TECHNICAL ADVICE MEMORANDUM
Subject: Deferred Liabilities/Deferred Tax Assets
Schedule: Corporate Franchise Tax - Article 3, Schedule C
Statute: N.C.G.S. § 105-122
Issued By: Corporate, Excise, and Insurance Tax Division
Date: August 1, 1996
Reference: TAM-CF 96-1
I. CHANGE IN ADMINISTRATIVE PRACTICE
For tax years ending on or after July 31, 1996, those liability accounts commonly
labeled "deferred liabilities" which are required under the referenced statute
to be included in the capital stock, surplus and undivided profits base on which
the tax liability may be measured, may be reduced by the deferred asset amount
that resulted when the deferred liability was required under the financial accounting
standards to be determined and recognized for financial reporting purposes.
Provided, when a separate deferred tax asset account is selected or required,
the amount(s) must clearly be identified with a specific deferred liability
and the reduction permitted for the specific deferred tax asset may not decrease
the related deferred liability below zero (0).
II. PRESENT ADMINISTRATIVE PRACTICE
Under N.C.G.S. § 105-122, the capital stock, surplus and undivided profits
base (net worth) permits only those liabilities that are definite and accrued
legal liabilities to be excluded in the determination of the taxable amount
of this base. Deferred liabilities that do not meet the explicit requirements
of "definite and accrued" increase the taxable amount of this net worth base
on the franchise tax return filed annually and a reduction of this base is not
permitted for a deferred tax asset that may have resulted from a deferred liability
or other credit accounts includible in the franchise tax base.
III. EXPLANATION OF CHANGE
Corporations complying with the requirements of the Financial Accounting Standards
Board ("FASB") contend that the department's position of including a deferred
liability in the computation of the net worth base should permit an offset or
adjustment for the deferred tax asset required to be computed under the accounting
standards without regard to how the deferred tax asset is reflected on the financial
statement. Under the subject provision, the determination of net worth subject
to tax does not seem to permit a reduction for a deferred tax asset account
and there have been legal opinions and decisions rendered to that effect.
A further review of the concept for determining the taxable franchise base
for those corporations doing business in this state using the valuation and/or
capital employed in the state as the primary basis indicates a more equitable
and consistent position is to recognize that such value (net worth) is incorrectly
stated when the total amount of a deferred liability is included without a contra
or netting adjustment for the deferred tax benefit resulting directly from such
However, it is well established that net worth for franchise tax purposes is
not required to be fully reconciled with the term as used for financial reporting
purposes. The notable exception relates to those accounts labeled deferred liabilities
which cannot meet the definite and accrued criteria and therefore are includible
in the computation of net worth for franchise tax purposes. In the past, the
most common "liability" causing controversy was the deferred tax liability that
may arise from installment sales, accelerated deductions for tax purposes, etc.
Also present for some time and becoming an issue more often are the employee
post retirement liabilities required by various FASB statements that do not
meet the definition of a liability under the subject statute and are required
to be added to financial net worth in computing the franchise taxable base.
The same Board requiring the financial standards for estimating/ computing the
liability further requires a deferred tax asset be determined and either posted
to an asset account or posted as a debit to the related deferred liability account.
There would not he an issue on this matter if the deferred liability was permitted
in computing the franchise tax base. However, since it is clearly not allowed
in computing net worth for franchise tax purposes, the effect of also not allowing
the amount to be netted by the deferred tax asset is to include in the net worth
base an amount in excess of the gross liability i.e., the amount of deferred
tax asset attributed to the deferred liability.
Last modified on: 10/31/07 03:36:05 PM.