GENERAL ASSEMBLY OF NORTH CAROLINA

SESSION 1995

H	1 

HOUSE BILL 813

Short Title:  Small Business Gain Exclusion.	(Public)

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Sponsors: Representatives Creech; and K. Miller.

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Referred to:  Finance.

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April 11, 1995

A BILL TO BE ENTITLED
AN ACT TO EXCLUDE FROM INCOME TAX CERTAIN GAINS FROM INVESTMENTS IN QUALIFIED NORTH CAROLINA BUSINESSES.
The General Assembly of North Carolina enacts:
Section 1.  This act shall be known as the Small Business Exclusion of Gain Act.
Sec. 2.  G.S. 105-130.5(b) is amended by adding a new subdivision to read:
"(17)	The amount of the exclusion of gain for qualified North Carolina businesses allowed under Division V of this Article, to the extent included in federal taxable income."
Sec. 3.  G.S. 105-134.6(b) is amended by adding a new subdivision to read:
"(11)	The amount of the exclusion of gain for qualified North Carolina businesses allowed under Division V of this Article."
Sec. 4.  The title of Division V of Article 4 of Chapter 105 of the General Statutes reads as rewritten:
"DIVISION V.  TAX INCENTIVES FOR QUALIFIED BUSINESS
INVESTMENTS."
Sec. 5.  G.S. 105-163.013 is recodified as G.S. 105-163.010A.
Sec. 6.  G.S. 105-163.010 and G.S. 105-163.010A are designated Part 1 of Division V of Article 4 of Chapter 105 of the General Statutes, entitled "General Provisions".
Sec. 7.  G.S. 105-163.011, 105-163.012, and 105-163.014 are designated Part 2 of Division V of Article 4 of Chapter 105 of the General Statutes, entitled "Tax Credits for Qualified Business Investments".
Sec. 8.  Section 7 of Chapter 443 of the 1993 Session Laws reads as rewritten:
"Sec. 7.  Part 2 of Division V of Article 4 of Chapter 105 of the General Statutes is repealed effective for investments made on or after January 1, 1999.  Part 2 of Division V of Article 4 of Chapter 105 of the General Statutes will remain in effect for investments made before January 1, 1999."
Sec. 9.  Division V of Article 4 of Chapter 105 of the General Statutes, as amended by this act, is further amended by adding a new Part 3 to read:
"Part 3. Exclusion of Gain for Qualified Business Investments.
"§ 105-163.020.  Exclusion of gain allowed.
(a)	Any gain recognized for federal income tax purposes from the sale or exchange of qualified securities is excluded from taxation under this Article if the sale or exchange occurs on or after January 1, 2000.
(b)	A taxpayer that is an owner of a pass-through entity may exclude from the taxpayer's income taxable under this Article an amount equal to the taxpayer's allocated share of the exclusion for which the pass-through entity is eligible under subsection (a) of this section.
"§ 105-163.021.  Qualified securities.
(a)	Qualified Security. – Except as otherwise provided in this section, any equity security or subordinated debt instrument issued by a qualified North Carolina business is a qualified security if it satisfies all of the following conditions:
(1)	It is originally issued by the business on or after January 1, 1995.
(2)	As of the date of issuance, the issuing business is a qualified North Carolina business.
(3)	The security or instrument is acquired by the taxpayer at its original issue in exchange for any tangible or intangible property or benefit to the business, including cash, promissory notes, services performed, contracts for services to be performed, or other equity securities of the business.
(b)	Registration. – Securities of a North Carolina Enterprise Corporation acquired before its incorporation are not qualified securities.  Securities of any other qualified North Carolina business acquired more than 60 days before the effective date of its registration are not qualified securities.  Revocation of the registration of a qualified North Carolina business pursuant to G.S. 105-163.010A does not affect the exclusion of gain from qualified securities acquired while the registration was in effect or within 60 days before it became effective.
(c)	Effect of Redemptions and Other Distributions. – An equity security or subordinated debt instrument is not a qualified security to the extent the taxpayer purchased it with the proceeds of a redemption, dividend, or distribution made by the business that issued the security or instrument.  For the purpose of this subsection, when a business makes a redemption, dividend, or distribution during the four-year period beginning two years before the issuance of securities or instruments to a taxpayer, the taxpayer is considered to have used the proceeds of the redemption, dividend, or distribution toward the purchase of the securities or instruments.  A redemption, dividend, or distribution occurs when the business issuing the security or instrument does one of the following:
(1)	Purchases, directly or indirectly, any of its outstanding equity securities or subordinated debt, other than qualified securities, from the taxpayer or a related person.
(2)	Declares a dividend or makes a distribution with respect to any of its outstanding equity securities or subordinated debt, other than qualified securities, to the taxpayer or a related person.  This subdivision does not apply, however, to a distribution in connection with one of the following:
a.	The reimbursement to the taxpayer of the reasonable costs of forming, syndicating, managing, and operating the business.
b.	An increase in the taxpayer's taxes, penalties, or interest to the extent the increase is caused by the allocation to the taxpayer of income of the business.
The repayment of principal on subordinated debt is a purchase of the debt except to the extent the repayment is repayment of principal due on the subordinated debt at its maturity pursuant to the terms of the subordinated debt instrument.  If a transaction is treated under section 304(a)	of the Code as a distribution in redemption of the equity securities of a business, that business has, for the purpose of this subsection, purchased an amount of its equity securities equal to the amount treated as such a distribution under section 304(a) of the Code.
(d)	Conversion of Other Securities. – Any equity security or subordinated debt instrument issued by a business and acquired by the taxpayer solely through the conversion of another equity security or subordinated debt instrument that was issued by the business and was a qualified security in the hands of the taxpayer is considered, for the purpose of this section, a qualified security in the hands of the taxpayer and acquired by the taxpayer on the date the taxpayer acquired the converted qualified security.
(e)	Transfers. – In the case of a transfer by gift, by death, or from a pass-through entity to one of its owners, the transferee is considered, for the purpose of this section, to have acquired the qualified security in the same manner as the transferor and to have held it during any continuous period immediately preceding the transfer during which it was held or treated as held by the transferor.
In the case of a transaction described in section 351 of the Code or a reorganization described in section 368 of the Code, if qualified securities are exchanged for other securities, the other securities are considered, for the purpose of this section, qualified securities acquired on the date the exchanged qualified securities were acquired.  In the case of a transaction described in section 351 of the Code, the newly acquired securities are considered qualified securities, however, only if, immediately after the transaction, the corporation issuing the securities owns, directly or indirectly, securities representing control, within the meaning of section 368(c)	of the Code, of the corporation whose securities were exchanged.
"§ 105-163.022.  Limitations.
(a)	Contributions and Exchanges of Property. – In the case of a transaction described in section 351 or 721 of the Code or a reorganization described in section 368 of the Code, if a taxpayer contributes property to or exchanges property with a qualified North Carolina business, the following rules apply:
(1)	Qualified securities exchanged for property. – Except as otherwise provided in subdivision (3) of this subsection, a taxpayer who transfers property to a business in exchange for qualified securities in the business shall, for purposes of determining North Carolina taxable income, recognize gain equal to the amount by which the fair market value of the property exceeded the taxpayer's basis in the property on the date the property was exchanged for the qualified securities.  This gain shall be recognized for the years for which the taxpayer claims an exclusion of gain under this Division with respect to the disposition of qualified securities received in exchange for the property.
(2)	Contributions to capital. – Except as otherwise provided in subdivision (3) of this subsection,  if the adjusted basis of a qualified security is adjusted due to a contribution to capital after the date the qualified security was issued originally, for purposes of determining North Carolina taxable income, the taxpayer shall recognize gain equal to the amount by which the fair market value of the contributed property exceeded the taxpayer's basis in the property on the date the property was contributed.  This gain shall be recognized for the years for which the taxpayer claims an exclusion of gain under this Division with respect to the disposition of the qualified securities.
(3)	Disposition of contributed property. – If a qualified North Carolina business disposes of property contributed to it, the disposition occurs before the taxpayer who contributed the property claims an exclusion of gain pursuant to this Division with respect to qualified securities affected by the contribution, and the taxpayer recognizes gain from the disposition, then for purposes of subdivisions (1) and (2) of this subsection, the taxpayer's basis in the contributed property is increased by any gain the taxpayer recognized from the disposition.
(b)	Short Positions. –  For the purposes of this subsection, a taxpayer has an offsetting short position with respect to qualified securities if one of the following conditions is satisfied:
(1)	The taxpayer or a related person has made a short sale of substantially identical property.
(2)	The taxpayer or a related person has acquired an option to sell substantially identical property at a fixed price.
(3)	The taxpayer has entered into any other transaction that the Secretary has identified in guidelines adopted under this section as one that substantially reduces the risk of loss from holding the qualified securities.
If a taxpayer has an offsetting short position with respect to any qualified securities, there shall be no exclusion of gain under this Division from the sale or exchange of the qualified securities unless the taxpayer established the short position on or after January 1, 2000, and elects to recognize gain as if the qualified securities were sold at fair market value on the date the taxpayer first established the short position.
(c)	Guidelines. – The Secretary shall adopt guidelines identifying transactions that substantially reduce the risk of loss from holding qualifying securities for the purpose of subsection (b) of this section.  In addition, the Secretary shall adopt guidelines identifying activities and situations designed to avoid the purpose of this Division through split-ups, shell corporations, partnerships, or otherwise.  There shall be no exclusion of gain otherwise allowable under this Division to the extent a taxpayer has engaged in an activity or created a situation identified by the Secretary in guidelines as one that is designed to avoid the purpose of this Division."
Sec. 10.  G.S. 105-163.010 is amended by adding a new subdivision to read:
"(8a)	Qualified North Carolina business. – A North Carolina Enterprise Corporation, a qualified grantee business registered under this Division, or a qualified business venture registered under this Division."
Sec. 11.  G.S. 105-163.010 is amended by renumbering subdivision (9a) as (8c) and adding a new subdivision to read:
"(9a)	Related person. – A related person as determined under section 267(b) or 707(b) of the Code."
Sec. 12.  G.S. 105-163.010(2) reads as rewritten:
"(2)	Business. – A corporation, a partnership, a limited liability company, an association, or a sole proprietorship operated for profit."
Sec. 13.  G.S. 105-163.010(4) reads as rewritten:
"(4)	Equity security. – Common stock, preferred stock, or an interest in a partnership or limited liability company, or subordinated debt that is convertible into, or entitles the holder to receive upon its exercise, common stock, preferred stock, or an interest in a partnership."
Sec. 14.  G.S. 105-163.010(9b) reads as rewritten:
"(9b)	Selling or leasing at retail. –Any of the following:
a.	Selling or leasing any service of any nature from a store or other location open to the public generally.
b.	Selling or leasing services of any nature by means other than to or through one or more other businesses.
c.	Reselling or leasing at retail products that are purchased or leased at wholesale and then resold or leased substantially unmodified."
Sec. 15.  G.S. 105-163.010(11) reads as rewritten:
"(11)	Subordinated debt. – Indebtedness that is not secured and is subordinated to all other indebtedness of the issuer issued or to be issued to a financial institution other than a financial institution described in subdivisions (5)(ii) through (5)(v) of this section.  For the purpose of Part 2 of this Division only, any portion of indebtedness that matures earlier than five years after its issuance is not subordinated debt."
Sec. 16.  G.S. 105-163.010A(b)(1), as recodified by this act, reads as rewritten:
"(1)	Its headquarters and principal business operations are in North Carolina or it has, as a condition to approval of the registration, agreed to establish its headquarters and principal business operations in North Carolina within three months after the later of the date its application is accepted or the date the first investment eligible for a credit or an exclusion of gain under this Division is made."
Sec. 17.  G.S. 105-163.010A(b)(2), as recodified by this act, reads as rewritten:
"(2)	It has, as a condition to approval of the registration, agreed to retain its headquarters and principal business operations in North Carolina for at least three years after the later of the date its application is accepted or the date the last investment eligible for credit under this Division is made."
Sec. 18.  G.S. 105-163.010A(b)(5), as recodified by this act, reads as rewritten:
"(5)	It was not formed for the primary purpose of acquiring all or part of the stock, other ownership interest, or assets of one or more existing businesses."
Sec. 19.  G.S. 105-163.010A(c)(1), as recodified by this act, reads as rewritten:
"(1)	Its headquarters and principal business operations are in North Carolina or it has, as a condition to approval of the registration, agreed to establish its headquarters and principal business operations in North Carolina within three months after the later of the date its application is accepted or the date the first investment eligible for a credit or an exclusion of gain under this Division is made."
Sec. 20.  G.S. 105-163.010A(c)(2), as recodified by this act, reads as rewritten:
"(2)	It has, as a condition to approval of the registration, agreed to retain its headquarters and principal business operations in North Carolina for at least three years after the later of the date its application is accepted or the date the last investment eligible for a credit under this Division is made."
Sec. 21.  G.S. 105-163.010A(d), as recodified by this act, reads as rewritten:
"(d)	Application Forms; Rules; Fees. – Applications for registration, renewal of registration, and reinstatement of registration under this section shall be in the form required by the Secretary of State. The Secretary of State may, by rule, require applicants to furnish supporting information in addition to the information required by subsections (b) and (c) of this section. The Secretary of State may adopt rules in accordance with Chapter 150B of the General Statutes that are needed to carry out the Secretary's responsibilities under this Division. The Secretary of State shall prepare blank forms for the applications and shall distribute them throughout the State and furnish them on request. Each application shall be signed by the owners, a manager, or an executive officer of the business. There shall be annexed to the application the affirmation of the person making the application in the following form: 'Under penalties prescribed by law, I certify and affirm that to the best of my knowledge and belief this application is true and complete.' A person who submits a false application is guilty of a Class 1 misdemeanor.
The fee for filing an application for registration under this section is one hundred dollars ($100.00). The fee for filing an application for renewal of registration under this section is fifty dollars ($50.00). The fee for filing an application for reinstatement of registration under this section is fifty dollars ($50.00).
An application for renewal of registration under this section shall indicate whether the applicant is a minority business, as defined in G.S. 143-128, and shall include a report of the number of jobs the business created during the preceding year that are attributable to investments that qualify under this Division for a tax benefit and the average wages paid by each job. An application that does not contain this information is incomplete and the applicant's registration may not be renewed until the information is provided."
Sec. 22.  This act is effective upon ratification.  Notwithstanding the provisions of G.S. 105-163.010A as recodified by this act, if a qualified North Carolina business files its application for registration within 60 days after the effective date of this act and the application is accepted, the effective date of the registration is the later of January 1, 1995, or the date the business first issues equity securities or subordinated debt.  Part 3 of Division V of Article 4 of Chapter 105 of the General Statutes, as amended by this act, is repealed effective for equity securities and subordinated debt instruments acquired on or after January 1, 2003.