A BILL TO BE ENTITLED
AN ACT TO CLOSE A LOOPHOLE THAT ALLOWS CORPORATIONS TO CONTINUE AVOIDING FRANCHISE TAXES AND TO REMOVE PROVISIONS THAT COULD RESULT IN FRANCHISE TAXES ON UNRELATED LIMITED LIABILITY COMPANIES.
The General Assembly of North Carolina enacts:
SECTION 1.  G.S. 105‑114.1 reads as rewritten:
"§ 105‑114.1.  Limited liability companies.
(a)	Definitions. – The definitions in G.S. 105‑130.7A apply in this section. In addition, the following definitions apply in this section:
(1)	Affiliated corporations. – Two or more corporations that are includible in the same affiliated group as defined in section 1504 of the Code.
(1b)	Governing law. – A limited liability company's governing law is determined under G.S. 57C‑6‑05 or G.S. 57C‑7‑01, as applicable.
(2)	Owned indirectly. – A person owns indirectly a percentage of the assets of a limited liability company if the limited liability company's governing law provides that the percentage of its assets, after payments to creditors, must be distributed upon dissolution to the person as of the last day of the principal corporation's taxable year.
(3)	Qualified limited liability company. – A limited liability company that is not treated as a partnership for federal income tax purposes.
(b)	Controlled Companies. – Except as provided in subsection (e) of this section, if a corporation owns indirectly, or two or more affiliated corporations together own indirectly, seventy percent (70%) or more of a qualified limited liability company's assets, then the following provisions apply:
(1)	A percentage of the qualified limited liability company's income, assets, liabilities, and equity is attributed to each corporation and must be included in the corporation's computation of tax under this Article.
(2)	Each corporation's investment in the qualified limited liability company is not included in the corporation's computation of tax under this Article.
(3)	The percentage attributable under subdivision (1) of this subsection is equal to the percentage of the qualified limited liability company's assets owned indirectly by each corporation.
(b1)	Attribution. – For the purpose of applying this section, the following rules apply:
(1)	Business trusts. – The direct or indirect ownership by a business trust of any qualified limited liability company assets is attributed to the owners of the beneficial interests in the business trust, according to their interests in the trust, and the trust itself is disregarded as a separate entity.
(2)	Partnerships. – The direct or indirect ownership by a partnership of any qualified limited liability company assets is attributed to the partners according to their interests in the partnership, and the partnership itself is disregarded as a separate entity.
(3)	Related entities. – The direct or indirect ownership by a noncorporate related entity of a corporation of any qualified limited liability company assets is attributed to the corporation in proportion to the actual aggregate percentage of stock ownership that establishes that the entity is a related entity of the corporation, and the related entity itself is disregarded as a separate entity.
(4)	No double taxation. – If the same ownership interest is attributed to more than one corporation under this subsection, with the result that the same income, assets, liabilities, or equity must be included in more than one corporation's computation of tax under this Article, those corporations may proportionally reduce the amount included to the extent necessary to avoid double taxation, as prescribed by the Secretary.
(c)	Other Companies. – In all other cases, none of the limited liability company's income, assets, liabilities, or equity is attributed to a principal corporation under this Article.
(d)	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).
(e)	Exception. – If a percentage of a qualified limited liability company's assets would otherwise be considered indirectly owned by one or more corporations as a result of attribution from a related entity pursuant to subdivision (b1)(3) of this section, the assets are not considered indirectly owned by the corporation if the corporation can demonstrate that no assets owned by the qualified limited liability company, and no predecessor assets of any assets owned by the qualified limited liability company, have ever been used by the corporation, used in connection with the corporation's business, or owned by the corporation."
SECTION 2.  G.S. 105‑130.7A(b)(4) reads as rewritten:
"(4)	Related entity. – Any of the following:
a.	A stockholder who is an individual, or a member of the stockholder's family enumerated in section 318 of the Code, if the stockholder and the members of the stockholder's family own in the aggregate at least eighty percent (80%) of the value of the taxpayer's outstanding stock.
b.	A stockholder, or a stockholder's partnership, limited liability company, estate, trust, or corporation, if the stockholder and the stockholder's partnerships, limited liability companies, estates, trusts, and corporations own in the aggregate at least fifty percent (50%) of the value of the taxpayer's outstanding stock.
c.	A corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of section 318 of the Code, if the taxpayer owns at least eighty percent (80%) of the value of the corporation's outstanding stock."
SECTION 3.  This act becomes effective January 1, 2004, and applies to taxes due on or after that date.