N.C. FARM BUREAU MUT. INS. CO. v. N.C. DEP'T OF REVENUE, 2023 NCBC 29

STATE OF NORTH CAROLINA
WAKE COUNTY
IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
20 CVS 10244
NORTH CAROLINA FARM BUREAU
MUTUAL INSURANCE COMPANY,
INC.,
Petitioner,
v.
NORTH CAROLINA DEPARTMENT
OF REVENUE,
Respondent.
ORDER AND OPINION ON
PETITION FOR JUDICIAL REVIEW
1. 	This is an appeal in a contested tax case. 	Petitioner North Carolina Farm
Bureau Mutual Insurance Company, Inc. (“Farm Bureau”) seeks judicial review of a
decision of the Office of Administrative Hearings that resulted in the disallowance of
tax credits that it claimed in 2014, 2015, and 2016. 	Respondent North Carolina
Department of Revenue (“Department”), which seeks to affirm the judgment, has filed
exceptions of its own to certain evidentiary rulings made during the administrative
proceeding.
2. 	For the following reasons, the Court REVERSES the decision of the Office
of Administrative Hearings and REMANDS with instructions to grant summary
judgment in favor of Farm Bureau. The Court also OVERRULES the Department’s
exceptions.
3. 	The Court notes that it is issuing this opinion in tandem with its decision in
McCabe v. N.C. Dep’t of Revenue, No. 21 CVS 5724 (Wake Cnty.) (Order and Opinion
located at ECF No. 72), which involves similar circumstances and presents similar
legal issues.
N.C. Farm Bureau Mut. Ins. Co. v. N.C. Dep’t of Revenue, 2023 NCBC 29.

Smith, 	Anderson, 	Blount, 	Dorsett, 	Mitchell 	& 	Jernigan, 	LLP, 	by
Christopher G. Smith, William W. Nelson, Robert W. Shaw, and John H.
Jo, and by Phillip Jacob Parker, Jr., General Counsel, for Petitioner
North Carolina Farm Bureau Mutual Insurance Company, Inc.
Joshua H. Stein, Attorney General of the State of North Carolina, by
Perry 	J. 	Pelaez, 	Special 	Deputy 	Attorney 	General, 	North 	Carolina
Department of Justice, for Respondent North Carolina Department of
Revenue.1
McDermott Will & Emery LLP, by Jennifer B. Routh, for American
Council 	of 	Life 	Insurers, 	American 	Property 	Casualty 	Insurance
Association, 	Genworth 	Financial, 	Inc., 	Great 	American 	Insurance
Company, Guardian Insurance Company, Liberty Mutual Group Inc.,
Nationwide 	Mutual 	Insurance 	Company, 	Pruco 	Life 	Insurance
Company, The Northwestern Mutual Life Insurance Company, The
Prudential 	Insurance 	Company 	of 	America, 	Transamerica 	Life
Insurance Company, and United Services Automobile Association, Amici
Curiae.
Kilpatrick Townsend & Stockton LLP, by Joseph S. Dowdy, for Cabretta
Capital Corporation, Amicus Curiae.
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., by James C.
Adams, II, for John M. McCabe, Amicus Curiae.
Richard D. Pomp, and North Carolina Chamber Legal Institute, by
Raymond M. Starling, for North Carolina Chamber Legal Institute,
Amicus Curiae.
North Carolina Sustainable Energy Association, by Peter H. Ledford and
Benjamin W. Smith, for North Carolina Sustainable Energy Association,
Amicus Curiae.
Parker Poe Adams & Bernstein LLP, by Kay Miller Hobart, for The
Hartford Group, Amicus Curiae.
Conrad, Judge.
1 Perry J. Pelaez has since withdrawn as counsel for the Department. Taking his place are
Ericka R. McDaniel, Assistant Attorney General, and M.A. Kelly Chambers, Senior Deputy
Attorney General, both of the North Carolina Department of Justice.

I.
BACKGROUND
4. 	When reviewing a final decision in a contested tax case, the Court does not
make findings of fact. The following background is intended only to provide context
for the Court’s analysis and ruling.
A. Statutory Background
5. 	North Carolina has long used tax credits to spur the advancement of
renewable energy resources. By the end of the twentieth century, there were at least
a dozen statutes governing tax credits for wind, solar, hydroelectric, and peat energy
facilities. 	In 1999, the General Assembly repealed and replaced these laws with a
simplified (though far from simple) statutory scheme for renewable energy tax
credits. See 1999 N.C. Sess. Laws 342, secs. 1, 2.
6. 	Here’s how the credit works. “A taxpayer that has constructed, purchased,
or leased renewable energy property” is eligible to receive a credit “if the property is
placed in service in this State during the taxable year.” 	N.C.G.S. § 105-129.16A(a).
The amount of the credit is “equal to thirty-five percent (35%) of the cost of the
property” up to a cost of $2.5 million per installation. Id. § 105-129.16A(a), (c)(1). But
when the property serves a “business purpose,” the taxpayer may not take the credit
all at one time. It is instead split into five annual “installments beginning with the
taxable year in which the property is placed in service.” Id. § 105-129.16A(a); see also
id. § 105-129.16A(c)(1) (defining “business purpose”). Each successive installment is
contingent. 	If the property is taken out of service during the five-year period, “the

credit expires,” and the taxpayer loses any installments that haven’t accrued. 	Id.
§ 105-129.16A(b).
7. 	In practice, few taxpayers that qualify for this credit can directly take
advantage of it. This is because builders and lessors of renewable energy installations
are often limited liability companies or other entities treated as partnerships for tax
purposes. See, e.g., id. § 105-153.3(9), (13). A partnership does not pay tax and has
no tax liability to offset with a credit. 	It is considered a pass-through entity: its
income, losses, and other tax items are allocated among its partners who then report
their shares of each on their tax returns.2
8. 	Thus, when a partnership earns a renewable energy tax credit, the partners
are the ones who claim it. A hybrid of state and federal law governs what the partners
are allowed to claim. 	The starting point is N.C.G.S. § 105-269.15. 	Subsection (a)
states that a partnership that qualifies for a credit “passes through to each of its
partners 	the 	partner’s 	distributive 	share 	of 	the 	credit.” 	Id. 	§ 105-269.15(a).
Subsection (c) goes on to say that a “distributive share of an income tax credit shall
be determined in accordance with sections 702 and 704 of the” Internal Revenue
2 North Carolina allows partnerships to borrow from federal forms for use in the state
partnership tax return, Form D-403. See 17 N.C. Admin. Code 6B.3501, 6B.3503(a). To fill
out Form D-403, a partnership can import some information directly from the federal IRS
Form 1065. Just as the federal Schedule K-1 sets out each partner’s allocated share of tax
items, the Schedule NC K-1 serves the same purpose on the state level. See 17 N.C. Admin.
Code 6B.3503(b).

Code. Id. § 105-269.15(c). The scope of this reference to Code3 sections 702 and 704
is central to the parties’ dispute here.
9. 	Those taxpayers that are allowed to claim a renewable energy tax credit, or
some share of a credit, must elect which of their tax liabilities to offset. 	At first,
taxpayers were allowed to use the credit against the income tax or the franchise tax,
but not both, and not any other type of tax. 	See 1999 N.C. Sess. Laws 342, sec. 2
(codified in part at N.C.G.S. § 105-129.17(a)). 	In 2009, the General Assembly
amended the law to allow taxpayers to elect to apply the credit against the gross
premiums tax as well. 	See 2009 N.C. Sess. Law 548, sec. 3 (codified at N.C.G.S.
§ 105-129.17(a)). 	This amendment gave insurance companies, health maintenance
organizations, and similar entities—all of which pay gross premiums tax and are
exempt from income tax—the same incentive to invest in renewable energy property
as other companies and individuals. See N.C.G.S. §§ 105-130.11(a)(10), 105-228.5(a).
10. 	Designed to be temporary, the statutory scheme for renewable energy tax
credits carries a built-in sunset provision. As a result, renewable energy properties
placed into service after 2017 are no longer eligible to earn the credit. 	See id.
§ 105-129.16A(e)–(g).
B. Farm Bureau’s Investments
11. 	Farm Bureau is a mutual insurance company. 	From 2014 to 2016, it
invested in various renewable energy projects to obtain a share of the tax credits
3 In keeping with the North Carolina Revenue Act, the Court refers to the Internal Revenue
Code simply as the “Code.” See N.C.G.S. § 105-228.90(b)(7) (defining “Code” as “[t]he Internal
Revenue Code as enacted as of May 1, 2020, including any provisions enacted as of that date
that become effective either before or after that date”).

generated by them and, thus, reduce its gross premiums tax liability. (See R.11658–
60.)
12. 	Farm Bureau made these investments through partnerships organized by
Monarch Tax Credits, LLC.4 	Monarch does not own or operate renewable energy
projects. Rather, it is a syndicator that works with project operators to market their
unused tax credits to investors.
13. 	In simple terms, Monarch sets up partnerships to route cash from investors
to operators of renewable energy projects and then allocate the tax credits generated
by the projects back to the investors. How much cash is raised depends on the size of
the expected tax credit. For a project expected to generate a $100,000 credit, Monarch
might promise to drum up $35,000 from investors. 	This is meant to cover just part
of the project’s cost (a project eligible for a $100,000 credit would have a total cost
near $300,000), with debt financing covering much of the rest. 	It’s a win-win-win:
the project operators receive capital; the investors claim the tax credit; and Monarch
takes a cut as middleman. 	(See R.2014, R.2016, R.11220–33, R.11661, R.13800–01,
R.44584, R.47604, R.47833, R.47866.)
14. 	Naturally, the details are more complex. 	Each project has many layers or
tiers of partnerships. 	At the top are the investors, such as Farm Bureau. They are
partners in an entity called the Annual Fund. The Annual Fund is itself a partner in
a partnership—called the Master Fund—in the tier below. 	The Master Fund is a
4 Monarch was once known as State Tax Credit Exchange, LLC. For consistency, the Court
refers to it as Monarch, although the record and the parties call it by different names.

partner in another partnership just below it. 	And so on, ending with the project
operator, or Sponsor, at the bottom. 	Because each partnership is a pass-through
entity, the tax credits earned by the Sponsor flow up through each tier until they
reach the investors. 	A web of operating agreements, subscription agreements, and
other contracts holds the partnerships together.5 (See, e.g., R.2285, R.3960, R.13718–
47, R.13884–99, R.47826.)
15. 	As the name suggests, each Annual Fund is tied to a single tax year. Recall
that renewable energy projects must take a tax credit in installments over five years.
Thus, a given project might support five Annual Funds—one for each installment.
An Annual Fund for 2014, for example, would receive the installment of tax credit
generated for that year and allocate the installment to its partners. 	By design, the
fund would exercise a contractual put option and sell its interest in the Master Fund
at the end of the year. 	A new Annual Fund would then be substituted as a partner
in the Master Fund to receive and allocate the 2015 installment. 	This structure
allows investors to participate and claim a share of tax credit on a year-to-year basis
with no long-term commitment. (See R.2272, R.2288; see also, e.g., R.13741.)
5 This, too, is a simplified depiction of a more complex corporate structure. The partnerships
are not necessarily stacked like rungs on a ladder, with just one partnership in the tier above
and one in the tier below. 	A given Master Fund could hold interests in several lower-tier
partnerships, thus dispensing capital to and drawing tax credits from many different
renewable energy projects. 	And, of course, every partnership has a cumbersome official
name—for example, STCE 2015 NC Solar Credit Investor Fund A, LLC—making it better to
use the sobriquets Annual Fund, Master Fund, and Sponsor for clarity and readability. Less
relevant, but worth noting, is that a parallel chain of partnerships exists to serve investors
interested in allocations of federal tax credits generated by the projects. (See, e.g., R.3960,
R.4001.)

16. 	Indeed, the shorter term helped sway Farm Bureau to invest. Before 2013,
all offerings presented to Farm Bureau by tax-credit syndicators had five-year
investment horizons. 	Allen Houck, Farm Bureau’s investment czar, deemed those
offerings too risky, partly because the principal is a sunk cost. 	Renewable energy
properties typically do not generate a profit in their early years. 	As a result,
tax-credit investors pay cash up front and do not expect to get it back. 	What they
expect to receive is a yearly allocation of tax credits, adding up to a positive total
return in the fourth year of the five-year commitment. Houck worried that tying up
cash for that long might endanger Farm Bureau’s ability to pay insurance claims. He
also worried that the tax credits might expire—if tax laws changed or if a natural
disaster disabled the renewable energy facility—before Farm Bureau received all five
installments. (See R.1985, R.1991, R.2036–38, R.2049, R.2267, R.2275–76.)
17. 	When syndicators, including Monarch, began offering one-year investment
structures in 2014, Houck welcomed the change.6 	The investment still required an
upfront, nonrecoverable cash payment, but he viewed it as a minor concern because
“the investment and the credit would be recognized in the same year.” 	He also
considered the risk of natural disasters during a one-year commitment a “non-issue”
and concluded that “the risk of non-recovery is far less than the risk we have on our
equity portfolio and not significantly greater than the risk on our bonds.” 	Having
observed that other insurance companies were investing with tax-credit syndicators,
6 Farm Bureau weighed investments offered by several tax-credit syndicators, including not
only Monarch but also Holocene, Churchill Securities, and Double Time. (See R.2031–42.)

Houck recommended that Farm Bureau do so as well. (See, e.g., R.1985–86, R.1998,
R.2032, R.2048–49, R.2052, R.2103, R.2331–34; see also R.2271.)
18. 	On that recommendation, and after obtaining an opinion of counsel and
making a site visit, Farm Bureau contributed to two Annual Funds in 2014. It paid
for membership units at a rate of seventy-five cents per expected dollar of tax credit.
The investment principal totaled $5.1 million, with about a third of that figure due
in December 2014 and the remainder due when Farm Bureau received its K-1
schedules several months later. A guaranty agreement also promised Farm Bureau
a partial reimbursement if it did not receive the amount of credit that it anticipated.
In early 2015, Farm Bureau received its expected return: an allocation of $6.8 million
in tax credit on its K-1 schedules. Farm Bureau then used the credit to offset its gross
premiums tax, netting a gain of $1.7 million or more than thirty percent. (See R.2070,
R.2151, R.2166, R.2272, R.2285, R.2293, R.2527–30.)
19. 	Farm Bureau also contributed to Annual Funds in 2015 and 2016. 	Each
year, it invested $10.85 million. In lieu of a guaranty, Farm Bureau took a discount
on membership units, paying just seventy cents per expected dollar of credit. 	The
investments earned Farm Bureau $15.5 million in tax credit—and, thus, a net gain
of more than $4.5 million—in each of those years. 	(See R.11325, R.11327, R.11666;
see also R.2272.)
20. 	All told, Farm Bureau invested almost $27 million in Annual Funds created
by Monarch and received tax-credit allocations of $37.8 million that it used to offset
its gross premiums tax liability.

C. Procedural History
21. 	In 2018, following an audit, the Department disallowed the renewable
energy tax credits claimed by Farm Bureau in 2014, 2015, and 2016 and issued a
proposed assessment of roughly $24 million in additional taxes, penalties, and
interest. 	Farm Bureau objected and requested further review. 	(See R.3073–75,
R.11664.)
22. 	While that review was ongoing, the Department issued public guidance
titled “Important Notice: Tax Credits Involving Partnerships.” The stated purpose of
the Important Notice was “to assist in evaluating the validity and potential amount
of” a partner’s distributive share of a tax credit earned by a pass-through entity. To
that end, the Department referred taxpayers to federal law, citing the link “to sections
702 and 704 of the Code” in N.C.G.S. § 105-269.15. 	In the Department’s words, a
“person not qualifying as a partner under federal income tax [law] would not qualify
for allocation of a credit” under state law. Similarly, the Department cautioned that
some transfers of tax credits may be viewed as disguised sales under Code section
707, which would prevent the “credits from being allocated to a taxpayer under
section 704.” (R.996–98.)7
7 In the years before the Important Notice, the Department issued many Private Letter
Rulings (“PLRs”) concerning section 105-269.15. Farm Bureau argues that the Department
blessed Monarch’s partnership structure in these PLRs and reversed course in the Important
Notice. The Department, on the other hand, argues that its interpretation has remained
consistent throughout and notes that Farm Bureau never requested a PLR. After reviewing
the PLRs, the Court concludes that they have little relevance to the questions presented. See
N.C.G.S. § 105-264.2(a) (“A written determination is applicable only to the individual
taxpayer addressed and as such has no precedential value except to the taxpayer to whom
the determination is issued.”).

23. 	Not long after, the Department upheld its proposed assessment against
Farm Bureau in a Notice of Final Determination. Echoing the guidance given in the
Important Notice, the Department concluded that Farm Bureau was not a bona fide
partner under federal law. 	It reasoned that Farm Bureau expected to receive no
material benefit from the Annual Funds other than allocations of tax credits, that the
short 	duration 	of 	the 	investment 	and 	contractual 	guaranties 	negated 	any
entrepreneurial risk, and that the Annual Funds engaged in no business activity
apart from allocating their single-year credit installments. This, in the Department’s
view, meant that Farm Bureau lacked the “meaningful upside potential” and
“meaningful downside risk” that federal courts look for when deciding whether a
taxpayer is a bona fide partner. (R.183–84 (citing, e.g., Historic Boardwalk Hall, LLC
v. Comm’r, 694 F.3d 425 (3d Cir. 2012)).)
24. 	The Department also concluded that Farm Bureau’s investments were
disguised sales under Code section 707. 	Farm Bureau had argued that section 707
does not apply because there is no reference to it in the applicable state statutes. It
had also argued that, even if section 707 applies, state tax credits are not property
that can be the subject of a disguised sale. 	The Department rejected both positions
and treated the investments as disguised sales for essentially the same reasons that
it deemed Farm Bureau not to be a bona fide partner. 	(See R.184–86 (citing Va.
Historic Tax Credit Fund 2001 LP v. Comm’r, 639 F.3d 129 (4th Cir. 2011)).)

25. 	Farm Bureau filed a petition for a contested case hearing in the Office of
Administrative Hearings. 	Voluminous discovery, including reports and depositions
of half a dozen experts, culminated in cross-motions for summary judgment.
26. 	In 	a 	Final 	Decision, 	the 	Administrative 	Law 	Judge 	(“ALJ”) 	granted
summary judgment for the Department. 	The ALJ saw “no evidence that Farm
Bureau intentionally sought to defraud the State” or the Department. 	Even so, the
ALJ concluded that Farm Bureau did not “meet the criteria” for claiming a credit
under section 105-129.16A(a) because it “did not construct, purchase, or lease
renewable energy property.” The decision says little about the bona fide partnership
and disguised sale issues, listing both as “[a]dditional issues for review” but providing
no analysis. (R.24624–31.)
27. 	Following the Final Decision, Farm Bureau paid the assessment and then
petitioned for judicial review in this Court. 	The Department, in turn, has filed
exceptions relating to the admissibility of expert testimony offered by Farm Bureau.
(See Pet., ECF No. 3; Resp. to Pet., ECF No. 12.)
28. 	These matters are ripe for determination.
II.
LEGAL STANDARD
29. 	In reviewing an agency’s final decision, this Court “acts in the capacity of an
appellate court,” and “the substantive nature of each assignment of error dictates the
standard of review.” N.C. Dep’t of Env’t & Nat. Res. v. Carroll, 358 N.C. 649, 658, 662
(2004). 	The Court reviews de novo an order granting summary judgment. 	Midrex
Techs. v. N.C. Dep’t 	of Revenue, 369 N.C. 250, 257 (2016); see also N.C.G.S.

§ 150B-51(b)(4), (c). This means that the Court “considers the matter anew and freely
substitutes its own judgment for” the agency’s. Midrex, 369 N.C. at 257 (cleaned up)
(quoting Carroll, 358 N.C. at 660). 	But the scope of review is limited to “the final
decision and the official record.” N.C.G.S. § 150B-51(c).
30. 	“In reviewing a final decision allowing . . . summary judgment, the court
may enter any order allowed by . . . Rule 56” of the North Carolina Rules of Civil
Procedure. 	Id. § 150B-51(d). 	Thus, summary judgment is appropriate “if the
pleadings, depositions, answers to interrogatories, and admissions on file, together
with the affidavits, if any, show that there is no genuine issue as to any material fact
and that any party is entitled to a judgment as a matter of law.” N.C. R. Civ. P. 56(c).
The Court views the evidence in the light most favorable to the nonmoving party and
draws all inferences in its favor. See, e.g., DeWitt v. Eveready Battery Co., 355 N.C.
672, 682 (2002); N.C. Farm Bureau Mut. Ins. Co. v. Sadler, 365 N.C. 178, 182 (2011).
31. 	The moving party has the initial, procedural “burden of establishing that
there is no triable issue of material fact,” which may be accomplished “by proving that
an essential element of the opposing party’s claim is nonexistent, or by showing
through discovery that the opposing party cannot produce evidence to support an
essential element of his claim.” 	DeWitt, 355 N.C. at 681 (citations and quotation
marks omitted). 	If the moving party carries this burden, then “the burden shifts to
the nonmoving party to produce a forecast of evidence demonstrating that the
nonmoving party will be able to make out at least a prima facie case at trial.” Id. at
681–82 (cleaned up).

32. 	The taxpayer retains the substantive “burden of proving eligibility for a
credit and the amount of the credit.” 	N.C.G.S. § 105-129.18. 	And the “proposed
assessment 	of 	the 	Secretary 	[of 	Revenue] 	is 	presumed 	to 	be 	correct.” 	Id.
§ 105-241.9(a).
III.
ANALYSIS
33. 	Farm Bureau seeks to reverse the judgment below and restore the tax
credits that it claimed in 2014, 2015, and 2016. 	In its view, the General Assembly
offered tax credits as an incentive to encourage insurance companies and others to
invest in renewable energy. 	Farm Bureau contends that it did its part by putting
millions of dollars in real money toward real renewable energy properties. It further
contends that it has earned a share of the tax credits generated by those properties
and that the Department unjustly used federal tax-abuse doctrines to disallow them.
34. 	The Department, by contrast, contends that a partner’s right to receive an
allocation of state tax credits depends on federal law relating to partnership tax,
including the law defining who is and isn’t a bona fide partner and which transactions
between a partner and a partnership are disguised sales. The evidence, according to
the Department, shows that Farm Bureau’s interest was in acquiring tax credits, not
carrying 	on 	a 	business 	with 	entrepreneurial 	risks 	and 	rewards. 	Thus, 	the
Department argues, Farm Bureau was not a bona fide partner in the Annual Funds,
and even if it were, its deals were disguised, cash-for-credit sales.
35. 	It is notable that the Department does not seek to affirm the judgment based
on the ALJ’s reasoning, namely that Farm Bureau could not claim tax credits because

it “did not construct, purchase, or lease renewable energy property.” (R.24627.) This
is because the ALJ appears to have mistaken the criteria for earning a tax credit with
those for allocating one.
36. 	The key state statutes—sections 105-129.16A(a) and 105-269.15(a)—are
straightforward on this point. A partnership qualifies for a tax credit “as an entity,”
and the way it qualifies is by “engag[ing] in an activity that is eligible for” the credit.
N.C.G.S. 	§ 105-269.15(a). 	Here, 	that 	means 	that 	the 	partnership 	must 	have
“constructed, purchased, or leased renewable energy property.” Id. § 105-129.16A(a).
If the partnership has done one of those things, then it has earned a tax credit and
“passes through to each of its partners the partner’s distributive share of the credit.”
Id. § 105-269.15(a). 	Nothing requires the partners themselves to engage in activity
eligible for a credit as a condition of claiming a distributive share.
37. 	It follows that Farm Bureau wasn’t required to construct, purchase, or lease
renewable energy property, as the ALJ held. 	Farm Bureau is not a partnership
claiming to have qualified for a tax credit. Rather, it claims to be a partner entitled
to an allocation of tax credits that were earned by Sponsors of renewable energy
projects and passed through tiers of intermediate partnerships. 	And there is no
dispute that those Sponsor-level partnerships legitimately earned renewable energy
tax credits by performing one or more activities listed in section 105-129.16A(a).
38. 	What is disputed is whether Farm Bureau is truly a partner entitled to claim
a share of the earned credits—a dispute rooted in a disagreement about which aspects
of federal law the General Assembly adopted in section 105-269.15 and which it did

not. 	Although the Final Decision did not resolve those issues, the task on appeal is
to determine whether the judgment itself—not the reason given for the judgment—is
correct. 	“If the granting of summary judgment can be sustained on any grounds, it
should be affirmed on appeal. 	If the correct result has been reached, the judgment
will not be disturbed even though the [lower tribunal] may not have assigned the
correct reason for the judgment entered.” Shore v. Brown, 324 N.C. 427, 428 (1989).
39. 	Accordingly, the Court turns to the parties’ arguments regarding Farm
Bureau’s partnership status and whether it may claim a distributive share of the tax
credits held by the Annual Funds. The Court begins with the bona fide partnership
and disguised sale issues before turning to the remaining issues, including the
Department’s exceptions.
A. Bona Fide Partnership
40. 	Under federal law, some entities legally organized as partnerships are not
bona fide partnerships for tax purposes. The doctrine goes back at least to the 1940s
when the United States Supreme Court defined the criteria that make a partnership
“real for income-tax purposes.” 	Comm’r v. Culbertson, 337 U.S. 733, 741 (1949); see
also Comm’r v. Tower, 327 U.S. 280 (1946). The basic test is “whether the partners
really and truly intended to join together for the purpose of carrying on business and
sharing in the profits or losses or both.” Culbertson, 337 U.S. at 741 (quoting Tower,
327 U.S. at 287). Taxpayers flunk that test when they adopt the partnership form as
“mere camouflage,” id. at 747, or to cover up “a mere paper reallocation” of gains or
losses, id. at 746 (quoting Tower, 327 U.S. at 292). But if “the partners joined together
in good faith to conduct a business, having agreed that the services or capital to be

contributed presently by each is of such value to the partnership that the contributor
should participate in the distribution of profits, that is sufficient” to pass the test. Id.
at 745.
41. 	The parties emphatically dispute whether Farm Bureau is a bona fide
partner as defined by Culbertson. 	They also dispute an antecedent issue: whether
N.C.G.S. § 105-269.15 adopts Culbertson’s definition of partnership. The Department
contends that, because a “distributive share of an income tax credit shall be
determined in accordance with sections 702 and 704 of the” Code, see N.C.G.S.
§ 105-269.15(c), the partner claiming the share must also be a partner as defined by
federal law. 	Farm Bureau disagrees, arguing that the General Assembly defined
partner and partnership broadly in the North Carolina Revenue Act and that section
105-269.15(c) lacks a clear and specific reference to federal definitions of those terms.8
42. 	“As a general proposition, when the General Assembly intends to adopt
provisions or definitions from other sources of law into a statute, it does so ‘by clear
and specific reference.’ ” 	Fidelity Bank v. N.C. Dep’t of Revenue, 370 N.C. 10, 19
(2017) (quoting Lutz Indus. v. Dixie Home Stores, 242 N.C. 332, 340 (1955)). This is
just as true for tax law as any other area of law. 	Thus, “the General Assembly has
8 Farm Bureau also argues that section 105-269.15(c) and its reference to federal law are red
herrings. According to Farm Bureau, the statute says that a distributive share of an “income
tax credit” must be determined under Code sections 702 and 704 but says nothing about how
to determine a tax credit used to offset a partner’s gross premiums tax. This is incorrect. An
“income tax credit” is simply a tax credit that a taxpayer may use to offset its income tax
liability. That is so even if the taxpayer has the option to use—and in fact uses—the credit
to offset one or more other types of tax liability. 	The renewable energy tax credit is
undoubtedly an income tax credit because it can be applied against the income tax. 	How
Farm Bureau elected to use the credit is beside the point.

selectively incorporated certain of the definitions contained in the Internal Revenue
Code into the North Carolina Revenue Act” but has not adopted them “on any sort of
wholesale basis.” Id. at 21.
43. 	Fidelity Bank illustrates this principle. There, the taxpayer bought United
States government bonds at a discount and earned a sizeable gain when they
matured. 	Federal law treats this gain “as interest” for the purpose of determining
federal taxable income, 26 U.S.C. § 1276(a)(4), and North Carolina law allows
taxpayers to deduct from state taxable income any “[i]nterest upon the obligations of
the United States . . . to the extent included in federal taxable income,” N.C.G.S.
§ 105-130.5(b). 	The 	taxpayer 	took 	the 	deduction 	on 	the 	theory 	that 	section
105-130.5(b) incorporated the federal definition of the word interest. 	Our Supreme
Court rejected that interpretation and reasoned that, “had the General Assembly
intended” to adopt the federal definition, “it would have incorporated that definition
into N.C.G.S. § 105-130.5(b)(1) by clear and specific reference.” 	Fidelity Bank, 370
N.C. at 20 (citation and quotation marks omitted). Because the statute lacked a clear
and specific reference, the Supreme Court construed interest according to its ordinary
meaning and rejected the taxpayer’s claim. See id. at 21–22.
44. 	For much the same reason, the Court agrees with Farm Bureau’s reading of
section 105-269.15 and disagrees with the Department’s.
45. 	As Farm Bureau observes, the General Assembly defined various terms,
including partner and partnership, in N.C.G.S. § 105-153.3. “Partnership” means “[a]
domestic partnership, a foreign partnership, or a limited liability company,” and “the

term 	‘partner’ 	means 	a 	member 	of 	the 	limited 	liability 	company.” 	N.C.G.S.
§ 105-153.3(9), (13). These definitions expressly apply to the part of the Revenue Act
that governs the determination of individual income tax. 	See id. § 105-153.3 (“The
following definitions apply in this Part[.]”). 	Although section 105-269.15 is in a
different part of the Revenue Act, it governs the allocation of “income tax credits” and
is therefore closely related. By using the same words in the same (or at least a highly
similar) context, the General Assembly presumably intended the same meaning. At
the least, the statutory structure and context do not indicate that the General
Assembly intended to define partner and partnership one way for determining
individual income tax and another way for allocating income tax credits. 	See Home
Depot U.S.A., Inc. v. N.C. Dep’t of Revenue, 2015 NCBC LEXIS 103, at *16 (N.C.
Super. Ct. Nov. 6, 2015) (recognizing the “natural presumption that identical words
used in different parts of the same act are intended to have the same meaning”
(quoting Atl. Cleaners & Dyers, Inc. v. United States, 286 U.S. 427, 433 (1932))).
46. 	The Department’s position is that section 105-269.15 incorporates federal
definitions of partner and partnership, thus departing from the definitions used in
analogous parts of the Revenue Act. 	As the Supreme Court held in Fidelity Bank,
had the General Assembly intended to adopt federal statutory or judicial definitions
of the words partner and partnership, it would have incorporated those definitions
into section 105-269.15 by clear and specific reference. There is no such reference in
the statute.

47. 	The only candidate is subsection (c)’s reference to Code sections 702 and 704.
See N.C.G.S. § 105-269.15(c). But neither section defines the term partnership. And
neither refers to bona fide partnerships. 	These Code sections are “silent on the
question of when a putative partnership is in fact valid.” 	Southgate Master Fund,
L.L.C. v. United States, 659 F.3d 466, 483 n.53 (5th Cir. 2011). 	All they address is
how to calculate a partner’s distributive share of tax items, such as income, loss, and
credit. See 26 U.S.C. §§ 702, 704. It is for that purpose—determining a distributive
share, not determining partnership status—that section 105-269.15(c) points to Code
sections 702 and 704.
48. 	No other language in section 105-269.15 refers to federal law, much less to
federal definitions of specific terms. Section 105-269.15 does not use the phrase bona
fide partnership. It does not cite, quote, or allude to Code section 7701, which defines
partnership but “does not supply a comprehensive definition.” 	Cross Refined Coal,
LLC v. Comm’r, 45 F.4th 150, 156 (D.C. Cir. 2022). Nor does it refer to the case law
and “anti-abuse regulations” that fashion the criteria that make a partnership bona
fide for federal income tax purposes. 	Id.; see also Southgate Master Fund, 659 F.3d
at 483 n.53 (“Here the judicial doctrines step into the breach.”).
49. 	It is true, as the Department contends, that “[a] statute providing exemption
from taxation is strictly construed against the taxpayer and in favor of the State.”
Aronov v. Sec’y of Revenue, 323 N.C. 132, 140 (1988). But this rule applies only when
“the meaning of a tax statute is doubtful . . . . 	[I]f the intent of the Legislature is
discernible from the statute it will prevail regardless of the rule of strict construction

against exemptions.” 	Institutional Food House, Inc. v. Coble, 289 N.C. 123, 135
(1976). 	Here, the intent of the General Assembly is discernible. 	The text and
structure of section 105-269.15 show an intent to use the words partner and
partnership in the same sense that they are used in analogous parts of the Revenue
Act. 	Had it wished to use a different meaning, the General Assembly could have
incorporated federal definitions of the disputed terms by a clear, specific reference.
It did not. There is no work for the canon of strict construction to do.9
50. 	As a result, Farm Bureau need not show that it is a bona fide partner under
federal law to claim a distributive share of a tax credit under section 105-269.15.
Farm Bureau qualifies as a partner if it is a “member” of a “limited liability
company”—which it indisputably is. N.C.G.S. § 105-153.3 (9), (13).
51. 	The 	Department 	worries 	that 	this 	interpretation 	elevates 	form 	over
substance and invites abuse. Its concern is exaggerated. North Carolina courts are
far from powerless when faced with abuse of the corporate form. In rare cases, it is
surely necessary to “look beyond the corporate facade and to substance rather than
form,” so as to ensure that the tax laws will not “ ‘be evaded through technicalities.’ ”
Good Will Distribs. (N.), Inc. v. Currie, 251 N.C. 120, 126 (1959) (quoting Indus.
Cotton Mills Co. v. Comm’r, 61 F.2d 291, 293 (4th Cir. 1932)).
9 It is also true that “the construction placed upon the statute by the Secretary . . . although
not binding, will be given due consideration by a reviewing court.” Aronov, 323 N.C. at 140.
But “our courts are not restricted with respect to the interpretation of the provisions of the
Revenue Act by reason of any decision made or regulation promulgated by the” Secretary.
Campbell v. Currie, 251 N.C. 329, 333 (1959). The Court has given due consideration to the
Department’s construction—taken as a litigating position, not by formal regulation—and
found it inconsistent with the statute’s text and structure.

52. 	This isn’t that kind of case. 	The transactions at issue were real, not
fictitious, and they involved exactly the kind of economic activity that the General
Assembly deemed socially desirable and sought to encourage with tax credits. Farm
Bureau contributed millions of dollars to support renewable energy properties—
properties that were, in fact, placed in service and that did, in fact, qualify to receive
tax credits. 	As the ALJ rightly observed, there is “no evidence that Farm Bureau
intentionally sought to defraud the State.” (R.24628.)
53. 	Moreover, Farm Bureau was not a member of the Annual Funds in name
only. It had meaningful membership rights—including rights to share in profits and
losses—established through operating agreements, subscription agreements, and
related organizational documents. (See, e.g., R.24937–52, R.24906–35.) Yes, its goal
in joining the Annual Funds was undoubtedly to obtain tax benefits, which would be
suspect if the activity that generated the tax benefits lacked substance or was
otherwise a sham. Again, though, the renewable energy properties in this case were
real and qualified for tax credits. Pursuing real economic ends for tax-related reasons
is legitimate and, as the Court of Appeals has observed, tends to support the existence
of a legal partnership. See Best Cartage, Inc. v. Stonewall Packaging, LLC, 219 N.C.
App. 429, 438 (2012) (“[W]e believe plaintiff’s allegations are sufficient to meet any
requirement of profit sharing [to form a partnership] in that they shared employees
with no accounting and jointly sought tax incentives to share in the vertical
integration of their businesses.”).

54. 	The undisputed evidence shows that Farm Bureau was a member of the
Annual Funds, having contributed real capital to further real renewable energy
projects. Accordingly, the Court concludes that Farm Bureau is a partner in the sense
meant by section 105-269.15. 	The Department’s contrary interpretation of that
statute is flawed, and its contention that Farm Bureau is not a bona fide partner
under federal law is misplaced.
55. 	For the sake of completeness, even if the Department’s interpretation were
correct, it would not be entitled to summary judgment. Federal courts “do not lightly
set aside de jure partnerships as shams.” 	Cross Refined Coal, 45 F.4th at 156.
Whether a partnership is bona fide depends on whether “the parties in good faith and
acting with a business purpose intended to join together in the present conduct of the
enterprise.” Culbertson, 337 U.S. at 742. This is “a question of fact,” id. at 741, that
federal courts typically decide after trial, not on summary judgment. See, e.g., Cross
Refined Coal, 45 F.4th at 155; Historic Boardwalk, 649 F.3d at 445–46; ASA
Investerings P’ship v. Comm’r, 201 F.3d 505, 511 (D.C. Cir. 2000); see also Feibus &
Co. v. Godley Constr. Co., 301 N.C. 294, 306 (1980) (noting that North Carolina courts
rarely resolve questions of intent on summary judgment).10
10 Courts must “consider[] all the facts,” including (a) “the agreement,” (b) “the conduct of the
parties 	in execution of 	its 	provisions,” 	(c) 	“their 	statements,” 	(d) 	“the testimony 	of
disinterested persons,” (e) “the relationship of the parties,” (f) “their respective abilities and
capital contributions,” (g) “the actual control of income and the purpose for which it is used,”
and (h) “any other facts throwing light on their true intent.” Culbertson, 337 U.S. at 742. In
addition to these factors, federal courts have employed an “analytically distinct” test distilled
by the Tax Court from Culbertson. See BCP Trading & Invs., LLC v. Comm’r, 991 F.3d 1253,
1269–70 (D.C. Cir. 2021); see also DJB Holding Corp. v. Comm’r, 803 F.3d 1014, 1022–23
(9th Cir. 2015) (stating eight factors “[t]he Tax Court distilled from Culbertson”).

56. 	Viewing the evidence in the light most favorable to Farm Bureau, a
factfinder could conclude that it had a business purpose and that it intended to join
together with others in the present conduct of the enterprise. 	The evidence shows
that Farm Bureau supplied capital, which is one of the essential “ingredients” of a
bona fide partnership. Culbertson, 337 U.S. at 740. This capital contribution had a
nontax business purpose, namely to support the creation and operation of properties
that produce renewable energy. And the use of the partnership form furthered that
business purpose by enabling the renewable energy properties “to raise more capital”
through tax-credit financing. Cross Refined Coal, 45 F.4th at 159. Indeed, “[l]ow-tax
entities . . . often use the prospect of tax credits to attract high-tax entities . . . into a
partnership, and in return, the high-tax partners provide the financing needed to
make the tax-incentivized project possible.” Id. at 157.
57. 	Evidence tying the use of the partnership form to a nontax business purpose
was absent in Historic Boardwalk, the Department’s preferred case. 	The alleged
partner there gave the appearance of contributing toward the rehabilitation of a
historic building, but its “contributions were not at all necessary for the . . . project to
be completed” because the rehabilitation was already “fully funded.” 	Historic
Boardwalk, 694 F.3d at 456–57. 	The use of the partnership form was mere
camouflage. 	It was not needed to secure capital, had no connection to the project’s
nontax business purpose, and was simply a conduit to obtain tax benefits. See id. at
461.

58. 	The Department insists that Farm Bureau had no upside potential, faced no
downside risk, and expected no profit from its year-to-year investments other than
through tax credits. As the D.C. Circuit recently observed, though, “a partnership’s
pursuit of after-tax profit can be legitimate business activity for partners to carry on
together. This is especially true in the context of tax incentives, which exist precisely
to encourage activity that would not otherwise be profitable.” Cross Refined Coal, 45
F.4th at 158.
59. 	The General Assembly determined that renewable energy sources are
socially desirable and used tax incentives to encourage investment in them. 	Farm
Bureau answered that call and made meaningful contributions to renewable energy
projects that (as far as the record shows) continue to generate energy within the
State’s power grid. Farm Bureau’s contributions are no less real because it aimed to
earn 	a 	positive, 	post-tax 	return 	from 	this 	otherwise 	unprofitable 	business.
“Taxpayers that structure their dealings to receive tax benefits afforded by statute
are entitled to those benefits, no matter their subjective motivations.” Id. at 156; see
also id. at 158–59 (“The Commissioner’s view would thus hamstring Congress’s
ability to use tax credits to encourage all kinds of activity that is socially desirable
but unprofitable to those undertaking it.”); see also Sacks v. Comm’r, 69 F.3d 982, 992
(9th Cir. 1995) (“If the government treats tax-advantaged transactions as shams
unless they make economic sense on a pre-tax basis, then it takes away with the
executive hand what it gives with the legislative.”).

60. 	At a minimum, Farm Bureau has shown that there is a genuine issue of
material fact concerning whether it is a bona fide partner under federal law. 	Thus,
even if section 105-269.15 incorporates federal law on bona fide partnerships, the
Department would not be entitled to summary judgment on that basis.
61. 	But, as discussed, section 105-269.15 does not incorporate that aspect of
federal law. 	There is no “clear and specific” reference to any federal statute,
regulation, or case law involving the bona fide partner doctrine. As a result, the Court
concludes that Farm Bureau need not show that it is a bona fide partner under federal
law. 	North Carolina law alone governs partnership status in this context, and as a
member of a limited liability company, Farm Bureau is indisputably a partner for
purposes of section 105-269.15.
B. Disguised Sale
62. 	The Department argues that, even if Farm Bureau qualifies as a partner,
the judgment must be affirmed because its cash-for-credit deals were disguised sales.
The Court turns to this argument next.
63. 	Under federal law, partnerships usually recognize no gain from their
partners’ contributions of capital and no loss from distributions to their partners. See
26 U.S.C. §§ 721, 731(b). 	In that sense, transfers between partnerships and their
partners “are tax-free.” 	Virginia Historic, 639 F.3d at 138. 	The disguised sale rule
is an exception. This rule, codified at Code section 707, aims to keep taxpayers from
using “the partnership provisions” of the Code to avoid paying tax on “what would in
substance have been a taxable exchange if it had not been run through the
partnership.” Id. (citation and quotation marks omitted). Section 707 is lengthy and

multifaceted. The relevant part addresses transactions between a partnership and a
partner that “are properly characterized as a sale or exchange of property.” 26 U.S.C.
§ 707(a)(2)(B)(iii). 	These transactions are treated as “between the partnership and
one who is not a partner”—in other words, as taxable events as opposed to tax-free
events. Id. § 707(a)(1).
64. 	Once again, the parties dispute whether the General Assembly adopted this
federal statute into section 105-269.15. Their arguments mirror those relating to the
bona fide partnership doctrine. 	The Department points to section 105-269.15(c)’s
reference to Code sections 702 and 704 and argues that it necessarily sweeps in
section 707 as well; by contrast, Farm Bureau argues that there is no clear and
specific reference to federal law governing disguised sales.
65. 	The Court agrees with Farm Bureau. Had the General Assembly intended
to adopt Code section 707 and its implementing regulations, it would have done so
“by clear and specific reference.” Fidelity Bank, 370 N.C. at 19 (citation and quotation
marks omitted). 	Yet the text of section 105-269.15(c) makes no mention of section
707. 	Nor does it address when, if ever, to treat a partnership’s allocation of a
distributive share of a tax credit to a partner as a taxable event.
66. 	The Department contends that section 707 applies even if not stated in so
many words. Its reasoning goes like this. A distributive share “shall be determined
in accordance with sections 702 and 704.” N.C.G.S. § 105-269.15(c). Section 704, in
turn, states that a distributive share “shall, except as otherwise provided in this
chapter, be determined by the partnership agreement.” 26 U.S.C. § 704(a) (emphasis

added). Thus, the Department says, determining a distributive share in accordance
with section 704 necessitates compliance with section 707, which is in the same
chapter.
67. 	This argument overreaches. 	The chapter at issue—“Normal Taxes and
Surtaxes”—is home to hundreds of statutes. Section 704(a) does not purport to bring
them all into play. Instead, it establishes a default rule for determining a partner’s
distributive share and makes that default rule subject to exceptions in a handful of
statutes 	scattered 	throughout 	the 	chapter. 	See, 	e.g., 	id. 	§ 48D(d)(2)(A)(i)(II)
(“paragraph (3) shall be applied with respect to such credit before determining any
partner’s distributive share . . . of such credit”); id. § 163(j)(4)(A) (“For purposes of
clause (ii)(II), a partner’s distributive share of partnership excess taxable income
shall be determined in the same manner as the partner’s distributive share of
nonseparately stated taxable income or loss of the partnership.”).
68. 	The Department seems to believe that section 707(a) is one of these
exceptions yet offers no persuasive reason to read it that way. 	The purpose of that
statute, which neither refers to distributive shares nor says how to determine one, is
to regulate the tax treatment of sale-like transactions between partnerships and their
partners. 	How to determine a distributive share is one thing; whether to tax a
distribution “as a sale or exchange” is another. Id. § 707(a)(2)(B)(iii). Whatever else
section 105-269.15’s directive to determine a distributive share “in accordance with
sections 702 and 704” may require, it is not a veiled reference to section 707(a) and
does not require application of the disguised sale rule.

69. 	Implicit in the Department’s position is a view that sections 704 and 707 are
intended to work together, each being a part of the fabric of federal partnership tax
law. Doubtless, that’s true. Even so, the General Assembly is free to pick and choose
which parts of federal partnership tax law to incorporate into state law and which to
leave out. It would turn Fidelity Bank on its head to construe a reference to one part
of the federal statutory scheme of partnership tax as a reference to the whole.
70. 	To be sure, Fidelity Bank does not say that the General Assembly must call
out Code sections by title and number to incorporate them into state law. Any clear
and specific reference will do. 	Certainly, the General Assembly is aware that the
Code is a complex, interrelated body of law and knows how to use plain language to
incorporate isolated definitions, all or part of a section, or more comprehensive
doctrines. 	But section 105-269.15 evinces no direct or indirect reference to section
707. The General Assembly chose to incorporate sections 702 and 704 and only those
sections. Honoring that choice does not cast doubt on the scope of broader references
to the Code in other parts of the Revenue Act, as the Department contends.
71. 	Consider, too, that section 105-269.15 serves to reduce the tax liability of
partners (by allocating shares of tax credits earned by partnerships) while the
disguised sale rule does the opposite (by stripping away the tax exemption that
usually applies to partnership-related contributions and distributions). 	There is an
obvious tension between the two. 	True, the tension is not insoluble. 	The General
Assembly could have adopted a rule, much like Code section 707, that treats certain
credit allocations as akin to sales and declares the income from claiming a share of

credit to be subject to taxation. But if that is what the General Assembly intended,
it would have used the language of taxation, not exemption. 	And if the General
Assembly had intended to adopt a law as complex and well-defined as the disguised
sale rule, it would have used clear, specific language to do so. 	It did neither. 	The
language of section 105-269.15(c) (“distributive share . . . shall be determined”)
mimics that of Code section 704 (“distributive share . . . shall . . . be determined”), not
that of Code section 707 (“such transfers shall be treated” as taxable events).
72. 	Ordinary canons of statutory construction point in the same direction. The
judiciary presumes that the General Assembly chooses its words “carefully.” 	N.C.
Dep’t of Corr. v. N.C. Med. Bd., 363 N.C. 189, 201 (2009). When dealing with “a series
of two or more terms or things that should be understood to go hand in hand,” the
inclusion of a subset supports “a sensible inference that the term left out must have
been meant to be excluded.” Cooper v. Berger, 371 N.C. 799, 810 (2018) (citation and
quotation marks omitted). 	So too here. 	The targeted enumeration of sections 702
and 704—which go hand in hand to determine a partner’s distributive share of tax
items—conveys an intent to omit and exclude section 707. See, e.g., C Invs. 2, LLC v.
Auger, 383 N.C. 1, 12 (2022) (“Moreover, this narrow scope . . . conveys the General
Assembly’s intent that the exception go no further than to exempt those specific types
of covenants.”).
73. 	Likewise, “a statute should not be interpreted in a manner which would
render any of its words superfluous.” 	State v. Coffey, 336 N.C. 412, 417–18 (1994).
The Department’s interpretation threatens to do just that. 	If the mention of Code

section 704 alone sweeps the bulk of federal partnership tax law into section
105-269.15(c), then the additional mention of Code section 702 serves no purpose.
The better approach is to “give every word of the statute effect.” N.C. Med. Bd., 363
N.C. at 201; see also Lunsford v. Mills, 367 N.C. 618, 623 (2014) (“Thus, in
effectuating legislative intent, it is our duty to give effect to the words actually used
in a statute and not to delete words used or to insert words not used.”).
74. 	If 	there 	were 	some 	reasonable 	doubt 	about 	the 	meaning 	of 	section
105-269.15, the Department could call on the canon of strict construction to tip the
scales in its favor. 	See Institutional Food House, 289 N.C. at 135; Aronov, 323 N.C.
at 140. There isn’t, and so it can’t.
75. 	Of course, if state law excludes the disguised sale rule, then state and federal
law may treat certain partnership transactions differently. There is no reason to be
uneasy about that result. 	See Fidelity Bank, 370 N.C. at 21–22 (finding “nothing
illogical” about treating a taxable event differently under state and federal law).
North 	Carolina’s 	policy-making 	branches 	are 	not 	beholden 	to 	the 	federal
government’s fiscal priorities. 	In this context, the General Assembly may have
reasonably decided that taxing allocations of tax credits as disguised sales would
deter the very investments in renewable energy that it wished to encourage. (As an
aside, the Department has not argued or shown that the federal government has
treated transactions between Monarch and its investors involving North Carolina tax
credits as disguised sales.)

76. 	In sum, section 105-269.15 does not incorporate the disguised sale rule.
Thus, application of that rule cannot support the judgment below.
77. 	To bring things to a close, it bears mention that the disguised sale rule—
assuming the rule applies and assuming the transactions at issue were disguised
sales—would not be a reason to disallow the credit allocations to Farm Bureau. The
appropriate result would instead be “to revoke the nonrecognition treatment for
transactions between a partner and a partnership and to treat the transaction as a
taxable sale of property between unrelated parties.” 	Tribune Media Co. v. Comm’r,
T.C. Memo 2021-122, 122 T.C.M. (CCH) 258 (2021). 	That is, income from the
exchange is subject to taxation. See, e.g., BC Ranch II, L.P. v. Comm’r, 867 F.3d 547,
557 (5th Cir. 2017) (“such a contribution is considered a disguised sale and treated as
income”); Route 231, LLC v. Comm’r, 810 F.3d 247, 262 (4th Cir. 2016) (adjusting
partnership’s “federal tax form to reflect, in relevant part, income of $3,816,000” from
partner’s contribution).
78. 	The Department’s contrary approach is misguided. 	It contends that North
Carolina law prohibits sales of tax credits, including disguised sales under Code
section 707. But if the Department is correct that section 105-269.15(c) incorporates
section 707, then section 707 is North Carolina law. The Department cannot take the
part of section 707 that it likes and leave out the part that it doesn’t. 	Section 707
taxes sale-like partnership transactions; it does not nullify them.11
11 The Department also argues that the Annual Funds actually sold tax credits to Farm
Bureau, contrary to North Carolina law. 	It is undisputed, though, that Farm Bureau
purchased a membership interest in each Annual Fund and received tax credits only in the

79. 	In any event, section 105-269.15(c) contains no “clear and specific reference”
to Code section 707 or the disguised sale doctrine. Accordingly, the Court concludes
that the disguised sale rule does not support the judgment.12
C. The Amount of Farm Bureau’s Distributive Shares
80. 	The next issue is whether Farm Bureau has carried its burden to show that
the credit allocations that it claimed in 2014, 2015, and 2016 are correct. 	Farm
Bureau argues that its allocations are commensurate with its ownership interests in
the Annual Funds and therefore comply with Code sections 702 and 704, as
incorporated 	into 	section 	105-269.15(c). 	In 	support, 	Farm 	Bureau 	cites
organizational 	documents 	for 	the 	various 	partnerships, 	transaction 	documents
regarding its contributions and the resulting allocations, and cost certifications for
the underlying renewable energy projects. 	Farm Bureau also contends that it
independently validated the accuracy of documents received from the partnerships.
(See, e.g., R.11666–69.)
81. 	In response, the Department fails to rebut this evidence. 	It argues, for
example, that Farm Bureau’s K-1 schedules are full of “errors and inconsistencies”
but never says what the errors and inconsistencies are. 	(DOR Op. Br. 53, ECF No.
61.)
form of partnership allocations. What the Department means by an “actual” sale is that the
transactions were sales in substance, though not in form. That argument simply repeats the
Department’s disguised sale argument.
12 The Court need not and does not address Farm Bureau’s alternative argument that tax
credits are not property and therefore cannot be subject to the disguised sale rule.

82. 	Likewise, the Department argues that the allocations made to Farm Bureau
were not in accordance with its partnership interests, as required by Code section
704(b), due to “the apparent use of recourse debt to finance the projects.” (DOR Op.
Br. 53.) But the Department cites no evidence, offers no law related to the treatment
of debt financing under section 704(b), and does not say how the projects’ debt
financing affects Farm Bureau’s interests in the partnerships.
83. 	Also missing are the Department’s own calculations. What shares of credit
would Farm Bureau be entitled to claim after correcting the supposed K-1 errors and
factoring in the projects’ debt financing? The response brief is silent.
84. 	In lieu of spelling out its arguments and citing evidence to support them, the
Department points to its “briefing below.” 	(DOR Op. Br. 53.) 	This is not only an
impermissible end run around the word limits imposed by the Business Court Rules
(which the Court enlarged in this case) but also a violation of the requirement to cite
evidence with specificity. 	“It is not the Court’s job to sift through the record and
make” the Department’s case for it. 	Brewster v. Powell Bail Bonding, Inc., 2020
NCBC LEXIS 27, at *9 (N.C. Super. Ct. Mar. 11, 2020) (cleaned up).
85. 	Accordingly, the Court concludes that Farm Bureau has offered unrebutted
evidence to show that its claimed allocations were determined in accordance with its
interests in the partnerships. The allocations comply with Code sections 702 and 704
and N.C.G.S. § 105-269.15(c).
D. The Department’s Exceptions
86. 	The Department has submitted exceptions to the ALJ’s denial of its motions
to exclude the reports and testimony of Farm Bureau’s expert witnesses. Specifically,

the Department contends that the experts impermissibly opined on questions of law
and on matters outside the scope of their expertise.
87. 	An ALJ’s ruling on the admissibility of expert testimony is reviewed for an
abuse of discretion. See, e.g., Stark v. N.C. Dep’t of Env’t & Nat. Res., 224 N.C. App.
491, 500–01 (2012). 	“The burden is on the party who asserts that evidence was
improperly admitted to show both error and that he was prejudiced by its admission.”
State v. Gappins, 320 N.C. 64, 68 (1987); see also Hasty v. Turner, 53 N.C. App. 746,
750 (1981) (“The burden is on the appellant not only to show error, but also to enable
the Court to see that he was prejudiced and that a different result would have likely
ensued had the error not occurred.”).
88. 	The Department has not come close to carrying its burden. 	To start, the
Department all but abandoned these issues by making only skeletal arguments in its
primary brief. 	As an example, in violation of the Business Court Rules, the
Department refers to its “brief below” for arguments that the experts impermissibly
opined on matters outside the scope of their expertise. 	(DOR Op. Br. 56.) 	This is
wholly insufficient to preserve an issue for appeal. 	Although the Department
advanced more comprehensive arguments in its reply brief, those arguments are
untimely. 	See, e.g., State v. Fowler, 353 N.C. 599, 607–08, 616, 620–22, 625 (2001)
(deeming issues abandoned when party assigned error but advanced no arguments
in supporting brief); McKinnon v. CV Indus., Inc., 228 N.C. App. 190, 196 (2013)
(deeming issue abandoned when party made only a “passing reference” rather than
any “specific argument”); State v. Triplett, 258 N.C. App. 144, 147 (2018) (“[A] reply

brief is not an avenue to correct the deficiencies contained in the original brief.”
(citations and quotation marks omitted)); Larsen v. Black Diamond French Truffles,
Inc., 241 N.C. App. 74, 78–79 (2015) (same).
89. 	Moreover, at no point in either brief does the Department address the issue
of prejudice or show that it was prejudiced by the ALJ’s decision. 	No potential
prejudice is apparent. 	In rendering the Final Decision, the ALJ did not rely on or
refer to any of Farm Bureau’s expert reports or testimony. Moreover, even if the ALJ
had considered that testimony, no prejudice resulted because the Department
prevailed. Likewise, this Court has not relied on the experts’ reports and testimony
as a basis for its decisions; rather, the Court has based its conclusions on the
application of North Carolina law to the undisputed facts. Even if the ALJ erred in
denying the Department’s motions to exclude, the Department has failed to meet its
burden to show that it was prejudiced by the error.
90. 	Accordingly, the Department has not met its burden to show an abuse of
discretion. Its exceptions are overruled.
IV.
CONCLUSION
91. 	For 	all 	these 	reasons, 	the 	Court 	GRANTS 	Farm 	Bureau’s 	Petition,
VACATES the Final Decision, and REMANDS with direction to GRANT summary
judgment 	in 	favor 	of 	Farm 	Bureau. 	The 	Court 	further 	OVERRULES 	the
Department’s exceptions to the ALJ’s denial of its motions to exclude.

SO ORDERED, this the 3rd day of April, 2023.
/s/ Adam M. Conrad
Adam M. Conrad
Special Superior Court Judge
for Complex Business Cases