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 ASSETS NOT INDIRECTLY OWNED BY CORPORATIONS.

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 following definitions apply in this section:
(1)	Affiliated group. – Defined in section 1504 of the Code.
(2)	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.
(3)	Entity. – A person that is not a human being.
(4)	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.

(b)	Controlled Companies. – If a corporation or an affiliated group of corporations owns seventy percent (70%) or more of the capital interests in a limited liability company, the corporation or group of corporations must include in its three tax bases under this Article the same percentage of the limited liability company's net assets. 			(c)	Constructive Ownership. – Ownership of the capital interests in a 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:
(1)	The term 'capital interest' is substituted for 'stock' each place it appears.
(2)	A limited liability company and any noncorporate entity other than a partnership, estate, or trust is treated as a partnership.
(3)	The operating rule of section 318(a)(5) of the Code applies without regard to section 318(a)(5)(C).
(d)	No Double Inclusion. – If a corporation is required to include a percentage of a limited liability company's assets in its tax bases under this Article pursuant to subsection (b) of this section, its investment in the limited liability company is not included in its computation of capital stock base under G.S. 105‑122(b).
(e)	Affiliated Group. – If the owner of the capital interests in a 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 limited liability company owned by the affiliated group by a fraction. The numerator of the fraction is the capital interests in the limited liability company owned by the group member, and the denominator of the fraction is the capital interests in the limited liability company owned by all group members that are doing business in this State.
(f)	Exemption. – This section does not apply to assets owned by a limited liability company if the total book value of the limited liability company's assets never exceeded one hundred fifty thousand dollars ($150,000) during its taxable year.
(g)	Timing. – Ownership of the capital interests in a 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 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 limited liability company must be determined as of the last day of the corporation or group of corporations' taxable year.
(h)	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)."
SECTION 2.  G.S. 105‑114.1(b), as amended by this act, reads as rewritten:
"(b)	Controlled Companies. – If a corporation or an affiliated group of corporations owns more than fifty percent (50%) of the capital interests in a limited liability company, the corporation or group of corporations must include in its three tax bases under this Article the same percentage of the limited liability company's net assets."

SECTION 3.  Section 1 of this act becomes effective January 1, 2003, and applies to taxes due on or after that date. Section 2 of this act becomes effective January 1, 2005, and applies to taxes due on or after that date. The remainder of this act is effective when it becomes law.
In the General Assembly read three times and ratified this the 28th day of June, 2004.

	s/	 Beverly E. Perdue
	 President of the Senate

	s/	 Richard T. Morgan
	 Speaker of the House of Representatives

	s/	 Michael F. Easley
	 Governor

Approved 4:07 p.m. this 8th day of July, 2004