Senate File 2043 - Introduced SENATE FILE 2043 BY SINCLAIR , ZAUN , CHAPMAN , GREINER , GUTH , CHELGREN , BREITBACH , WHITVER , SCHNEIDER , GARRETT , and SEGEBART A BILL FOR An Act providing an exemption from the computation of net 1 income for the individual income tax of net capital gain 2 from the sale or exchange of qualified capital stock and 3 including effective date and retroactive applicability 4 provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 5024XS (4) 85 mm/sc

S.F. 2043 Section 1. Section 422.7, subsection 21, paragraph a, 1 subparagraph (2), Code 2014, is amended to read as follows: 2 (2) For purposes of this paragraph subsection , “lineal 3 descendant” means children of the taxpayer, including legally 4 adopted children and biological children, stepchildren, 5 grandchildren, great-grandchildren, and any other lineal 6 descendants of the taxpayer. 7 Sec. 2. Section 422.7, subsection 21, Code 2014, is amended 8 by adding the following new paragraph: 9 NEW PARAGRAPH . f. (1) Net capital gain from the sale or 10 exchange of capital stock of a qualified corporation for which 11 an election is made by an employee-owner. 12 (2) (a) An employee-owner is entitled to make one 13 irrevocable lifetime election to exclude the net capital 14 gain from the sale or exchange of capital stock of one 15 qualified corporation which capital stock was acquired by the 16 employee-owner on account of employment by such qualified 17 corporation and while employed by such qualified corporation. 18 (b) The election shall also apply to all subsequent sales or 19 exchanges of the elected capital stock, provided it is capital 20 stock in the same qualified corporation and was acquired by 21 the employee-owner on account of employment by such qualified 22 corporation and while employed by such qualified corporation. 23 (c) (i) The election shall apply to transfers of the 24 capital stock by inter vivos gift from the employee-owner to 25 the employee-owner’s spouse or lineal descendants, or to a 26 trust for the benefit of the employee-owner’s spouse or lineal 27 descendants. This subparagraph subdivision (i) shall apply to 28 a spouse only if the spouse was married to the employee-owner 29 on the date of the sale or exchange of the capital stock or the 30 date of death of the employee-owner. 31 (ii) If after transferring the capital stock by inter 32 vivos gift as provided in subparagraph subdivision (i), 33 the employee-owner dies without making an election, the 34 surviving spouse or, if there is no surviving spouse, the 35 -1- LSB 5024XS (4) 85 mm/sc 1/ 4

S.F. 2043 personal representative of the employee-owner’s estate may 1 make the election that would have qualified under subparagraph 2 subdivision (i). 3 (d) The election shall be made by including a written 4 statement with the taxpayer’s state income tax return for 5 the taxable year in which the election is made. The written 6 statement shall identify the qualified corporation that issued 7 the capital stock, the grounds for the election under this 8 paragraph “f” , a statement that the taxpayer elects to have this 9 paragraph “f” apply, and any other information required by the 10 department. The department shall provide appropriate forms 11 for making elections and reporting exclusions pursuant to this 12 paragraph “f” . 13 (3) For purposes of this paragraph: 14 (a) “Capital stock” means common or preferred stock, either 15 voting or nonvoting. “Capital stock” does not include stock 16 rights, stock warrants, stock options, or debt securities. 17 (b) “Employee-owner” means an individual who owns capital 18 stock in a qualified corporation, which capital stock was 19 acquired by the individual on account of employment by such 20 qualified corporation and while employed by such corporation. 21 (c) “Personal representative” means the same as defined in 22 section 633.3, or if there is no such personal representative 23 appointed, then the person legally authorized to perform 24 substantially the same functions. 25 (d) (i) “Qualified corporation” means a corporation 26 which, at the time of the first sale or exchange for which an 27 election is made under this paragraph “f” , meets the following 28 conditions: 29 (A) The corporation has been in existence and actively doing 30 business in this state for at least ten years. 31 (B) The corporation has at least five shareholders. 32 (C) The corporation has at least two shareholders or 33 groups of shareholders who are not related. Two persons are 34 considered related when, under section 318 of the Internal 35 -2- LSB 5024XS (4) 85 mm/sc 2/ 4

S.F. 2043 Revenue Code, one is a person who owns, directly or indirectly, 1 capital stock that if directly owned would be attributed to the 2 other person, or is the brother, sister, aunt, uncle, cousin, 3 niece, or nephew of the other person who owns capital stock 4 either directly or indirectly. 5 (ii) A qualified corporation shall include any member 6 of an affiliated group, as defined in section 422.32, if the 7 affiliated group includes a member that has been in existence 8 and actively doing business in this state for at least ten 9 years. 10 (iii) A qualified corporation shall include any corporation 11 that was a party to a reorganization that was entirely or 12 substantially tax free if such reorganization occurred during 13 or after the employment of the employee-owner. 14 Sec. 3. EFFECTIVE UPON ENACTMENT. This Act, being deemed of 15 immediate importance, takes effect upon enactment. 16 Sec. 4. RETROACTIVE APPLICABILITY. This Act applies 17 retroactively to January 1, 2014, for tax years beginning on 18 or after that date. 19 EXPLANATION 20 The inclusion of this explanation does not constitute agreement with 21 the explanation’s substance by the members of the general assembly. 22 This bill grants an employee-owner, as defined in the 23 bill, one irrevocable lifetime election to exclude from state 24 individual income tax the net capital gain from the sale or 25 exchange of the capital stock of one qualified corporation. 26 Several requirements must be met for capital stock to qualify 27 as capital stock of a qualified corporation. First, the 28 stock must be either voting or nonvoting, common or preferred 29 stock. Stock rights, stock warrants, stock options, and debt 30 securities do not qualify. Second, the corporation that issued 31 the stock must be in existence and actively doing business 32 in Iowa for at least 10 years. A corporation that is part 33 of an affiliated group will qualify if the affiliated group 34 includes a member that has been in existence and actively doing 35 -3- LSB 5024XS (4) 85 mm/sc 3/ 4

S.F. 2043 business in Iowa for at least 10 years. Third, the corporation 1 that issued the stock must have at least five shareholders, 2 two of whom must not be related. Fourth, the stock must have 3 been acquired by the employee-owner on account of employment 4 with the corporation and while employed by the corporation. A 5 corporation will qualify if it is a party to a reorganization 6 that was entirely or substantially tax free as long as the 7 reorganization occurred during or after the employee-owner’s 8 employment. 9 The election shall also apply to all subsequent sales of the 10 elected capital stock, provided it is capital stock in the same 11 qualified corporation and was acquired by the employee-owner 12 on account of employment by the corporation and while employed 13 by the corporation. 14 The bill provides that the election applies to transfers of 15 the capital stock by inter vivos gift from the employee-owner 16 to a spouse or lineal descendant, or to a trust for the benefit 17 of the employee-owner’s spouse or lineal descendant. The 18 election will apply to a spouse only if the spouse was married 19 to the employee-owner on the date of the sale or the date of the 20 employee-owner’s death. 21 If, after making a valid inter vivos transfer of stock that 22 meets all the requirements for an election, an employee-owner 23 dies without making an election, the surviving spouse, or if 24 there is no surviving spouse, the personal representative of 25 the employee-owner’s estate may make the election. 26 An election is made by including a written statement 27 containing certain required information, as specified in the 28 bill, with the taxpayer’s Iowa income tax return for the 29 taxable year in which the election is made. The department of 30 revenue is required to provide appropriate forms for making 31 elections and reporting exclusions. 32 The bill takes effect upon enactment and applies 33 retroactively to January 1, 2014, for tax years beginning on 34 or after that date. 35 -4- LSB 5024XS (4) 85 mm/sc 4/ 4