Reed Smith Client Alerts

The Business Court division of the Wake County Superior Court recently issued an opinion in N.C. Dep’t of Revenue v. Graybar concerning the impact of dividends on a taxpayer’s net economic loss ("NEL") carryforward.1 The court ruled that the taxpayer’s dividend income is “income not taxable” to the extent of its federal dividends received deduction ("DRD"), which means the taxpayer’s NEL carryforward must be reduced by the North Carolina-apportioned dividend income. Although North Carolina replaced its NEL regime with a more traditional net operating loss ("NOL") regime for tax years beginning on or after January 1, 2015, Graybar still impacts many taxpayers because that law change permits taxpayers to carry forward any unused NELs and deduct them just like NOLs. Graybar filed a notice of appeal to the North Carolina Supreme Court on 7 February 2019.

Autoren: Megan Q. Miller Jeremy Abrams Kenneth R. Levine Gloria Thompson2

The taxpayer, Graybar Electric Company, Inc., received over $400 million of dividends in 2007 and 2008, claiming a DRD in that amount for federal income tax purposes.  Graybar’s North Carolina returns for 2007 and 2008 reflected federal taxable income after application of the DRD.  Graybar had substantial NELs available to be carried forward from years dating back to 2001.  Graybar used those NELs to reduce its North Carolina taxable income remaining after state modifications in 2007 and subsequent taxable years.

For the years at issue in the case, North Carolina’s NEL regime differed from the federal NOL regime.  Specifically, under North Carolina’s NEL regime, an NEL carryforward was required to be offset by any “income not taxable” before it could be deducted from taxable income.3