March 16, 1983
Subject:
Taxation; Income Tax; Franchise Tax; Calculation of Taxable Percentage of Dividends from Domestic Holding Companies; G.S. 105-130.7(5); G.S. 105-147(7); G.S. 105-203.
Requested By:
W. B. Matthews, Director Corporate Income and Franchise Tax Division North Carolina Department of Revenue
Question:
Is the Corporate Income and Franchise Tax Division correctly calculating taxable percentages applicable to dividends paid by domestic holding companies to shareholders, pursuant to G.S. 105-130.7(5)?
Conclusion:
Yes.
The Director of the Corporate Income and Franchise Tax Division has inquired whether that division is calculating taxable percentages correctly pursuant to G.S. 105-130.7. We are of the opinion that it is.
The question has relevance both to intangibles tax, and to corporate and individual income tax.
For example, G.S. 105-203 levies an intangibles tax on shares of stock measured by their value on 31 December multiplied by a tax rate, "less such proportion of such value as is equal to the proportion of the dividends upon such stock deductible by such taxpayer in computing his income tax liability under the provisions of G.S. 105-130.7 and 105-147(7).
Similarly, G.S. 105-147(7) provides relative to individual income taxpayers "a taxpayer who is a stockholder in a holding company as defined in G.S. 105-130.7(6) shall determine the deductible portion of dividend received from such holding company as provided herein." A word of explanation is appropriate concerning reference to G.S. 105-130.7(6). At the time G.S. 105147(7) was amended to include the quoted language, the provision relative to holding companies in the corporate income tax law was found in G.S. 105-130.7(6), which was enacted in SL 1969,
C. 1123. In 1973, G.S. 105-130.7(3) was repealed and succeeding subsections were renumbered, making former G.S. 105-1307.7(6) then become G.S. 105-130.7(5). SL 1973, C. 1053, § 3. Thus, the reference in G.S. 105-147(7) to G.S. 105-130.7(6) is at present codified as G.S. 105-130.7(5), a fact that creates no problem in correctly interpreting the meaning and effect of the deduction, in our opinion. However, it should be the subject of a technical amendment to the Revenue Act in the future, so as to avoid any confusion arising from the present reference.
Therefore, for both intangibles and individual income tax purposes, we are necessarily required to refer to G.S. 105-130.7(5), which delineates the corporate income tax deduction.
G.S. 105-130.7 provides a deduction to corporations for "dividends from stock . . . to the extent herein provided." Specifically, subsection (5) provides that "a corporation which is a shareholder in a holding company having its commercial domicile in North Carolina shall be allowed as a deduction an amount equal to those dividends received by it from such holding company, multiplied by a fraction. . . ." (Emphasis added.) The fraction’s numerator is those "dividends received by such holding company attributable to North Carolina." Dividends attributable to North Carolina" is defined as "the amount of dividend income received by the holding company on stock owned in other corporations equal to the total of the proportion of each of such corporation’s dividends as shall be determined deductible by the Secretary under subdivisions (1) through (3a) of this section. . . ." (Emphasis added.) The denominator of the fraction is "the gross dividends received by such holding company." (Emphasis added.) It is significant that the statute does not appear to require that the dividends considered in the numerator and denominator of the fraction represent dividends only from wholly owned or even substantially owned subsidiary corporations. It is enough that they be dividends received on stock owned by the holding company. Even the definition of "holding company" in G.S. 105-130.7(5) makes clear that such company need only have 50% of its gross income from dividends of corporations in which it owns more than 50% of the outstanding capital stock. Therefore, we conclude that if a holding company, as defined, as dividend income even from a corporation in which it owns only a single share, that income must find its way into the fraction. This is consistent with the method of calculation which has been used by the Corporate Income Tax Division, and applied to both intangibles and corporate and individual income taxpayers as the law requires.
In the case of the taxpayer holding company whose inquiry prompted this opinion, it is a holding company which presumably pays dividends to shareholders, individual and corporate. As to those dividends, the provisions of G.S. 105-130.7(5), 105-147(7) and 105-203 apply. G.S. 105130.7(5) has no bearing on the calculation of the taxpayer’s own income and franchise tax, however, unless it has dividends from a holding company in which it owns stock.
The taxpayer holding company also suggests that because it has reported all of its dividend income (and thus all of its income) for North Carolina income tax purposes, this fact alone should eliminate any taxable percentage. Unfortunately, this contention fails to consider two salient points. The first is that, as appealing as the suggestion may be, the Legislature simply has provided by statute for the calculation of a taxable percentage, and an exempt percentage, clearly implying that if the statute is correctly applied, some portion of the dividends may be taxable even if the corporation has reported all of its dividend income. The second is that exemptions and deductions are matters of legislative grace, to which, generally speaking, no one is entitled as a matter of right. Consequently, if one feels that an exemption or deduction should have been provided but was not, he is bound by what the Legislature has provided or failed to provide, and his relief, if any, must come from the Legislature.
In summary, it is our opinion that the Corporate Income and Franchise Tax Division is correctly calculating taxable percentages pursuant to G.S. 105-130.7.
RUFUS L. EDMISTEN Attorney General
Myron C. Banks Special Deputy Attorney General