FALL 2015 NORTH CAROLINA STATE AND LOCAL TAX UPDATE Keith A. Wood, - - PDF document

11/17/2015 1

Keith A. Wood, Attorney, CPA Carruthers & Roth, P.A. 235 N. Edgeworth Street Post Office Box 540 Greensboro, NC 27402 Phone: (336) 478-1185 Fax: (336) 478-1184 kaw@crlaw.com

FALL 2015 NORTH CAROLINA STATE AND LOCAL TAX UPDATE An Overview of Today’s Discussion

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PART ONE – Federal and NC Tax Treatment of Section 179 Expense Elections and Section 168 Bonus Depreciation Rules PART TWO – Personal Income Tax - New Personal Income Tax Changes for 2015 and Beyond PART THREE - The Fowler Case – Am I A Resident of NC or Not?

An Overview of Today’s Discussion

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PART FOUR – NC Estate and Trust Fiduciary Tax Developments: The Kaestner Trust Case PART FIVE – Sales & Use Taxes PART SIX – NC Corporate Income Tax Changes PART SEVEN - NC Tax Collection Procedure PART EIGHT - Trust Fund Tax Collection

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NORTH CAROLINA “DECOUPLES” FROM SOME OF THE PROVISIONS OF THE FEDERAL TAX INCREASE PREVENTION ACT OF 2014 – Page 2

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• I. Section 179 Limits Under the Federal

Income Tax Prevention Act of 2014

• A. Federal Limits
• For 2014, $500,000 Section 179 Deduction

Limit & Phase out beginning at $2 Million

• Section 179 Deduction Limit is $25,000 for

2015

• Section 179 “Phases Out” for Purchases

between $200,000 - $225,000 for 2015

• Will Congress Extend Section 179 Deduction for

2015?

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• I. Section 179 Limits
• B. NC Limits
• $25,000 Limit for 2015
• HB 14 (2013)

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• II. New Section 179 Limits

 2014 HB 1050 provides for

“phase-outs” for acquisitions between $200,000 and $225,000

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II. No NC Section 168 Bonus Depreciation; HB 82 (March 13, 2013) and HB 14 (August 23, 2013) – Page 4

• A. Federal Law. The Federal 2014 Tax Increase

Prevention Act of 2014 extended the 50% Section 168 Bonus Depreciation for 2014.

• However, the Federal bonus depreciation rules

expired on December 31, 2014.

• Will Congress extend bonus depreciation for

2015?

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• B. HB 82 “De-couples” From Federal

Section 168 Bonus Depreciation. House Bill 82 (2013) did not adopt the federal Section 168 bonus depreciation rules for North Carolina tax purposes for 2013 and thereafter.

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So, for 2015 and beyond, the North Carolina rules mandate

• an 85% "add back" for 2015 for Excess

Federal Section 179 and Section 168 Deductions

• with 20% "add back" deductions over

the next five (5) years beginning in 2016.

• Page 3
• III. Bonus Depreciation Deductions of a

Transferor Can Be Added to Tax Basis of Transferee: House Bill 14 (2013). Special rules apply where:

 property, subject to Section 168 bonus

depreciation is transferred in a nonrecognition event, or

 where the ownership interests in the owner of

property subject to Section 168 bonus depreciation is transferred in a nonrecognition event.

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• New N.C.G.S. 105-

130.5B(e) (for corporations)

• New N.C.G.S. 105-

134.6A(e) (for individuals):

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If there is a carryover basis transfer

by gift, by a merger, by a Section 351 capital contribution

to a corporation, or

by a Section 721 contribution to a

partnership),

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• the transferee may add any remaining

unused 20% "add-back" deductions to the tax basis of the transferred asset, and

• the transferee may then depreciate the

new adjusted tax basis in the property

• ver its remaining useful life.

NCDOR Clarifies Bonus Depreciation Adjustments Upon Non-Recognition Event Transfer

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 NCDOR Announcement (Feb. 21, 2014)

– Page 4

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• For transfers of Bonus

Depreciation assets after 2012, in all events, the transferor is not allowed any remaining future bonus depreciation deductions associated with the transferred asset.

However, for personal income tax purposes, the transferee gets the basis addition only if the transferor (or the owner in a transferor)

• certifies in writing to the transferee that the

transferor (or the owner in a transferor) will not take any remaining future 20% bonus depreciation deductions associated with the transferred asset.

N.C.G.S. 105-134.6A(e).

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 Note: This Notice illustrates the importance of

making sure that the transferee receives the certified written certification from the transferor (or its owners) that future bonus depreciation deductions will not be claimed by the transferor (nor by any of its owners).

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PART TWO

• I. Individual Income Tax Changes: HB 97

(September 18, 2015).

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

The 2015 Session Law 2015-241 (HB 97) made several changes to the North Carolina individual income tax system. These changes will go into effect beginning in 2015, 2016 and 2017.

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A. Reduced Flat Tax Rates. Under HB 97 (2015), beginning in 2017, the North Carolina individual tax rate will drop to 5.499%. 1. New Flat Tax Rates: 2013 Graduated rates range from 6% to 7.75% 2014 5.8% 2015 and 2016 5.75% 2017 5.499% New N.C.G.S. 105-153.7.

B. Medical Expense Deduction Reinstated for 2015 for Taxpayers Who Itemize on Federal Return.

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Under prior law, beginning in 2014, taxpayers who itemized their deductions for federal tax purposes were limited to the following itemized deductions for North Carolina tax purposes beginning in 2014: 1. Charitable contributions. N.C.G.S. 105- 153.5(a)(2)a. 2. Qualified residence interest and real property taxes are deductible, but only up to $20,000 in combined total. N.C.G.S. 105-153.5(a)(2)b.

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However, under HB 97 (2015), beginning in 2015, the medical expense deduction for itemizers will be reinstated. So, for 2015 and beyond, North Carolina will allow the following itemized deductions: 1. Charitable contributions. N.C.G.S. 105-153.5(a)(2)a. 2. Qualified residence interest and real property taxes are deductible, but only up to $20,000 in combined total. N.C.G.S. 105-153.5(a)(2)b. 3. Medical expenses deductible under IRC Section 213.

• C. New Increased Standard Deduction Amounts.

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2015 HB 97 (2015) increases the standard deduction beginning in 2016 as follows:

2016 2015 Standard Standard Deduction Deduction Filing Status Amounts Amounts Single $7,750 $ 7,500 Married filing separately $7,750 $ 7,500 Married filing jointly $15,500 $15,000 Head of Household $12,400 $12,000 New N.C.G.S. 105-153.5(a)(1).

• D. New Withholding Tables.

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HB 97 (2015) revised N.C.G.S. 105-163.2(b) to now allow the North Carolina Secretary of Revenue to increase the individual income tax withholdings by 1/10 of one percent (or up to 100.1%) beginning in 2016.

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Changes Applicable to Withholding for Tax Year 2016 Since the individual income tax rate remains at 5.75% for tax year 2016, the withholding rate on wages will be 5.85%.

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Changes Applicable to Withholding for Tax Year 2017 Session Law 2015-241 also lowered the individual income tax rate from 5.75% to 5.499%, effective for taxable years beginning on or after January 1, 2017. However, during 2017, the withholding tax rate will be 5.599%.

E. Overview of AGI Reductions From Federal AGI Under N.C.G.S. 105-153.5(b).

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• 1. Interest income from U.S. and North

Carolina debt obligations. N.C.G.S. 105- 153.5(b)(1);

• 2. Social Security and Railroad Retirement

Benefits. N.C.G.S. 105-153.5(b)(3);

• 3. Federal and North Carolina retirement

benefits that are exempt under the Bailey, Emory and Patton line of cases. N.C.G.S. 105-153.5(b)(5);

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E. Overview of AGI Reductions From Federal AGI Under N.C.G.S. 105-153.5(b).

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• 4. State and local income tax refunds. N.C.G.S.

105-153.5(b)(4);

• 5. 20% deduction allowed due to the Section 168
• r Section 179 "add back." N.C.G.S. 105-

153.5(b)(8); and

• 6. for property sold during the tax year, a

reduction to the extent that the taxpayer's tax basis for North Carolina tax purposes exceeds the income tax basis for federal tax purposes. N.C.G.S. 105-153.5(b)(7). See revised N.C.G.S. 105-153.5(b).

F. Additions To Federal AGI.

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Here are some of the Federal AGI additions that apply for 2015 and thereafter:

• 1. Interest income from debt obligations of states
• ther than North Carolina. N.C.G.S. 105-

153.5(c)(1);

• 2. Reduction in S corporation shareholder income

by virtue of the Federal Section 1374 "built- in-gains" tax. N.C.G.S. 105-153.5(c)(2);

F. Additions To Federal AGI.

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• 3. 85% "add back" for excess Federal

Section 179 and Section 168 deductions. N.C.G.S. 105-153.5(c)(5); and

• 4. For property sold during the tax year,

the amount by which the taxpayer's tax basis for Federal tax purposes exceeds the income tax basis for North Carolina tax purposes. N.C.G.S. 105-153.5(c)(3).

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• II. New Historic Rehabilitation

Tax Credits.

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HB 97 (2015) restored a credit for rehabilitating historic structures that expired in 2015. The new Article 3L Historic Rehabilitation Credits contain a number of differences from the former rehabilitation credit structure. See new North Carolina General Statute 105-129.100 et al. The new Article 3L credits are effective for expenses incurred beginning in 2016, but expires for expenses incurred after January 1, 2020. See N.C.G.S. 105- 129.105.

PART THREE

When is a Person a Resident of North Carolina? –

Page 9

Fowler v. NC Department of Revenue.

(August 4, 2015)

• NC Court of Appeals Affirms NC Superior Court

that the Fowlers

• had abandoned North Carolina as their domicile
• and had adopted Florida as their new domicile.

32 33

Fowler v. NC Department of Revenue.

(August 4, 2015)

• As a result, the Fowlers escaped a significant

amount of NC income tax on the sale of their closely-held business while they were attempting to move to Florida.

11/17/2015 12 Background of NC Residency Rules

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183 days in NC creates presumption

• f NC residency

But, less than 183 days in NC DOES

NOT create presumption of non-NC residency NCGS 105-134.1(12) defines a North Carolina “Resident” as a person

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 Who is “domiciled” in NC

OR

 Who “resides” in NC for other than a

temporary or transitory purpose

17 NCAC 6B.3901 states

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 “Domicile” means place where an

individual has a true, fixed permanent home and principal establishment, and to which place, whenever absent, the individual has the intention of returning.

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17 NCAC 6B.3901 states

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 An individual can only have one domicile  Once domicile is established, it is not

abandoned until new domicile is established

 A mere intent or desire to make a change

in domicile is not enough; voluntary and positive action must be taken

17 NCAC 6B.3901

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 16 non-exclusive factors to be considered in

determining residency

 See Pages 10-11

17 NCAC 6B.3901(c)

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Following factors indicate a “change in residency”

 (1) Selling a house and buying a new one.  (2) Directing the U.S. Postal Service to forward mail to a new

address.

 (3) Notifying senders of statements, bills, subscriptions, and

similar items of a new address.

 (4) Transferring family medical records to a new healthcare

provider.

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17 NCAC 6B.3901(c)

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 (5) Registering a vehicle in a new jurisdiction.  (6) Transferring memberships for church, a

health club, a lodge, or a similar activity.

 (7) Applying for professional certifications in a

new jurisdiction.

NC Case Law: Reynolds/Farnsworth/Hall

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To establish change of domicile, person must show: 1. Actual abandonment of first domicile with no intent to return; 2. Acquire a new domicile by actual residence; and 3. Intent to make new residence a permanent home

Fowler vs. NCDOR

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 January 19, 2006 – signed binding agreement to

sell majority of stock in closely-held business

 February 3, 2006 closing occurred and $ wired to

• Mr. Fowler’s account

 Mr. Fowler kept 33% of stock and signed 3 year

Employment Agreement with Buyer

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Events Before January 20, 2006

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 Formed Commercial Grading, Inc. in 1984  Mr. and Mrs. Fowler born and raised in NC  No family in Florida

Events Before January 20, 2006

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 1990s began considering Florida as retirement

location

 1999 built Apex, NC home for $2.8 Million

 2,080 square feet

 2002, purchased 3,400 square foot home in

Naples for $1.6 Million (“Tiburon House”)

 Moved some furniture and family heirlooms to

Naples home

Events Before January 20, 2006

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 2004 Mr. Fowler diagnosed with kidney cancer and

accelerated efforts to sell company and retire to Florida

 January 2005 formed and invested $1.775 Million

in a Florida corporation, Fowler Aviation, Inc., to sell new type of jet

 Abandoned Fowler Aviation in 2006

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Events Before January 20, 2006

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 Early 2005, hired investment banking firm to

market company for sale

 October 2005, signed Letter of Intent for sale of

company

 Told friends and family they were going to move to

Florida

Events Before January 20, 2006

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Signed Contract to Purchase 2nd

Naples home

9,300 square feet Purchased in August 2006 Never lived there and sold it in

2009

Events Before January 20, 2006

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 Late 2005, bought plane for $1.9

Million

 Tried unsuccessfully to locate

Naples hanger space

 Ultimately stored and registered

plane in Raleigh

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Events Before January 20, 2006

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 January 19, 2006, signed Binding

Agreement to sell stock

Events On January 20, 2006

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January 20, 2006, Fowlers chartered

plane to Florida to take “official action” to become Florida residents

Events On January 20, 2006

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 But, left personal identification home

Denied application for Florida drivers license Denied voter registration Unsuccessfully attempted to register dog and get

PO Box

Registered car in Florida as “non-residents” and

listed NC address

Stayed at Tiborun house

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Events After January 20, 2006

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 Returned to Raleigh on Jan. 22, 2006  Closed on sale of Business on February 3, 2006

and received purchase funds

Events After January 20, 2006

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 Went back to Florida on March 10, 2006  Signed Florida Declaration of Domicile  Obtained Naples PO Box  Got Florida drivers license  Registered to Vote in Florida  Signed Homestead Exemption Application

Events from 2006 - 2009

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 Kept Apex, Raleigh home until 2010  Mr. Fowler continued to work for Buyer  Continued to use NC physicians  Kept NC drivers licenses and vehicle registration  Used NC as address on business licenses  Made substantial charitable contributions to NC

charities

 Formed two NC business entities

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2006 - 2009

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 Kept $91 Million of NC municipal bonds at

Wachovia investment account

 Purchased homeowners insurance policy on Apex

home showing “dwelling is not seasonal or secondary”

 Donated to NC (but not Florida) political candidates  Spent $1.3 Million on birthday party for Mr. Fowler

2006 – 2009: Days Spent in NC vs. Florida

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2006 NC Florida

• Mr. Fowler

162 51

• Mrs. Fowler

173 47 2006 – 2009: Days Spent in NC vs. Florida

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2007 NC Florida

• Mr. Fowler

168 27

• Mrs. Fowler

180 27

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Decision of Superior Court

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 Unsuccessful actions on January 20, 2006 were

adequate to abandon NC and adopt Florida as new domicile

 16 Factor Test  Four Factors in favor of NC  One Factor favored Florida  Six Factors were neutral  Two Factors beyond Taxpayers’ control  Three Factors were inapplicable

August 4, 2015: Court of Appeals Affirms Decision of Business/Superior Court

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 The North Carolina Court of Appeals upheld the

Superior Court's decision, stating there was "substantial evidence" in the court's record that supported the earlier determination of the Superior Court – "even though the record contained evidence that could have led to contrary findings of fact and conclusions of law."

 Accordingly, based upon the Court of Appeal's

“limited standard of review,” the Court of Appeals found no error in the earlier conclusions of the Superior Court.

PART FOUR

FIDUCIARY INCOME TRUST TAX DEVELOPMENTS – Page 22

Kaestner Trust case

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North Carolina Income Taxation of Foreign Trusts With North Carolina Beneficiaries – Page 21.

• A. Background. North Carolina assesses income

tax on the income of a foreign trust holding assets for the benefit of one or more North Carolina residents, even where (1) the trustee is not a North Carolina resident, (2) the trust's assets are held outside North Carolina, and (3) the Trust instrument provides that the Trust is governed by the laws of a state other than North Carolina.

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North Carolina General Statute Section 105-160.2 imposes income tax on the amount of taxable income of a trust that is "for the benefit of a resident of North Carolina."

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And, North Carolina requires a fiduciary to file a North Carolina income tax return if a trust derives any income for the benefit of a North Carolina resident. 17 NCAC 6B.3716(b)(2).

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• B. Kaestner Trust claimed that such

taxation is unconstitutional under the Due Process Clause and the Commerce Clause of the United States Constitution and the North Carolina Constitution where the only connection of a foreign trust to North Carolina is the North Carolina residence of the trust's discretionary trust beneficiaries.

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Facts of Kaestner Trust

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 In 1992, Mr. Rice Forms Irrevocable Trust in NY  “Discretionary Trust” for benefit of children and

grandchildren

 No one was NC resident in 1992  In 1997, Mrs. Kaestner (Daughter) moved to NC  2005-2008, Trust filed NC returns even though no

trust distributions were made to Mrs. Kaestner

 NY Trust filed amended returns and claimed NC tax

refund

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Kimberly Rice Kaestner 1992 Family Trust vs. North Carolina Department of Revenue, 12 CVS 8740 (April 23, 2015). On April 23, 2015, the North Carolina Business Court held that such taxation is

 unconstitutional under the Due Process Clause and the

Commerce Clause of the United States Constitution "as applied" to the Kaestner Family Trust,

 where the only connection of the foreign trust to North

Carolina was the North Carolina residence of the trust's discretionary beneficiaries.

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Note: There are several important observations to be drawn from this case.

 First of all, the Court ruled that the North Carolina

fiduciary income statute was unconstitutional "as applied," rather than "on its face."

 If the Court had ruled that the North Carolina statute

was unconstitutional "on its face," then virtually any out-

• f-state trust, that pays North Carolina tax, could seek

a refund of income taxes paid to North Carolina based upon the Kaestner Trust decision.

 So, this case may have very little precedential value to

• ther out-of-state trusts, since the tax was deemed

unconstitutional only "as applied" to the Kaestner Trust.

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 Finally, the North Carolina Department of Revenue

was unable to show any physical connection or business connection between the Trust and the State

• f North Carolina.

 The Business Court may well have reached a

different result if the Trust had invested in any assets or businesses located in, or operating in, North Carolina, or if the Grantor or Trustee was a North Carolina resident.

PART FIVE

NORTH CAROLINA SALES AND USE TAX DEVELOPMENTS – Page 23

• I. Real Property Contractors

Effective January 1, 2015, real property contractors are now responsible for paying sales & use tax on purchases of personal property used to:

• Build real property
• Improve real property
• Repair real property

New N.C.G.S. 105-164.4(a)(13)

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II. New NCDOR Directive SD-15-1 (March 17, 2015) Provides Clarification to New Rules

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• A. Retailer-Contractor

is exempt from purchases, but pays use tax as items removed from inventory to perform real property contracts

II. New NCDOR Directive SD-15-1 (March 17, 2015) Provides Clarification to New Rules

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• B. Real Property Contractors get 1% ($80

per article) benefit for purchases of mill machinery.

II. New NCDOR Directive SD-15-1 (March 17, 2015) Provides Clarification to New Rules

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• C. Purchases to Fulfill Contract With

Qualified Farmers Are Exempt

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III. HB 97 (2015) Expands the Sales Tax Base To Repair, Maintenance and Installation Services.

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• Page 25-

 A. Overview. Perhaps the most significant (and

perhaps the most controversial) change brought by 2015 House Bill 97 was the expansion of the sales tax base to include repair, installation and maintenance services beginning March 1, 2016. See new Section 105-164.3(33d).

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This new change specifically includes motor vehicle repairs and maintenance services (see N.C.G.S. 105-164.3(33d)(a)) and the sales tax basis is expanded to include services to install or apply tangible personal property (except in some cases dealing with real property contractors). N.C.G.S. 105-164.3(33d).

B. Exceptions and Exemptions.

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There are some important exceptions and exemptions to the new rules. NCDOR Form E-505

 On October 15, 2015, the North Carolina Department

• f Revenue issued Form E-505 to provide an overview
• f some of the changes enacted to the sales and use

tax rules under HB 97 that become effective on March 1, 2016. In this announcement, the NCDOR further explained some of the exceptions and exemptions from the application of the sales and use tax rules to repair, maintenance and installation services.

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B. Exceptions and Exemptions.

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Dealer & Manufacturer Warranties

 For example, the NCDOR advised that the new

sales and use tax rules do not apply to repair, maintenance and installation services provided for a motor vehicle under a dealer's warranty or a manufacturer's warranty. See N.C.G.S. 105- 164.13(62a). So, repair, maintenance and installation services provided under a dealer warranty or a manufacturer's warranty will be exempt from sales and use tax.

B. Exceptions and Exemptions.

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Retailer vs. Service Provider

 In addition, the Notice advises that a "retailer," that is responsible

for collecting sales and use tax on repair, maintenance and installation services, would be defined as a person engaged in the business of delivering or installing tangible personal property, unless the taxpayer is one or more of the following: (1) a person that solely operates as a real property contractor

• r

(2) a person whose only business activity is providing repair, maintenance and installation services where the person's activities do not otherwise meet the definition of a "retail trade".

 See NCGS 105-164.3(35).

B. Exceptions and Exemptions.

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 And, the term "retail trade" is defined as a "trade in

which the majority of the revenue is from retailing tangible personal property." NCGS 105-164.3(35b).

 The Notice further advises that a person engaged in a

"retail trade" is a retailer and must treat all transactions as retail sales, including the sale of or the gross receipts derived from repair, maintenance and installation services, even if that person may install or apply tangible personal property that becomes affixed to real property.

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Note: Presumably, this Notice would imply that a taxpayer, that is engaged in both retail sales as well as repair, maintenance and installation services, may be forced to bifurcate their business into separate entities, one of which provides only retail sales and one of which provides only repair, maintenance or installation services.

B. Exceptions and Exemptions.

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 Real Property Contractors And Retailer-Contractors.

The Notice advises that the definition of "real property contractor" in NCGS 105-164.3(33d), as amended, does not include a person engaged in retail trade. Instead, if that person meets the definition of "retail trade," then that person cannot act as a real property contractor or a retailer contractor. This would indicate that, if a person meets the definition of a "retail trade," then this taxpayer must charge and assess sales and use tax on repair, maintenance, and installation contracts - even if tangible personal property is

• therwise affixed to real property.

B. Exceptions and Exemptions.

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Installation charges. Finally, the Notice advices that NGGS 105-164.13(49), which provides an exemption from sales and use tax on instillation services that are separately stated in an invoice, has been repealed effective as of March 1, 2016. This means that any installation charges made by retailers as part of the retail sale of tangible personal property will be subject to sales tax, regardless of whether the installation charges are separately stated on the invoice or other billing documents.

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PART SIX CORPORATE INCOME AND FRANCHISE TAX DEVELOPMENTS

– Page 28

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• A. Corporate Tax Rate Changes.

Here are the new corporate tax rates under 2014 HB 998:

• 1. 2014 – 6% (down from 6.9%).

N.C.G.S. 105-130.3.

• 2. 2015 – 5%.

N.C.G.S. 105-130.3.

• A. Corporate Tax Rate Changes.

Here are the new corporate tax rates under 2014 HB 998:

• 3. 2016 – If the general fund revenues exceed

$20.2 Billion for fiscal year 2014-15, the rate will lower to 4%. N.C.G.S. 105.130.3A.

• 4. 2017 -- If the general fund revenues exceed

$20.975 Billion for fiscal year 2015-2016, the rate will lower to 3%. N.C.G.S. 105-130.3A.

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11/17/2015 29 2015 HB 97 New Lowered Corporate Tax Rates for 2016 and After

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 For the fiscal year ending June 2015, the targeted

budget amount of $20.2 billion was exceeded and therefore the corporate tax rate for 2016 and beyond will be lowered to 4%.

 In addition, N.C.G.S. 105-130.3C has been revised

to provide that the corporate tax rate then will permanently drop to 3% -- beginning in the first year after which the revenues from the prior fiscal year exceeded $20.975 billion.

• II. HB97 Changes to Multi-State Apportionment

– Move to “Single Sales Factor” Approach

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 HB 97 provides that, beginning in 2016, the appointment

factor for multi-state corporations will gradually move from a "multi-factor" approach to a single sales-factor approach.

 For 2016 and 2017, multi-state tax apportionment will still be

made on the property factor, the payroll factor and the sales tax factor, but for 2016 and 2017, the sales tax factor will be given more weight until 2018, when the property factor and the payroll factor will be completely removed.

 Thus, for 2018 and beyond, the apportionment statute will rely

solely on "sales sourcing" rules. See revised N.C.G.S. 105- 130.4(i).

• III. Changes to the North Carolina

Franchise Tax System

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A. New "Net Worth" Concept. Under HB 97 (2015), beginning in 2017, the new concept of "net worth base" will replace the "capital base" concept for purposes of determining North Carolina franchise tax liabilities.

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A. New "Net Worth" Concept.

N.C.G.S. 105-122 has been revised and now provides that the term "net worth" will be equal to a corporation's total assets, less all of its liabilities -- as determined in accordance with "generally accepted accounting principles."

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A. New "Net Worth" Concept. However, N.C.G.S. 105-122(b) provides that, if the corporation does not maintain its books and records in accordance with "GAAP ," then its "net worth" will be computed "in accordance with the accounting method used by the entity for federal tax purposes so long as the method fairly reflects the corporation's net worth" for purposes of calculating the franchise tax. See amended N.C.G.S. 105-122(b).

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 B.

Increase in Minimum Franchise Tax. Beginning in 2017, the minimum corporate franchise tax will be increased from $35.00 to $200.00. N.C.G.S. 105-122(e).

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 C. Franchise Tax Apportionment. Likewise, for

purposes of apportioning a multi-state corporation's "net worth" among various states, the corporation would use the same apportionment method for franchise tax purposes that it uses for income tax purposes (i.e. moving to a single sales factor apportionment model).

 See amended N.C.G.S. 105-122(c1).

PART SEVEN NORTH CAROLINA DEPARTMENT OF REVENUE COLLECTION PROCEDURES – Page 37

I.In 2014, North Carolina Launched New Program to Help Businesses with Trust Fund Tax Liabilities.

92

Former "Small Business Counseling Program."

Ended on February 14, 2014.

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New “Trust Fund Tax Recovery Program."

• However, NCDOR has launched a

new program.

NCDOR Notice (February 5, 2014).

New “Trust Fund Recovery Program."

 Offers penalty and fee waivers and

payment plans to employers with delinquent trust fund tax payments.

 Does not apply to just “small

employers”; and

95 96

New “Trust Fund Recovery Program.“

 The owners no longer must attend

counseling with the Small Business and Technology Development Center or the North Carolina Small Business Small Business Center Network.

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Also, under the old program, the business had to

identify and designate at least one owner or

• fficer of the business as a "responsible

person" so that if the business falls out of compliance, the NCDOR would be able to pursue personal liability against that "responsible person.”

97 98

New “Trust Fund Recovery Program.“

Program not available to taxpayers

under criminal investigation.

Program not available to taxpayers who

defaulted under previous programs

Businesses that file and pay all

• utstanding taxes will have penalties

and collection fees waived.

However, fees and penalty will be

reinstated if the program participants fail to file or pay their taxes on time.

99

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• II. New Withholdings Required for Payments

to Contractors with ITINs – Page 40

100

Effective Jan. 1, 2010, any "payer" that pays more than $1,500 to an independent contractor who holds an Individual Taxpayer Identification Number (ITIN) must withhold 4 percent of that pay. ITINs are issued by the Internal Revenue Service to individuals who are not eligible to receive a social security

• number. Payers include businesses, organizations or
• ther individuals.
• II. New Withholdings Required for Payments

to Contractors with ITINs – Page 40

101

This new law does not apply to wage compensation from which state and federal income taxes are already being withheld. So, ITIN holders, who are paid as employees as opposed to independent contractors and who already have state and federal taxes withheld from their pay, are not subject to additional withholding.

• II. New Withholdings Required for Payments

to Contractors with ITINs – Page 40

102

Payers should file and pay withholding taxes on contractors with ITINs just like they would for regular employees (using the same online process or forms and the same filing and paying frequency). Payers that are subject to this new withholding requirement, and that don’t currently file and pay withholding taxes, must register with the state and receive a withholding account number so they can begin filing and paying the taxes.

 Chapter 476 (S.B. 1006, Laws 2009).

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PART EIGHT TRUST FUND RECOVERY AND “RESPONSIBLE PERSONS”

103

• I. Responsible Person Liability for Trust Fund Taxes



A.

• Background. Individual officers and

directors of a corporation are usually not liable for corporate debts or obligations. General partners

• f a partnership, on the other hand, are always

personally liable for debts and liabilities of the partnership.

104

• B. "Responsible Person" Liability Under N.C.G.S. 105-242.2.

However, by statute, a "responsible officer" of a corporation or a limited liability company may be held personally liable for certain unpaid "trust taxes" owed by the business entity, such as sales and use, motor fuels, and income withholding taxes. A "responsible

• fficer" is defined as any of the following:

(i) the president, treasurer, and the CFO of a corporation, (ii) the manager of an LLC, and (iii) any other officer of a corporation or a member of a LLC who has a duty to pay trust taxes on behalf of the entity. Note: This statute was amended in 2007 to add CFOs to the list of persons who are automatically deemed "responsible persons."

105

• C. Now, Partners Are Added to the List of "Responsible

Persons."

Prior to 2008, there was no similar statutory provision to assess partners for these taxes. Instead, the Department of Revenue, like any other creditor of a partnership, had to sue the partners in

• rder to collect this liability against the partners of a partnership.

Once a judgment was obtained, the Department of Revenue had to seek to execute the judgment. Senate Bill 1704 (2008) amended N.C.G.S. 105-242.2 to add general partners of a partnership to the list of "responsible persons." Note: SB 1704 also recodified N.C.G.S. 105-253 as new N.C.G.S. 105-242.2.

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106

II.Secretary of Revenue Decision No. 2006-145, North Carolina Department of Revenue, November 7, 2006 (Released February 13, 2007). A Manager of a Limited Liability Company Was Personally Liable for the Unpaid North Carolina Sales Taxes of the LLC.

107

 The Taxpayer was a manager of the LLC and was

responsible for the purchasing and merchandising of the products for the stores and developing the store

• locations. The Taxpayer was assessed the sales tax as

a "responsible officer" after the LLC failed to pay the Department the sales taxes it had collected.

 In this case, the Taxpayer was the only person listed

under the section for "Corporate Officers" on the sales and use tax registration application and listed his title as managing-member.

108

 Also, the Articles of Organization for the LLC listed

the Taxpayer as one of the "Organizers" of the LLC. Also, Article VIII, Managers, Section 8.2(b) of the Operating Agreement for the LLC, provided that the Taxpayer was appointed one of the managers

• f the LLC and by signing the agreement, he

accepted the appointment. Also, the Taxpayer was listed as the registered agent of the LLC on the Secretary of State's website.