Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
By Che Odom
Fidelity Bank is stuck with a tax bill to North Carolina for interest earned in 2001 from redeemed U.S. Treasury bonds, the state supreme court ruled ( Fid. Bank v. N.C. Dep’t of Revenue , 2017 BL 289780, N.C., No. 392A16 and 393PA16, 8/18/17 ).
Fidelity, which is owned by Fidelity Bancshares Inc., bought the bonds at a discount, then held them until maturity before cashing them. It claimed income as market-based income, then claimed a deduction on a state tax return. North Carolina denied the deduction.
The Supreme Court’s Aug. 18 decision to affirm hinged on the interpretation of the term “interest” in the relevant statute, N.C.G.S. § 105-130.5 . The supreme court agreed with the state Business Court that “interest” should be considered “periodic payments received by the holder of a bond.”
“We hold that the Business Court correctly concluded that the Market Discount Income that Fidelity Bank received on the discounted bonds that matured during 2001 was not deductible for North Carolina corporate income tax purposes,” the Supreme Court said.
Fidelity earned $724,000 in market discount income related to the securities. The state assessed Fidelity income taxes of almost $50,000 and charged associated interest for 2001.
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