North Carolina § 105-114 - 1. Limited liability companies.

§ 105-114. 1. Limited liability companies.

Definitions. - The following definitions apply in this section: Affiliated group. - Defined in section 1504 of the Code. Capital interest. - The right under a limited liability company's governing law to receive a percentage of the company's assets upon dissolution after payments to creditors. Entity. - A person that is not a human being. Governing law. - The law under which a limited liability company is organized. Noncorporate limited liability company. - A limited liability company that does not elect to be taxed as a corporation under the Code. (Effective for taxable years beginning before January 1, 2017) Controlled Companies. - If a corporation or an affiliated group of corporations owns more than fifty percent (50%) of the capital interests in a noncorporate limited liability company, the corporation or group of corporations must include in its three tax bases pursuant to G.S. 105-122 the same percentage of (i) the noncorporate limited liability company's capital stock, surplus, and undivided profits; (ii) fifty-five percent (55%) of the noncorporate limited liability company's appraised ad valorem tax value of property; and (iii) the noncorporate limited liability company's actual investment in tangible property in this State, as appropriate. (Effective for taxable years beginning on or after January 1, 2017, and applicable to the calculation of franchise tax reported on the 2016 and later corporate income tax return) Controlled Companies. - If a corporation or an affiliated group of corporations owns more than fifty percent (50%) of the capital interests in a noncorporate limited liability company, the corporation or group of corporations must include in its three tax bases pursuant to G.S. 105-122 the same percentage of (i) the noncorporate limited liability company's net worth; (ii) fifty-five percent (55%) of the noncorporate limited liability company's appraised ad valorem tax value of property; and (iii) the noncorporate limited liability company's actual investment in tangible property in this State, as appropriate. Constructive Ownership. - Ownership of the capital interests in a noncorporate limited liability company is determined by reference to the constructive ownership rules for partnerships, estates, and trusts in section 318(a)(2)(A) and (B) of the Code with the following modifications: The term "capital interest" is substituted for "stock" each place it appears. A noncorporate limited liability company and any noncorporate entity other than a partnership, estate, or trust is treated as a partnership. The operating rule of section 318(a)(5) of the Code applies without regard to section 318(a)(5)(C). (Effective for taxable years beginning before January 1, 2017) No Double Inclusion. - If a corporation is required to include a percentage of a noncorporate limited liability company's assets in its tax bases under this Article pursuant to subsection (b) of this section, its investment in the noncorporate limited liability company is not included in its computation of capital stock base under G.S. 105-122(b). (Effective for taxable years beginning on or after January 1, 2017, and applicable to the calculation of franchise tax reported on the 2016 and later corporate income tax return) No Double Inclusion. - If a corporation is required to include a percentage of a noncorporate limited liability company's assets in its tax bases under this Article pursuant to subsection (b) of this section, its investment in the noncorporate limited liability company is not included in its computation of net worth base under G.S. 105-122(b). Affiliated Group. - If the owner of the capital interests in a noncorporate limited liability company is an affiliated group of corporations, the percentage to be included pursuant to subsection (b) of this section by each group member that is doing business in this State is determined by multiplying the capital interests in the noncorporate limited liability company owned by the affiliated group by a fraction. The numerator of the fraction is the capital interests in the noncorporate limited liability company owned by the group member, and the denominator of the fraction is the capital interests in the noncorporate limited liability company owned by all group members that are doing business in this State. Exemption. - This section does not apply to assets owned by a noncorporate limited liability company if the total book value of the noncorporate limited liability company's assets never exceeded one hundred fifty thousand dollars ($150,000) during its taxable year. Timing. - Ownership of the capital interests in a noncorporate limited liability company is determined as of the last day of its taxable year. The adjustments pursuant to subsections (b) and (d) of this section must be made to the owner's next following return filed under this Article. If a noncorporate limited liability company and a corporation or an affiliated group of corporations have engaged in a pattern of transferring assets between them with the result that each did not own the capital interests on the last day of its taxable year, the ownership of the capital interests in the noncorporate limited liability company must be determined as of the last day of the corporation or group of corporations' taxable year. Penalty. - A taxpayer who, because of fraud with intent to evade tax, underpays the tax under this Article on assets attributable to it under this section is guilty of a Class H felony in accordance with G.S. 105-236(7). History (2002-126, s. 30G.2(b); 2004-74, ss. 1, 2; 2004-170, s. 8.1; 2006-66, s. 24A.2(b); 2008-107, s. 28.7(b); 2013-157, s. 25; 2015-241, s. 32.15(e); 2016-5, s. 1.7(a).) Subsections (b) and (d) Set Out Twice. - The first versions of subsections (b) and (d) set out above are effective for taxable years beginning before January 1, 2017. The second versions of subsections (b) and (d) set out above are effective for taxable years beginning on or after January 1, 2017, and applicable to the calculation of franchise tax reported on the 2016 and later corporate income tax return. Editor's Note. - Session Laws 2002-126, s. 30G.2(a), provides: "The General Assembly finds that most corporations engaged in business in this State comply with the State franchise tax on corporate assets. Some taxpayers, however, take advantage of an unintended loophole in the law and avoid franchise tax by transferring their assets to a controlled limited liability company. This tax avoidance creates an unfair burden on corporate citizens that pay the franchise tax on their assets. It is the intent of this section to apply the franchise tax equally to assets held by corporations and assets held by corporate-affiliated limited liability companies. It is also the intent of this section to provide that a criminal penalty applies to taxpayers who fraudulently evade the tax. "The General Assembly further finds that, after this loophole was closed in 2001, some taxpayers continue to avoid franchise tax by manipulating ownership of assets. One method is to interpose a controlled partnership between the corporation and the controlled limited liability company. This tax avoidance creates an unfair burden on corporate citizens that pay the franchise tax on their assets. It is the intent of the General Assembly to apply the franchise tax equally to assets held by corporations and assets held by corporate-controlled entities." Session Laws 2015-241, s. 32.15(g), as amended by Session Laws 2016-5, s. 1.7(a), made the amendments to subsections (b) and (d) by Session Laws 2015-241, s. 32.15(e), applicable to the calculation of franchise tax reported on the 2016 and later corporate income tax return. Session Laws 2015-241, s. 1.1, provides: "This act shall be known as 'The Current Operations and Capital Improvements Appropriations Act of 2015.'" Session Laws 2015-241, s. 33.6, is a severability clause. Effect of Amendments. - Session Laws 2004-74, s. 1, effective January 1, 2003, and applicable to taxes due on or after that date, rewrote the section. Session Laws 2004-74, s. 2, effective January 1, 2005, and applicable to taxes due on or after that date, substituted "more than fifty percent (50%)" for "seventy percent (70%) or more" in subsection (b). Session Laws 2004-170, s. 8.1, effective August 2, 2004, in subsection (b), substituted "pursuant to G.S. 105-122 " for "under this Article," and substituted "(i) the limited liability company's capital stock, surplus, and undivided profits; (ii) fifty-five percent (55%) of the limited liability company's appraised ad valorem tax value of property; and (iii) the limited liability company's actual investment in tangible property in this State, as appropriate" for "the limited liability company's net assets." Session Laws 2006-66, s. 24A.2(b), effective for taxable years beginning on or after January 1, 2007, added subdivision (a)(5); and inserted "noncorporate" preceding "limited liability" throughout the section. Session Laws 2008-107, s. 28.7(b), effective for taxable years beginning on or after January 1, 2009, substituted "corporation" for "C Corporation" in subdivision (a)(5). Session Laws 2013-157, s. 25, effective January 1, 2014, rewrote subdivision (a)(4), which formerly read "A limited liability company's governing law is determined under G.S. 57C-6-05 or G.S. 57C-7-01, as applicable." Session Laws 2015-241, s. 32.15(e), as amended by Session Laws 2016-5, s. 1.7(a), effective for taxable years beginning on or after January 1, 2017, substituted "net worth" for "capital stock, surplus, and undivided profits" in subsection (b); and substituted "net worth" for "capital stock" in subsection (d). See editor's note for applicability. § 105-115: Repealed by Session Laws 1989 (Regular Session, 1990), c. 1002, s. 1.