GENERAL ASSEMBLY OF NORTH CAROLINA

SESSION 1995

H	3 

HOUSE BILL 422
Committee Substitute Favorable 5/1/95
Committee Substitute #2 Favorable 6/27/95

Short Title:  N.C. Enterprise Corporations/AB.	(Public)

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Sponsors:

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Referred to:  

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March 9, 1995

A BILL TO BE ENTITLED
AN ACT TO PROMOTE ECONOMIC DEVELOPMENT BY REMOVING TECHNICAL REQUIREMENTS FOR THE FORMATION OF NORTH CAROLINA ENTERPRISE CORPORATIONS, AUTHORIZING THE FORMATION OF NONPROFIT ENTERPRISE CORPORATIONS, AND PROHIBITING AN ENTERPRISE CORPORATION FROM INVESTING IN A BUSINESS CONTROLLED BY OR RELATED TO A PERSON WHO HAS INVESTED IN ENTERPRISE CORPORATION.
The General Assembly of North Carolina enacts:
Section 1.  G.S. 53A-37 reads as rewritten:
"§ 53A-37.  Definitions.
The following definitions apply in this Article:
(1)	Business. – A corporation, partnership, association, or sole proprietorship operated for profit.
(1b)	Control. – Defined in G.S. 105-163.010.
(2)	Equity security. – Common stock, preferred stock, an interest in a partnership, subordinated debt, or a warrant that is convertible into, or entitles the holder to receive upon its exercise, common stock, preferred stock, or an interest in a partnership.
(3)	Mezzanine finance. – An investment in the equity securities or subordinated debt of a Qualified North Carolina Business.
(4)	Qualified North Carolina Business. – A business whose headquarters and principal business operations are located in North Carolina and that, together with its affiliates on a consolidated basis, had gross income during the immediately preceding fiscal year, determined in accordance with generally accepted accounting principles without taking into account extraordinary items, of less than forty million dollars ($40,000,000).
(4a)	Related. – Defined in G.S. 105-163.010.
(5)	Rural areas. – Any county in North Carolina that does not include within its boundaries a city, as defined by G.S. 160A-1(2), with a population greater than one percent (1%) of the population of North Carolina.
(6)	Security. – A security as defined in G.S. 78A-2(11).
	(7)	Subordinated debt. – Indebtedness that is or will be subordinated to other indebtedness of the issuer. Subordinated debt may be convertible into common stock, preferred stock, or an interest in a partnership.
(8)	Traditional financial institutions. – Corporations or associations chartered under Chapters 53 or 54B of the General Statutes."
Sec. 2.  G.S. 53A-38(b) reads as rewritten:
"(b)	Persons who wish to associate themselves for the purpose of establishing a North Carolina Enterprise Corporation shall file a certificate of incorporation with the Secretary of State.  The certificate shall be in accordance with either G.S. 55-2-02 or G.S. 55A-2-02.  An existing corporation may become a North Carolina Enterprise Corporation by filing amended articles of incorporation with the Secretary of State's office in accordance with Article 10 of either Chapter 55 or Chapter 55A of the General Statutes."
Sec. 3.  G.S. 53A-40 is repealed.
Sec. 4.  G.S. 53A-41 reads as rewritten:
"§ 53A-41.  Governing law.
Except as otherwise provided in this Article, a North Carolina Enterprise Corporation shall be governed by the applicable Chapter of the General Statutes under which the corporation is incorporated."
Sec. 5.  G.S. 53A-42 reads as rewritten:
"§ 53A-42.  Powers.
A North Carolina Enterprise Corporation created under this Article shall have all the powers conferred on a business corporation if it was incorporated under Chapter 55 of the General Statutes or all the powers conferred on a nonprofit corporation if it was incorporated under Chapter 55A of the General Statutes."
Sec. 6.  G.S. 53A-44 reads as rewritten:
"§ 53A-44.  Prohibited investments.
A North Carolina Enterprise Corporation shall not invest in any business unless the business can demonstrate to the satisfaction of the North Carolina Enterprise Corporation that the business cannot obtain sufficient financing through traditional financial institutions.  A North Carolina Enterprise Corporation shall not invest in a business that is related to or controlled by one of the Enterprise Corporation's investors."
Sec. 7.  G.S. 53A-45 reads as rewritten:
"§ 53A-45.  Board of directors.
The business and affairs of a North Carolina Enterprise Corporation shall be managed and conducted by a board of directors and by any officers and agents the corporation authorizes in its bylaws.  The initial board of directors shall be those listed in the Articles of Incorporation.  
For a corporation organized under Chapter 55 of the General Statutes, at the initial shareholders meeting, and thereafter annually, the voting common stock shareholders shall elect a board of directors comprised of not less than thirteen members.  For a corporation organized under Chapter 55A of the General Statutes, the board of directors shall be appointed in accordance with the corporation's bylaws but shall be comprised of not less than 13 members.
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Sec. 8.  G.S. 53A-46 reads as rewritten:
"§ 53A-46.  Tax credit.
A person or corporation that invests in the equity securities of a North Carolina Enterprise Corporation or in the equity securities of a limited partnership in which a North Carolina Enterprise Corporation is the only general partner, or that makes a contribution to a North Carolina Enterprise Corporation organized under Chapter 55A of the General Statutes, is entitled to a tax credit as provided in G.S. 105-163.010 through G.S. 105-163.014."
Sec. 9.  G.S. 105-130.9(4) reads as rewritten:
"(4)	The amount of a contribution for which the taxpayer claims a tax credit pursuant to G.S. 105-130.34 or Division V of this Article shall not be eligible for a deduction under this section.  The amount of the credit claimed with respect to the contribution is not, however, required to be added to income under G.S. 105-130.5(a)(10)."
Sec. 10.  G.S. 105-134.6(c)(5) reads as rewritten:
"(5)	To prevent a double benefit from a tax credit, the following additions shall be made:
a.	The fair market value, up to a maximum of one hundred thousand dollars ($100,000), of the donated property interest for which the taxpayer claims a credit for the taxable year under G.S. 105-151.12.
b.	The market price of the gleaned crop for which the taxpayer claims a credit for the taxable year under G.S. 105-151.14.
c.	The amount of a contribution to a nonprofit North Carolina Enterprise Corporation for which the taxpayer claims a credit under Division V of this Article, to the extent the contribution was deducted by the taxpayer under the Code for the current or an earlier taxable year."
Sec. 11.  G.S. 105-163.010 is amended by renumbering definitions (9b) and (9c) as (9c) and (9d), respectively, and by adding the following new definitions in the appropriate alphabetical order:
"(5a)	Invest. – Purchase an entity's equity securities or subordinated debt directly from that entity or make a contribution directly to a nonprofit North Carolina Enterprise Corporation.
(9b)	Related. – Having a relationship described in section 267 or section 707(b) of the Code."
Sec. 12.  G.S. 105-163.011 reads as rewritten:
"§ 105-163.011.  (Repealed effective for investments made on or after January 1, 1999) Tax credits allowed.
(a)	Corporations. – Subject to the limitations contained in G.S. 105-163.012, a corporation that invests in an Enterprise Corporation is allowed as a credit for the taxable year an amount equal to twenty-five percent (25%) of the amount invested.  The aggregate amount of credit allowed a corporation for one or more investments in a single taxable year under this Division, whether directly or indirectly as owner of a pass-through entity, may not exceed seven hundred fifty thousand dollars ($750,000).  The credit is allowed against one or more of the following taxes:
(1)	The income tax imposed by Division I of this Article.
(2)	The franchise tax imposed by G.S. 105-116, 105-120.2, and 105-122.
(3)	The gross premiums tax imposed by G.S. 105-228.5 and G.S. 105-228.8.
The credit may not be taken for the year in which the investment is made but shall be taken for the taxable year beginning during the calendar year in which the application for the credit becomes effective as provided in subsection (c)	of this section.  This subsection does not apply to a corporation that is also a pass-through entity.
(b)	Individuals. – Subject to the limitations contained in G.S. 105-163.012, an individual who invests in a qualified business venture, a qualified grantee business, or a North Carolina Enterprise Corporation is allowed as a credit against the tax imposed by Division II of this Article for the taxable year an amount equal to twenty-five percent (25%) of the amount invested.  The aggregate amount of credit allowed an individual for one or more investments in a single taxable year under this Division, whether directly or indirectly as owner of a pass-through entity, may not exceed fifty thousand dollars ($50,000).  The credit may not be taken for the year in which the investment is made but shall be taken for the taxable year beginning during the calendar year in which the application for the credit becomes effective as provided in subsection (c) of this section."
(b1)	Pass-Through Entities. – Subject to the limitations provided in G.S. 105-163.012, a pass-through entity that invests in a qualified grantee business, a qualified business venture, or a North Carolina Enterprise Corporation is eligible for a tax credit equal to twenty-five percent (25%) of the amount invested.  The aggregate amount of credit allowed a pass-through entity for one or more investments in a single taxable year under this Division, whether directly or indirectly as owner of another pass-through entity, may not exceed seven hundred fifty thousand dollars ($750,000).  The pass-through entity is not eligible for the credit for the year in which the investment by the pass-through entity is made but shall be eligible for the credit for the taxable year beginning during the calendar year in which the application for the credit becomes effective as provided in subsection (c) of this section.
Each individual who is an owner of a pass-through entity is allowed as a credit against the tax imposed by Division II of this Article for the taxable year an amount equal to the owner's allocated share of the credits for which the pass-through entity is eligible under this subsection.  The aggregate amount of credit allowed an individual for one or more investments in a single taxable year under this Division, whether directly or indirectly as owner of a pass-through entity, may not exceed fifty thousand dollars ($50,000).
Each corporation that is an owner of a pass-through entity is allowed as a credit for the taxable year an amount equal to the corporation's allocated share of the tax credits for which the pass-through entity is eligible under this subsection as a result of the pass-through entity's investment in equity securities of a North Carolina Enterprise Corporation.  The credit is allowed against one or more of the following taxes:
(1)	The income tax imposed by Division I of this Article.
(2)	The franchise tax imposed by G.S. 105-116, 105-120.2, and 105-122.
(3)	The gross premiums tax imposed by G.S. 105-228.5 and G.S. 105-228.8.
The aggregate amount of credit allowed a corporation for one or more investments in a single taxable year under this Division, whether directly or indirectly as owner of a pass-through entity, may not exceed seven hundred fifty thousand dollars ($750,000).
If an owner's share of the pass-through entity's credit is limited due to the maximum allowable credit under this section for a taxable year or if a corporate owner is not eligible for the credit because the investment was not made in a North Carolina Enterprise Corporation, the pass-through entity and its owners may not reallocate the unused credit among the other owners.
(c)	Application. – To be eligible for the tax credit provided in this section, the taxpayer must file an application for the credit with the Secretary on or before April 15 of the year following the calendar year in which the investment was made.  The Secretary may grant extensions of this deadline, as the Secretary finds appropriate, upon the request of the taxpayer, except that the application may not be filed after September 15 of the year following the calendar year in which the investment was made.  An application is effective for the year in which it is timely filed.  The application shall be on a form prescribed by the Secretary and shall include any supporting documentation that the Secretary may require.  If an investment for which a credit is applied for was paid for other than in money, the taxpayer shall include with the application a certified appraisal of the value of the property used to pay for the investment.  The application for a credit for an investment made by a pass-through entity must be filed by the pass-through entity.
(d)	Penalties. – The penalties provided in G.S. 105-236 apply in this Division."
Sec. 13.  G.S. 105-163.014 is amended by adding a new subsection to read:
"( d1)	Relationship to Business. – A taxpayer who has received a credit under this Division for an investment in a North Carolina Enterprise Corporation forfeits the credit if, within three years after the investment was made, the taxpayer controls or is related to a business to which the North Carolina Enterprise Corporation has provided financing."
Sec. 14.  G.S. 105-163.014(d) reads as rewritten:
"(d)	Transfer or Redemption of Investment. – A taxpayer who has received a credit under this Division for an investment in a North Carolina Enterprise Corporation organized under Chapter 55 of the General Statutes, a qualified business venture, or a qualified grantee business forfeits the credit in the following cases:
(1)	Within one year after the investment was made, the taxpayer transfers any of the securities received in the investment that qualified for the tax credit to another person or entity, other than in a transfer resulting from one of the following:
a.	The death of the taxpayer.
b.	A final distribution in liquidation to the owners of a taxpayer that is a corporation or other entity.
c.	A merger, consolidation, or similar transaction requiring approval by the shareholders of the North Carolina Enterprise Corporation, qualified business venture, or qualified grantee business under applicable State law, to the extent the taxpayer does not receive cash or tangible property in the merger, consolidation, or other similar transaction.
(2)	Within five years after the investment was made, the North Carolina Enterprise Corporation, qualified business venture, or qualified grantee business in which the investment was made makes a redemption with respect to the securities received in the investment.
In the event the taxpayer transfers fewer than all the securities in a manner that would result in a forfeiture, the amount of the credit that is forfeited is the product obtained by multiplying the aggregate credit attributable to the investment by a fraction whose numerator equals the number of securities transferred and whose denominator equals the number of securities received on account of the investment to which the credit was attributable.  In addition, if the redemption amount is less than the amount invested by the taxpayer in the securities to which the redemption is attributable, the amount of the credit that is forfeited is further reduced by multiplying it by a fraction whose numerator equals the redemption amount and whose denominator equals the aggregate amount invested by the taxpayer in the securities involved in the redemption.  The term 'redemption amount' means all amounts paid that are treated as a distribution in part or full payment in exchange for securities under section 302(a)	of the Code."
Sec. 15.  Sections 9 through 13 of this act are effective for taxable years beginning on or after January 1, 1995.  The remainder of this act is effective upon ratification.  If Division V of Article 4 of Chapter 105 of the General Statutes expires or is repealed, the amendments made by this act to that Division expire or are repealed on the same date.