Tax Credit for North Carolina Enterprise Corporation

163.010 et seq.

Dear Senator Hoyle:

You have asked for our opinion on whether investors in North Carolina Enterprise Corporations are eligible to receive a tax credit pursuant to N.C.G.S. § 105-163.010 et seq. for taxable years 1996, 1997 and 1998. The Attorney General’s Office has previously issued an Advisory Opinion dated 17 December 1996 addressing this issue ("1996 Opinion"). See Opinion dated 17 December 1996 and advisory letter dated 28 October 1996, attached hereto and incorporated by reference. We now reaffirm our 1996 Opinion.

The tax credit for investing in North Carolina Enterprise Corporations was repealed on August 2, 1996. N.C. Sess. Laws (Second Extra Sess. 1996) ch. 14, § 7. The repeal was effective for investments made on or after January 1, 1997. N.C. Sess. Laws (Second Extra Sess. 1996) ch. 14, § 27(3).

The cap on the total amount allowed as credits in N.C.G.S. § 105-163.011(b) for investments in North Carolina Enterprise Corporations, qualified business ventures and qualified grantee businesses was also amended. N.C. Sess. Laws (Second Extra Sess. 1996) ch. 14, § 6. The effective date of the reduced cap was for investments made on or after January 1, 1996. N.C. Sess. Laws (Second Extra Sess. 1996) ch. 14, § 27(2).

N.C.G.S. § 105-163.012(b) limits the total amount of tax credits allowed per calendar year. Prior to amendment, the statute imposed a cap of $12,000,000 with $6,000,000 earmarked for investments in enterprise corporations and $6,000,000 earmarked for investments in qualified business ventures and qualified grantee businesses ("qualified businesses"). The amendment reduced the cap from $12,000,000 to $6,000,000. Additionally, the amendment removed the bifurcation, with the total amount divided among all claimants, regardless of type of investment. Thus, the amendment did not reduce the $6,000,000 available for investments in enterprise corporations to zero.

The amendments did not affect the basic mechanics governing application of the credit.

To be eligible for the credit, the investor must file an application with the Secretary of Revenue on or before April 15 of the year following the calendar year in which the investment was made.

N.C.G.S. § 105-163.011(c). The application is effective for the year in which it was timely filed. Id. The credit may not be taken for the year in which the investment is made, but rather for the taxable year beginning during the calendar year in which the application for credit becomes effective. Former N.C.G.S. § 105-163.011(a) (1995); N.C.G.S. § 105-163.011(b).

The Secretary of Revenue calculates the total amount of credits claimed from the applications filed. If the total amount applied for exceeds the statutory cap, the Secretary allows a portion of the credit claimed by allocating the total amount available among all taxpayers in proportion to the size of the credit claimed by each taxpayer. N.C.G.S. § 105-163.012(b). If the amount of the credit allowed by the Secretary is less than the amount claimed on the application, the Secretary must notify the taxpayer of the amount of allowable credit on or before December 31 of the year following the year in which the investment was made. Id.

Our 1996 Opinion concluded that since the effective date of the repeal of the tax credits for North Carolina Enterprise Corporations was for investments made on or after January 1, 1997, a taxpayer who made an investment during calendar year 1996 would be eligible for the credit, subject to the restrictions contained in N.C.G.S. §§ 105-163.011(c) and 105-163.012, including, inter alia, the amended total credit limitation of $600,000,000 in N.C.G.S. § 105-163.012(b). Our 1996 Opinion further concluded that the provisions of the "savings clause" in Section 26 of Chapter 14 of the 1996 Session Laws (Second Extra Sess.) did not operate to preserve the higher credit limitation in effect prior to the amendment. Thus, all investments made in calendar year 1996 in any North Carolina Enterprise Corporation (or qualified business) are subject to the amended total credit limitation of $600,000,000 in N.C.G.S. § 105-163.012(b). Investments in a North Carolina Enterprise Corporation made on or after January 1, 1997 would not be eligible for any credit.

Our 1996 Opinion further notes (through an advisory letter dated 28 October 1996 incorporated into the Opinion) that the repeal of the credit for investing in North Carolina Enterprise Corporations was precipitated by the United States Supreme Court’s decision in Fulton Corp. v. Faulkner, 516 U.S. 325 (1996). Fulton declared the taxable percentage deduction provision of North Carolina’s intangibles tax unconstitutional on the grounds that it was designed to benefit in-state economic interests at the expense of out-of-state competitors. As part of the explanation of recommended legislation following Fulton, the Interim Report of the Revenue Laws Study Committee to the Legislative Research Commission to the General Assembly issued 1 May 1996 ("Report") states: "Repeal and reform of these North Carolina tax preferences is recommended because of their similarity to a provision of the intangibles tax that was recently declared unconstitutional by the United States Supreme Court. . . ." The Report noted that North Carolina Enterprise Corporations must invest in businesses whose headquarters and principal business operations are located in North Carolina.

A carryover of the credit is available in certain situations. At the close of the taxpayer’s taxable year, the taxpayer computes its net income and determines the portion of the credit allowed by the Secretary that he may deduct in that taxable year under the limitations imposed by N.C.G.S. § 105-163.012(a). If the limitations prevent a taxpayer from utilizing all of the credit allowed by the Secretary in that year, the statute permits the taxpayer to carryover the unused portion of the credit for the next five succeeding years. Thus, it is possible that an investor who made an investment prior to January 1, 1997 may have credits eligible for carryover to his tax return for the years 1997, 1998 or later. It is precisely this circumstance that the "that would have otherwise been available" language of the savings clause in Section 26 was designed to address. However, it only operates to preserve "perfected" and "ripened" rights.

A few examples illustrate our conclusions: Assume a calendar year taxpayer invests in a North Carolina Enterprise Corporation during 1996. The investor must file an application for the credit on or before April 15, 1997 in order to perfect his interest. The portion of the credit allowed by the Secretary would be taken on the taxpayer’s 1997 return. This credit would be subject to the amended credit limitation.

If that investor had made the investment during 1995, the portion of the credit allowed by the Secretary would be taken on the taxpayer’s 1996 return. This credit would be subject to the credit limitation in effect prior to amendment.

Any investments made on or after January 1, 1997 would not be eligible for any credit.

We emphasize that at no time prior to repeal or amendment of the statutory cap were any investors "vested" in any rights to a tax credit for investments made during 1996 or in future years. The 1996 Opinion addressed this issue in some detail. Under the mechanics of the statute, the absolute earliest an investor could conceivably become "vested" in a right to a tax credit would be on December 31 of the year following the investment.

Using the examples cited previously, assuming arguendo that it is possible for a taxpayer to become "vested" in a right to a tax credit at all, the investor who made the investment in 1995 could not become "vested" in any right to a credit until December 31, 1996. The amendments to the statute did not affect the taxpayer’s ability to deduct whatever portion of the credit taxpayer had "vested" in, since the effective dates of the amendment to the cap and the repeal were for investments made on or after January 1, 1996 and January 1, 1997, respectively, and therefore do not apply to taxpayer’s investment.

The taxpayer who makes an investment during calendar year 1996 does not become "vested" in any right to a credit until December 31, 1997. Thus, on the date of the amendment, August 2, 1996, this taxpayer was not "vested" in any right to a credit and the amendment therefore did not affect any "vested" right of this investor.

Since the legislation repealing the tax credits was ratified on August 2, 1996 and was effective for investments made on or after January 1, 1997, the repeal affected no vested rights of any investor since the date of the repeal was prior to the time any investments which may have given rise to a vested right would have been made.

We have carefully reviewed our 1996 Opinion in light of the intervening decision of the North Carolina Supreme Court in Bailey v. State of North Carolina, 348 N.C. 130, 500 S.E.2d 54 (1998). We have concluded from our review that Bailey does not affect our 1996 Opinion.

We trust this Advisory Opinion proves helpful.

signed by:

Reginald L. Watkins Senior Deputy Attorney General

Kay Linn Miller Hobart

Assistant Attorney General