AN ACT to make corporate income tax adjustments inapplicable to s corporations.

The General Assembly of North Carolina enacts:

SECTION 1.  G.S. 105‑131.2 reads as rewritten:
"§ 105‑131.2.  Adjustment and characterization of income.
(a)	Adjustment. – Each shareholder's pro rata share of an S Corporation's income is subject to the adjustments provided in G.S. 105‑134.6.
(b)	Repealed by Session Laws 1989, c. 728, s. 1.35.
(c)	Characterization of Income. – S Corporation items of income, loss, deduction, and credit taken into account by a shareholder pursuant to G.S. 105‑131.1(b) are characterized as though received or incurred by the S Corporation and not its shareholder."
SECTION 2.  G.S. 105‑134.6(a) reads as rewritten:
"(a)	S Corporations. – Each shareholder's pro rata share of an S Corporation's income is subject to the adjustments provided in this section."
SECTION 3.  G.S. 105‑134.6(c) is amended by adding a new subdivision to read:
…
(3a)	The amount by which a shareholder's share of S Corporation income is reduced under section 1366(f)(2) of the Code for the taxable year by the amount of built‑in gains tax imposed on the S Corporation under section 1374 of the Code.
…"
SECTION 4.  This act is effective for taxable years beginning on or after January 1, 2006.
In the General Assembly read three times and ratified this the 19th day of June, 2006.

	_____________________________________
		 Marc Basnight
	 President Pro Tempore of the Senate

	_____________________________________
		 James B. Black
	 Speaker of the House of Representatives

	_____________________________________
		 Michael F. Easley
	 Governor

Approved __________.m. this ______________ day of ___________________, 2006