Taxation; Income Tax; Exemptions; Tax Credits; Energy Conservation; Insulation and Storm Windows

August 24, 1977

Subject:

Taxation; Income Tax; Exemptions; Tax Credits; Energy Conservation; Insulation and Storm Windows; G.S. 105-151.3

Requested By:

B. W. Brown, Director Individual Income Tax Division North Carolina Department of Revenue

Question:

(1): Where a statute, effective for taxable years beginning on and after 1 January 1977, provides for "a credit" against income tax for any person who installs insulation in an existing building "during the period from January 1, 1977, through December 31, 1978", can the credit be available in each of the two taxable years, or is only one credit available, to be taken in one, but not both, of such years?
(2): If the credit is available in each of two years, may the taxpayer install insulation in one year, but pay for it in both years and thus obtain two credits?
(3): Is the credit available only with respect to taxable years 1977 and 1978, or, installing insulation in 1977 or 1978 but deferring payment until 1979, may he extend the availability of the credit by one more year?
(4): Is the credit limited to 25% of the cost of installation, or to 25% of the amount actually paid for installation, during the taxable year?

Conclusion:

(1): The credit may be available in each of two taxable years.
(2): No.
(3): No.
(4): The credit is limited to 25% of the cost of installation, but may not exceed the lesser of $100 or the amount acutally paid in the tax year for which the credit is claimed.

G.S. 105-151.3, enacted as section 5 of Chapter 792, S.L. 1977, makes the following provisions for a credit against personal income tax for home insulation, storm windows and storm doors:

"(a) During the period from January 1, 1977, through December 31, 1978, any person (to include partnerships) who installs new or additional insulation, storm windows or storm doors (to include thermal pane windows and doors) in any building located in North Carolina which was constructed and occupied prior to January 1, 1977, shall be allowed as a credit against the taxes imposed by this division, an amount equal to twenty-five percent (25%) of the cost of such insulation, storm windows or storm doors; provided, that credit allowed under this section shall not exceed one hundred dollars ($100.00) on any single building or for each family dwelling unit of a multi-dwelling building; provided further, that in order to secure the credit allowed by this section the taxpayer must be liable for payment of such insulation, storm windows or storm doors and such payment must be made by the taxpayer during the tax year for which the credit is claimed."

Section 5 of the chapter became effective upon ratification (29 June 1977) for income years beginning on and after 1 January 1977. Its provisions may perhaps be analyzed more clearly if put in outlien form:

(a): during the period 1 January 1977 – 31 December 1978
(b): any person who installs insulation (for brevity, references to storm windows and storm doors will be omitted hereafter)
(c): in a building built and occuped before 1 January 1977
(d): shall be allowed as a credit against his income tax
(f): the credit shall not exceed $100 for each single building or each family dwelling unit in a multi-dwelling unit

AND

(g): the taxpayer must be liable "for payment of such insulation" and
(h): "such payment" must be made by the taxpayer during the tax year for which the credit is claimed.

A number of questions have arisen with respect to the application of the new statute to specific factual situations:

"(1) Since the section states that the amount is limited to $100 on any single building, does this mean that only one credit of $100 will be allowed, or may a credit of up to $100 be claimed for each tax year?"

We recognize that the reference to "a credit" can be taken to man a single, one-time credit, particularly if we apply the familiar rule that deductions and exemptions (a credit being in the nature of an exemption) are strictly construed against the taxpayer, but we do not believe that the construction necessarily follows, for at least two reasons: (1) G.S. 105-151(a) provides for "a credit" to individuals, who are residents of the State who pay income tax to another state, yet the State recognizes that such credit is available for as many years as the individual pays income tax to a foreign state, and no more rigid construction should apply to a similar credit statute; and (2)

C. 792 declares it to be the policy of the State "to encourage and promote conservation of energy", which would seem to require that a strict construction of the statute be ameliorated somewhat in order to promote that expressed policy. Moreover, we believe that the introductory phrase "during the period from January 1, 1977 through December 31, 1978" has reference to the time during which insulation may be installed rather than the time in which a single credit may be obtained. In our view, "a credit" may be obtained in each taxable year, just as other credits, exemptions and deductions may be, where, for example, a taxpayer installs insultation and pays for it in 1977, and installs and pays for storm doors in 1978.

"(2) If the taxpayer may claim credit for the same building in each of two separate years, may he receive the minimum credit in one year and an additional credit in the following year if he pays for a single installation in two years?"

For example, "a cash basis taxpayer adds insulation to his house in 1977, at a cost of $800. If he pays $00 in 1977 and $400 in 1978, may he claim a $100 credit in each year?

Referring to the provisions of G.S. 105-151.3(a), a taxpayer who installs insulation may claim as a tax credit "an amount equal to twenty-five percent (25%) of the cost of such installation". (Emphasis added.) The cost of "such insulation" in the example is $800, 25% of which is $200. However, the credit is subject to three important limitations: (1) the taxpayer must be liable for payment of "such insulation"; (2) "such payment" (i.e., payment for "such insulation") must be made during the tax year for which the credit is claimed; and (3) the credit shall not exceed $100. It is apparent, therefore, that the total credit available from the installation of insulation in the example given will be only $100. Since the taxpayer has paid $400 in 1977, he has used up the $100 credit which he may not claim any amount in 1978, even though he again pays $400 in that year. Moreover, the statute clearly implies that only one credit is available per installation, which may be taken in one year but not in two. Having taken "the credit" in "the tax year for which the credit is claimed", no other credit for the same installation may be taken in another tax year.

"(3) Is the insulation, storm window, or storm door credit available only for the tax years 1977 and 1978?"

For example, "if a taxpayer adds $400 of insulation to his house in 1978 and pays for it in 1979, is he denied the credit, or may he claim the credit in tax year 1979?"

G.S. 105-151.3(a) begins by providing that "during the period from January 1, 1977, through December 31, 1978, any person . . . who installs . . . insulation . . . shall be allowed . . . a credit. . . ." The meaning of the phrase "during the period from January 1, 1977, through December 31, 1977" is obscure at best. It may (1) limit only the period of installation; or (2) limit the availability of the credit to that period; or (3) limit the availability of the credit to each of the two tax years in the period; or (4) limit both the installation and the credit to the period or tax years involved. Taking the Act as a whole, we feel that the intention of the General Assembly was two-fold: to require that any qualifying installation be made between 1 January 1977 and 31 December 1978, and, to the extent indicated in the discussion of question (1) above, to permit a credit in each of the two tax years.

Despite the fact that G.S. 105-151.3 provides that "payment must be made by the taxpayer during the tax year for which the credit is claimed" we do not believe that the Legislature intended that payment could be made in years after 31 December 1978 and claimed as a credit in years after that date. We conclude that the credit is available only for the tax years 1977 and 1978, and, in the example given, the taxpayer who adds insulation in 1978 and pays for it in 1979 may not claim the credit in tax year 1979.

"(4) Is the credit allowable for a tax year limited to the amount paid during that year, or is it limited to 25% of the amount paid?"

For example, "if a taxpayer installs $600 of insulation during 1977 and pays $100 of his bill during that year, may he claim $100 credit for 1977, or only $25?"

G.S. 105-151.3(a) limits the credit to "an amount equal to twenty-five percent (25%) of the cost of such insulation", but further provides that the credit "shall not exceed one hundred dollars ($100.00). . . ." Thus the total credit obtainable by the taxpayer for a particular installation may never exceed $100. Two additional requirements are also set out: (1) "the taxpayer must be liable for such insulation", and (2) "such payment be made by the taxpayer during the tax year for which the credit is claimed." (Emphasis added.) Assuming the existence of the taxpayer’s liability, and noting that the statute clearly implies that only one credit per installation may be claimed, we believe that he may claim $100 for 1977 in the example given, but may claim nothing in 1978, both because the $100 credit has been entirely used up and because only one credit per installation is permissible, and that credit was used in 1977.

Finally we believe that common sense dictates that the credit may not in any case exceed the amount actually paid in the tax year for which the credit is claimed. In the example given, if instead of paying $100, the taxpayer had paid $1.00, he would be entitled to a $1.00 credit, not a credit of $100. The reference to "such payment" seems clearly to relate to "the credit (which) is claimed."

Rufus L. Edmisten Attorney General

Myron C. Banks Special Deputy Attorney General