17 NCAC 05F .0205 — Economic Substance Factors

Determining whether or not a transaction has economic substance is a fact-intensive inquiry that is dependent upon the facts and circumstances of each transaction made by a taxpayer. The Secretary shall consider or analyze all the facts and circumstances including the following: (1) The reasons for the transaction; (2) Whether the transaction was a reasonable means to accomplish the asserted purposes; (3) Expectations of benefits obtained from the transactions; (4) The effects the transaction had on the taxpayer's profits; (5) The existence of a reasonable or realistic potential for profit from making the transaction; (6) The objective economic impact of the transaction other than State income tax savings; (7) The transaction's effect on the taxpayer's State income tax liability; (8) The transaction's effect on the taxpayer's tax liability in other states; (9) The transaction's effect on the taxpayer's federal tax liability; (10) Whether the method of determining the amount of payment is an industry practice; (11) The change in the business operations of the parties, if any, after the transaction; (12) Whether assets were transferred between or among related parties; (13) Whether the business operations related to specific assets changed after any transfer of those assets; (14) Whether the entity transferring assets retained control over the assets; (15) The tax consequences of the transfer of assets; (16) The party or parties who created or developed the ideas which led to the transaction; (17) The party or parties who presented the ideas concerning the transaction to the taxpayer; (18) Whether the contemporaneous documentation explaining the transaction to the taxpayer discussed profit potential in addition to tax benefits; (19) The party or parties that drafted the agreements relating to the transaction; (20) The party or parties that negotiated the agreements relating to the transaction; (21) The party or parties that dictated the terms of the agreements relating to the transaction; (22) Cost-benefit analyses or other studies conducted related to the transaction; (23) Non-tax benefits obtained by the taxpayer as a result of the transaction; and (24) Whether the intercompany transaction resulted in a circular cash flow. 17 NCAC 05F .0206 WHEN STATE INCOME TAX Benefits ARE CONSIDERED (a) State income tax benefits resulting from a transaction are considered by the Secretary in determining whether a transaction has reasonable business purposes and economic substance when the State income tax benefits are consistent with legislative intent, such as when the transaction is made in accordance with laws enacted by the General Assembly to encourage engagement in certain types of activities through tax deductions or tax credits. (b) When a transaction that generates targeted tax incentives is, in form and substance, consistent with the State income tax benefits designed by the General Assembly, the State income tax benefits shall be considered by the Secretary in determining whether the transaction has reasonable business purposes and economic substance.