North Carolina Corporate Income and Franchise Taxes examines a wide range of issues dealing with the taxation of corporations in North Carolina. Designed to give an overview of North Carolina corporate income and franchise taxation, this Portfolio, written by Jasper L. Cummings, Jr., of the law firm Alston & Bird LLP, refers to North Carolina statutes, cases, rules, administrative decisions, and other relevant authority.  This Portfolio analyzes the method of computing state taxable income and the proper allocation and apportionment of business and nonbusiness income, examining such issues as the constitutional limitations of the Due Process and Commerce clauses, the relationship of constitutional and statutory issues, UDITPA, and the statutory definition of business income. 

North Carolina Corporate Income and Franchise Taxes r eviews the procedure for computing state net income subject to tax.  It identifies additions, deductions, and other adjustments to federal taxable income and outlines the business income apportionment rules for corporations that are taxable both in-state and out-of-state. 

This Portfolio also addresses special nexus problems encountered by taxpayers, the authority behind and petition procedure for alternative apportionment, and the applicability and computation of the franchise tax. 

North Carolina Corporate Income and Franchise Taxes allows you to benefit from: 

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Plain-English guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios.

This Portfolio is part of the Premier State Tax Library, a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.

Detailed Analysis

2250.01. INTRODUCTION AND OVERVIEW OF NEXUS

Introductory Material

A. N.C. Statute and Administrative Rules

1. General

a. Income Tax

b. Franchise Tax

2. Public Law 86-272

a. Income Tax

b. Franchise Tax

B. Other Administrative and Analogous Authority

1. Employees and agents

2. Tangible personal property

3. “Economic Nexus”/Financial Institutions

C. Constitutional Limitations

2250.02. PROCEDURE FOR COMPUTING STATE NET INCOME SUBJECT TO TAX - OVERVIEW

Introductory Material

A. Determine Federal Taxable Income; Deconsolidation

B. Make Adjustments to Federal Taxable Income

C. Determine Whether Allocation and Apportionment Are Required

D. Divide the Income Base, if Allocation and Apportionment Are Required

1. Step One: Segregate “Nonbusiness Income, Loss, and Expense” from “Business Income, Loss, and Expense”

2. Step Two: Allocate Nonbusiness Income

3. Step Three: Apportion Business Income

E. Calculate State Net Income

2250.03. ADJUSTMENTS TO FEDERAL TAXABLE INCOME

A. Additions

1. Net Income Taxes

2. Interest Paid In Connection With Exempt Income

3. Contributions Deduction

4. Interest On Bonds of Other States

5. Capital Loss Carryovers And NOLs

6. Dividends Received Deductions

7. Excessive Payments

8. State Income Tax Credits

9. Bonus Depreciation Deduction Addback

10. Other

B. Deductions

1. U.S. Interest

2. North Carolina and Nonprofit Interest

3. Excessive Payments

4. Deductible Dividends

5. Net Economic Losses

6. Contributions

7. Bonus Depreciation Deduction

8. Other

C. Other Adjustments

1. Basis Differences

2. Expenses Related To Untaxed Income

3. Installment Method

D. Consolidated/Combined Return

E. Tax Credits

2250.04. “UNITARY” TAXATION

A. Significance in North Carolina: Overview

B. Origin of Unitary Taxation

C. Meaning of Unitary Taxation

1. Apportionment

2. Constitutional Limits

3. Single Corporation

4. Multiple Corporations

a. Scope of the Application of the Unitary Method to Related Corporations

b. Normally no Unitary Multicorporate Taxation in North Carolina

c. Required “Consolidation” and Unitary Businesses

d. Required “Consolidation” Procedure

D. When Are Corporations Unitary?

E. Passive Investment Companies/Delaware Holding Companies

2250.05. ALLOCATION AND APPORTIONMENT: BUSINESS v. NONBUSINESS INCOME

A. Overview

B. Constitutional Limitations

1. Due Process Clause

2. Commerce Clause

3. Relation of Constitutional and Statutory Issues

C. UDITPA

D. Results of Classification

E. Statutory Definition of Business Income

1. The Two Prongs of the Definition

2. The Polaroid Decision

3. The Scope of Business Income

a. General

b. The Union Carbide Decision

c. The Administrative Rules

(1) Rental Income

(2) Working Capital

(3) Disposition of Property

(4) Interest

(5) Dividends

(6) Royalties

(7) Partnership Income

d. Other Scenarios

2250.06. BUSINESS INCOME APPORTIONMENT RULES FOR CORPORATIONS TAXABLE BOTH IN-STATE AND OUT-OF-STATE

Introductory Material

A. Mechanics

1. General Business Corporations

2. Excluded Corporations

B. Property Factor

C. Payroll Factor

D. Sales Factor

1. General

2. Sourcing Sales

2250.07. ALLOCATION OF NONBUSINESS INCOME

A. Statutory Provisions

1. Real Property Rent and Sale Gain and Loss

2. Tangible Personal Property Rent and Sale Gain and Loss, Royalties From Patents, Etc.

3. Intangible Personal Property Gain and Loss

4. Interest and Dividends

5. Other

B. Netting

2250.08. ALTERNATIVE APPORTIONMENT

A. Authority

B. Petition Procedure

1. Petition

2. Hearing

3. Final Decision

4. Appeal

C. Department's Power to Impose Alternative Apportionment Methods

2250.09. ASSESSMENT PROCEDURE

Introductory Material

A. Challenging a Notice of Proposed Assessment

2250.10. THE FRANCHISE TAX

Introductory Material

A. Overview: Entities Subject to Tax

B. Franchise Tax Nexus

C. Special Franchise Taxes

1. Utilities

2. Holding Companies

3. Exemptions: RICs and REITs

D. Computation of the Franchise Tax on General Business Corporations

1. Overview

2. Book Value

a. Effect of Owning Subsidiaries on the General Franchise Tax

b. Definite and Accrued Legal Liabilities

c. Deferred Tax Assets and Liabilities and Similar Items

d. Affiliate Debt

e. Apportionment

3. Appraised Value Base

4. Total Actual Investment in Tangible Property

5. Computational and Reporting Issues

Working Papers

Item Description Sheet

Worksheet 1 BNA 2008 Survey of State Tax Departments: North Carolina Questionnaire

Worksheet 2 North Carolina Department of Revenue: Business Questionnaire

Bibliography

Bibliography