Senate File 2295 - Introduced SENATE FILE 2295 BY McCOY and SCHNEIDER A BILL FOR An Act exempting from the computation of net income for the 1 individual income tax the net capital gain from the sale 2 or exchange of qualified capital stock and including 3 applicability provisions. 4 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 5 TLSB 5836XS (2) 86 mm/sc

S.F. 2295 Section 1. Section 422.7, subsection 21, paragraph a, 1 subparagraph (2), Code 2016, 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 2016, is amended 8 by adding the following new paragraph: 9 NEW PARAGRAPH . f. (1) The following percentage of the 10 net capital gain from the sale or exchange of capital stock of 11 a qualified corporation for which an election is made by an 12 employee-owner: 13 (a) For the tax year beginning in the 2017 calendar year, 14 fifty percent. 15 (b) For the tax year beginning in the 2018 calendar year, 16 sixty percent. 17 (c) For the tax year beginning in the 2019 calendar year, 18 seventy percent. 19 (d) For the tax year beginning in the 2020 calendar year, 20 eighty percent. 21 (e) For the tax year beginning in the 2021 calendar year, 22 ninety percent. 23 (f) For tax years beginning on or after January 1, 2022, one 24 hundred percent. 25 (2) (a) An employee-owner is entitled to make one 26 irrevocable lifetime election to exclude the net capital 27 gain from the sale or exchange of capital stock of one 28 qualified corporation which capital stock was acquired by the 29 employee-owner while employed by such qualified corporation. 30 (b) The election shall apply to all subsequent sales or 31 exchanges of the elected capital stock, provided it is capital 32 stock in the same qualified corporation and was acquired by the 33 employee-owner while employed by such qualified corporation. 34 (c) The election shall apply to transfers of the capital 35 -1- LSB 5836XS (2) 86 mm/sc 1/ 5

S.F. 2295 stock by inter vivos gift from the employee-owner to the 1 employee-owner’s spouse or lineal descendants, or to a trust 2 for the benefit of the employee-owner’s spouse or lineal 3 descendants. This subparagraph division (c) shall apply to a 4 spouse only if the spouse was married to the employee-owner on 5 the date of the sale or exchange or the date of death of the 6 employee-owner. 7 (d) If the employee-owner dies without making an election, 8 the surviving spouse or, if there is no surviving spouse, the 9 personal representative of the employee-owner’s estate may 10 make the election that would have qualified under subparagraph 11 division (c). 12 (e) The election shall be made by including a written 13 statement with the taxpayer’s state income tax return for 14 the taxable year in which the election is made. The written 15 statement shall identify the qualified corporation that issued 16 the capital stock, the grounds for the election under this 17 paragraph “f” , a statement that the taxpayer elects to have this 18 paragraph “f” apply, and any other information required by the 19 department. The department shall provide appropriate forms 20 for making elections and reporting exclusions pursuant to this 21 paragraph “f” . 22 (3) For purposes of this paragraph: 23 (a) “Capital stock” means common or preferred stock, either 24 voting or nonvoting. “Capital stock” does not include stock 25 rights, stock warrants, stock options, or debt securities. 26 (b) “Employee-owner” means an individual who owns capital 27 stock in a qualified corporation, which capital stock was 28 acquired by the individual while employed by such corporation. 29 (c) “Personal representative” means the same as defined in 30 section 633.3, or if there is no such personal representative 31 appointed, then the person legally authorized to perform 32 substantially the same functions. 33 (d) (i) “Qualified corporation” means a corporation 34 which, at the time of the first sale or exchange for which an 35 -2- LSB 5836XS (2) 86 mm/sc 2/ 5

S.F. 2295 election is made under this paragraph “f” , meets the following 1 conditions: 2 (A) The corporation has been in existence and actively doing 3 business in this state for at least ten years. 4 (B) The corporation has at least five shareholders. 5 (C) The corporation has at least two shareholders or 6 groups of shareholders who are not related. Two persons are 7 considered related when, under section 318 of the Internal 8 Revenue Code, one is a person who owns, directly or indirectly, 9 capital stock that if directly owned would be attributed to the 10 other person, or is the brother, sister, aunt, uncle, cousin, 11 niece, or nephew of the other person who owns capital stock 12 either directly or indirectly. 13 (ii) A qualified corporation shall include any member 14 of an affiliated group, as defined in section 422.32, if the 15 affiliated group includes a member that has been in existence 16 and actively doing business in this state for at least ten 17 years. 18 (iii) A qualified corporation shall include any corporation 19 that was a party to a reorganization that was entirely or 20 substantially tax free if such reorganization occurred during 21 or after the employment of the employee-owner. 22 Sec. 3. APPLICABILITY. This Act applies to tax years 23 beginning on or after January 1, 2017. 24 EXPLANATION 25 The inclusion of this explanation does not constitute agreement with 26 the explanation’s substance by the members of the general assembly. 27 This bill grants an employee-owner, as defined in the 28 bill, one irrevocable lifetime election to exclude from state 29 individual income tax the net capital gain from the sale of the 30 capital stock of one qualified corporation. 31 The capital gain exclusion is phased in over a six-year 32 period beginning with a 50 percent exclusion for tax years 33 beginning in calendar year 2017, and increasing 10 percent each 34 calendar year until the exclusion equals 100 percent for tax 35 -3- LSB 5836XS (2) 86 mm/sc 3/ 5

S.F. 2295 years beginning on or after January 1, 2022. 1 Several requirements must be met for capital stock to 2 qualify as capital stock of a qualified corporation. First, 3 the stock must be either voting or nonvoting, common or 4 preferred stock. Stock rights, stock warrants, stock options, 5 and debt securities do not qualify. Second, the corporation 6 that issued the stock must be in existence and actively doing 7 business in Iowa for at least 10 years. A corporation that 8 is part of an affiliated group will qualify if the affiliated 9 group includes a member that has been in existence and actively 10 doing business in Iowa for at least 10 years. Third, the 11 corporation that issued the stock must have at least five 12 shareholders, two of whom must not be related. Fourth, the 13 stock must have been acquired by the employee-owner while 14 employed by the corporation. A corporation will qualify 15 if it is a party to a reorganization that was entirely or 16 substantially tax free as long as the reorganization occurred 17 during or after the employee-owner’s employment. 18 The election shall apply to all subsequent sales of the 19 elected capital stock, provided it is capital stock in the same 20 qualified corporation and was acquired by the employee-owner 21 while employed by the corporation. 22 The bill provides that the election applies to transfers of 23 the capital stock by inter vivos gift from the employee-owner 24 to a spouse or lineal descendant, or to a trust for the benefit 25 of the employee-owner’s spouse or lineal descendant. The 26 election will apply to a spouse only if the spouse was married 27 to the employee-owner on the date of the sale or the date of the 28 employee-owner’s death. 29 If, after making a valid inter vivos transfer of stock that 30 meets all the requirements for an election, an employee-owner 31 dies without making an election, the surviving spouse, or if 32 there is no surviving spouse, the personal representative of 33 the employee-owner’s estate may make the election. 34 An election is made by including a written statement 35 -4- LSB 5836XS (2) 86 mm/sc 4/ 5

S.F. 2295 containing certain required information, as specified in the 1 bill, with the taxpayer’s Iowa income tax return for the 2 taxable year in which the election is made. The department of 3 revenue is required to provide appropriate forms for making 4 elections and reporting exclusions. 5 The bill applies to tax years beginning on or after January 6 1, 2017. 7 -5- LSB 5836XS (2) 86 mm/sc 5/ 5