Why are North Carolina banks allowed to deduct the full amount of their federal bond interest income for state tax purposes, when other corporations have to subtract out the interest expenses associated with that income, and is that bank-specific treatment constitutional?

Plain-English summary

Representative John Gamble, a physician and legislator, had a tax-policy question that had been festering for at least a decade. North Carolina taxes corporations on "State net income," which starts with federal taxable income and is then adjusted under NCGS 105-130.5. One of those adjustments, in subsection (a)(2), requires adding back "interest paid in connection with income exempt from taxation under this Division." A literal reading would suggest that financial institutions, which pay interest on customer deposits and use those deposits to buy federal bonds (whose income is exempt from NC tax under intergovernmental immunity principles), should add back the deposit interest. The Department of Revenue had taken the opposite position since 1987 and was letting banks deduct the gross (not net) amount of federal bond income.

Gamble asked the AG four sub-questions: (1) does NCGS 105-130.5(a)(2) require banks to add back deposit interest tied to exempt income; (2) does failing to enforce uniformly violate intergovernmental tax immunity under the Shaper Ohio litigation; (3) does it violate uniformity and equal protection; (4) does it violate the Commerce Clause given the U.S. Supreme Court's Fulton invalidation of NC's intangibles tax on stock?

AG Mike Easley, through Senior Deputy AG Reginald Watkins, Special Deputy AG George Boylan, and Assistant AG Kay Linn Miller Hobart, answered each question.

On question 1: NCGS 105-130.5(a)(2) does not require banks to add back deposit interest. Two earlier AG opinions, one in March 1987 and one in April 1987, had concluded that subsection (a)(2) does not apply to deposit interest, and that subsection (b)(1)'s deduction for "interest upon the obligations of the United States" is limited to the net amount included in federal taxable income (under First National Bank of Atlanta v. Bartow County, 470 U.S. 583 (1985)). Despite the 1987 opinions being narrowly framed, the Department had read them broadly to let banks deduct the gross amount of federal bond income, eliminating any need for an add-back. The 1997 AG opinion noted that the General Assembly had been on notice of this practice since at least 1991 (House Bill 1355) and 1993 (House Bill 17), both of which would have reversed the practice and both of which the legislature declined to pass. Under United States v. Rutherford, 442 U.S. 544 (1979), long-standing administrative interpretation with legislative acquiescence becomes "the law." So the bank-specific gross deduction policy is the law.

On question 2 (intergovernmental tax immunity): not implicated. The statute treats NC bonds and other-state bonds consistently on a net basis, which is itself consistent with federal treatment. No discrimination against federal obligations exists.

On question 3 (uniformity and equal protection): closer call. NC Const. Art. V, § 2(2) requires that all members of the same tax classification be taxed uniformly under Hajoca Corp. v. Clayton, 277 N.C. 560 (1971). Since 1974, banks have been classified with all other C corporations. Letting banks alone take the gross federal bond deduction looks like nonuniform treatment within the C-corporation class. The AG conceded the issue is "more difficult," but ultimately concluded the differential treatment survives because (a) the General Assembly has implicitly ratified it, (b) acts of the legislature carry a strong presumption of constitutionality under Moore v. Knightdale Board of Elections, 331 N.C. 1 (1992), and (c) any change in policy should come from the General Assembly, not from a unilateral Department of Revenue reversal or judicial intervention.

On question 4 (Commerce Clause): no implication. The interpretation does not discriminate against interstate commerce.

The opinion is one of the more politically loaded tax opinions of the era. It validates the Department's existing favorable treatment of banks while flagging that the constitutional argument is not airtight and could be addressed cleanly through legislation if the General Assembly decided to fix it. It also defuses Representative Gamble's request, which had political content beyond the legal question.

Currency note

This opinion was issued in 1997. 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. NCGS 105-130.5 has been amended many times since 1997, and the Internal Revenue Code reference date in NCGS 105-228.90 is updated each session. The treatment of bank deposit interest and federal bond income under state corporate tax has been the subject of additional administrative pronouncements and possibly legislative action. Anyone evaluating a current corporate return must work from the current statutes, current Department of Revenue rulings, and current case law, not from this 1997 opinion's snapshot.

Background and statutory framework

The North Carolina corporate income tax begins with federal taxable income as defined under the Internal Revenue Code, then makes a series of adjustments under NCGS 105-130.5 to arrive at "State net income." Subsection (a) adds items back; subsection (b) subtracts items out.

For federal tax purposes:
- State and local bond interest is exempt. The income is not in federal taxable income to begin with.
- Federal bond interest is taxable. The net (gross minus associated interest expense, under I.R.C. § 265) is in federal taxable income.

For NC tax purposes, intergovernmental immunity requires reverse treatment:
- Federal bond interest must be excluded from NC tax. NCGS 105-130.5(b)(1) deducts it from federal taxable income.
- Other-state bond interest must be added back to NC tax. NCGS 105-130.5(a)(4) adds it.
- NC bond interest is exempt for both NC and federal purposes; no NC-specific adjustment is needed.

The 1987 AG opinions construed subsection (b)(1) to deduct only the net amount of federal bond income, matching the federal treatment of bond expenses under I.R.C. § 265 and following First National Bank of Atlanta v. Bartow County (1985), which held that a state need not provide a full gross deduction; states can require federal obligations to bear their "fair allocation" of expenses. That treatment was applied to other corporations.

For banks, the 1987 opinions reached a more limited result. Subsection (a)(2) requires adding back "interest paid in connection with income exempt from taxation." The March 1987 opinion held this did not require banks to add back deposit interest used to acquire federal obligations. The April 1987 opinion separately addressed subsection (b)(1) and the net-deduction rule. The Department of Revenue, however, ran the two opinions together: if banks did not have to add back deposit interest under (a)(2), then in effect their deduction under (b)(1) was the gross amount. This was a generous reading of the 1987 opinions, but the Department adopted it as its administrative practice and stuck with it.

By 1991 and 1993, the issue had drawn legislative attention. House Bill 1355 (1991) and House Bill 17 (1993) both proposed to reverse the Department's practice and require banks to add back deposit interest. Neither bill passed. House Bill 17 received a committee hearing, generated press coverage, and was reported out unfavorably. The Department's critiques of those bills made the administrative practice explicit on the record, so the General Assembly had clear notice that the Department was treating banks favorably and chose not to change the rule.

That legislative notice plus inaction is what saves the policy under the 1997 opinion. United States v. Rutherford recognizes that long-standing administrative interpretation, fully brought to the attention of Congress without legislative correction, is presumed to reflect legislative intent. The AG transposed that doctrine to the NC General Assembly.

The uniformity question under NC Const. Art. V, § 2(2) is the harder issue the opinion sidesteps. Hajoca holds that all members of a tax classification must be treated uniformly. Since 1974, banks have been in the C-corporation class. Letting only banks within that class take a gross federal bond deduction looks like classic non-uniform treatment. The AG's answer is essentially: yes, but the General Assembly has knowingly tolerated it, and courts presume legislative acts constitutional. So a uniformity challenge would probably fail.

That balance is uncomfortable. The opinion acknowledges the tension and notes that the cleanest fix would be legislative. But the AG was not going to declare the Department's practice unconstitutional and trigger a retroactive tax shock on the banking industry; the political and economic cost of a holding that swept aside ten years of Department practice was too high.

Common questions

Why does federal-tax treatment matter for a state-tax question?

State net income calculations almost always start with federal taxable income, so federal rules ripple into state results. Under I.R.C. § 265, interest expenses tied to tax-exempt income are not deductible federally. That means state and local bond interest is excluded net from federal taxable income (because the associated expenses are already disallowed). NC then has to decide whether to follow that net treatment or carve out something different. The 1987 opinion chose to follow it for most corporations but, in effect, depart from it for banks.

What is "intergovernmental tax immunity"?

A constitutional doctrine, derived from McCulloch v. Maryland (1819), that prevents states from taxing federal instrumentalities (and to a more limited extent vice-versa). For federal bonds, intergovernmental immunity is partly statutory (31 USC § 3124) and partly constitutional. States cannot tax interest on federal obligations, but states can require the obligations to bear their share of administrative expenses, which is what First National Bank of Atlanta allowed.

Did the AG say the Department of Revenue could change its practice on its own?

The opinion strongly hints no. After acknowledging the Department's "long-standing administrative interpretation, impliedly ratified by the legislature," the opinion says any policy change "should be left to the general assembly." The Department could theoretically reverse course, but doing so would unwind a decade of bank tax returns and would likely trigger immediate legislative pushback. The opinion's framing puts the political ball in the General Assembly's court.

How does the Shaper Ohio litigation fit?

Representative Gamble's question 2 referenced "the Shaper litigation in Ohio," which the AG read as a reference to ongoing Ohio cases about intergovernmental immunity in state corporate income tax. The AG declined to substantively engage because the issue is not implicated under the AG's interpretation. The interpretation treats NC bonds and other-state bonds consistently on a net basis, so no discrimination against federal bonds arises.

What's the Fulton case Representative Gamble mentioned?

That refers to Fulton Corp. v. Faulkner, 516 U.S. 325 (1996), where the U.S. Supreme Court struck down NC's intangibles tax on stock as discriminating against interstate commerce. Gamble worried that letting banks alone take a gross federal bond deduction might be similarly vulnerable under the Commerce Clause. The AG saw no parallel: there is no facially preferential treatment of in-state versus out-of-state economic activity; banks are NC entities for the most part, and the deduction at issue is for federal bonds, not for in-state versus out-of-state bonds. No Commerce Clause challenge would succeed.

Has this opinion been overruled or modified?

The opinion is from 1997 and is now nearly 30 years old. Whether the Department of Revenue still applies the same practice, whether the General Assembly has amended NCGS 105-130.5 to clarify the treatment, and whether subsequent AG opinions have revisited the issue all need to be checked against current sources. The opinion's reasoning is intact as a snapshot of 1997 law; its application to current corporate returns is not.

Source

• Landing page: https://ncdoj.gov/opinions/interest-expenses-incurred-in-connection-with-exempt-income-adjustments-to-federal-taxable-income/

Citations

• N.C. Gen. Stat. §§ 105-130.2, 105-130.3, 105-130.4, 105-130.5, 105-228.90, 143B-218
• I.R.C. § 265
• N.C. Const. art. V, § 2(2)
• U.S. Const. amend. XIV (Equal Protection Clause)
• House Bill 1355 (1991 Session); House Bill 17 (1993 Session)
• AG Opinions of March 18, 1987 and April 3, 1987 (referenced)
• AG Opinion of August 16, 1991 (referenced)
• First National Bank of Atlanta v. Bartow County Board of Tax Assessors, 470 U.S. 583 (1985)
• Hajoca Corp. v. Clayton, 277 N.C. 560, 178 S.E.2d 481 (1971)
• Moore v. Knightdale Board of Elections, 331 N.C. 1, 413 S.E.2d 541 (1992)
• United States v. Rutherford, 442 U.S. 544 (1979)

Original opinion text

May 1, 1997

The Honorable John R. Gamble, Jr., M.D.
North Carolina General Assembly
House of Representatives
State Legislative Building
Raleigh, North Carolina 27611

Re: Attorney General's Opinion: Interest Expenses Incurred in Connection with Exempt Income; Adjustments to Federal Taxable Income; N.C.G.S. § 105-130.5

Dear Representative Gamble:

We reply to your request for our opinion whether N.C.G.S. § 105-130.5(a)(2) requires financial institutions to add back to federal taxable income interest they pay on deposits when the deposits are used to acquire obligations which produce income exempt from taxation. You state that this request encompasses the following four additional questions, regarding which you also request our opinion:

1. Would the failure of the Secretary of Revenue to apply N.C.G.S. § 105-130.5(a)(2) with respect to financial institutions constitute a violation of her duties under Article 4 of Chapter 143B of the General Statutes?

2. In light of the Shaper litigation in Ohio and the 1995 North Carolina legislation providing uniform State income tax treatment of capital gains from the transfer of all State, local and federal bonds, would failure to apply N.C.G.S. § 105-130.5(a)(2) uniformly with respect to North Carolina bonds and other bonds constitute a violation of the federal constitutional doctrine of intergovernmental tax immunity?

3. In light of the tax treatment of expenses related to subsidiary dividends of foreign corporations under N.C.G.S. § 105-130.4, as well as the tax treatment of other corporations' expenses related to tax-exempt income under N.C.G.S. § 105-130.5(a)(2), does failure to apply N.C.G.S. § 105-130.5(a)(2) to financial institutions violate the constitutional requirements of uniformity and equal protection?

4. In light of the United States Supreme Court's invalidation of the intangibles tax on stock in the Fulton case, does failure to apply N.C.G.S. § 105-130.5(a)(2) to financial institutions violate the interstate commerce clause of the federal constitution?

Financial institutions are subject to the Corporate Income Tax Act, N.C.G.S. §§ 105-130 et seq., and are taxed on their "State net income," computed under Division I, Schedule D, Article 4 of Chapter 105 of the General Statutes, as are all corporate taxpayers doing business in North Carolina. The calculation of "State net income" begins with federal taxable income. "State net income" is defined as "federal taxable income as determined under the Code, adjusted as provided in G.S. 105-130.5…." N.C.G.S. § 105-130.2 (5c). For these purposes, "Code" is defined by N.C.G.S. § 105-228.90. N.C.G.S. § 105-130.2(1). N.C.G.S. § 105-228.90(a)(1a) currently defines "Code" as "The Internal Revenue Code as enacted as of March 20, 1996, including any provisions enacted as of that date which become effective either before or after that date." The definition of "Code" is amended each legislative session to reference the most recently enacted version of the Internal Revenue Code. To determine "State net income," a taxpayer's federal taxable income as determined under the Code is then adjusted under N.C.G.S. § 105-130.5. Subsection (a) of this provision requires certain additions to federal taxable income, while subsection (b) requires specific deductions from federal taxable income.

As an initial matter, it should be noted that tax exempt obligations for federal purposes are different than tax exempt obligations for state purposes. For federal tax purposes, the obligations of all state and local governments are exempt, while the obligations of the federal government remain taxable. For North Carolina state tax purposes, the obligations of the federal government are exempt, as are the obligations of North Carolina state and local governments; obligations of state and local governments other than North Carolina remain taxable by this state. Since your inquiry refers to "income exempt from taxation," this opinion addresses the state tax treatment of expenses associated with income exempt for either federal or state tax purposes. We emphasize that the issues raised by your opinion request are extremely complex, requiring the examination of at least 4 prior opinions of the Attorney General as well as the administrative practice and policy of the Department of Revenue over the past decade.

For federal tax purposes, income from federal obligations is taxable. Expenses associated with this taxable income are deductible in the determination of "federal taxable income." Thus, in the case of a taxpayer that has income from federal obligations, that taxpayer's "federal taxable income as determined under the Code" includes the net, not gross, amount of the income from federal obligations. To determine the taxpayer's "State net income" for purposes of payment of state income taxes, that taxpayer's federal taxable income is then adjusted under N.C.G.S. § 105-130.5.

Consistent with principles of intergovernmental tax immunity, to determine the taxpayer's state income tax liability, income from federal obligations is excluded from State net income by virtue of N.C.G.S. § 105-130.5(b)(1), which provides for a deduction for "[i]nterest upon the obligations of the United States or its possessions, to the extent included in federal taxable income." An Attorney General's Opinion dated 3 April 1987 (copy of which is attached) construed the scope of the deduction in subsection (b)(1). The opinion relied upon the decision of the United States Supreme Court in First National Bank of Atlanta v. Bartow County Board of Tax Assessors, 470 U.S. 583 (1985). In First National Bank, the Court stressed that to permit a full deduction would allow a taxpayer to shelter taxable assets by purchasing federal obligations. This would do more than immunize bonds from taxation; rather it would confer an affirmative benefit on the owner of the obligations at the expense of the taxing power of the state and other taxpayers, by relieving the owner from the full burden of taxation. Id. at 590, 596.

The Attorney General's 3 April 1987 Opinion concluded: "In light of First National Bank and its instructions that tax-exempt obligations are not required to be immunized from taxation but may be asked to pay their fair allocation of expenses and costs related to their acquisition and possession, it is our opinion that the amount deductible under G.S. 105-130.5(b)(1) is limited to that included in federal taxable income." Thus, under the opinion rendered in April 1987, the deduction in subsection (b)(1) is limited to the net amount of income from federal obligations. The Department of Revenue's Corporate Income Tax Rules and Bulletins specifically reference the April 1987 opinion. Since N.C.G.S. § 105-130.5(b)(1) limits the deduction to the net amount of income from federal obligations, there is no need to add back the expenses associated with the gross amount of this income under N.C.G.S. § 105-130.5(a)(2). Eliminating the 'double benefit' enjoyed when a taxpayer deducts interest paid in the process of acquiring tax-exempt income is addressed for state tax purposes by the operation of subsection (b)(1) of N.C.G.S. § 105-130.5.

Subsection (a)(2) of N.C.G.S. § 105-130.5 provides that "interest paid in connection with income exempt from taxation under this Division" shall be added to federal taxable income in determining State net income. An opinion of the Attorney General, dated 18 March 1987 (copy of which is attached), examining comparable federal provisions and addressing probable intent of the legislature when it elected to subject financial institutions to the general corporate income tax, concluded that N.C.G.S. § 105-130.5(a)(2) did not require a financial institution to add to its federal taxable income deposit interest which it paid in connection with income exempt from taxation. Since its issuance, despite its limited scope of addressing only the addback of deposit interest under subsection (a)(2) of N.C.G.S. § 105-130.5, this 1987 opinion has been consistently interpreted by the Department to permit financial institutions to deduct the gross, rather than net, amount of income from federal obligations under subsection (b)(1) of N.C.G.S. § 105-130.5 when computing State net income under this statute.

The general assembly is presumed to be aware of the law, and, by implication, of administrative interpretations and policy. Here, as a result of various bills introduced to correct the perceived noncompliance with the statutory language of N.C.G.S. § 105-130.5 as to financial institutions, the general assembly in fact has actual knowledge of the Department's long-standing administrative practice and policy. n1 Administrative practice which has continued over a long period of time with the silent acquiescence of the legislature is presumed to be an accurate expression of legislative intent. See, e.g., United States v. Rutherford, 442 U.S. 544. n. 10 (1979) ("once an agency's statutory construction has been fully brought to the attention of the public and Congress, and the latter has not sought to alter that interpretation although it has amended the statute in other respects, then presumably the legislative intent has been correctly discerned.") It is therefore the opinion of the Attorney General's Office that the administrative practice of the Department permitting financial institutions to deduct the gross amount of income from federal obligations, which has continued with the implicit blessing of the general assembly, has become the law in North Carolina.

n1 For example, at least two bills have been introduced to reverse the administrative practice of the Department of allowing a gross deduction of income from federal obligations. House Bill 1355, Session 1991; House Bill 17, Session 1993. Neither of these bills were ratified. In its critiques of the proposed legislation, the Department made clear that, by administrative practice, it allowed financial institutions to deduct the gross amount of interest income from federal obligations, i.e., did not require attribution of interest expenses, in the computation of State net income. House Bill 17 received a considerable amount of attention; a public hearing was held and several reports appeared in the media. House Bill 17 received an unfavorable report from the assigned committee.

We turn now to income from state and local obligations. For federal tax purposes, the income from all state and local obligations is exempt. Under the Internal Revenue Code, no deduction is permitted for interest expenses incurred or continued to purchase or carry state and local obligations, or for that portion of a financial institution's interest expense allocable to tax-exempt interest. I.R.C. § 265(a)(2) and (b)(1). Thus, in the computation of federal taxable income, interest income from state and local obligations is not included, and interest expenses associated with these obligations are not deductible under the provisions of I.R.C. § 265.

In determining state net income, N.C.G.S. § 105-130.5(a)(4) provides for an addition to federal taxable income of "[i]nterest income earned on bonds and other obligations of other states or their political subdivisions…." By an opinion dated 16 August 1991 (copy of which is attached), the Attorney General has interpreted subsection (a)(4) to permit the addition of the net, rather than gross, amount of income from state and local obligations, under the same rationale as the earlier 3 April 1987 opinion regarding subsection (b)(1) of N.C.G.S. § 105-130.5. Since financial institutions and other corporate taxpayers add back only the net, rather than gross, amount of income from obligations of states other than North Carolina, a further adjustment for interest expenses related to this income is unnecessary; this adjustment has already been made through the operation of (a)(4) and there is no provision in N.C.G.S. § 105-130.5(b) or elsewhere which permits a further adjustment to federal taxable income.

The add back in (a)(4) is required only for obligations of states other than North Carolina. Interest from obligations of North Carolina and its political subdivisions is exempt for North Carolina state tax purposes, as well as for federal purposes. As previously noted, both the income from state obligations and the associated expenses are excluded in the determination of federal taxable income under the Code. Thus, the net, not gross, amount of income from North Carolina obligations is excluded from federal taxable income. There is no provision in N.C.G.S. § 105-130.5(b) which permits a deduction for interest expenses related to income from North Carolina obligations. Therefore, only the net amount of income from North Carolina obligations is excluded from taxation in North Carolina.

Responding to question (2) of your inquiry, since we have concluded that N.C.G.S. § 105-130.5(a)(2) is not implicated in the calculation of the allowance or disallowance of expenses associated with income from State and local obligations of states other than North Carolina, it is unnecessary to address this question. In any event, we note that a correct application of the statute in question, N.C.G.S. § 105-130.5, interpreted in light of the applicable Internal Revenue Code provisions, most notably I.R.C. § 265, as adopted by our legislature, treats income and expenses from North Carolina and other states' obligations consistently. Whereas the legislature has chosen to exempt the obligations of North Carolina, while taxing those of other states, the obligations of North Carolina are exempt on a net basis, while those of other states are taxable on a net basis. This is consistent with federal treatment; for federal tax purposes, obligations of North Carolina are exempted on a net, not gross, basis.

Regarding (4) of your inquiry, we see no interstate commerce clause implications arising from the interpretation and application of N.C.G.S. § 105-130.5.

Questions (1) and (3) are more difficult. Essentially, you inquire whether the failure to apply the provisions of the Corporation Income Tax Act, N.C.G.S. §§ 105-130 et seq., specifically, N.C.G.S. § 105-130.5, to banks in the same manner as they are applied to other corporations would constitute a violation of the Equal Protection Clause of the United States Constitution or of the uniformity requirement of the North Carolina Constitution. You further inquire whether failure to apply the provisions of N.C.G.S. § 105-130.5 uniformly would be a violation of the Department of Revenue's statutory duty "to insure uniformity of administration of the tax laws and regulations" under N.C.G.S. § 143B-218.

Under Article V, § 2(2) of the North Carolina Constitution, only the general assembly has the power to establish classifications for taxation; such power to classify subjects for taxation cannot be delegated. Article V, § 2(2) further requires that all classes be taxed uniformly. Under this constitutional mandate, a tax is uniform when it operates without distinction or discrimination upon all persons composing the prescribed class upon which the tax is imposed. Hajoca Corp. v. Clayton, 277 N.C. 560, 178 S.E.2d 481 (1971). The Constitution does not permit a state to levy a tax which differentiates among taxpayers in the same classification. Id. Here, the prescribed class likely is "every C Corporation doing business in the State." N.C.G.S. § 105-130.3. Prior to 1974, banks were specifically excluded from this classification and taxed as a separate class, under former Article 8C. Former N.C.G.S. § 105-130.11(a)(2); former N.C.G.S. §§ 105-228.11 et seq.

In 1973, however, by a bill entitled "An Act To Tax Banks As Other Corporations," the general assembly removed banks from the unique classification they had enjoyed, and specifically classified them with all other C Corporations doing business in the State. By this act, the legislature made banks subject to the provisions of the Corporate Income Tax Act, just as any other C Corporation doing business in the State, specifically including the methodology by which State net income is computed under N.C.G.S. § 105-130.5. N.C.G.S. § 105-130.5(b)(1) requires all corporations subject to the Corporate Income Tax Act to compute their State net income by deducting the net, rather than gross, amount of income from federal obligations from their federal taxable income as determined under the Code. In computing their State net income under N.C.G.S. § 105-130.5, however, financial institutions, by administrative interpretation which has continued with the silent acquiescence of the legislature, deduct the gross amount of income from federal obligations from their federal taxable income under (b)(1). As the North Carolina Supreme Court has explicitly recognized, the State Constitution does not permit a state to levy a tax which differentiates among taxpayers in the same classification. Hajoca, 277 N.C. 560, 178 S.E.2d 481. Unless a tax operates without distinction upon all members belonging to the prescribed class, it violates the uniformity requirement of Article V, § 2(2). Id.

Here, since N.C.G.S. § 105-130.5 is not applied uniformly to all members of the prescribed class, an argument can be made that this may violate Article V, § 2(2) of the North Carolina Constitution, and possibly the Equal Protection Clause of the United States Constitution. On balance, however, we believe that the better argument is that the Department's long-standing administrative interpretation, impliedly ratified by the legislature, gives rise to no constitutional violation. It is our opinion that, since the legislature has implicitly sanctioned the differential treatment of banks, and the strong presumption of constitutionality accorded by courts to acts of the legislature, Moore v. Knightdale Board of Elections, 331 N.C. 1, 413 S.E.2d 541 (1992), the law and the Department's long and consistent interpretation of the law would likely withstand challenge. Moreover, any change in the Department's policy, particularly in light of the legislative history herein described, should be left to the general assembly.

Regarding your inquiry as to whether this failure to apply N.C.G.S. § 105-130.5(b)(1) and the applicable regulation in the Corporate Income Tax Rules and Bulletins to banks in the same manner as they are applied to all other C Corporations doing business in the State would give rise to a claim that Department has violated its duties under N.C.G.S. § 143B-218 "to insure uniformity of administration of the tax laws and regulations," we believe this question is subsumed within the larger issue of whether such practice violates the uniformity requirement of the State Constitution.

We hope the foregoing is helpful. If we can be of further assistance, please let us know.

Very Truly Yours,

MICHAEL F. EASLEY
ATTORNEY GENERAL

Reginald L. Watkins
Senior Deputy Attorney General

George W. Boylan
Special Deputy Attorney General

Kay Linn Miller Hobart
Assistant Attorney General