Taxation; Income taxes, Corporations; Deductions, Charitable Contributions; North Carolina donees

Subject:

Taxation; Income taxes, Corporations; Deductions, Charitable Contributions; North Carolina donees; G.S. 105-130.9.

Requested By:

W. B. Matthews Director, Corporate Income and Franchise Tax Division North Carolina Department of Revenue

Question:

Is a deduction for a contribution by a corporation, allocating income to this and other states, to a foreign charitable foundation having an office in North Carolina, which foundation in turn distributes the contribution to North Carolina educational institutions, subject to the 5% limit on ordinary charitable donations?

Conclusion:

Yes. It is the status of the donee of the contribution, not the status of the ultimate recipient, that controls the deduction.

You have inquired about the availability of a deduction for charitable contributions made by a corporation under the following circumstances.

X, Incorporated is a corporation whose business activities are such that its income is allocated and apportioned among many states, including North Carolina. X, Incorporated has created X Foundation a charitable entity organized and having its principal office in New York, but also having an office in this State. X, Incorporated generously contributes money to X Foundation, which in turn distributes that money to North Carolina educational institutions. For purposes of illustration, let us also assume that X, Incorporated contributes annually to Y Foundation, a charity operating exclusively in North Carolina, and Z Foundation, a charity not operating at all in this State.

G.S.

105-130.9(1) provides a deduction for charitable contributions by a corporation which does not allocate any portion of its net income to any other state, limited to 5% of its net income computed without the benefit of the deduction. This section has no application to X, Incorporated, since it allocates income.

G.S.

105-130.9(2) provides an unlimited deduction for contributions by a corporation to the State, any county or municipality or to "educational institutions located within North Carolina." This section is not inapplicable to X, Incorporated, on its face.

G.S.

105-130.9(3) provides a deduction to "corporation allocating a part of their total net income outside North Carolina" for "contributions made to North Carolina donees qualified under subdivisions (1) and (2) of this section or made through North Carolina offices or branches of

other donees qualified under the above-mentioned subdivisions of this section." However, contributions to donees qualified under subdivision (1) are limited to 5% of income allocated to North Carolina computed without the benefit of the deduction. This section has application to X, Incorporated, since it allocates income.

We believe that G.S. 105-130.9(3) makes it quite clear that X, Incorporated’s contributions to Y charity would be deductible, and would be calculated under that section. We believe it equally clear that X, Incorporated’s contributions to Z charity would not be deductible under G.S. 105130.9(3). The question which X, Incorporated raises is whether it contributions which go to X Foundation and from the Foundation to North Carolina educational institutions are deductible without limit under G.S. 105-130.9(2), or deductible but subject to the 5% limit imposed by G.S. 105-130.9(3).

X, Incorporated makes two points:

(1)

G.S. 105-130.9(3) provides for deductions for donations to North Carolina donees made through North Carolina offices of qualified donees.

(2)

The limitation (or lack of limitation) upon donations is therefore determined by the identity of the "ultimate donee. "

Thus, it reads G.S. 105-130.9(3) as if it said "corporations allocating a part of their total net income outside North Carolina . . . shall deduct from total income allocable to North Carolina contributions . . . made through North Carolina offices or branches of other donees (to donees) qualified under the branches of other donees (to donees) qualified under the above-mentioned subdivisions of this section." However, the inserted words, "to donees," do not appear in the statute and, in our opinion, are not required to be inferred in order to understand the meaning are not required to be inferred in order to understand the meaning of the statute and its application to X, Incorporated, particularly when we recall the familiar rule of construction that in case of doubt or ambiguity, deduction provisions are construed strictly, and in favor of the State. Ward v. Clayton (1969), 5 N.C. App. 53, 167 S.E.2d 808, aff’d., 276 N.C. 411, 172 S.E.2d 531.

Before 1967, corporate and individual income tax provisions were combined in the same schedule of the Revenue Act. Before 1961, contributions by corporations and individuals to the State, and to counties and municipalities were fully deductible, but contributions for charitable and educational purposes were subject to the 5% limitation. G.S. 105-147(15)(16). Subsection

(18) at that time dealt exclusively with nonresident individuals, and limited their deductions to those "connected with income arising within the State." In 1961, G.S. 105-147(18) was rewritten. The former provisions were carried forward in G.S. 105-147(18)a., and two new paragraphs were added. The first, b., also applied to nonresident individuals and for the first time permitted to them the charitable deductions provided for and limited by G.S. 105-147(15) and (16), but "only if the donee shall have an office in this State and be actively engaged in this State in performing the functions for which said donees were organized."

The second, c., was apparently intended to be the corporate mirror of the individual provisions, where a corporation was not wholly taxable in this State, similar to the Status of a nonresident individual. The contents of G.S. 105-147(18)c. then were essentially as G.S. 105-130.93(3) presently is.

In 1963, the legislature extended the privilege of unlimited deduction for gifts to North Carolina educational institutions, by amending G.S. 105-147(16). S.L. 1963, C. 1169, § 2.

When the income tax provisions were separated in 1967, G.S. 105-147(15), (16) and (18) a. and b., modified to fit only individual taxpayers, continued with the same designation. Former G.S. 105-147(15), (16) and (18) c., modified to fit only corporate taxpayers, became present G.S. 105130.9(1), (2) and (3).

It seems apparent from the recitation of the history of the pertinent sections that the purpose of the various amendments was both to encourage gifts to North Carolina educational institutions, and to encourage gifts by nonresidents", based upon business activity here. However, there is no reason to believe that these two purposes were connected or interrelated. The separation in time of enactment suggests that they were not. Gifts by such "nonresidents" were restricted only to "North Carolina donees" or to donees having some North Carolina nexus. In the case of individuals, that nexus was expressed in the requirement that "the donee shall have an office in this State and be actively engaged in this State in performing the functions for which said donees were organized." In the case of corporations, it was expressed in the requirement that contributions be "made through North Carolina offices or branches of other donees (i.e., donees other than "North Carolina donees") qualified under the above-mentioned subdivisions of this section." In each case, the status of deductibility appears to be determined by the character of donee receiving the contribution, not by the character of the ultimate recipient of the donee’s charity. If it were otherwise, then a gift to the Red Cross which was used to help a flood victim could be said to be non-deductible, because gifts to individuals are not deductible. Instead, it appears to us that the only determinant for purposes of G.S. 105-130.9(3) is the character or status of the donee which initially receives the contribution. If it has a North Carolina nexus and is an educational institution, a contribution is deductible without limit. If it has a North Carolina nexus but is another enumerated eleemosynary institution a contribution is limited to 5% of total allocated income.

In the case of X, Incorporated, since X Foundation is not an educational institution, the deduction is limited to 5%.

Rufus L. Edmisten Attorney General

Myron C. Banks Special Deputy Attorney General