O. Transactions Between Affiliated Corporations and Consolidated Returns (G.S.
105-130.5 (a) (9)) (G.S. 105-130.6)
- Preliminary Statement
The law provides certain limitations and restrictions on deductions for payments
or charges made in connection with transactions between a parent, subsidiary
and affiliated corporation. The purpose of these provisions is to prevent
a parent, subsidiary or affiliated corporation from reporting a distorted
net income to North Carolina by siphoning off its income properly attributable
to its operations in North Carolina to an out-of-state parent, subsidiary
or affiliated corporation.
- Deductions for Payments and Charges Must Be Commensurate with Goods and
In arriving at its state net income, a taxpayer corporation which is a parent,
subsidiary or affiliate of another corporation or group of corporations is
required to limit any deductions for payments to, or charges by, its parent,
subsidiary or affiliated corporation to amounts which are reasonable in relation
to the goods or services received therefor.
- Consolidated Returns
Under State law, a corporation is not permitted to file a consolidated income
tax return. However, in certain cases, the law does give the Secretary of
Revenue authority to require the filing of a consolidated return.
If the Secretary finds that the net income reported by a parent, subsidiary
or affiliated corporation does not represent the true earnings of such corporation
on its business carried on in this State, the Secretary may require that such
corporation file a consolidated return covering the entire operations of the
parent and all subsidiary and affiliated corporations which had transactions
with the corporation required to file a return in this state. The Secretary
shall then determine the true amount of net income earned by the taxpayer
in this State.
The combined net income of the parent and all subsidiary and affiliated corporations
shall be apportioned to North Carolina by use of the applicable apportionment
formula required to be used by the taxpayer under G.S. 105-130.4. In such
cases there shall be included in the apportionment formula the property, payrolls
and sales of all corporations for which the consolidated return is made.
If the Secretary finds that the determination of the net income
of a parent, subsidiary or affiliated corporation under a consolidated
return will produce a greater or lesser figure than the amount
of income actually earned in the State, the Secretary may readjust
the determination by reasonable methods of computation to make
it conform to the amount of income earned in North Carolina. If
the corporation disagrees with the Secretary's determination,
it may, within 30 days after notice of such determination, submit
its objections and an alternative method of determination. The
Secretary will consider the alternative method proposed in arriving
at a conclusive determination.
- Subsidiary and Affiliated Corporations Required to Furnish Information
Requested by Secretary
The law provides that a parent, subsidiary or affiliated corporation
shall report, in its income tax return or otherwise, any information
the Secretary "may reasonably require for the determination
of the net income taxable under this division", and that
for failure to furnish such information within thirty days after
demand the corporation shall be subject to a penalty of $100 for
each day's omission in addition to the penalty provided under
- Definitions of Subsidiary Corporation, Parent Corporation, and Affiliated
For the purpose of the provisions of G.S. 105-130.6, a "subsidiary
corporation" is a corporation that is controlled either directly
or indirectly by another corporation by stock ownership, interlocking
directors, or by any other means whatsoever exercised by the same
or associated financial interests, whether such control is direct
or through one or more subsidiary, affiliated or controlled corporations.
A "parent corporation" is a corporation which by any
of the foregoing means controls another corporation. An "affiliated
corporation" is a member of a group of corporations which
are controlled directly or indirectly by the same parent corporation
or by the same or associated financial interest by stock ownership,
interlocking directors, or by any other means whatsoever, regardless
of whether such control is through one or more subsidiary, affiliated,
or controlled corporations.
- Transactions Between Affiliated Corporations Closely Examined by the
When examining and auditing corporate income tax returns, the
Department's auditors give special attention to income and expense
items resulting from transactions between affiliated corporations
in order to determine whether the taxpayers have complied with
the provisions of G.S. 105-130.6 in reporting their net income.