When Congress changed federal depreciation rules in August 1981 to apply retroactively to property placed in service after December 31, 1980, did NC corporations get to use those faster federal write-offs for state income tax purposes too, given that NC's corporate tax statute cross-referenced the Internal Revenue Code 'in effect on January 1, 1981'?
Plain-English summary
In August 1981, Congress passed the Economic Recovery Tax Act (Reagan's first big tax bill, Pub. L. No. 97-34). Among its major provisions was the Accelerated Cost Recovery System (ACRS), which let businesses write off depreciable property faster. The new depreciation rules applied retroactively to property placed in service after December 31, 1980.
NC's Secretary of Revenue, Mark Lynch, asked the AG a clean question: did NC corporations get to use the faster federal depreciation for their state corporate income tax too? The catch was statutory. G.S. § 105-130.3 said the corporate net income for NC tax purposes was "the same as 'taxable income' as defined in the Internal Revenue Code in effect on January 1, 1981." If "in effect on" meant the Code as it literally read on that date, then ERTA, signed in August 1981, was not "in effect on" January 1, 1981, and its accelerated depreciation would not flow through to NC corporate returns.
The AG, through Special Deputy AG Myron Banks, said the faster depreciation did flow through. The reasoning had two pieces. First, the legislative intent was clearly to conform NC corporate tax to federal, with specific carve-outs handled by G.S. § 105-130.5 (the adjustment list). The General Assembly was not trying to lock NC into a snapshot of the federal Code; it was trying to piggyback on federal taxable-income computations. Second, on the individual income tax side, G.S. § 105-147(12) used the words "as amended," which clearly captured ERTA's changes. Treating corporations differently than individuals on the same depreciable property would have been incoherent and was not what the General Assembly intended.
To get there textually, the AG read "in effect on" as meaning "with respect to" or "pertaining to" January 1, 1981. The Code as it ultimately applied to a particular date, the AG said, includes amendments later enacted that, by their terms, apply to that date. ERTA's depreciation provisions, by their own terms, applied to property placed in service after December 31, 1980 (so to the 1981 tax year forward). Reading the NC statute together with ERTA's retroactivity provision, the NC corporate tax also got the benefit of those amendments for taxable years beginning on or after January 1, 1981. The AG cited two old state-court decisions (Florida and Mississippi) for the proposition that "with respect to" was an accepted meaning of "on."
Currency note
This opinion was issued in 1981. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. NC's federal-conformity rules for corporate income tax have been rewritten many times since 1981. Modern NC tax law follows a "rolling" or "fixed-date" conformity rule that the legislature updates periodically (and often decouples from specific federal provisions like bonus depreciation and § 179 expensing). Anyone with a current NC corporate income tax question needs to read the current Article 4 of Chapter 105 of the General Statutes and the Department of Revenue's bulletins, not this opinion.
Background and statutory framework
NC has long computed corporate income tax by starting from federal taxable income and making state-specific adjustments. The mechanism is a "conformity" statute that incorporates the Internal Revenue Code by reference, then layers on NC-specific add-backs and deductions through a separate adjustment statute.
In 1981, NC was using a "static" or "fixed-date" conformity for corporations: the cross-reference was to the Code "in effect on January 1, 1981." That phrasing creates an interpretive problem whenever Congress passes a retroactive amendment, as ERTA did. Either (a) the state must update its cross-reference each session to capture the new federal rules (a "rolling" conformity adjustment), or (b) the state must read the existing cross-reference broadly enough to capture the federal change.
The AG chose option (b) for ERTA, anchored in the legislative-intent observation that the General Assembly was trying to align state and federal computations. Once a federal amendment said by its terms that it applied to a date the state cross-reference also referred to, the AG was willing to read "in effect on" as "with respect to" so the two would line up.
The AG also made a parallel-treatment argument. Individual income tax under G.S. § 105-147(12) cross-referenced the federal Code "as amended," language that unambiguously picked up ERTA. The same depreciable property in an individual's hands would get the new fast write-off; in a corporation's hands, on the AG's reading, it would too. The AG considered any other result not only contrary to the General Assembly's general conformity policy, but practically incoherent.
The General Assembly later resolved the structural problem by amending the conformity statute itself to address rolling or fixed-date conformity more clearly, and by adopting decoupling provisions when it disagreed with specific federal tax changes (notably bonus depreciation in later decades).
Common questions
Did this opinion mean every federal tax change flowed through to NC corporate tax automatically?
Not quite. The AG's reasoning rested on (a) the federal provision saying by its own terms that it applied to property "placed in service after December 31, 1980" and (b) the existing NC adjustment statute (§ 105-130.5) being the proper place to add decoupling adjustments if the General Assembly wanted to opt out. Federal changes that did not have similar retroactivity language, or that the General Assembly later expressly decoupled from, would have been treated differently.
What was the corporate tax rate in 1981 NC?
G.S. § 105-130.3 set the rate at six percent of NC-allocated net income. The rate has been reduced many times since then; modern NC corporate tax rates are far lower (and on a phased path to zero under recent legislation).
Why cite two out-of-state cases for the meaning of "on"?
The cases (a 1930s Florida decision and a 1930s Mississippi decision) were cited for the unremarkable proposition that "on" can mean "with respect to" or "pertaining to." That linguistic move was the textual bridge between the federal retroactivity and the NC cross-reference. Out-of-state cases were the closest analog the AG could find for the dictionary-style point.
Could a NC corporation have safely taken the deduction before the AG issued this opinion?
Aggressive tax positions can be taken without an AG opinion as cover. But this opinion gave both taxpayers and the Department of Revenue an authoritative read that lowered audit risk and gave the Department a basis to allow the deduction on examination.
Source
Citations
- N.C. Gen. Stat. § 105-130.3
- N.C. Gen. Stat. § 105-130.5
- N.C. Gen. Stat. § 105-147(12)
- Economic Recovery Tax Act of 1981, Pub. L. No. 97-34
- Jerome H. Shelp Co. v. Amos, 100 Fla. 863, 130 So. 699
- Welch v. Gant, 161 Miss. 867, 138 So. 585
Original opinion text
Requested By: Mark G. Lynch Secretary of Revenue
Question: Are the depreciation deductions made available under the Economic Recovery Tax Act of 1981 available to corporate taxable years beginning on and after 1 January 1981?
Conclusion: Yes.
The Secretary of Revenue has inquired whether the deductions allowed for accelerated depreciation by the Economic Recovery Tax Act of 1981 to taxpayers for federal purposes will also be available for State income tax purposes to corporate taxpayers. G.S. 105-130.3 provides:
"Every corporation doing business in this State shall pay annually an income tax equivalent to six percent (6%) of its net income or the portion thereof allocated and apportioned to this State. The net income or net loss of such corporation shall be the same as "taxable income" as defined in the Internal Revenue Code in effect on January 1, 1981, subject to the adjustments provided in G.S. 105-130.5." (Emphasis added.)
The question arises because the federal Act was not approved until 13 August 1981, but provides that the new depreciation provisions "shall apply to property placed in service after December 31, 1980, in taxable years ending after such date." Economic Recovery Tax and Administrative News, No. 6, August 1981.
It should also be noted that the new changes are clearly applicable to individual income taxpayers for State income tax purposes. G.S. 105-147(12) permits as a deduction "an allowance for depreciation and obsolescence of property . . . to the extent allowed or allowable for federal income tax purposes under the provisions of the Internal Revenue Code of 1954 as amended . . ." (Emphasis added)
If the meaning of "in effect on" is that the code as it existed on a given date is the Code that must be applied, then obviously the Internal Revenue Code in effect on 1 January 1981 could not include amendments from an act nor approved until 13 August 1981. However, it seems clear that the legislative intent is, with specified statutory exceptions, to conform State corporate income tax provisions with federal law. It seems that as clear that the depreciation schedule applicable to a particular item of property owned by a corporation ought logically to be the same as that applicable to an identical item owned by an individual.
If, however, the meaning of "in effect on" is that the Code as it applied with respect to a given date is the one to be given effect, then the Code provisions which apply with respect to 1 January 1981 are those which were approved as 13 August 1981 and which "apply to property placed in service after December 31, 1981, in taxable years ending after such date."
"With respect to" and "pertaining to" are recognized and accepted meanings which may be ascribed to the word "on", and given that meaning, the provisions of G.S. 105-130.3 appear to meet the demands of both legislative intent and logic. Jerome H. Shelp Co. v. Amos, 100 Fla. 863, 130 So. 699; Welch v. Gant, 161 Miss. 867, 138 So. 585.
It is therefore our opinion that the depreciation deductions made available under the Economic Recovery Tax Act of 1981 are available to corporate taxpayers for State income tax purposes for taxable years beginning on and after 1 January 1981.
Rufus L. Edmisten
Attorney General
Myron C. Banks
Special Deputy Attorney General