After the General Assembly cut the NC Enterprise Corporation tax credit cap in mid-1996 and then repealed the credit altogether effective January 1, 1997, did the savings clause in the repealer let an existing enterprise corporation keep offering investors the old, higher credit for the remainder of 1996?

Plain-English summary

In the mid-1990s, North Carolina was using its corporate income tax to subsidize venture-capital investment in small in-state companies. The Enterprise Corporation tax credit program, codified at § 105-163.010 et seq., let an investor in a qualified "North Carolina Enterprise Corporation" claim a state tax credit equal to a portion of the investment, with a total statewide credit cap of an aggregate annual amount. Piedmont Venture Management, Inc., was one of the corporations qualified to offer this credit.

In the 1996 Second Extra Session, the General Assembly enacted Chapter 14, which (a) reduced the total annual credit cap to $6 million effective for investments made on or after January 1, 1996 (retroactive to the start of the calendar year), and (b) repealed the entire credit effective for investments made on or after January 1, 1997. Section 26 of the same chapter contained a savings clause: the chapter "does not affect the rights or liabilities of the State, a taxpayer or another person arising under a statute amended or repealed by this act before its amendment or repeal; nor does it affect the right to any refund or credit of tax that would have otherwise been available under the amended or repealed statute before its amendment or repeal."

Piedmont argued the savings clause preserved the pre-amendment credit limit for 1996 investors in Piedmont. Its theory was: Piedmont was incorporated before the amendments. Piedmont's status as an enterprise corporation gave it the "right" to offer tax credits to investors. That right arose before the amendments. Therefore the savings clause preserved the right and 1996 investors in Piedmont could still get the old, higher credit.

Senior Deputy Attorney General Reginald L. Watkins and Assistant Attorney General Kay Linn Miller Hobart rejected the argument on three independent grounds.

First, Piedmont never had a "right" to offer tax credits. The power to tax and the power to exempt from taxation are exclusive attributes of state sovereignty. Sale v. Johnson, 258 N.C. 749 (1963). Article V, § 2(1) of the state constitution says the power of taxation may "never be surrendered, suspended or contracted away." Aronov v. Secretary of Revenue, 323 N.C. 132 (1988), held that deductions and exemptions are "privileges, not rights" and "are allowed as a matter of legislative grace." Tax credits are in the nature of exemptions. They are benefits the state gratuitously confers, and the corporation that channels them is the channel, not the holder of a right.

Second, even if a tax credit could be called a "right" under the savings clause, the investors' rights to specific credits had not yet accrued at the time of the amendments. Under the statutory scheme, an investor's right to a credit on a particular investment did not become fixed until December 31 of the year following the calendar year in which the investment was made. The 1996 amendments hit before any 1996-investment credit had ripened. There was nothing for the savings clause to preserve. Citicorp v. Currie, 75 N.C. App. 312 (1985), and Pinkham v. Unborn Children of Jather Pinkham, 227 N.C. 72 (1946), confirmed that no one has a vested right in the continuation of a tax statute. The U.S. Supreme Court had said the same in United States v. Carlton, 512 U.S. 26 (1994): "tax legislation is a promise, and a taxpayer has no vested rights in the Internal Revenue Code."

Third, Piedmont's reading of the savings clause would nullify the legislative changes entirely. If Piedmont were right, every investment in every pre-existing enterprise corporation through 1998 (the original sunset date) would still get the old cap, and the amendments would do nothing. That cannot be the meaning of a savings clause. Savings clauses preserve rights that have ripened from interference, not rights that did not exist when the legislation passed. Knickerbocker Ice Co. v. Stewart, 253 U.S. 149 (1920). AGL, Inc. v. Alcoholic Beverage Control Comm'n, 68 N.C. App. 604 (1984), recognized the same purpose.

The AG concluded that all 1996 investments in any qualified enterprise corporation, including Piedmont, were subject to the new $6 million total credit limitation in § 105-163.012(b).

Currency note

This opinion was issued in 1996. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. The Enterprise Corporation tax credit was repealed effective January 1, 1997 and no longer exists. North Carolina has experimented with various venture-capital tax-credit programs over the years, none of which has restored the 1990s framework. The savings-clause analysis the AG used remains the standard approach: a savings clause preserves vested rights, not statutory expectations. The vested-rights/legislative-grace distinction for tax credits is still good law.

Background and statutory framework

North Carolina's venture-capital tax credit programs in the 1980s and 1990s were part of a national trend among states trying to keep emerging-company financing in-state rather than seeing it flow to coastal venture funds. The Enterprise Corporation framework, like the parallel Qualified Business Venture program, gave investors a state tax credit on a portion of qualifying investments, with an annual statewide cap to limit the cost.

By the mid-1990s the program had generated mixed evaluations. Some critics argued the credits subsidized investments that would have happened anyway; others argued the cap encouraged race-to-claim behavior that distorted timing. The 1996 Second Extra Session's repeal reflected one side of that debate. The retroactive cap reduction, combined with the prospective repeal, signaled that the legislature wanted to wind down the program quickly.

Piedmont's argument was an effort to take some of the bite out of the wind-down. If existing enterprise corporations could claim that their status conferred a vested right to offer credits at the old cap, then mid-year investments in those corporations would still get the old benefit. From a deal-flow perspective, the argument had appeal: it would let Piedmont close 1996 deals at the higher credit rate. From a tax-policy perspective, however, the argument had the structural defect the AG identified: it would effectively gut the amendment, because every existing enterprise corporation had the same theoretical "right."

The opinion's careful work on the savings clause is a useful general teaching. Savings clauses preserve rights as they exist at ratification; they do not create rights that have not yet ripened. The investor's right to a tax credit on a 1996 investment was inchoate until the close of the relevant taxable year, and the legislature could change the rules in the interim.

The constitutional clause the AG quoted, Article V, § 2(1), is unusually direct: "[t]he power of taxation shall … never be surrendered, suspended or contracted away." The drafters wanted to foreclose exactly the kind of argument Piedmont was making: that a corporation could obtain a vested right to a future tax-credit scheme by establishing itself under existing law.

Common questions

What was a North Carolina Enterprise Corporation?

It was a corporation that registered with the state under § 105-163.010 et seq. to channel investor capital into small in-state companies. Investors in the Enterprise Corporation received a state tax credit equal to a portion of their investment, up to a statewide annual cap.

What did the 1996 amendments change?

Two things. First, the total statewide credit cap was reduced effective for investments made on or after January 1, 1996. Second, the credit was repealed entirely effective for investments made on or after January 1, 1997.

What is a "savings clause" and what did Section 26 say?

A savings clause in a repealer or amendment preserves rights that have accrued before the change. Section 26 said the chapter did not affect rights or liabilities arising under the amended or repealed statute before its amendment or repeal, and did not affect refunds or credits that would otherwise have been available before the change.

Why didn't Piedmont's status protect 1996 investors?

Three reasons. Piedmont never had a "right" to offer tax credits (credits are legislative grace, not rights). Even if status counted as a right, the investor's credit on a specific investment did not vest until December 31 of the year after the investment, so 1996 investments were exposed to the cap change. And reading the savings clause to preserve all pre-existing enterprise corporations' credit-offering capacity would gut the legislative change.

Does this analysis still apply to other tax-credit programs?

The savings-clause and vested-rights framework still applies. Tax credits remain creations of legislative grace under North Carolina law, and savings clauses still preserve accrued rights rather than statutory frameworks. The specific Enterprise Corporation program was repealed in 1997 and is gone.

Source

• Landing page: https://ncdoj.gov/opinions/enterprise-corporation-tax-credit-piedmont-venture-management-inc/

Citations

• N.C. Const. art. V, § 2(1) (taxation power not surrendered or contracted away)
• N.C.G.S. § 105-163.010 et seq. (Enterprise Corporation tax credit, repealed 1997)
• N.C.G.S. § 105-163.011, § 105-163.012 (mechanics; total credit cap)
• 1996 Session Laws (Second Extra Sess.), Ch. 14, §§ 6, 7, 26, 27(2), 27(3)
• Sale v. Johnson, 258 N.C. 749, 129 S.E.2d 465 (1963)
• Aronov v. Secretary of Revenue, 323 N.C. 132, 371 S.E.2d 468 (1988)
• Citicorp v. Currie, 75 N.C. App. 312, 330 S.E.2d 635 (1985)
• Pinkham v. Unborn Children of Jather Pinkham, 227 N.C. 72, 40 S.E.2d 690 (1946)
• Chicago & Alton Railroad Co. v. Tranbarger, 238 U.S. 67 (1915)
• U.S. v. Carlton, 512 U.S. 26 (1994)
• Knickerbocker Ice Co. v. Stewart, 253 U.S. 149 (1920)
• AGL, Inc. v. Alcoholic Beverage Control Comm'n, 68 N.C. App. 604, 315 S.E.2d 718 (1984)

Original opinion text

December 17, 1996

Jack L. Harper, Director Corporate Income, Franchise and Insurance Tax Division North Carolina Department of Revenue 501 North Wilmington Street Raleigh, North Carolina 27604

Re: Advisory Opinion; Piedmont Venture Management, Inc.; Enterprise Corporation Tax Credit; N.C.G.S. §§ 105-163.010 et seq.

We provided you an advisory letter regarding certain amendments to the provisions granting tax credits for investments in North Carolina Enterprise Corporations on 28 October 1996. As a follow up, you have requested an advisory opinion regarding the effect of Section 26 of Chapter 14 of the 1996 Session Laws (Second Extra Sess.) on the amount of the tax credit available for investments in a North Carolina Enterprise Corporation ("enterprise corporation") during calendar year 1996. The relevant facts are set forth in the advisory letter, attached hereto and made a part of this advisory opinion.

Section 26 provides:

This act does not affect the rights or liabilities of the State, a taxpayer or another person arising under a statute amended or repealed by this act before its amendment or repeal; nor does it affect the right to any refund or credit of tax that would have otherwise been available under the amended or repealed statute before its amendment or repeal.

The provision granting the tax credit for investing in an enterprise corporation was repealed effective for investments made on or after 1 January 1997. Ch. 14, §§ 7, 27(3), 1996 Session Laws (Second Extra Sess.). The reasons for the repeal are discussed in the advisory letter. Additionally, the total amount of credits available for investing in enterprise corporations was reduced, effective for investments made on or after 1 January 1996. Ch. 14, §§ 6, 27(2), 1996 Session Laws (Second Extra Sess.). These amendments, however, did not affect the basic mechanics governing application of the credit. Once a qualifying investment is actually made, any potential credit is allowable for the taxable year beginning during the following calendar year, subject to certain limitations and restrictions. See N.C.G.S. §§ 105-163.011 and 105-163.012.

Piedmont Venture Management, Inc., a North Carolina Enterprise Corporation ("Piedmont" or "taxpayer") contends that, even though the total amount of credits available was reduced effective for investments made on or after 1 January 1996, the language of Section 26 preserves the higher credit limit for investors in Piedmont during calendar year 1996, since Piedmont was incorporated prior to the ratification of the amending legislation. Piedmont maintains that its status as an enterprise corporation conferred the right to offer tax credits to investors, that this right arose on the date of its incorporation, prior to the statute's amendment, and that this right is therefore preserved by Section 26.

The advisory letter rejected the construction urged by Piedmont, concluding that the protections afforded by Section 26 did not extend to, in effect, nullifying the amendments made to the relevant statutory provisions for enterprise corporations in existence prior to ratification. The advisory letter noted that "[t]he power to exempt from taxation, as well as the power to tax, is an essential attribute of sovereignty." Sale v. Johnson, 258 N.C. 749, 755, 129 S.E.2d 465, 469 (1963). As such, the "right" to offer tax credits is entrusted exclusively to the General Assembly. Moreover, the North Carolina Constitution flatly prohibits the interpretation urged by Piedmont. Article V, Section 2(1) provides that "[t]he power of taxation shall … never be surrendered, suspended or contracted away." The advisory letter properly concluded that at no time did Piedmont ever possess any 'rights' to offer tax credits to potential investors. Thus, we, too, find unpersuasive Piedmont's assertion that its status as an enterprise corporation on a particular date insulated it from amendments, otherwise applicable.

We further note that, in materials submitted, Piedmont claims that the interpretation of the first clause of Section 26 in the advisory letter renders that phrase meaningless, which contravenes well-established principles of statutory construction. To the contrary, we find that Piedmont's explanation of the savings clause annuls the legislative changes. Under a consistent interpretation of Piedmont's position, just as the amendment to the cap supposedly has no effect, so, too, apparently, the repeal of the credit has no effect; all investments in enterprise corporations existing as of the date of the ratification therefore remain eligible for the credit, at the higher limit, until the sunset date of the original legislation (repealed effective for investments made on or after 1 January 1999). We necessarily reject such a construction.

Since we have determined that Piedmont possessed no independent right to offer tax credits, we must next ascertain whether any other rights of Piedmont or others arose before the statute's amendment for Section 26 to preserve. The advisory letter pointed out that deductions and exemptions from taxation "are privileges, not rights," and "are allowed as a matter of legislative grace." Aronov v. Secretary of Revenue, 323 N.C. 132, 140, 371 S.E.2d 468, 472 (1988). "They are benefits which the state gratuitously confers." Id. at 138, 371 S.E.2d at 471. The advisory letter therefore reasoned that credits, which are "in the nature of exemptions," see id. at 140, 371 S.E.2d at 472, cannot properly be considered "rights" arising under the granting legislation according to decisions of the North Carolina courts. We adopt this conclusion as sound.

Furthermore, as discussed in the advisory letter, even if a tax credit can be considered a "right" for purposes of Section 26, this provision only protects rights "arising under a statute amended or repealed by this act before its amendment or repeal." Under the statutory scheme, the right to a tax credit, and the amount thereof, does not become fixed or vested until December 31 of the year following the calendar year in which the investment was made, or the close of the taxpayer's taxable year, if later. Here, none of the events which would have fixed the right of the investors to the credit ever occurred. Consequently, the right to the credit had not yet accrued at the time of the statute's amendment. The language of Section 26 relied on by Piedmont therefore has no application.

Finally, it cannot be said that Piedmont possessed a "right" in the continuation of the provisions granting the tax credit. "[N]o one has the right for the General Assembly not to change a law…." Citicorp v. Currie, 75 N.C. App. 312, 315-316, 330 S.E.2d 635, 637, disc. rev. denied, 314 N.C. 538, 335 S.E.2d 16 (1985). So, too, "no person has a vested right in any general rule of law or policy of legislation entitling him to insist that it shall remain unchanged for his benefit…." Chicago & Alton Railroad Company v. Tranbarger, 238 U.S. 67, 76 (1915). See also Pinkham v. Unborn Children of Jather Pinkham, 227 N.C. 72, 78, 40 S.E.2d 690, 694 (1946). "[A] right cannot be considered a vested right unless it is something more than such a mere expectancy as may be based upon an anticipated continuance of the present general law…." Pinkham, 227 N.C. at 79, 40 S.E.2d at 695 (quoting Cooley's Constitutional Limitations, Vol. II, p. 749). See also U.S. v. Carlton, 512 U.S. 26, 114 S.Ct. 2018, 2023 (1994) ("tax legislation is a promise, and a taxpayer has no vested rights in the Internal Revenue Code").

An analysis of the second clause of Section 26 also fails to support the result Piedmont urges. Essentially, Piedmont faces the same obstacle here as discussed above. Under the statutory scheme, the earliest a taxpayer can potentially have a "right" to a credit is when the Secretary determines the portion of the claimed credit allowed. This occurs on December 31 following the calendar year the investment is made. It is not until that time that the right to the credit "becomes available" to the taxpayer. As the advisory letter properly concluded, under the circumstances presented, there simply existed no "right to any refund or credit of a tax that would have otherwise been available under the amended or repealed statute before its amendment or repeal." Since no rights to tax credits had accrued at the time of the ratification of the amendment, there was nothing for Section 26 to preserve.

Our conclusions are bolstered by the nature and purpose of savings clauses. The function of a savings clause is not to create something that does not exist at the time legislation is ratified, but rather to preserve a right which has ripened from interference. Knickerbocker Ice Co. v. Stewart, 253 U.S. 149 (1920). "An exception to the general rule regarding the unconditional repeal of a statute occurs when the repealing act contains a 'savings clause' preserving pre-existing rights." AGL, Inc. v. Alcoholic Beverage Control Com'n., 68 N.C.App. 604, 607, 315 S.E.2d 718, 720 (1984). "Where a savings clause is appended to an act which by express declaration or by necessary implication repeals another enactment, the law repealed is continued in force as to existing rights and pending actions in accordance with the terms of the savings clause." 1 SUTHERLAND, STATUTORY CONSTRUCTION § 2049 (3d ed. 1943).

Here, we believe the phrase "that would otherwise have been available" in the savings clause means credits and refunds that have accrued. For example, N.C.G.S. § 105-163.012(a) permits a credit for investing in an enterprise corporation to be carried over for five succeeding years in the event certain limitations prevent the taxpayer from full utilization of the credit in a particular year. Section 26 clarifies that, even though the statutes are amended or repealed for actions taken in the future, a taxpayer is permitted to carryover and claim any remaining credits which had already accrued at the time of ratification. The "would otherwise have been available" conditional language recognizes that the credit or refund would have been allowed under the amended or repealed law. The key, however, is that the right to the credit or refund must already exist at the time of the legislation; savings clauses cannot manufacture rights which do not yet exist.

For the foregoing reasons, we conclude that all investments made in calendar year 1996 in Piedmont or any other enterprise corporation or qualified business venture are subject to the amended total credit limitation of $6,000,000.00 in N.C.G.S. § 105-163.012(b).

We hope the foregoing is helpful. If you have questions or need further assistance, please advise.

Reginald L. Watkins Senior Deputy Attorney General

Kay Linn Miller Hobart Assistant Attorney General