K. Change of Income Year (G.S. 105-122(e))
- Computation of Tax (Section .1501)
A change in income year automatically establishes a new franchise year. A combined franchise and income tax return is required for the short income period. Credit is permitted on such return against the franchise tax to the extent that the new franchise year overlaps the old year.
Example: A corporation changes it income year from a calendar year to one ending July 31. A combined franchise and income return is required for the short period January 1, 2001 through July 31, 2001 (7 months). Franchise tax paid on the 2000 return applicable to the calendar year 2001 was $242.88. Franchise tax on the short period would be applicable to the year August 1, 2001 through July 31, 2002, and would be computed as follows:
Total tax due per return $268.00 Less credit for portion of prior year's tax: Total tax paid on 2000 return $242.88 Less amount applicable to short period (7/12 of $242.88) 141.68 Amount applicable beyond short period 101.20 Net franchise tax due on short period return $166.80
- Computation of Tax When Merger is Involved (Section .1502)
Often when two corporations merge, a question arises concerning which corporation is liable for the franchise tax. If the merger is effective at any time after the close of the submerged corporation's year end, then the submerged corporation is liable for the tax. If the merger is effective at any time prior to the close of the submerged corporation's year end, then the surviving corporation is liable for the tax.
Since franchise tax is prepaid, a special computation is sometimes required to prevent a duplication of tax when two or more corporations with different income years merge or otherwise transfer the entire assets from one corporation to the other. The following example illustrates the conditions under which this occurs.
Example: ABC Corporation, whose income year ends July 31, merged into XYZ Corporation, whose income year is the calendar year. The merger occurred on October 31, 2001. ABC filed a combination franchise and income tax return for the year ended July 31, 2001 and paid franchise tax of $600 applicable to the ensuing year ending July 31, 2002. XYZ filed a combination franchise and income tax return for the calendar year 2001 and paid franchise tax of $700 applicable to the ensuing calendar year 2002. The assets reflected in ABC's tax base were also reflected in XYZ's tax base since they had been transferred to XYZ in the merger, and therefore, were on its books as of the end of its income year, December 31, 2001. The year to which ABC's payment applied overlapped the year to which XYZ's payment applied by seven months (January 1, 2002 through July 31, 2002) and reflected a duplication of tax to that extent.
When the conditions illustrated in the above example exist, where, the acquiring corporation acquired the entire assets of the disposing corporation, the acquiring and disposing corporations had different income years, the date of merger or transfer was after the end of the disposing corporation's income year next preceding such transfer but before the beginning of the surviving corporation's income year next following such transfers, and the disposing corporation had paid franchise tax applicable to its income year in which the transfer occurred, the acquiring corporation may compute its franchise tax on its franchise and income tax return for the income year in which the transfer occurred as shown in the following example:
Franchise tax per surviving corporation's return for income year in which
$700 Less: Franchise tax paid by submerged corporation per return for income year
immediately preceding transfer
$600 Number of months between the ending dates on the above returns 5 Number of months in year 12 x $600 = 250 Amount pertaining to overlapping months $350 Net franchise tax due $350
- Investment Base Property Included (Section .1406)
A corporation including property in the investment in tangible property base shall also include the value of this property in the appraised valuation base.