August 22, 1977
Subject:
Corporate Income Tax; Net Economic Loss; Insurance Proceeds; Income Not Taxable; G.S. 105-130.8.
Requested By:
Wiley A. Warren, Jr., Assistant Director Corporate Income and Franchise Tax Division North Carolina Department of Revenue
Question:
Do life insurance proceeds constitute "income not taxable" for purposes of computing the net economic loss deduction under G.S. 105-130.8?
Conclusion:
Yes.
G.S. 105-130.8(2) defines net economic loss as the amount by which a corporation’s allowable deductions in a given year exceed its total income, including "income not taxable". G.S. 105-130.8(3) provides that net economic loss may be carried forward and claimed as a deduction in a subsequent year to the extent that it exceeds the corporation’s "income not taxable" in the later year. Thus, if a corporation insures the life of an employee and receives insurance proceeds by reason of the death of the employee, such proceeds must be used to offset a prior year’s net economic loss if they constitute "income not taxable".
The term "income not taxable" is not defined by statute. However, its meaning can be inferred from the statutes delineating what income is taxable. According to G.S. 105-130.3, corporations doing business in North Carolina are taxed on their net income, which is identical to taxable income as it was defined in the Internal Revenue Code on January 1, 1975. The Internal Revenue Code, in turn, defines taxable income by reference to gross income. I.R.C. 1954 § 63. Gross income, as defined in § 61 of the Code, includes all income except for certain specific exclusions. Once such exclusion is found on § 101, which provides that, subject to certain limitations, gross income does not include proceeds of life insurance contracts payable by reason of the death of the insured.
If life insurance proceeds are excluded from gross income for federal tax purposes, then they are necessarily excluded from taxable income and also from North Carolina net income. Therefore, such proceeds constitute "income not taxable" within the meaning of G.S. 105-130.3, and they must be used to offset net economic loss in computing the deduction.
Rufus L. Edmisten Attorney General
Marilyn R. Rich Associate Attorney General