A North Carolina Administrative Law Judge held that the Department of Revenue did not have the authority to adjust the taxpayer’s net income because the Department failed to timely issue a statutorily required written statement.

The Department believed the taxpayer had not accurately reported income properly attributable to North Carolina due to intercompany transactions that either lacked economic substance or were not at fair market value and issued a proposed assessment pursuant to N.C. Gen. Stat. § 105-130.5A(k). Although the Department is generally permitted to make such adjustments to a taxpayer’s net income, certain statutory requirements must be met. One such requirement is that the Department “shall” provide the taxpayer a written statement within 90 days of issuing the proposed assessment, detailing the support for the Department’s findings and its proposed method for computation of net income.

Here, it took the Department nearly five years after issuance of the notice of proposed assessment to provide the required written statement. The ALJ analyzed the language within the 90-day deadline, ruling that the use of the word “shall” in reference to providing the written statement and the imposition of a deadline following the phrase “no later than” indicated the requirement was mandatory, not directory. Because the Department did not comply with a mandatory requirement, the Department lacked authority to adjust the taxpayer’s income under this code section.

Ingram Micro, Inc. v. N.C. Dep’t of Revenue, 22 REV 04478 (N.C. Office Admin. Hearings Oct. 27, 2023).