HF 2411 (LSB 5439YH (2) 86)

HOUSE FILE 2411

BY  JONES

A BILL FOR

An Act prohibiting the deduction of amounts classified as a penalty reimbursement for purposes of the individual and corporate income tax and franchise tax, and including retroactive applicability provisions.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:

    Section 1.  Section 422.7, Code 2016, is amended by adding the following new subsection:
   NEW SUBSECTION.  51.  a.  Add, to the extent it reduced federal adjusted gross income, any amount paid by the taxpayer to the extent such payment is a penalty reimbursement.
   b.  A payment is presumed to be a penalty reimbursement if the following conditions are met:
   (1)  The payment was made to a person, or an affiliate of a person, who was the subject of a fine or similar penalty.
   (2)  The fine or similar penalty was in whole or in part the result of the actions or inactions of the taxpayer while employed by or associated with that person or affiliate of that person.
   (3)  The payment was made on or after the date of the taxpayer’s actions or inactions that resulted in the fine or similar penalty.
   c.  The presumption established in paragraph “b” may be rebutted by a showing of proof that the payment was not motivated by or related to the imposition of the fine or similar penalty and that such payment would have been made in the absence of such fine or similar penalty.
   d.  Payments shall not be considered a penalty reimbursement to the extent they exceed, in the aggregate, the amount of the fine or similar penalty.
   e.  For purposes of this subsection, unless the context otherwise requires:
   (1)  “Affiliate” means a person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, another person.
   (2)  “Fine or similar penalty” means the same as defined in 26 C.F.R. §1.162-21, but shall also include amounts paid as a fine or penalty imposed by the national collegiate athletic association or an affiliate of the national collegiate athletic association.
   (3)  “Person” means the same as defined in section 4.1.
    Sec. 2.  Section 422.9, subsection 2, Code 2016, is amended by adding the following new paragraph:
   NEW PARAGRAPH.  j.  (1)  Subtract charitable contributions under section 170 of the Internal Revenue Code to the extent such contribution is a penalty reimbursement.
   (2)  A contribution is presumed to be a penalty reimbursement if the following conditions are met:
   (a)  The contribution was made to a person, or an affiliate of a person, who was the subject of a fine or similar penalty.
   (b)  The fine or similar penalty was in whole or in part the result of the actions or inactions of the taxpayer while employed by or associated with that person or affiliate of that person.
   (c)  The contribution was made on or after the date of the taxpayer’s actions or inactions that resulted in the fine or similar penalty.
   (3)  The presumption established in subparagraph (2) may be rebutted by a showing of proof that the contribution was not motivated by or related to the imposition of the fine or similar penalty and that such contribution would have been made in the absence of such fine or similar penalty.
   (4)  Contributions shall not be considered a penalty reimbursement to the extent they exceed, in the aggregate, the amount of the fine or similar penalty.
   (5)  For purposes of this paragraph, unless the context otherwise requires:
   (a)  “Affiliate” means a person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, another person.
   (b)  “Fine or similar penalty” means the same as defined in 26 C.F.R. §1.162-21, but shall also include amounts paid as a fine or penalty imposed by the national collegiate athletic association or an affiliate of the national collegiate athletic association.
   (c)  “Person” means the same as defined in section 4.1.
    Sec. 3.  Section 422.35, Code 2016, is amended by adding the following new subsection:
   NEW SUBSECTION.  13.  a.  Add, to the extent it reduced federal taxable income, any amount contributed under section 170 of the Internal Revenue Code or otherwise paid by the taxpayer to the extent such contribution or payment is a penalty reimbursement.
   b.  A contribution or payment is presumed to be a penalty reimbursement if the following conditions are met:
   (1)  The contribution or payment was made to a person, or an affiliate of a person, who was the subject of a fine or similar penalty.
   (2)  The fine or similar penalty was in whole or in part the result of the actions or inactions of the taxpayer while associated with that person or affiliate of that person.
   (3)  The contribution or payment was made on or after the date of the taxpayer’s actions or inactions that resulted in the fine or similar penalty.
   c.  The presumption established in paragraph “b” may be rebutted by a showing of proof that the contribution or payment was not motivated by or related to the imposition of the fine or similar penalty and that such contribution or payment would have been made in the absence of such fine or similar penalty.
   d.  Contributions and payments shall not be considered a penalty reimbursement to the extent they exceed, in the aggregate, the amount of the fine or similar penalty.
   e.  For purposes of this subsection, unless the context otherwise requires:
   (1)  “Affiliate” means a person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, another person.
   (2)  “Fine or similar penalty” means the same as defined in 26 C.F.R. §1.162-21, but shall also include amounts paid as a fine or penalty imposed by the national collegiate athletic association or an affiliate of the national collegiate athletic association.
   (3)  “Person” means the same as defined in section 4.1.
    Sec. 4.  RETROACTIVE APPLICABILITY.  This Act applies retroactively to January 1, 2016, for tax years beginning on or after that date.
EXPLANATION
The inclusion of this explanation does not constitute agreement with

the explanation’s substance by the members of the general assembly.
   BACKGROUND. Section 162(f) of the Internal Revenue Code and Treasury Regulation §1.162-21 generally prohibit fines or similar penalties paid to governmental entities from being deducted as a business expense for federal tax purposes. By operation of law, these fines and similar penalties are prohibited from being deducted for Iowa tax purposes.
   BILL CHANGES. This bill prohibits amounts classified as a penalty reimbursement from being deducted for purposes of the Iowa individual and corporate income tax and franchise tax. The bill provides that charitable contributions and other payments are presumed to be a penalty reimbursement if they are made to a person, or an affiliate of a person, who was the subject of a fine or similar penalty, if the taxpayer’s actions or inactions while employed by or associated with that person or affiliate resulted in the fine or similar penalty, and if the payment was made on or after the date those actions or inactions occurred. This presumption may be rebutted by a showing of proof that the payment was not motivated by or related to the imposition of the fine or similar penalty and would have been made in the absence of the fine or similar penalty. Contributions or payments are not considered penalty reimbursements to the extent they exceed, in the aggregate, the amount of the fine or similar penalty.
   “Fine or similar penalty” is defined in the bill to mean the same as defined in 26 C.F.R. §1.162-21, but also includes amounts paid as a fine or penalty imposed by the national collegiate athletic association or its affiliate. The bill also defines “affiliate” and “person”.
   The bill applies retroactively to January 1, 2016, for tax years beginning on or after that date.