North Carolina Administrative Code Title 17 — Revenue

17 NCAC 05F .0205

Economic Substance Factors

Official textreports.oah.state.nc.us24 subsections

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.

Last amended: Authority G.S. 105-130.5A; 105-262.1; Eff. January 31, 2013; Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

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