“Cause I’m the taxman, yeah, I’m the taxman.”

Taxman, The Beatles (1966)

Wary of the old maxim about giving inches and losing miles, the North Carolina Department of Revenue appealed an Office of Administrative Hearings decision that favored a taxpayer by $371. In N.C. Dep’t of Revenue v. Clifton, 2022 NCBC 20, the Business Court agreed with NCDOR on the broader principle that large understatements of taxable income appropriately draw mandatory penalties regardless of how they occurred.

Clifton appealed to OAH a Department determination that had disallowed a set of business losses and expenses arising from her membership in an LLC. NCDOR ruled that this resulted in an understatement of income of approximately $25,000 – a 64% error. (Id. ¶¶ 6-7). OAH affirmed the Department’s ruling on the understatement, and its additional tax assessment of $1,484, but reversed its imposition of a $371 penalty under § 105-236(a)(5)(b):

Large individual income tax deficiency. – In the case of individual income tax, if a taxpayer understates taxable income, by any means, by an amount equal to twenty-five percent (25%) or more of gross income, the Secretary shall assess a penalty equal to twenty-five percent (25%) of the deficiency.

OAH reasoned that the extra penalty for a “large” deficiency was instituted to reach “improper deductions” but not “an insufficiently documented deduction.” In a taxpayer-friendly analysis, OAH concluded that the Department had not met its “clear and convincing” burden to show that Clifton had “understated” her taxable income “as opposed to merely failing to support . . . an otherwise lawful deduction.” NCBC 20, ¶ 11.

The Business Court endorsed the Department’s interpretation of the statute as brooking no leniency derived from how an understatement of at least 25% occurred.

Sitting as an appellate court when it “exercises” judicial review over an agency’s decision, the Court reviewed de novo NCDOR’s legal challenge to OAH’s reading of the tax deficiency statute. Id. ¶¶ 18, 21. Judge Bledsoe relied considerably on the Court’s obligation in interpreting tax statutes “not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out.” Id. ¶ 24 (quoting Institutional Food House, Inc. v. Coble, 289 N.C. 123, 135 (1976). Moreover, the Court noted the General Assembly’s edict that the Secretary of Revenue’s interpretation of such laws is deemed “prima facie correct.” Id. (citing N.C.G.S. 105-264(a)).

Judge Bledsoe agreed with NCDOR that the OAH hearing officer’s concerns about the “somewhat subjective standards” of whether a deduction is “sufficiently” documented or supported “invented a distinction that contradicts the plain,” unambiguous statutory language that “requires the automatic imposition of a penalty against taxpayers who understate their taxable income by 25% or greater by any means[.]” NCBC 20, ¶¶ 26-27, 29. The Court held that “by any means” meant exactly what it says, and that “[w]hether Clifton acted innocently or with an improper motive, her claiming deductions and then failing to substantiate them is undoubtedly a ‘means’ of understating her taxable income.” Id. ¶ 30.


  • Here at the blog, we tend to favor Eleanor Rigby and Got to Get You Into My Life from The Beatles’ 1966 classic, Revolver, but Taxman’s anti-establishment backbone has a great lineage. The George Harrison-penned song is said to have gotten musical inspiration from the theme to the American television series Batman.

Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.