAn FCC ruling requiring that a separate subsidiary be created if Southern Bell wished to continue selling or leasing customer premises telephone equipment was an incident of trade and a circumstance which has no bearing on whether Southern Bell qualified for a tax deduction for losses incurred by the subsidiary prior to its merger with Southern Bell following another FCC order which permitted Southern Bell to directly market and sell customer premises equipment.\nAm Jur 2d, State and Local Taxation \u00a7\u00a7 534-587.\n2. Taxation \u00a7 118 (NCI4th)\u2014 merger of corporation and subsidiary \u2014 no continuity of business enterprise \u2014 deduction of subsidiary\u2019s pre-merger losses not allowed\nThe merger of Southern Bell and its subsidiary did not qualify as a continuity of business under Fieldcrest Mills, Inc. v. Coble, 290 N.C. 586 (1976), so as to entitle Southern Bell to deduct the pre-merger economic losses of the subsidiary against Southern Bell\u2019s post-merger gains in calculating its income tax. The merger did not meet the \u201cbut-for\u201d or \u201cassets\u201d tests where the record does not show whether the subsidiary\u2019s assets earned any post-merger profits; nor did the merger meet the \u201csubstantially the same business\u201d test where it materially altered and enlarged the assets of the acquired subsidiary.\nAm Jur 2d, State and Local Taxation \u00a7\u00a7 534-537.\nAppeal by respondent from order entered 19 February 1996 by Judge James U. Downs in Mecklenburg County Superior Court. Heard in the Court of Appeals 29 January 1997.\nKeith G. Landry and Robert E. Thomas, Jr. for petitioner-appellee.\nAttorney General Michael F. Easley, by Assistant Attorney General Kay Linn Miller Hobart, for respondent-appellant." }, "file_name": "0409-01", "first_page_order": 447, "last_page_order": 453 }