“Shenanigans” is a word which has an uncertain origin. Etymologists have suggested that it comes from a Spanish term connoting trick or deceit, or an Irish expression for “I play the fox,” or, more obscurely, a phrase in East Anglian dialect meaning “playing the fool.”  Any of those explanations are plausible. As the meaning of the term has evolved, it generally means some petty mischief, perhaps amusing, if you are not the victim of the mischief. When a state agency engages in shenanigans, it lacks humor and almost always involves unnecessary expense. A case before the N.C. Business Court provides an excellent example of something bordering on “petty mischief, perhaps amusing, if you are not the victim of the mischief.”

In 1999, the N.C. General Assembly passed bills which created a tax credit program designed to promote investment in renewable energy projects. We have written about this program before. Provisions explicitly encouraging investments by insurance companies were enacted in 2009. For a number of years, this program directed significant investment into these projects, in fulfillment of its intent, and tax credits were routinely generated. But in 2018, the N.C. Department of Revenue issued a guidance letter which essentially adopted the complete opposite of its previous interpretation of the eligibility for the credits. Following its 2018 guidance, it denied a credit taken by Integon National Insurance Company. Integon challenged the denial in the Office of Administrative Hearings (“OAH”).

The case in OAH dragged on for over three years, including extensive (and expensive) discovery, during which Integon expended considerable company resources and paid mounting legal fees. Finally, the case reached the point by which motions for summary judgment had been filed by each side. As the motions each alleged that there was no remaining fact in dispute, a hearing was scheduled on a Monday. Then the shenanigans began. On the Friday before the hearing, the N.C. DOR announced that it had withdrawn its Final Determination rejecting the credit, agreed to issue the taxpayer’s refund resulting from application of the credit, and submitted a Consent Order it negotiated with Integon in which the parties agreed to the refund and sought dismissal of the case.

The withdrawal of the Final Determination flew in the face of the 2018 guidance, suggesting yet another reversal of N.C. DOR’s position. Or did it?  Integon declined to simply withdraw its petition for a contested case hearing and N.C. DOR declined to withdraw the 2018 guidance or agree to disavow its reasoning going forward. No explanation for the withdrawal of the Final Determination has been provided by N.C. DOR.

The Administrative Law Judge (“ALJ”) proceeded to reject the Proposed Order, held the scheduled hearing, and issued a ruling on the motions. Much to the chagrin of N.C. DOR, he granted summary judgment to Integon, and rejected N.C. DOR’s claim that he had no continuing authority to do so. N.C. DOR has appealed the final decision of the ALJ in the N.C. Business Court on the basis of jurisdiction, with a side order of mootness.

It is important to point out that OAH has narrowly drawn jurisdiction. It is not a court created under Article IV of the N.C. Constitution. It was created by General Assembly and is an executive branch agency. Central to this case, a Petitioner must show that it was aggrieved by an action of a state agency, in that the action was the assessment of a fine or penalty, or that the action has deprived it of property or otherwise prejudiced its rights. These requirements, and the attendant OAH process, is generally spelled out in Article 3 of Chapter 150B. Additionally, a party appealing an OAH decision must be able to show that it is aggrieved in order to maintain its appeal. It is also important to note that a decision in OAH does not stand as binding precedent, either for other OAH cases or certainly not the Article IV courts.

The basis of N.C. DOR’s appeal to the Business Court is, essentially, that because the harm suffered by Integon, i.e., denial of the credits, was undone, the case became moot.  Consequently, OAH was deprived of its jurisdiction in the matter. Specifically, N.C. DOR argued that because it acceded to Integon’s claim, the ALJ had no authority to reject the proposed Consent Order nor to consider the motions for summary judgment on their merits.

Integon’s response is that the Business Court has no jurisdiction to consider N.C. DOR’s appeal, because the threshold for an appeal to the courts from an OAH decision is that the appellant be a “person aggrieved.”  Since N.C. DOR withdrew its Final Determination, and since an OAH ruling has no precedential effect, it has nothing from which to appeal. The consequence to N.C. DOR is no different whether OAH granted Integon’s motion or N.C. DOR withdrew its Final Determination and allowed the credit.

But why, you might ask, did Integon enter a proposed Consent Order with N.C. DOR?  Integon’s answer was simple and thoroughly understandable to the regulated community. It pays its lawyers by the hour. N.C. DOR does not. If the Proposed Order would stop the hemorrhage of legal fees in addition to securing the tax credit it sought, why wouldn’t Integon enter it? One fact, though, weighs heavily in this matter. Renewable energy tax credits are taken in installments over a number of years. Each installment is subject to audit. Integon had claimed several later annual installments of the credit for the very same renewable energy project in addition to the one at issue at OAH. As an OAH decision does not stand as precedent, N.C. DOR could simply deny the subsequent installments and defend the next challenge. Remember that N.C. DOR does not pay their lawyers by the hour. And maybe, just maybe, they would draw an ALJ more willing to accept their argument in the next challenge. Or, perhaps, the weight of mounting legal fees might discourage further challenges or persuade disappointed taxpayers to bargain for less.

Shenanigans indeed. Is this appropriate conduct for a state agency? Should a state agency play the Emily Littela “Never Mind” card (if you are unfamiliar with this classic SNL character, it would be worth your time to click the link) to avoid potentially embarrassing, though not precedential, rulings in OAH, or, worse, in attempt to leverage their opponents’ costs? Those questions sit squarely before the N.C. Business Court in this appeal. Stay tuned.