McCABE v. N.C. DEP'T OF REVENUE, 2023 NCBC 28

STATE OF NORTH CAROLINA
WAKE COUNTY
IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
21 CVS 5724
JOHN M. MCCABE and REBECCA
B. MCCABE,
Petitioners,
v.
NORTH CAROLINA DEPARTMENT
OF REVENUE,
Respondent.
ORDER AND OPINION ON
PETITION FOR JUDICIAL REVIEW
1. 	In this appeal, Petitioners John and Rebecca McCabe seek judicial review of
an administrative decision that resulted in the disallowance of an income tax credit
they 	claimed 	in 	2014. 	Respondent 	North 	Carolina 	Department 	of 	Revenue
(“Department”) contends that disallowance is appropriate and seeks to affirm the
judgment. 	The Department has also filed exceptions 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 the McCabes. The Court also OVERRULES the Department’s
exceptions.
3. 	The Court notes that it is issuing this decision in tandem with its decision
in a separate appeal brought by North Carolina Farm Bureau Mutual Insurance
Company. 	Both cases involve similar factual circumstances and present nearly
identical legal questions. 	See N.C. Farm Bureau Mut. Ins. Co. v. N.C. Dep’t of
McCabe v. N.C. Dep’t of Revenue, 2023 NCBC 28.

Revenue, No. 20 CVS 10244 (Wake Cnty.) (Order and Opinion located at ECF No.
103).
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P, by James C
Adams, II and Howard L. Williams, for Petitioners John M. and Rebecca
B. McCabe.
Joshua H. Stein, Attorney General of the State of North Carolina, by
Perry J. Palaez, Special Deputy Attorney General, North Carolina
Department of Justice, for Respondent North Carolina Department of
Revenue.1
Conrad, Judge.
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. 	As the Court explained in the companion Farm Bureau decision, North
Carolina has long used tax credits to spur the advancement of renewable energy
resources. 	There were once a dozen or more statutes granting tax credits for wind,
solar, and similar energy facilities. 	In 1999, the General Assembly repealed and
replaced this patchwork of laws with a unified statutory scheme for renewable energy
tax credits. See 1999 N.C. Sess. Laws 342, Secs. 1, 2.
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.

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
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).

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
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. 	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. The McCabes’ Investment
10. 	John and Rebecca McCabe are North Carolina residents. 	In 2014, they
invested 	in 	several 	renewable 	energy 	projects 	in 	North 	Carolina 	through 	a
partnership organized by Monarch Tax Credits, LLC. The McCabes then claimed a
share of the tax credits generated by the projects on their joint income tax return.
(See R.72302, R.72308–09.)4
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”).
4 The Court refers to the McCabes jointly as “investors” and “partners” for simplicity. It is
more accurate to say that John McCabe invested in the partnership as an individual and that

11. 	Monarch specializes in tax-equity financing across a variety of industries,
including 	renewable 	energy, 	low-income 	housing, 	film 	projects, 	and 	historic
rehabilitation. 	Put simply, this means that Monarch works with project developers
to raise capital by marketing their surplus or unused tax credits to investors. 	(See
R.66405.)
12. 	The events in this case involve solar energy projects sponsored by Ecoplexus,
Inc. and FLS Energy, Inc. 	Seeking capital for the projects, the sponsors enlisted
Monarch to find investors who would finance a portion of the cost—roughly 11% for
EcoPlexus and 17% for FLS Energy—with the expectation of receiving in return
allocations of tax credits generated by the projects. Much of the remaining cost was
financed with debt. 	Recall that the amount of tax credit that a renewable energy
property generates depends on its total cost (not its method of financing). 	See
N.C.G.S. § 105-129.16A(a). Factoring in projected costs and the size of its investment,
Monarch anticipated a ratio of $1 in credit for every 35 cents its investors contributed
to EcoPlexus and $1 in credit for every 58 cents contributed to FLS Energy. 	This
arrangement benefited the investors and sponsors alike: as one developer with FLS
Energy testified, the “projects would not have been feasible” without the capital from
Monarch’s investors. (See R.66243, R.66406–08.)
13. 	Monarch created partnerships designed to route capital from investors to
the sponsors and to return the tax credits generated by the projects to the investors.
the McCabes together claimed a share of credit on their tax return as a married couple filing
jointly. (See R.72308, R.72311.) The Court also refers to Monarch Tax Credits as “Monarch”
throughout this opinion, though the parties often refer to it by its previous name, State Tax
Credit Exchange, LLC.

The partnership structure is complex, comprising several tiers. 	In the top tier, the
investors are partners in an entity called the Annual Fund. 	In the next tier down,
the Annual Fund is a partner in another entity called the Master Fund. 	There are
more tiers below that, with the Master Fund holding an interest in one or more
partnerships connected to the project sponsors. 	At the bottom are the renewable
energy projects. 	(See, e.g., R.65411–75, R.65479–564, R.65568–731, R.66278–81,
R.66297–36.)5
14. 	One advantage of this partnership structure for investors is the short-term
commitment. 	As its name suggests, each Annual Fund is tied to a single tax year.
This year-to-year framework runs in parallel with the statutory scheme, which
requires taxpayers to take renewable energy tax credits in installments over five
years. 	In effect, Monarch created a new Annual Fund each year to receive and
allocate that year’s installment of tax credits, along with any profits or losses. After
doing so, the Annual Fund would exercise a put option and sell its interest in the
Master Fund for $100.00, and a new Annual Fund for the next year would take its
place. Each investor would be free to make a new contribution and become a partner
in the new Annual Fund, or to step aside. 	(See, e.g., R.66320, R.70335, R.72307,
R.72311.)
5 This is a simplified summary of a more complex organizational chart. (See, e.g., R.72305–
07.) 	For clarity and readability, the Court refers to the partnerships as Annual Fund and
Master Fund as a shorthand in place of their much lengthier proper names. Also, although
this case concerns only state tax credits, the projects at issue generated federal tax credits as
well. A parallel chain of partnerships was created to facilitate allocations of the federal tax
credits to other investors.

15. 	The McCabes chose to invest in the Annual Fund for 2014 after learning
about it from their accountant and sometime investment advisor. Monarch gave the
McCabes several agreements that set forth the fund’s details, including that its
primary purpose was to invest in renewable energy properties and that the pool of
available tax credits would depend on the amount invested and other factors.
Monarch also noted that the actual amount of credit generated by the projects might
fall short of what was anticipated and that there were legislative and regulatory risks
associated with the investment. 	The investment materials stated that the Annual
Fund might cover a credit shortfall out of its reserves but was under no obligation to
do so. (See R.66364, R.66372–75, R.70061, R.70094–109, R.70110–39.)
16. 	In December 2014, the McCabes bought a .3166842% membership interest
in the Annual Fund. 	They made an initial capital contribution of $8,640.00—or 30
percent of the total contribution—at that time. In April 2015, the Annual Fund then
allocated to the McCabes their pro rata share of tax items, including $36,000 in tax
credit and $14,192 in losses. 	After receiving their K-1 schedule, the McCabes paid
the remaining $20,160 to the Annual Fund to complete their total investment
contribution of $28,800. 	In total, the Annual Fund for 2014 contributed over
$6,000,000 in capital to the underlying projects. (See, R.64890, R.64893–94, R.66243,
R.66407, R.70061, R.72310–11.)
17. 	The McCabes claimed their share of credit and losses on their 2014 tax
returns. Because they could not offset more than 50% of their North Carolina income
tax liability with tax credit, the McCabes claimed less than their full allocation from

the Annual Fund ($30,464) in 2014. Because the unused credit carried forward, the
McCabes were able to claim allocated losses and the credit remaining from 2014 on
their 2015 tax return. (See R.72311–12.)
18. 	In July 2015, the 2014 Annual Fund exercised its put option and redeemed
its interest in the Master Fund for $100.00. After exercising this put option, the 2014
Annual Fund retained only a nominal interest in the Master Fund. In 2015, despite
its nominal interest in the Master Fund, the 2014 Annual Fund still allocated $11,614
in losses to McCabe along with $3 of interest income. 	(See R.62875, R.64897,
R.72311.)
C. Procedural History
19. 	At the beginning of 2018, the Department notified the McCabes that their
2014 tax return was subject to an audit. (See R.72313.)
20. 	While the audit was pending, the Department issued an “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.65034–
36.)6
21. 	In November 2018, the Department issued a proposed assessment based on
the Official Auditor’s report that disallowed the McCabes’ claimed share of tax credit.
The McCabes then requested a Departmental review. (See R.72313.)
22. 	Following its review, the Department upheld the proposed assessment.
Tracking its guidance in the Important Notice, the Department reasoned that section
105-269.15(c)’s reference to Code sections 702 and 704 incorporates the federal bona
fide 	partnership 	and 	disguised 	sale 	doctrines. 	Applying 	these 	doctrines, 	the
Department first concluded that the McCabes were not bona fide partners in the
Annual Fund because any upside potential from the underlying renewable energy
projects would not go to them, guaranty agreements ensured that they would face no
downside risk, and the substance of the transaction was not an investment in a true
partnership. 	(See R.63541–44 (citing, e.g., Historic Boardwalk Hall v. Comm’r, 694
F.3d 425 (3rd Cir. 2012)).)
23. 	In addition, the Department concluded that even if the McCabes were bona
fide partners, allocating a share of tax credit to them in return for their investment
6 In the years before the Important Notice, the Department issued many Private Letter
Rulings (“PLRs”) concerning section 105-269.15. The McCabes argue 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 the McCabes 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.”).

amounted to 	a 	disguised sale. 	The 	Department 	reasoned 	that 	the 	McCabes’
investment was tied directly to the amount of credit they expected to receive, which
was reasonably certain at the time of the investment; that they had a contractual
right to the expected share of credit; that the amount of credit due was secured
against 	shortfall 	or 	recapture; 	that 	their 	interest 	in 	the 	partnership 	was
disproportionate to their share of the profits; and that they had no further obligation
to the partnership after receiving their share of the credit. 	The Department also
relied on its finding that the McCabes faced no entrepreneurial risk. (See R.63544–
47 (citing Va. Historic Tax Credit Fund 2001 LP v. Comm’r, 639 F.3d 129 (4th Cir.
2011)).)
24. 	The McCabes filed a timely petition for a contested case hearing in the Office
of 	Administrative 	Hearings. 	The 	parties 	filed 	numerous 	motions, 	including
cross-motions 	for 	summary 	judgment, 	cross-motions 	to 	exclude 	expert 	witness
testimony, and the McCabes’ motion to supplement the record on summary judgment.
The presiding Administrative Law Judge (“ALJ”) denied the McCabes’ motion to
supplement the record and granted in part the cross-motions to exclude expert
testimony. (See R.64367–68, R.64390–92, R.64404–5.)
25. 	In a Final Decision, the ALJ granted the Department’s motion for summary
judgment and denied the McCabes’ motion. 	Among other things, the ALJ observed
that the McCabes’ investments mirrored the “partnership structure commonly used
throughout the United States for renewable energy tax equity financing projects
under federal and various state laws.” 	Even so, the ALJ held that this partnership

structure is unlawful in North Carolina “because this State does not allow renewable
energy tax credits to be bought or sold.” Reasoning that “the McCabes purchased the
renewable energy credits to offset their state income tax liability,” the ALJ concluded
that their claimed allocation of credit must be disallowed. (R.62788, R.62791.)
26. 	Moreover, the ALJ agreed with the Department that state law “treats the
allocation of tax credits by partnerships in the same fashion as federal law.” The ALJ
concluded that the McCabes were not bona fide partners under federal law because
the partnerships at issue “lacked a non-tax business purpose” and because their
“cash-for-credit 	transactions 	were 	not, 	in 	substance, 	partnership 	investments.”
Assuming that the McCabes were bona fide partners, the ALJ further concluded that
their “purchase of the renewable energy credits amounted to a ‘disguised sale’ under
Code § 707(a) and cannot be included in the calculation of a partner’s distributive
share as set forth in Code § 704(b).” (R.62788, R.62791.)
27. 	Having concluded that the McCabes could not claim a share of tax credit in
any amount, the ALJ had no need to decide whether they adequately substantiated
their claim or whether the claimed allocation of credit was correctly calculated. (See
R.62791.)
28. 	Following the Final Decision, the McCabes 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 the McCabes.
(See Pet., ECF No. 3; Resp. to Pet., ECF No. 13.)
29. 	These matters are ripe for determination.

II.
LEGAL STANDARD
30. 	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).
31. 	“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).
32. 	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).
33. 	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
34. 	The McCabes seek to reverse the judgment below and restore the tax credits
that they claimed for tax year 2014. 	The Department argues that the judgment
should be affirmed for the reasons stated by the ALJ and on alternative grounds that
the ALJ did not reach.
35. 	The Court will begin by addressing disputes concerning, first, whether the
McCabes unlawfully bought a share of a tax credit as a matter of state law and,
second, whether their entitlement to claim a share of the credit depends on the
application of certain federal tax doctrines. Then, the Court will address the amount
of credit the McCabes may claim, if entitled to do so. Last, the Court will address the
parties’ evidentiary disputes.

A. Actual Sale
36. 	The ALJ disallowed the McCabes’ claimed tax credit for several reasons.
The first stated reason is that the McCabes “purchased the renewable energy credits
to offset their State income tax liability,” which “is unlawful in North Carolina.”
(R.62791.)
37. 	The McCabes contend that this was error. 	In their view, the ALJ treated
the disputed transaction as an “actual sale” of tax credit when, in reality, it involved
the sale of an interest in a partnership that carried with it various rights, including
the right to receive pro rata shares of income, loss, and credit generated by the
partnership.
38. 	Indeed, there is no serious dispute about the form of the transaction. 	The
undisputed evidence shows that the McCabes claimed a share of tax credit received
in the form of a partnership allocation, not in the form of a sale. 	The Department
acknowledges as much. Accordingly, there is no basis to disallow the McCabes’ claim
on the ground that it arose from an “actual sale” of credit.
39. 	Even so, the Department argues that the judgment must be affirmed
because the McCabes’ use of the partnership form concealed what was in substance
a sale of credit. In support, the Department points to Monarch’s marketing materials,
which often describe its business as buying and selling tax credits. The Department
also cites two North Carolina appellate decisions, neither of which involves section
105-269.15 or tax credits more generally.
40. 	The Court is not persuaded. To be sure, there are times when courts must
“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)). But the scope of that principle is not well
developed within our State’s case law, and rarely should a court cast aside a lawfully
formed partnership as a tax-manipulative sham.
41. 	Caution is warranted here. 	This is, at root, a statutory question, and the
Court is bound to respect the General Assembly’s wishes. 	To encourage the
development of renewable energy resources, the General Assembly offered tax credits
as incentives. 	Its detailed statutory scheme established not only the criteria that a
partnership must meet to qualify to receive a tax credit, see N.C.G.S. § 105-269.15,
but also the structure by which the partnership “passes through to each of its
partners the partner’s distributive share of the credit,” id. § 105-269.15(a). There is
little room for judicial meddling if a transaction checks these boxes. 	As one federal
court recently observed, “it’s odd to reject a Code-compliant transaction in the service
of general concerns about tax avoidance.” Summa Holdings, Inc. v. Comm’r, 848 F.3d
779, 787 (6th Cir. 2017).
42. 	The McCabes’ claim checks the boxes. It is undisputed that each underlying
renewable 	energy 	project 	legitimately qualified for a 	tax 	credit 	under section
105-129.16A. It is also undisputed that the McCabes acquired a membership interest
in a limited liability company. For tax purposes, that makes the McCabes partners
in a partnership. 	There is no statutory basis to disallow tax credits legitimately
earned by a partnership and then passed through to its partners.

43. 	Yes, it might be necessary to put up judicial guardrails if there were
evidence of fraud or a sham transaction. 	But there isn’t. 	These transactions were
real, not fake. The McCabes invested real money in real renewable energy properties
that were placed in service and that generated tax credits. 	Their investment
mattered too: according to one of the project sponsors, the properties “would not have
been 	feasible” 	without 	the 	contributions 	from 	investors 	in 	Monarch’s 	tiered
partnerships. (R.66243.) Moreover, nothing suggests that the McCabes obtained an
illusory partnership interest. They had meaningful rights—including rights to share
in 	profits 	and 	losses—established 	through 	operating 	agreements 	and 	other
organizational documents. 	(See, e.g., R.70094–109, R.70110–39.) 	And to boot, the
McCabes’ investments involved exactly the kind of economic activity that the General
Assembly deemed socially desirable and sought to encourage with tax credits.
44. 	Accordingly, the undisputed evidence does not show that the McCabes
purchased a renewable energy tax credit or that their partnership transaction was
“unlawful” under state law. 	It was error to disallow the claimed share of credit for
that reason.
45. 	The Department also advances distinct but highly similar arguments based
on federal tax doctrines, which it contends have been incorporated into section
105-269.15. The Court now turns to these arguments.
B. Federal Doctrines
46. 	As secondary grounds for disallowing the McCabes’ share of credit, the ALJ
relied on two federal tax doctrines. 	The ALJ concluded that the McCabes were not
bona fide partners under federal law. 	In addition, the ALJ concluded that, even if

the 	McCabes 	were 	bona 	fide 	partners, 	their 	transactions 	were 	impermissible
disguised sales under Code section 707, thus necessitating the exclusion of the
partnership’s tax credit from their distributive share of tax items.
47. 	The McCabes contend that neither federal doctrine is part of North Carolina
law and that the ALJ therefore erred in relying on them. The Department contends
that the General Assembly incorporated both doctrines into North Carolina law by
stating that “a distributive share of an income tax credit shall be determined in
accordance with sections 702 and 704 of the” Code. N.C.G.S. § 105-269.15(c).
48. 	The Court thoroughly addressed these interpretative questions in the
companion Farm Bureau decision and concluded that the General Assembly did not
intend to adopt federal laws on bona fide partnerships and disguised sales into section
105-269.15(c). This conclusion applies with equal force here. Rather than repeat the
discussion in Farm Bureau in full, the Court incorporates it by reference. 	See
generally N.C. Farm Bureau Mut. Ins. Co. v. N.C. Dep’t of Revenue, No. 20 CVS 10244
(Wake Cnty.) (ECF No. 103 at ¶¶ 40–79).
49. 	By way of summary, it will suffice to note that “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)). Section 105-269.15(c) contains no reference to federal definitions of partner
and partnership or to Code section 707 and disguised sales. 	The only reference to
federal law is instead to Code sections 702 and 704, but these two sections deal with

the mechanics of calculating a partner’s distributive share of tax items, such as
income, losses, and credit. 	See 26 U.S.C. §§ 702, 704. 	It is for that purpose—
determining a distributive share, not determining partnership status or determining
whether to treat a transaction as a disguised sale—that section 105-269.15(c) points
to Code sections 702 and 704.
50. 	Had the General Assembly intended to adopt these federal doctrines, it
would have incorporated them into section 105-269.15 by clear and specific reference.
It did not. Consequently, the Department’s contention that the McCabes are not bona
fide partners and that their transactions were disguised sales is misplaced.
51. 	In addition, the Department has not argued or shown that the McCabes do
not qualify as partners under state law. As the Court explained in Farm Bureau, the
text and context of section 105-269.15(c) show an intent to use the terms partner and
partnership as defined in an analogous part of the Revenue Act governing individual
income tax. 	See N.C.G.S. § 105-153.3(9), (13) (defining “partnership” to include “a
limited liability company” and “partner” to include “a member of the limited liability
company”). It is uncontested that the McCabes—as members in the Annual Fund—
are members of a limited liability company. Accordingly, the Court concludes, based
on the undisputed evidence, that the McCabes are partners in the sense meant by
section 105-269.15 and thus are entitled to claim a distributive share of tax credits.7
7 It is perhaps worth noting that the Department has not argued or shown whether the
federal government has applied either doctrine to the McCabes’ partnership transactions.

C. The Amount of the McCabes’ Distributive Share
52. 	Next, the Court considers whether the McCabes have carried their burden
to show the amount of credit that they are entitled to claim. 	The ALJ noted the
parties’ disputes on this point but chose not to decide them, having concluded that
the McCabes could not claim a distributive share in any amount. Because the record
is complete and because the parties have presented their disputes on appeal, the
Court concludes that it is proper to decide them now and that a remand to the Office
of Administrative Hearings to calculate the amount would be inefficient and wasteful.
53. 	One 	dispute 	involves 	the 	substantiation 	requirement 	in 	N.C.G.S.
§ 105-129.18. 	This statute requires a taxpayer who claims a credit to “provide any
information required by the Secretary of Revenue” and to “maintain and make
available for inspection by the Secretary of Revenue any records the Secretary
considers necessary to determine and verify the amount of the credit to which the
taxpayer is entitled.” 	N.C.G.S. § 105-129.18. 	The penalty for noncompliance is
disallowance of the claimed credit: “The burden of proving eligibility for a credit and
the amount of the credit rests upon the taxpayer, and no credit may be allowed to a
taxpayer that fails to maintain adequate records or to make them available upon
inspection.” Id.
54. 	The 	McCabes 	argue 	that 	they 	complied 	with 	the 	substantiation
requirement. They contend that the only materials required by the Department were
the partnership agreements, which were produced. (See R.66245; see also R.66720–
21.) This contention is supported by the Department’s stipulation that the McCabes
maintained all records that they had received and provided them to the Department.

(See R.72313.) 	Additionally, the Department testified that it was not aware of any
requested document that had not been provided. (See R.66755.)
55. 	The Department’s response is inscrutable. 	What information does the
Secretary require to substantiate a claim for a tax credit? 	What records does the
Secretary consider necessary to determine and verify the amount of the claimed
credit? Did the McCabes fail to maintain these records or to make them available for
inspection? 	The Department doesn’t say. 	Its conclusory, one-paragraph argument
cites no evidence and offers no reasonable basis to conclude that the McCabes failed
to comply with section 105-129.18.
56. 	A second dispute is whether the McCabes complied with Code section 704,
as incorporated into section 105-269.15(c). 	Code section 704 has two potentially
applicable subsections. Subsection (a) states a default rule that a distributive share
shall “be determined by the partnership agreement.” 26 U.S.C. § 704(a). Subsection
(b), on the other hand, states that a distributive share “shall be determined in
accordance with the partner’s interest in the partnership” when the partnership
agreement is silent or when the allocation at issue “does not have substantial
economic effect.” Id. § 704(b).
57. 	It is undisputed that the McCabes received a pro rata allocation of credit
from the partnership. That is, the McCabes hold a .3166842% membership interest
in the Annual Fund, and the $36,000.00 in credit they received amounts to .3166842%
of the total credit held by the fund and distributed to all partners. 	(See R.64890,
R.72311.) This allocation is consistent with the terms of the Annual Fund’s operating

agreement. 	(See R.66307–10.) 	Thus, according to the McCabes, their claimed
allocation complies with section 704—no matter which subsection applies—because
it 	follows 	the 	partnership 	agreement 	and 	aligns 	with 	their 	interest 	in 	the
partnership.
58. 	The Department argues that section 704(b) controls and that the amount of
credit 	allocated 	to 	the 	McCabes 	is 	not 	consistent 	with 	their 	interest 	in 	the
partnership. 	The basis for this argument is that the McCabes’ credit allocation
exceeds their capital contribution to the partnership due to the way the underlying
renewable energy projects were financed. In a nutshell, the financing included a mix
of investor contributions and recourse debt. 	Each project qualified to receive a tax
credit in an amount based on its total cost without regard to the source of financing
or the ratio of capital to debt financing. As a result, each project generated more in
tax credit than it received in investor contributions.
59. 	According to the Department, this means that the McCabes received a
benefit from the projects’ use of debt financing that is not reflected in their
partnership interest and their claimed allocation of credit. But at no point does the
Department explain how debt financing affects interests in a partnership. It cites no
case, regulation, or statute on the subject. Nor does it say how the law applies in this
case—that is, what share of credit the McCabes are entitled to claim once debt
financing is considered. The Department’s brief also runs afoul of the Business Court
Rules by incorporating its “brief below,” (DOR Op. Br. 52–53, ECF No. 54), in lieu of
citing evidence in the record.

60. 	Accordingly, the Court concludes that there are no genuine issues of
material fact concerning the amount of credit the McCabes are entitled to claim. The
McCabes have offered unrebutted arguments and evidence to show that they
substantiated their claim as required by section 105-129.18 and to show that their
claim is consistent with their interest in the partnership as required by Code section
704. 	The McCabes are entitled to an allocation of $36,000 in tax credit and are
entitled to use that credit to offset up to 50% of their 2014 income tax liability.
D. Evidentiary Disputes
61. 	Each side contends that the ALJ erred in ruling on certain evidentiary
issues.
62. 	First, the ALJ denied the McCabes’ motion to supplement the record
following the hearing on the parties’ cross-motions for summary judgment. 	The
McCabes contend that this was an abuse of discretion because the proffered evidence
addressed questions raised by the ALJ at the hearing. As the ALJ observed, though,
the time to submit evidence relating to the cross-motions was before the hearing, not
after. The Court cannot say that the ALJ’s decision to deny the motion to supplement
as untimely was “manifestly unsupported by reason, or could not be the product of a
reasoned decision.” Terry’s Floor Fashions, Inc. v. Crown Gen. Contractors, Inc., 184
N.C. App. 1, 17 (2007) (citation and quotation marks omitted).
63. 	Second, 	the 	ALJ 	excluded 	expert 	opinion 	testimony—from 	both 	the
McCabes’ experts and the Department’s—concerning the scope of state law and the
General Assembly’s legislative intent. 	The McCabes agree with that decision

generally but argue that the ALJ went too far, excluding parts of three expert reports
that merely referred to state law or legislative policies.
64. 	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 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.” 	Hasty v. Turner, 53 N.C. App. 746,
750 (1981); see also N.C. Dep’t of Transp. v. Mission Battleground Park, DST, 370
N.C. 477, 483 (2017) (observing that complaining party must show whether exclusion
of expert testimony “was prejudicial or harmless”); Ingram v. Henderson Cnty. Hosp.
Corp., 259 N.C. App. 266, 285 (2018) (finding no abuse of discretion when party could
not “demonstrate prejudice” from exclusion of expert testimony).
65. 	After careful review, the Court concludes that any error in the ALJ’s
evidentiary ruling, if one exists, was harmless. In the McCabes’ own words, most of
the disputed portions of the expert reports concern background context and rote
recitations of law. 	The McCabes do not identify any prejudice or explain what
difference it would have made had the ALJ admitted these aspects of the reports.
66. 	Third, the ALJ denied the Department’s motion to exclude the reports and
testimony of the McCabes’ experts in their entirety. The Department filed exceptions
to this decision, which is subject to review for abuse of discretion. 	The Department
has the burden “to show both error and that [it] was prejudiced by” the admission of
the evidence. State v. Gappins, 320 N.C. 64, 68 (1987).

67. 	Citing only its “brief below,” the Department contends that the McCabes’
expert reports “are no different from legal briefs.” 	(DOR Op. Br. 60.) This does not
fairly raise the issue on appeal. The attempt to incorporate arguments made below
violates the Business Court Rules that set out word limits for briefs (which the Court
enlarged in this case) and that require parties to cite supporting materials with
specificity. 	Indeed, 	the 	Department 	does 	not 	describe 	the 	experts’ 	opinions
individually, point to representative passages in any of their reports, or cite relevant
pages or paragraphs. 	Although the Department advanced more comprehensive
arguments in its reply brief, those arguments are untimely. See, e.g., 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). 	Moreover, any error was harmless—the Department does not mention
prejudice or show that it was prejudiced by the ALJ’s decision. 	Accordingly, the
Department has not met its burden to show an abuse of discretion. Its exceptions are
overruled.
IV.
CONCLUSION
68. 	For 	all 	these 	reasons, 	the 	Court 	GRANTS 	the 	McCabes’ 	Petition,
VACATES the Final Decision, and REMANDS with direction to GRANT summary
judgment 	in 	favor 	of 	the 	McCabes. 	The 	Court 	further 	OVERRULES 	the
Department’s exceptions to 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