If North Carolina repealed its Enterprise Corporation investment tax credit in 1996, can someone who invested in 1996 still claim the credit, and at what cap?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:
- 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.
- The credit itself was repealed.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 investor was still entitled to the credit, but only at the reduced cap. The "savings clause" in § 26 of the repeal session law did not preserve the higher pre-amendment cap because no investor became "vested" in a credit until December 31 of the year following the investment, which was after both the cap amendment and the repeal.
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 AG walked through the timing carefully. The earliest moment any investor could become vested was December 31 of the year after the investment. For 1996 investments, that was December 31, 1997, well after the August 2, 1996 amendment date. For 1995 investments, the vesting moment (December 31, 1996) followed the August 1996 amendments, but the amendments themselves applied only to investments made on or after January 1, 1996, so a 1995 investor kept the old cap. The repeal of the credit for 1997+ investments touched no vested right because no investment had yet been made when the repeal was enacted.
Bailey did not change the analysis. The AG specifically reviewed Bailey v. State, 348 N.C. 130 (1998), the North Carolina Supreme Court decision then-recently reshaping the State's power to renege on tax-related promises. Bailey created a contract-clause theory where state-induced "vested" benefits could not be reduced. The AG concluded Bailey did not affect the 1996 opinion because no investor here had taken any inducing act before the repeal: the statute amended/repealed itself before any investment under the new rules could have happened.
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.
NC Enterprise Corporations as a credit category no longer exist. The credit was repealed effective January 1, 1997 and the carryover window ran out within five years after that. The general framework for analyzing whether a tax preference repeal impairs vested rights under Bailey has continued to develop, including subsequent cases applying the contract-clause theory to other state programs.
Common questions
Q: What was a "North Carolina Enterprise Corporation"?
A: A specially structured investment vehicle, recognized under former N.C.G.S. § 105-163.010 et seq., that pooled investor capital and channeled it into NC-headquartered businesses. Investors got a state income tax credit. The structure resembled the federal Small Business Investment Company concept but with a state-specific tax incentive layered on top.
Q: Why did NC repeal the credit?
A: The U.S. Supreme Court's 1996 decision in Fulton Corp. v. Faulkner struck down NC's "taxable percentage deduction" inside the intangibles tax for discriminating against out-of-state investment. The Enterprise Corporation credit had the same in-state-only design (the corporations had to invest in NC-headquartered businesses with principal operations in NC). The Revenue Laws Study Committee recommended repeal in May 1996 to avoid a parallel constitutional challenge.
Q: What is the "savings clause" and why didn't it help?
A: Section 26 of the repeal session law preserved benefits "that would have otherwise been available" before the amendments. The AG read it as preserving only credits the taxpayer had already become vested in. Because nobody had vested in a 1996 credit before the August 1996 amendments (vesting would not happen until December 1997), the savings clause did nothing for 1996 investors.
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: Could an investor claim that the legislature breached a contract by changing the cap?
A: Bailey v. State opened that door in some contexts, but the AG concluded it did not apply here because no investor had taken any state-induced action before the amendments. The repeal and cap reduction were effective before any investment under the new rules could occur, so no inducement-then-broken-promise pattern existed.
Q: What is the practical impact on a calendar-year investor who put money in during 1996?
A: They applied by April 15, 1997. The Secretary allowed a pro rata share of the $6 million pool (not the prior $12 million). They claimed the allowed portion on their 1997 tax return.
Background and statutory framework
Investor tax credits as a tool of state economic development policy expanded in the late 1980s and early 1990s. North Carolina was an enthusiastic adopter. By the mid-1990s, the state had several layered credits for capital investment in NC-headquartered or NC-operating businesses. The Enterprise Corporation credit was one piece; qualified business venture credits and grantee business credits were others.
The 1996 U.S. Supreme Court decision in Fulton Corp. v. Faulkner, 516 U.S. 325, struck down NC's taxable percentage deduction inside the intangibles tax under the dormant commerce clause. The decision sent a signal that in-state-only investment preferences carried constitutional risk. The General Assembly responded in the Second Extra Session of 1996 by reducing or repealing several such preferences, including the Enterprise Corporation credit.
The Revenue Laws Study Committee's May 1996 report explained the repeal logic: the Enterprise Corporation credit required investment in NC-headquartered businesses with principal operations in NC, which was the same kind of geographic discrimination Fulton had condemned in the intangibles tax. The Committee recommended pulling the credit before a taxpayer challenged it.
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
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