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Computation of Tax When Merger is Involved (17 NCAC 05B.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, 2016. ABC filed a North Carolina tax return for the year ended July 31, 2016 and paid franchise tax of six hundred dollars ($600) applicable to the ensuing year ending July 31, 2017. XYZ filed a North Carolina tax return for the calendar year 2016 and paid franchise tax of seven hundred dollars ($700) applicable to the ensuing calendar year 2017. 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, 2016. The year to which ABC’s payment applied overlapped the year to which XYZ’s payment applied by seven months (January 1, 2017 through July 31, 2017) and reflected a duplication of tax to that extent. Franchise tax for the surviving corporation for the income year in which the transfer occurred would be computed as follows:

Franchise tax per surviving corporation’s return for income year in which transfer occurred $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) divided by the number of months in year (12) 5 ÷ 12 x $600 = $250
Amount pertaining to overlapping months $350
Net franchise tax due $350