If North Carolina repealed its Enterprise Corporation investment tax credit in 1996, can someone who invested in 1996 still claim the credit, and at what cap?

Plain-English summary

In 1996, after the U.S. Supreme Court struck down a piece of North Carolina's intangibles tax in Fulton Corp. v. Faulkner, the General Assembly cleaned up several similar in-state-only tax preferences. One of them was the income tax credit available to investors in North Carolina Enterprise Corporations under N.C.G.S. § 105-163.010 et seq.

Two things happened in the 1996 Second Extra Session:

1. The total annual cap on the credit was cut in half. It went from $12 million (with $6M earmarked for enterprise corporations and $6M for qualified business ventures and grantee businesses) down to a single combined $6 million pool. Effective for investments made on or after January 1, 1996.
2. The credit itself was repealed. Effective for investments made on or after January 1, 1997.

Senator David W. Hoyle asked whether investors who put money into a NC Enterprise Corporation during 1996 could still claim the credit, and at what cap. The AG had answered the question in a December 1996 opinion and reaffirmed that answer here.

The AG's answer: a 1996 investment remained eligible for the credit, subject to the amended $6 million total credit limit and the statute's other restrictions. The "savings clause" in § 26 of the repeal session law did not preserve the higher pre-amendment cap. The opinion says the earliest an investor could conceivably become vested in a credit was December 31 of the year following the investment.

Mechanics that drove the answer. Under § 105-163.011(c), an investor applied to the Secretary of Revenue by April 15 of the year after the investment. The Secretary then totalled all applications and, if they exceeded the cap, allocated pro rata. The investor could not actually take the credit until the tax year for which the application was effective, i.e. the year after the investment. So a 1996 investor was looking at a 1997 return, with the amended cap fully in effect by then.

No impairment of vested rights. The opinion says the earliest an investor could conceivably become vested was December 31 of the year after the investment. For a 1996 investment, that would be December 31, 1997, after the August 2, 1996 amendment. The amendment applied to investments made on or after January 1, 1996, so the opinion says a 1995 investment remained subject to the earlier cap. The repeal applied only to investments made on or after January 1, 1997, and the AG said it affected no vested rights.

Bailey did not change the answer. After reviewing its 1996 opinion in light of Bailey v. State of North Carolina, 348 N.C. 130, 500 S.E.2d 54 (1998), the AG said only that Bailey did not affect the earlier opinion. This letter does not explain Bailey's reasoning or add a separate test based on what an investor did before the amendment.

Currency note

This opinion was issued in 1998. 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.

The opinion states that investments made on or after January 1, 1997 were ineligible for this credit. It also describes a five-year carryover for some credits allowed on earlier investments. Check current law for any present-day tax question.

Common questions

Q: Did enterprise-corporation investors have their own $6 million credit pool after the amendment?
A: No. Before the amendment, $6 million of the $12 million annual cap was earmarked for enterprise-corporation investments. The amendment created one $6 million total cap shared with qualified business ventures and qualified grantee businesses.

Q: Why did NC repeal the credit?
A: The opinion says repeal followed the U.S. Supreme Court's decision in Fulton Corp. v. Faulkner, which invalidated an in-state tax preference. It quotes a legislative committee report recommending repeal and reform of similar North Carolina tax preferences and notes the enterprise-corporation investment requirement for businesses headquartered and operating principally in the state.

Q: What is the "savings clause" and why didn't it help?
A: The AG said it did not preserve the old $12 million cap for 1996 investments. The opinion explains that the clause preserved "perfected" and "ripened" rights, including a possible carryover of a credit allowed for an earlier investment. It says no right to a credit for a 1996 investment was vested before the August 1996 amendment.

Q: What happened to the carryover?
A: If an investor had a credit allowed by the Secretary in an earlier year but could not use it all because of N.C.G.S. § 105-163.012(a) limitations, the unused portion could carry forward five years. So pre-1997 investors could still carry over unused credits into 1997, 1998, and later returns, but capped by the existing carryover rules.

Q: Did the later Bailey decision change the AG's answer?
A: No. The AG said it reviewed the 1996 opinion in light of Bailey v. State of North Carolina and concluded that decision did not affect the earlier opinion. This letter gives no separate Bailey analysis.

Q: What is the practical impact on a calendar-year investor who put money in during 1996?
A: The investor had to apply by April 15, 1997. If the applications exceeded the $6 million cap, the Secretary allocated the available credits proportionally. The allowed credit was taken on the investor's 1997 return.

Background and statutory framework

The opinion says the U.S. Supreme Court's decision in Fulton Corp. v. Faulkner, 516 U.S. 325 (1996), invalidated North Carolina's taxable percentage deduction in its intangibles tax because it favored in-state economic interests over out-of-state competitors. In the Second Extra Session of 1996, the General Assembly reduced the total cap and repealed the enterprise-corporation credit for later investments.

The Revenue Laws Study Committee's May 1996 report, quoted in the opinion, recommended repeal and reform of tax preferences similar to the intangibles-tax provision invalidated in Fulton. The opinion notes that enterprise corporations had to invest in businesses headquartered and operating principally in North Carolina.

The technical question for the AG was how the cap amendment and repeal interacted with the timing of investments and the savings clause. The 1996 Opinion (December 17, 1996) worked through it; the 1998 reaffirmation simply confirmed the conclusions in light of the intervening Bailey decision.

Citations

• N.C.G.S. § 105-163.010 et seq. (former NC Enterprise Corporation tax credit framework)
• N.C.G.S. § 105-163.011(b) and (c) (credit application mechanics)
• N.C.G.S. § 105-163.012(a) and (b) (annual cap and pro rata allocation)
• N.C. Sess. Laws (Second Extra Sess. 1996) ch. 14, §§ 6, 7, 26, 27 (cap reduction, repeal, savings clause, effective dates)
• Fulton Corp. v. Faulkner, 516 U.S. 325 (1996) (U.S. Supreme Court invalidating NC's intangibles tax preference)
• Bailey v. State of North Carolina, 348 N.C. 130, 500 S.E.2d 54 (1998) (NC Supreme Court on contract-clause protection of state-induced tax benefits)

Source

• Landing page: https://ncdoj.gov/opinions/tax-credit-for-north-carolina-enterprise-corporation/

Original opinion text

October 22, 1998

The Honorable David W. Hoyle
Senator, 25th District
North Carolina General Assembly
300-A Legislative Office Building
Raleigh, North Carolina 27601-2808

Re: Advisory Opinion; Tax Credit for North Carolina Enterprise Corporations; N.C.G.S. § 105-163.010 et seq.

Dear Senator Hoyle:

You have asked for our opinion on whether investors in North Carolina Enterprise Corporations are eligible to receive a tax credit pursuant to N.C.G.S. § 105-163.010 et seq. for taxable years 1996, 1997 and 1998. The Attorney General's Office has previously issued an Advisory Opinion dated 17 December 1996 addressing this issue ("1996 Opinion"). See Opinion dated 17 December 1996 and advisory letter dated 28 October 1996, attached hereto and incorporated by reference. We now reaffirm our 1996 Opinion.

The tax credit for investing in North Carolina Enterprise Corporations was repealed on August 2, 1996. N.C. Sess. Laws (Second Extra Sess. 1996) ch. 14, § 7. The repeal was effective for investments made on or after January 1, 1997. N.C. Sess. Laws (Second Extra Sess. 1996) ch. 14, § 27(3).

The cap on the total amount allowed as credits in N.C.G.S. § 105-163.011(b) for investments in North Carolina Enterprise Corporations, qualified business ventures and qualified grantee businesses was also amended. N.C. Sess. Laws (Second Extra Sess. 1996) ch. 14, § 6. The effective date of the reduced cap was for investments made on or after January 1, 1996. N.C. Sess. Laws (Second Extra Sess. 1996) ch. 14, § 27(2).

N.C.G.S. § 105-163.012(b) limits the total amount of tax credits allowed per calendar year. Prior to amendment, the statute imposed a cap of $12,000,000 with $6,000,000 earmarked for investments in enterprise corporations and $6,000,000 earmarked for investments in qualified business ventures and qualified grantee businesses ("qualified businesses"). The amendment reduced the cap from $12,000,000 to $6,000,000. Additionally, the amendment removed the bifurcation, with the total amount divided among all claimants, regardless of type of investment. Thus, the amendment did not reduce the $6,000,000 available for investments in enterprise corporations to zero.

The amendments did not affect the basic mechanics governing application of the credit.

To be eligible for the credit, the investor must file an application with the Secretary of Revenue on or before April 15 of the year following the calendar year in which the investment was made. N.C.G.S. § 105-163.011(c). The application is effective for the year in which it was timely filed. Id. The credit may not be taken for the year in which the investment is made, but rather for the taxable year beginning during the calendar year in which the application for credit becomes effective. Former N.C.G.S. § 105-163.011(a) (1995); N.C.G.S. § 105-163.011(b).

The Secretary of Revenue calculates the total amount of credits claimed from the applications filed. If the total amount applied for exceeds the statutory cap, the Secretary allows a portion of the credit claimed by allocating the total amount available among all taxpayers in proportion to the size of the credit claimed by each taxpayer. N.C.G.S. § 105-163.012(b). If the amount of the credit allowed by the Secretary is less than the amount claimed on the application, the Secretary must notify the taxpayer of the amount of allowable credit on or before December 31 of the year following the year in which the investment was made. Id.

Our 1996 Opinion concluded that since the effective date of the repeal of the tax credits for North Carolina Enterprise Corporations was for investments made on or after January 1, 1997, a taxpayer who made an investment during calendar year 1996 would be eligible for the credit, subject to the restrictions contained in N.C.G.S. §§ 105-163.011(c) and 105-163.012, including, inter alia, the amended total credit limitation of $6,000,000 in N.C.G.S. § 105-163.012(b). Our 1996 Opinion further concluded that the provisions of the "savings clause" in Section 26 of Chapter 14 of the 1996 Session Laws (Second Extra Sess.) did not operate to preserve the higher credit limitation in effect prior to the amendment. Thus, all investments made in calendar year 1996 in any North Carolina Enterprise Corporation (or qualified business) are subject to the amended total credit limitation of $6,000,000 in N.C.G.S. § 105-163.012(b). Investments in a North Carolina Enterprise Corporation made on or after January 1, 1997 would not be eligible for any credit.

Our 1996 Opinion further notes (through an advisory letter dated 28 October 1996 incorporated into the Opinion) that the repeal of the credit for investing in North Carolina Enterprise Corporations was precipitated by the United States Supreme Court's decision in Fulton Corp. v. Faulkner, 516 U.S. 325 (1996). Fulton declared the taxable percentage deduction provision of North Carolina's intangibles tax unconstitutional on the grounds that it was designed to benefit in-state economic interests at the expense of out-of-state competitors. As part of the explanation of recommended legislation following Fulton, the Interim Report of the Revenue Laws Study Committee to the Legislative Research Commission to the General Assembly issued 1 May 1996 ("Report") states: "Repeal and reform of these North Carolina tax preferences is recommended because of their similarity to a provision of the intangibles tax that was recently declared unconstitutional by the United States Supreme Court. . . ." The Report noted that North Carolina Enterprise Corporations must invest in businesses whose headquarters and principal business operations are located in North Carolina.

A carryover of the credit is available in certain situations. At the close of the taxpayer's taxable year, the taxpayer computes its net income and determines the portion of the credit allowed by the Secretary that he may deduct in that taxable year under the limitations imposed by N.C.G.S. § 105-163.012(a). If the limitations prevent a taxpayer from utilizing all of the credit allowed by the Secretary in that year, the statute permits the taxpayer to carryover the unused portion of the credit for the next five succeeding years. Thus, it is possible that an investor who made an investment prior to January 1, 1997 may have credits eligible for carryover to his tax return for the years 1997, 1998 or later. It is precisely this circumstance that the "that would have otherwise been available" language of the savings clause in Section 26 was designed to address. However, it only operates to preserve "perfected" and "ripened" rights.

A few examples illustrate our conclusions: Assume a calendar year taxpayer invests in a North Carolina Enterprise Corporation during 1996. The investor must file an application for the credit on or before April 15, 1997 in order to perfect his interest. The portion of the credit allowed by the Secretary would be taken on the taxpayer's 1997 return. This credit would be subject to the amended credit limitation.

If that investor had made the investment during 1995, the portion of the credit allowed by the Secretary would be taken on the taxpayer's 1996 return. This credit would be subject to the credit limitation in effect prior to amendment.

Any investments made on or after January 1, 1997 would not be eligible for any credit.

We emphasize that at no time prior to repeal or amendment of the statutory cap were any investors "vested" in any rights to a tax credit for investments made during 1996 or in future years. The 1996 Opinion addressed this issue in some detail. Under the mechanics of the statute, the absolute earliest an investor could conceivably become "vested" in a right to a tax credit would be on December 31 of the year following the investment.

Using the examples cited previously, assuming arguendo that it is possible for a taxpayer to become "vested" in a right to a tax credit at all, the investor who made the investment in 1995 could not become "vested" in any right to a credit until December 31, 1996. The amendments to the statute did not affect the taxpayer's ability to deduct whatever portion of the credit taxpayer had "vested" in, since the effective dates of the amendment to the cap and the repeal were for investments made on or after January 1, 1996 and January 1, 1997, respectively, and therefore do not apply to taxpayer's investment.

The taxpayer who makes an investment during calendar year 1996 does not become "vested" in any right to a credit until December 31, 1997. Thus, on the date of the amendment, August 2, 1996, this taxpayer was not "vested" in any right to a credit and the amendment therefore did not affect any "vested" right of this investor.

Since the legislation repealing the tax credits was ratified on August 2, 1996 and was effective for investments made on or after January 1, 1997, the repeal affected no vested rights of any investor since the date of the repeal was prior to the time any investments which may have given rise to a vested right would have been made.

We have carefully reviewed our 1996 Opinion in light of the intervening decision of the North Carolina Supreme Court in Bailey v. State of North Carolina, 348 N.C. 130, 500 S.E.2d 54 (1998). We have concluded from our review that Bailey does not affect our 1996 Opinion.

We trust this Advisory Opinion proves helpful.

signed by:

Reginald L. Watkins
Senior Deputy Attorney General

Kay Linn Miller Hobart
Assistant Attorney General