17 N.C. Admin Code 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.