Iowa Legislature: Bulletin_10_18

Bulletin 10-18-2023

Front matter not included

ARC 7101CRevenue Department[701]Notice of Intended Action

Proposing rulemaking related to settlement authority and providing an opportunity for public comment

The Revenue Department hereby proposes to rescind Chapter 3, “Voluntary Disclosure Program”; to amend Chapter 7, “Appeals, Taxpayer Representation, and Other Administrative Procedures,” and Chapter 10, “Interest, Penalty, Exceptions to Penalty, and Jeopardy Assessments”; to adopt Chapter 19, “Settlements—Compromises and Abatements of Tax, Penalty, and Interest”; to amend Chapter 101, “Replacement Tax and Statewide Property Tax,” Chapter 108, “Replacement Tax and Statewide Property Tax on Rate-Regulated Water Utilities,” Chapter 254, “Administration,” Chapter 300, “Administration,” Chapter 305, “Assessments and Refunds,” Chapter 504, “Assessments, Refunds, Appeals,” Chapter 603, “Assessments, Refunds, Appeals,” Chapter 700, “Fiduciary Income Tax,” and Chapter 900, “Inheritance Tax,” Iowa Administrative Code.Legal Authority for Rulemaking This rulemaking is proposed under the authority provided in Iowa Code sections 421.5 and 421.14.State or Federal Law Implemented This rulemaking implements, in whole or in part, Iowa Code sections 17A.10, 421.5, 422.25(3), 422.28, 423.47, 450.94 and 452A.65.Purpose and Summary The purpose of the proposed rulemaking is to implement division VI of 2023 Iowa Acts, Senate File 565. Division VI amends several Iowa Code sections related to settlement authority, including the authority to fully abate liabilities under certain circumstances. The Act also establishes new procedures related to estimated assessments. The statutory changes related to settlement authority in Iowa Code section 421.5 include a requirement that the Department adopt rules to administer the section. A new chapter is proposed to cover the various types of settlements that the Department may enter into. The proposed chapter defines key terms of the statute and describes procedures related to different types of settlements. The settlement authority is very discretionary. Adopting rules on this authority will provide taxpayers with information on the required procedures and limitations. The sections of the Act related to estimated assessments did not include mandatory rulemaking authority. The Department did not find it necessary to propose any new rules on the estimated assessment provisions of the statute at this time but did find that several rules that would otherwise need to be amended could instead be rescinded because they largely repeated the statute. One relevant rule, 701—700.11(422), is proposed to be amended and significantly shortened as a result of the changes to ensure accuracy.Fiscal Impact This rulemaking has no fiscal impact beyond that of the legislation it is intended to implement.Jobs Impact After analysis and review of this rulemaking, no impact on jobs has been found.Waivers Any person who believes that the application of the discretionary provisions of this rulemaking would result in hardship or injustice to that person may petition the Department for a waiver of the discretionary provisions, if any, pursuant to rule 701—7.28(17A). Public Comment Any interested person may submit written or oral comments concerning this proposed rulemaking. Written or oral comments in response to this rulemaking must be received by the Department no later than 4:30 p.m. on November 7, 2023. Comments should be directed to: Alana Stamas Department of Revenue Hoover State Office Building P.O. Box 10457 Des Moines, Iowa 50306-3457 Phone: 515.350.3932 Email: alana.stamas@iowa.gov Public Hearing If requested, a public hearing at which persons may present their views orally or in writing will be held as follows: November 8, 2023 1 to 2 p.m. Via video/conference call Persons who wish to participate in the video/conference call should contact Alana Stamas before 4:30 p.m. on November 7, 2023, to facilitate an orderly hearing. A video link and conference call number will be provided to participants prior to the hearing. Persons who wish to make oral comments at the public hearing may be asked to state their names for the record and to confine their remarks to the subject of this proposed rulemaking. Any persons who intend to attend the public hearing and have special requirements, such as those related to hearing or mobility impairments, should contact the Department and advise of specific needs. Review by Administrative Rules Review Committee The Administrative Rules Review Committee, a bipartisan legislative committee which oversees rulemaking by executive branch agencies, may, on its own motion or on written request by any individual or group, review this rulemaking at its regular monthly meeting or at a special meeting. The Committee’s meetings are open to the public, and interested persons may be heard as provided in Iowa Code section 17A.8(6). The following rulemaking action is proposed:

ITEM 1. Rescind and reserve 701—Chapter 3.

ITEM 2. Amend subrule 7.11(5) as follows: 7.11(5) Settlements. Settlement proposals may be submitted to the department employee assigned to the appeal or through GovConnectIowa using the manage appeal feature.Only the director, the deputy director, or the division administrator of the legal services and appeals division may approve and sign settlements of appeals. If a settlement is reached during informal procedures, a closing order stating that a settlement was reached by the parties and that the case is terminated shall be issued by the director and provided to all parties.

ITEM 3. Amend rule 701—7.11(17A), parenthetical implementation statute, as follows:

701—7.11(17A,421) Informal stage of the appeals process.

ITEM 4. Amend rule 701—7.11(17A), implementation sentence, as follows: This rule is intended to implement Iowa Code sectionsections 17A.10and 421.5.

ITEM 5. Rescind and reserve rule 701—7.31(421).

ITEM 6. Amend subrule 10.3(2) as follows: 10.3(2) Interest on unpaid tax. Interest due on unpaid tax is not a penalty, but rather it is compensation to the government for the period the government was deprived of the use of money. Therefore, interestInterest due cannot be waivedexcept in accordance with the settlement authority described in Iowa Code sections 421.5 and 17A.10. Vick v. Phinney, 414 F.2d 444, 448 (5th CA 1969); Time, Inc. v. United States, 226 F.Supp. 680, 686 (S.D. N.Y. 1964); In Re Jeffco Power Systems, Dep’t of Revenue Hearing Officer decision, Docket No. 77-9-6A-A (1978); Waterloo Courier, Inc. v. Iowa Department of Revenue and Finance, Case No. LACV081252, Black Hawk County District Court, December 30, 1999.

ITEM 7. Amend rule 701—10.3(422,423,450,452A), parenthetical implementation statute, as follows:

701—10.3(421,422,423,450,452A) Interest on refunds and unpaid tax.

ITEM 8. Amend rule 701—10.3(422,423,450,452A), implementation sentence, as follows: This rule is intended to implement Iowa Code sections 421.5,422.25(3), 422.28, 423.47, 450.94 and 452A.65.

ITEM 9. Adopt the following new 701—Chapter 19: CHAPTER 19SETTLEMENTS—COMPROMISES AND ABATEMENTS OF TAX, PENALTY, OR INTEREST

701—19.1(421) Settlements. Pursuant to Iowa Code section 421.5, in addition to the authority granted to the department pursuant to Iowa Code section 17A.10 and notwithstanding Iowa Code section 7D.9, the department may, in its sole discretion, settle any taxes, penalties, or interest. A settlement may be a compromise or full abatement of any amount in dispute.

701—19.2(421) Amounts qualifying for settlement. To be eligible for settlement under Iowa Code section 421.5, the amount must be of doubtful liability or doubtful collectability or must cause severe economic hardship, or the settlement of the amount must promote effective tax administration. The decision whether to accept a settlement amount will be based on a taxpayer’s facts and circumstances; verifiable documentation is required for all grounds. 19.2(1) Doubtful collectability. Doubt as to collectability may exist in any case where the taxpayer’s assets and discretionary income may not satisfy the full amount of the liability after satisfying senior priority liabilities. An offer to settle based on doubt as to collectability may be considered acceptable if it is unlikely that the tax, penalty, and interest can be collected in full and the offer reasonably reflects the amount the department could collect through other means, including administrative and judicial collection remedies. This amount is the reasonable collection potential of a case. In determining the reasonable collection potential of a case, the department will take into account the taxpayer’s verifiable reasonable basic living expenses. In some cases, the department may accept an offer of less than the reasonable collection potential of a case if there are special circumstances. 19.2(2) Severe economic hardship. The department may settle where it determines that, although collection in full could be achieved, collection of the full amount would cause the taxpayer severe economic hardship. Severe economic hardship is defined as the inability to pay reasonable basic living expenses. An offer to settle based on economic hardship may be considered acceptable when, even though the tax, penalty, and interest could be collected in full, the amount offered reflects the amount the department can collect without causing the taxpayer severe economic hardship. 19.2(3) Doubtful liability. A doubtful liability may exist where there is a significant doubt as to the existence or amount of the correct tax liability under the law. A doubtful liability does not exist where the liability has been established by a final court judgment or administrative ruling or final order of the department concerning the existence or amount of the liability. An offer to settle a doubtful liability may be considered acceptable if it reasonably reflects the likelihood the department could expect to collect through litigation. This analysis may include consideration of the hazards and costs of litigation that would be involved if the liability were litigated. The evaluation of the hazards and costs of litigation is not an exact science and is within the discretion of the department. 19.2(4) Promote effective tax administration. The department may settle to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for settling the liability that is equitable under the particular facts and circumstances of the case. Settlements pursuant to this subrule may be justified only where, due to exceptional circumstances, collection of the full liability may undermine public confidence that the tax laws are being administered in a fair and equitable manner. The taxpayer will be expected to demonstrate circumstances that justify settlement even though a similarly situated taxpayer may have paid the liability in full. The department may settle cases where doing so will promote voluntary compliance with the law. The department may decline a settlement for reasons promoting effective tax administration if the settlement of the liability would undermine compliance by taxpayers with the tax laws.

701—19.3(421) Settlement procedures and limitations, generally. 19.3(1) Whether to seek a settlement. When determining whether to seek a settlement, a taxpayer should first consider whether a settlement is necessary. Nothing in this chapter is intended to preclude a taxpayer who misses the time provided by law to appeal a notice of assessment from paying the amount due, filing a refund claim, and contesting any denial of that refund claim as described in Iowa Code section 421.60(2)“h.” If a taxpayer has not received a billing but has information that would adjust the liability down, the appropriate remedy is to file an amended return within the statute of limitations. If a taxpayer has received an estimated assessment and is within three years of when the assessment was issued, the taxpayer should file a return. If a taxpayer has received an assessment and is within the time period to file an appeal, it is proper to file an appeal rather than a settlement request. If a taxpayer does not dispute the liability, but is unable to pay the liability due to financial hardship, the taxpayer should submit an offer in compromise application. 19.3(2) Which type of settlement to seek. Different types of settlements require different forms and procedures. Procedures for abatement, offer in compromise, and voluntary disclosure agreements are described in specific rules below. For matters currently under appeal pursuant to 701—Chapter 7, settlement requests must be submitted to the appeals section of the legal services and appeals division in accordance with 701—subrule 7.11(5). For matters currently under audit, settlement requests must be submitted to the department employee assigned to the audit. 19.3(3) Who may authorize a department settlement. Only the director, the deputy director, or the division administrator of the legal services and appeals division may approve and sign settlements under this chapter unless otherwise specified in rule or designated by the director. 19.3(4) Discretionary nature of settlements. There is no right to appeal an abatement denial, offer in compromise denial, or other settlement decision by the department under 701—Chapter 7. As described in Iowa Code section 421.5, a taxpayer shall not have the right to a settlement of any tax, penalty, or interest liability under this chapter or Iowa Code section 421.5. Any determination shall be discretionary and shall be final and conclusive except in the case of fraud or mutual mistake of material fact or as otherwise stated in a written settlement agreement between the taxpayer and the department.

701—19.4(421) Applications for abatement. 19.4(1) When to file. Abatement is intended to be a possible remedy for taxpayers who have received a billing or refund denial letter and have information that could lead to a reduction in the liability, but failed to file a timely appeal. Grounds for abatement include doubt as to liability and promoting effective tax administration. 19.4(2) How to file an application. To apply, a taxpayer must submit an application for abatement in the department’s prescribed paper or electronic format. The application can be submitted through GovConnectIowa or by using the form available on the department’s website and following the submission instructions on the form. 19.4(3) Required information. A request for abatement must be submitted on the department’s form. The form must be fully completed and properly signed. 19.4(4) Review of requests. a. After the application has been submitted, it will be reviewed by department staff. b. Additional information may be requested to assist the department in its review. c. A letter will be issued to the applicant notifying the applicant of the decision to grant, deny or partially grant the abatement request. The department’s decision on an abatement application will only be contained in a formal determination letter. d. Applicants whose applications are granted in part will receive an agreement describing the terms of the partially granted abatement request and must sign and return that agreement to the department in order to receive the partially granted abatement. e. Decisions to accept an abatement request in full or in part for doubt as to liability may be approved by the bureau chief of the compliance section of the tax management division or another staff member designated by the director. f. Decisions to accept an abatement request to promote effective tax administration may only be approved by the director, the deputy director, or the division administrator of the legal services and appeals division. 19.4(5) Limitations. The department will accept applications for abatement during the appeal period but will not review such applications until the appeal period has passed. The department will generally not refund amounts already paid in response to an application for abatement. Some exceptions may include the following circumstances: a. The application is received within three years after the return related to the application for abatement was due or within one year after the payment related to the application for abatement was made, whichever is later. b. The application is received within one year of the final determination date of any final federal adjustment arising from an internal revenue service audit or other similar action by the internal review service with respect to the particular tax year at issue in the application. c. Payments were received in violation of Title 11 of the United States Code. d. Exceptional circumstances demonstrate that a refund would promote effective tax administration as described in subrule 19.2(4).

701—19.5(421) Offers in compromise. 19.5(1) When to file. An offer in compromise packet should be used to apply for relief based on doubtful collectability or severe economic hardship. 19.5(2) How to submit a packet. To apply, a taxpayer must submit an offer in compromise packet in the department’s prescribed paper or electronic format. An offer in compromise packet can be submitted through GovConnectIowa or by using the form available on the department’s website and following the submission instructions on the form. 19.5(3) Required information. An offer in compromise must be submitted using the department’s offer in compromise packet. 19.5(4) Review of requests. a. After the packet has been submitted, it will be reviewed by department staff. b. Additional information may be requested to assist the department in its review. c. A letter will be issued to the applicant notifying the applicant of the decision to grant, deny or partially grant the offer in compromise request. The department’s decision on an offer in compromise request will only be contained in a formal determination letter. d. Applicants whose applications are granted in part will receive an agreement describing the terms of the partially granted offer in compromise request and must sign and return that agreement to the department in order to receive the partially granted offer in compromise. e. Decisions to enter into an offer in compromise must be approved by the bureau chief of the central collections unit, the director, the deputy director, the division administrator of the legal services and appeals division, or another staff member designated by the director. 19.5(5) Limitations. The department will not review offer in compromise applications until a liability is at least one year old. Premature applications will be denied. Denial on this basis does not prevent the taxpayer from reapplying at a later date.

701—19.6(421) Voluntary disclosure agreements. 19.6(1) When to file. Any person who is subject to Iowa tax or tax collection responsibilities may be eligible for the voluntary disclosure program. Being subject to Iowa tax may occur when a person has Iowa source income, business activities, or representatives or other presence in Iowa. Certain activities by such persons may create Iowa tax return filing requirements for Iowa source income. In addition, activities may also result in tax liabilities that are past due and owing. 19.6(2) Purpose of the voluntary disclosure program. The purpose of the voluntary disclosure program is to promote effective tax administration through voluntary compliance by encouraging unregistered business entities and persons to voluntarily contact the department regarding unreported Iowa source income or other Iowa taxes described in subrule 19.6(4). 19.6(3) Anonymity. A person or the person’s representative may initially contact the department on an anonymous basis. Anonymity of the taxpayer can be maintained until the voluntary disclosure agreement is executed by the taxpayer and the department. The voluntary disclosure program may be used by the department and the taxpayer to report previous periods of Iowa source income and to settle outstanding tax, penalty and interest liabilities, but it must also ensure future tax compliance by the taxpayer. 19.6(4) Type of taxes eligible. Only taxes, penalties, and interest related to the following tax types are eligible for settlement under the voluntary disclosure program: corporate income tax, franchise tax, fiduciary income tax, withholding income tax, individual income tax, composite return tax, local option school district income surtax, state sales tax, state use tax, fuel taxes, cigarette and tobacco taxes, local option tax, state and local hotel and motel taxes, automobile rental excise tax, equipment excise tax, water service excise tax, and the prepaid wireless 911 surcharge. 19.6(5) Eligibility of the taxpayer. The department has discretion to determine who is eligible for participation in the voluntary disclosure program. In making the determination, the department may consider the following factors: a. The person must be subject to Iowa tax on Iowa source income or have Iowa tax collection responsibilities; b. The person must have tax due; c. The person must not currently be under audit or examination by the department or under criminal investigation by the department; d. The person must not have had any prior contact with the department or a representative of the department that could lead to audit or assessment associated with the tax types or tax periods sought to be addressed under the program; e. The type and extent of activities resulting in Iowa source income; f. Failure to report the Iowa source income or pay any liability was not due to fraud, intentional misrepresentation, an intent to evade tax, or willful disregard of Iowa tax laws; and g. Any other factors which are relevant to the particular situation. 19.6(6) How to file an application. a. Required format.To apply, a taxpayer must submit an application in the department’s prescribed paper or electronic format. A voluntary disclosure application can be submitted through GovConnectIowa or by using the form available on the department’s website and following the submission instructions on the form. b. Required information.A voluntary disclosure application must be submitted using the department’s form. c. Review of the application. (1) After the application is submitted, it will be reviewed by department staff. (2) Additional information may be requested to assist the department in its review. (3) The department will notify an applicant in writing regarding whether the applicant’s application for participation in the program is accepted or rejected. 19.6(7) Terms of the voluntary disclosure agreement. a. Discretion.The department has the discretion to settle any outstanding Iowa tax, penalty, and interest liabilities of the eligible applicant. Settlement terms are on a case-by-case basis. Items considered by the department in determining the settlement terms include: the type of tax, the tax periods at issue, the reason for noncompliance, whether the tax is deemed to be held in trust for the state of Iowa, the types of activities resulting in the tax, the frequency of the activities that resulted in the tax, and any other matters which are relevant to the particular situation. b. Maximum scope of audit.If a taxpayer initiates the contact with the department and is eligible for the voluntary disclosure program and complies with the agreement terms, the maximum prior years for which the department will generally audit and pursue settlement and collection will be five years, absent an intent to defraud, the making of material misrepresentations of fact, or an intent to evade tax. c. Future filing requirements.All voluntary disclosure agreements must require that the applicant file future Iowa tax returns, unless the activity by the applicant resulting in the Iowa source income has changed or there has been a change in the law, rules, or court cases that dictate a different result. d. Audit and assessment rights.The department reserves the right to audit all returns and other documents submitted by the applicant or a third party to verify the facts and whether the terms of the voluntary disclosure agreement have been met. The department may audit information submitted by the applicant at any time within the allowed statutory limitation period. The department may also assess any tax, penalty, and interest found to be due in addition to the amount of original tax reported. The statute of limitations for assessment and statute of limitations for refunds begin to run as provided by law. 19.6(8) Commencement of the voluntary disclosure agreement. The voluntary agreement commences on the date the voluntary disclosure agreement is fully executed by all parties or another date specified by the agreement. Execution of the agreement is complete when the agreement is executed by the taxpayer or taxpayers and the bureau chief of the compliance section of the tax management division or another staff member designated by the director. Prior to the execution of the voluntary disclosure agreement by the taxpayer and the department, the taxpayer is not protected from the department’s regular audit process if the identity of the taxpayer, as an applicant, is unknown to the department. However, if the department has knowledge of the taxpayer’s identity, as an applicant, the department will not take audit action against the taxpayer during the voluntary disclosure process. If a voluntary disclosure agreement is not reached, the department may assess tax, penalty, and interest as provided by law at the time the identity of the applicant becomes known to the department. 19.6(9) Voiding a voluntary disclosure agreement. a. Authority.The department has the authority to declare a voluntary disclosure agreement null and void subsequent to the execution of the agreement. The department may void the contractual agreement if the department determines that a misrepresentation of a material fact was made by the person or a third party representing the person to the department. The department may also void a voluntary disclosure agreement if the department determines any of the following has occurred: (1) The person does not submit information requested by the department within the time period specified by the department, including any extensions granted by the department; (2) The person fails to file future Iowa returns as agreed to in the voluntary disclosure agreement; (3) The person does not pay the agreed settlement liability within the time period designated by the department, including any extensions of time that may be granted by the department; (4) The person does not remit all taxes imposed upon or collected by the person for all subsequent tax periods and all tax types that are subject to the voluntary disclosure agreement; (5) The person fails to prospectively comply with Iowa tax law. Whether the person has failed to prospectively comply with Iowa tax law is determined by the department on a case-by-case basis; (6) The person, based on a determination by the department, materially understates the person’s tax liability; or (7) The person has made a material breach of the terms of the voluntary disclosure agreement. b. Audit rights.Voiding of the agreement results in nonenforceability of the agreement by the applicant and allows the department to proceed to assess tax, penalty, and interest for that person’s Iowa tax and tax collection responsibilities for all periods within the statute of limitations. If the applicant is justifiably rejected for the voluntary disclosure program or the agreement between the person and the department is declared by the department to be null and void, the department reserves the right to audit all returns or other documents submitted by the applicant or a third party on behalf of the applicant and to make an assessment for all tax, penalty, and interest owed. If the voluntary disclosure agreement is voided or the application for the program is rejected and the department issues an assessment, the taxpayer may appeal the assessment pursuant to 701—Chapter 7. If the department does not issue an assessment, but does reject the application or voids the agreement, such action is not subject to appeal under 701—Chapter 7 but is considered to be “other agency action.” 19.6(10) Partnerships, partners, S corporations, shareholders in S corporations, trusts, and trust beneficiaries. Once the department has initiated an audit or investigation of any type of partnership, partners of the partnership, S corporations, a shareholder in an S corporation, a trust, or trust beneficiaries, the department is deemed to have initiated an audit or investigation of the entity and of all those who receive Iowa source income from or have an interest in such an entity for purposes of eligibility for participation in the voluntary disclosure program. 19.6(11) Transfer or assignment. The terms of the voluntary disclosure agreement are valid and enforceable by and against all parties, including their transferees and assignees. These rules are intended to implement Iowa Code sections 421.5 and 421.17.

ITEM 10. Amend rule 701—101.8(437A) as follows:

701—101.8(437A) Abatement of tax. Theabatementprovisions of rule 701—7.31(421)701—Chapter 19 are applicable to replacement tax. In the event that the taxpayer files a request for abatement with the director, the appropriate county treasurer shall be notified. The director’sdepartment’s decision on the abatement request shall be sent to the taxpayer and the appropriate county treasurer.

ITEM 11. Amend rule 701—101.21(437A) as follows:

701—101.21(437A) Abatement of tax. Theabatement provisions of rule 701—7.31(421)701—Chapter 19 are applicable to the statewide property tax.

ITEM 12. Amend rule 701—108.8(437B) as follows:

701—108.8(437B) Abatement of tax. Theabatement provisions of rule 701—7.31(421)701—Chapter 19 are applicable to replacement tax. In the event that the taxpayer files a request for abatement with the directordepartment, the appropriate county treasurer shall be notified. The director’sdepartment’s decision on the abatement request shall be sent to the taxpayer and the appropriate county treasurer.

ITEM 13. Amend rule 701—108.20(437B) as follows:

701—108.20(437B) Abatement of tax. Theabatement provisions of rule 701—7.31(421)701—Chapter 19 are applicable to the statewide property tax.

ITEM 14. Rescind and reserve rule 701—254.11(453A).

ITEM 15. Rescind and reserve rule 701—300.11(422).

ITEM 16. Rescind and reserve rule 701—305.5(422).

ITEM 17. Rescind and reserve rule 701—504.4(421).

ITEM 18. Rescind and reserve rule 701—504.5(422).

ITEM 19. Rescind and reserve rule 701—603.4(421).

ITEM 20. Rescind and reserve rule 701—603.5(422).

ITEM 21. Amend rule 701—700.11(422) as follows:

701—700.11(422) Appeals to the director. An estate or trust has the right to appeal to the director for a revision of an assessment for additional tax due, the denial or reduction of a claim for refund, the denial of a request for a waiver of a penalty and theThe denial of a request for an income tax certificate of acquittancemay be appealed. The beneficiary of an estate or trust has the right to appeal a determination of the correct amount of income distributed and a determination of the correct allocation of deductions, credits, losses and expenses between the estate or trust and the beneficiary. The personal representative of an estate and the trustee of a trust have the right to appeal a determination of personal liability for income taxes required to be paid or withheld and for a penalty personally assessed. An appeal to the director must be in writing and must be made within 60 days of the notice of assessment and the other matters which are subject to appeal or for assessments issued on or after January 1, 1995, if the beneficiary of an estate or trust, the personal representative of an estate, or the trustee of a trust fails to timely appeal a notice of assessment, the person may pay the entire assessment and file a refund claim within the period provided by law for filing such claimsdenial. 701—Chapter 7 shall govern appeals to the director. See specifically rules 701—7.8(17A) to 701—7.22(17A) governing taxpayer protests. This rule is intended to implement Iowa Code chapter 17A and sections 421.60 and 422.28.

ITEM 22. Rescind and reserve rule 701—900.4(450).

ITEM 23. Amend subrule 900.8(18) as follows: 900.8(18) Appeals. Rule 701—86.4(450)701—Chapter 7 providing for an appeal to the director and a subsequent appeal to district court under the Iowa administrative procedure Act for disputes involving the inheritance tax imposed by Iowa Code chapter 450 shall also be the rule for appeal for disputes concerning special use valuation and the additional inheritance tax imposed by Iowa Code chapter 450B.

ITEM 24. Amend subparagraph 900.9(2)"f" as follows: (1) Real estate. If the department, the estate and the persons succeeding to the decedent’s property have not reached an agreement as to the value of real estate under 86.9(2)“e,” the market value for inheritance tax purposes will be established by the appraisal proceedings specified in Iowa Code sections 450.27 to 450.36. For the purposes of appraisal, “real estate or real property” means the land and appurtenances, including structures affixed thereto. Use of the inheritance tax appraisers to determine value for other purposes such as, but not limited to, determining the share of the surviving spouse in the estate or for determining the fair market value of real estate for the purposes of sale, is not controlling in determining values for inheritance tax purposes. In re Estate of Giffen, 166 N.W.2d 800 (Iowa 1969); In re Estate of Lorimor, 216 N.W.2d 349 (Iowa 1974). Appraisals of real estate must be made in fee simple including land, all appurtenances and structures affixed to the real estate. Discounts in the value of real estate are not to be considered in the valuation of real property for the purposes of an appraisal. Such discounts in valuation are to be resolved by mutual agreement through informal procedures between the personal representative of the estate and the department. If an agreement between the personal representative of the estate and the department cannot be obtained, then the valuation placed on the property by the department may be appealed by the personal representative of the estate pursuant to the procedures set forth in rule 701—86.4(450)701—Chapter 7. If either the department or the estate does not agree with the results of an appraisal that is conducted pursuant to Iowa Code sections 450.27 through 450.36, either the department or the estate may file an objection to the appraisal pursuant to Iowa Code section 450.31. See 701—subrule 86.9(2) forInformation on additional factors to assist in the determination of fair market value of real propertycan be found in 701—subrule 86.9(2).ARC 7102CRevenue Department[701]Adopted and Filed

Rulemaking related to capital gain deduction and farm tenancy income exclusion

The Revenue Department hereby amends Chapter 302, “Determination of Net Income,” Iowa Administrative Code.Legal Authority for Rulemaking This rulemaking is adopted under the authority provided in Iowa Code sections 421.14, 422.7(13), 422.7(14) and 422.68.State or Federal Law Implemented This rulemaking implements, in whole or in part, 2022 Iowa Acts, House File 2317.Purpose and Summary The purpose of this rulemaking is to implement the deductions for farm tenancy agreement income and farm capital gains enacted by 2022 Iowa Acts, House File 2317, divisions II and III. The legislation repealed the previous Iowa capital gain deduction for gains resulting from the sale of a business, the sale of real property used in a business, the sale of timber, and the sale of employer securities to an Iowa employee stock ownership plan. The legislation provided a capital gain deduction for taxpayers who have held real property used in a farming business for ten years and who have materially participated in a farming business for ten years. The legislation also provided an election for retired farmers and eligible individuals to elect to deduct capital gains from the sale of cattle or horses, breeding livestock, and real property used in a farming business or to deduct income from a farm tenancy agreement covering real property. These deductions are effective for tax years beginning on or after January 1, 2023. This rulemaking also rescinds and replaces the rule for capital gains according to the law prior to the legislation.Public Comment and Changes to Rulemaking Notice of Intended Action for this rulemaking was published in the Iowa Administrative Bulletin on July 26, 2023, as ARC 7050C. A public hearing was held on August 17, 2023, at 2 p.m. via video/conference call. Two attendees made comments. The Department also received a written public comment during the comment period. In response to comments and further review, the Department made the following changes to the Notice:

Revised subrules 302.87(1) and 302.88(1) to include a definition of “disabled individual.”
Revised paragraph 302.87(2)“d” to clarify whose activities can be attributed to the taxpayer for material participation purposes.
Revised subparagraph 302.87(2)“e”(5) to clarify the example.
Revised subparagraph 302.87(2)“f”(2) to use “taxpayer” instead of “landlord” to be consistent with the language in the rest of the rule.
Revised subparagraph 302.87(2)“f”(4) to clarify that a taxpayer whose sole activity is participating in the Conservation Reserve Program does not meet the requirement of materially participating in a farming business. This clarification is consistent with the definition of “farming business” in Iowa Code section 422.7(13)“a”(1).
Revised subparagraph 302.87(3)“b”(1) to include a deadline by which the surviving spouse must make an election on behalf of a deceased retired farmer.
Revised subparagraph 302.87(3)“b”(2) to add an additional example and renumber the following examples.
Revised subparagraph 302.87(3)“b”(3) to clarify the due date by which the surviving spouse must make a disclaimer, to add an additional example, and to renumber the following examples.
Removed subparagraph 302.87(3)“b”(4) and included language in subparagraph 302.87(3)“b”(3) clarifying the surviving spouse’s ability to make an election after a disclaimer.
Revised subparagraph 302.87(3)“c”(1) to include a presumption that spouses who jointly own real property used in a farming business each have a 50 percent ownership interest in the real property.
Revised paragraph 302.87(4)“a” to clarify that a taxpayer who is not a retired farmer must be materially participating in a farming business for the ten years immediately preceding the sale.
Revised paragraph 302.87(4)“c” to clarify the circumstances under which an owner of a pass-through entity may claim the capital gain deduction.
Revised paragraph 302.87(4)“f” to clarify examples.
Revised subrules 302.87(5) and 302.87(6) to clarify the requirements to exclude net capital gains from the sale of breeding livestock, cattle, or horses.
Revised subrule 302.87(7) to clarify the applicable version of the Iowa Code and a rule.
Revised subrule 302.88(2) to clarify that the material participation of a spouse does not count when determining if a taxpayer is no longer materially participating to meet the definition of a retired farmer.

Adoption of Rulemaking This rulemaking was adopted by the Department on September 29, 2023.Fiscal Impact This rulemaking has no known fiscal impact to the State of Iowa beyond that of the legislation it is intended to implement. The final Fiscal Note for 2022 Iowa Acts, House File 2317, found that division II is projected to reduce General Fund revenue by $2.1 million for fiscal year 2024, $2.0 million for fiscal year 2025, $1.8 million for fiscal year 2026, $1.5 million for fiscal year 2027, $1.6 million for fiscal year 2028, and increasing each year at the rate of inflation for fiscal years beyond. The final Fiscal Note for 2022 Iowa Acts, House File 2317, found that division III is projected to reduce General Fund revenue by $7.2 million for fiscal year 2024, $6.9 million for fiscal year 2025, $6.1 million for fiscal year 2026, $5.4 million for fiscal year 2027, $5.7 million for fiscal year 2028, and increasing each year at the rate of inflation for fiscal years beyond. Jobs Impact After analysis and review of this rulemaking, no impact on jobs has been found.Waivers Any person who believes that the application of the discretionary provisions of this rulemaking would result in hardship or injustice to that person may petition the Department for a waiver of the discretionary provisions, if any, pursuant to rule 701—7.28(17A).Review by Administrative Rules Review Committee The Administrative Rules Review Committee, a bipartisan legislative committee which oversees rulemaking by executive branch agencies, may, on its own motion or on written request by any individual or group, review this rulemaking at its regular monthly meeting or at a special meeting. The Committee’s meetings are open to the public, and interested persons may be heard as provided in Iowa Code section 17A.8(6).Effective Date This rulemaking will become effective on November 22, 2023. The following rulemaking action is adopted:

ITEM 1. Rescind and reserve rule 701—302.38(422).

ITEM 2. Adopt the following new rule 701—302.87(422):

701—302.87(422) Capital gain deduction for certain types of net capital gains. Information relating to the Iowa capital gain deduction available for tax years prior to January 1, 2023, can be found in prior versions of rule 701—302.38(422). Prior versions of the Iowa Administrative Code are located here: www.legis.iowa.gov/law/administrativeRules/agencies. For tax years beginning on or after January 1, 2023, net capital gains from the sale of real property used in a farming business and the sale of certain livestock described in subrules 302.87(5) and 302.87(6) may be excluded in the computation of net income for qualified individual taxpayers. To exclude qualifying capital gains, a taxpayer has to meet certain holding period and material participation requirements, unless otherwise indicated in this rule. 302.87(1) Definitions. Unless otherwise indicated in this rule or required by the context, all words and phrases used in this rule that are defined under Iowa Code section 422.7(13) shall have the same meaning as provided to them under that Iowa Code section. "Disabled individual" means an individual who is receiving benefits as a result of retirement from employment or self-employment due to disability. In addition, a person is considered to be a disabled individual if the individual is determined to be disabled in accordance with criteria established by the Social Security Administration or other federal or state governmental agency. 302.87(2) Material participation. If the taxpayer has regular, continuous, and substantial involvement in the operations of a farming business that meets the criteria for material participation in an activity under Section 469(h) of the Internal Revenue Code and the federal tax regulations for material participation in 26 CFR Sections 1.469-5 and 1.469-5T for the applicable number of years required under Iowa law for the deduction, the taxpayer has met the material participation requirement. Section 469(h)(3) of the Internal Revenue Code does not apply when determining material participation for the purposes of this rule. a. Work done in connection with an activity is not participation in the activity if the work is not of a type that is customarily done by an owner and one of the principal purposes for the performance of the work is to avoid the disallowance of any loss or credit from the activity. b. Work done in an activity by an individual in the individual’s capacity as an investor is not material participation in the business or activity unless the investor is directly involved in the day-to-day management or operations of the activity or business. Investor-type activities include the study and review of financial statements or reports on operations of the activity, preparing or compiling summaries or analyses of finances or operations of the activity for the individual’s own use, and monitoring the finances or operations of the activity in a nonmanagerial capacity. c. A highly relevant factor in material participation in a business is how regularly the taxpayer is present at the place where the principal operations of a business are conducted. In addition, a taxpayer is likely to have material participation in a business if the taxpayer performs all functions of the business. The fact that the taxpayer utilizes employees or contracts for services to perform daily functions in a business will not prevent the taxpayer from qualifying as materially participating in the business, but the services will not be attributed to the taxpayer. d. In determining whether a particular taxpayer has material participation in a business, participation of the taxpayer’s spouse in a business must also be taken into account. Activity done by a taxpayer’s spouse is considered activity done by the taxpayer. The spouse’s participation in the business must be taken into account even if the spouse does not file a joint state return with the taxpayer or if the spouse has no ownership interest in the business. The activities of other family members, employees, independent contractors, vendors, laborers, or consultants are not attributed to the taxpayer to determine material participation. e. Generally, an individual will be considered as materially participating in a tax year if the taxpayer satisfies or meets any of the following tests: (1) The individual participates in the farming business for more than 500 hours in the taxable year. (2) The individual’s participation in the farming business constitutes substantially all of the participation of all individuals in the business (including individuals who are not owners of interests in the business) for the tax year. (3) The individual participates in the farming business for more than 100 hours in the tax year, and no other individual (including individuals who are not owners of interests in the business) participates more in the business than the taxpayer during the tax year. (4) The individual participates in two or more businesses, excluding rental businesses, in the tax year and participates for more than 500 hours in all of the businesses and more than 100 hours in each of the businesses, and the participation is not material participation within the meaning of one of the tests in subparagraphs 302.87(2)“e”(1) through (3), (5) and (6). (5) The individual materially participated (determined without regard to this subparagraph) in a farming business for five of the ten years preceding the applicable tax year. (6) The individual participates in the business activity for more than 100 hours and, based on all the facts and circumstances, the individual participates on a regular, continuous, and substantial basis. Management activities of a taxpayer are not considered for purposes of determining if there was material participation if either of the following applies: any person other than the taxpayer is compensated for management services or any person provides more hours of management services than the taxpayer. f. The following paragraphs provide additional information regarding material participation: (1) Limited partners of a limited partnership. The limited partners will not be treated as materially participating in any activity of a limited partnership except in a situation where the limited partner would be treated as materially participating under the material participation tests in subparagraphs 302.87(2)“e”(1) or 302.87(2)“e”(5) above if the taxpayer were not a limited partner for the tax year. (2) Cash farm lease. A taxpayer who rents out farmland on a cash basis is not materially participating in a farming business. The burden is on the taxpayer to show that the taxpayer materially participated in the farming business operated on the cash-rented farmland. (3) Farmer landlord involved in crop-share arrangement. A farmer landlord is subject to self-employment tax on net income from a crop-share arrangement with a tenant. The landlord is considered to be materially participating with the tenant in the crop-share activity if the landlord satisfies one of the four following tests: Test 1: The landlord does any three of the following: (1) pays or is obligated to pay for at least half the direct costs of producing the crop; (2) furnishes at least half the tools, equipment, and livestock used in producing the crop; (3) consults with the tenant; and (4) inspects the production activities periodically. Test 2: The landlord regularly and frequently makes, or takes part in making, management decisions substantially contributing to or affecting the success of the enterprise. Test 3: The landlord worked 100 hours or more spread over a period of five weeks or more in activities connected with crop production. Test 4: The landlord has done tasks or performed duties which, considered in their total effect, show that the landlord was materially and significantly involved in the production of the farm commodities. (4) Conservation reserve program (CRP). Activities conducted under the CRP do not fall within the definition of “farming business” under Iowa Code section 422.7. If a taxpayer’s only activity is managing CRP land, the taxpayer does not meet the material participation requirement. A taxpayer may still meet the material participation requirement if the taxpayer materially participates in a farming business through a different activity. (5) Recordkeeping requirements. Taxpayers are required to provide proof of services performed and the hours attributable to those services. Detailed records should be maintained by the taxpayer, on as close to a daily basis as possible at or near the time of the performance of the activity, to verify that the material participation test has been met. However, material participation can be established by any other reasonable means, such as approximating the number of hours based on appointment books, calendars, or narrative summaries. Records prepared long after the activity, in preparation of an audit or proceeding, are insufficient to establish participation in an activity. 302.87(3) Lifetime election. A retired farmer may make a single lifetime election on a form prescribed by the department to exclude all qualifying capital gains from the sale of real property used in a farming business and the sale of certain livestock described in subrules 302.87(5) and 302.87(6). If a retired farmer makes the election described in this subrule, the retired farmer is not eligible to make the election to exclude the net income received pursuant to a farm tenancy agreement covering real property under Iowa Code section 422.7(14) and rule 701—302.88(422) or claim the beginning farmer tax credit under Iowa Code section 422.11E in the same tax year or any subsequent tax year. The election is irrevocable once made. a. Beginning farmer tax credit.A retired farmer shall not utilize an unclaimed amount of a beginning farmer tax credit in the same tax year they are making an election described in this subrule or in subrule 302.88(3) or in any subsequent tax year. b. Surviving spouses.A surviving spouse of a deceased retired farmer may be eligible to make the election described in this subrule or the election described in subrule 302.88(3) or exclude the qualifying income pursuant to the election made by the retired farmer prior to death. (1) A surviving spouse of a deceased retired farmer may make the election described in this subrule or the election described in subrule 302.88(3) on behalf of the deceased retired farmer that the retired farmer would have been eligible to make prior to death. A surviving spouse may only make an election on behalf of the deceased retired farmer by the due date of the tax return, including extensions, for the tax year immediately following the tax year of the retired farmer’s death. (2) If a retired farmer made the election described in this subrule or the election described in subrule 302.88(3) prior to death, the surviving spouse of the deceased retired farmer may exclude the qualifying income pursuant to the election made by the retired farmer prior to death. A surviving spouse cannot change the election the deceased retired farmer made. Any election made by the retired farmer prior to death is binding on all real property used in a farming business owned by the retired farmer at the time of death. This election is only binding on the retired farmer and the surviving spouse. (3) A surviving spouse of a deceased retired farmer may disclaim the election made by the retired farmer. If a surviving spouse of a deceased retired farmer makes this disclaimer, the surviving spouse is not eligible to deduct qualifying income pursuant to an election made by the retired farmer prior to death. A surviving spouse of a deceased retired farmer shall make this disclaimer on a form prescribed by the department and file the form with the surviving spouse’s income tax return. A surviving spouse must make the disclaimer by the due date of the tax return, including extensions, for the tax year immediately following the tax year of the retired farmer’s death. If the surviving spouse excluded income on the surviving spouse’s return for the tax year of the retired farmer’s death pursuant to the election the retired farmer made and wants to disclaim the election, then the surviving spouse must amend the surviving spouse’s return to include that income in Iowa net income and adjust tax liability accordingly. If no disclaimer is made by the due date, including extensions, of the surviving spouse’s income tax return for the tax year immediately following the tax year of the retired farmer’s death, then the surviving spouse is no longer eligible to make a disclaimer and is bound by the election the retired farmer made. The disclaimer is irrevocable once made. Once a disclaimer has been made, a surviving spouse may make a single lifetime election that would also apply to the land previously bound by the deceased retired farmer’s election if the surviving spouse meets the definition of a retired farmer. A surviving spouse may make a single lifetime election that would apply to land not bound by the deceased retired farmer’s election if the surviving spouse meets the eligibility criteria. c. Joint owners.A retired farmer may exclude income pursuant to the election described in this subrule or the election described in subrule 302.88(3) to the extent of the retired farmer’s ownership interest in the real property. (1) A retired farmer who owns real property used in a farming business jointly with a spouse and makes the election described in this subrule or the election described in subrule 302.88(3) may only exclude qualifying income from that real property to the extent of the retired farmer’s ownership interest held in that real property. The retired farmer’s ownership interest does not include the ownership interest of the retired farmer’s spouse. If each spouse qualifies as a retired farmer, each spouse may make different elections on the property they jointly own to the extent of their respective ownership interests. There is a rebuttable presumption that spouses who jointly own real property used in a farming business each have a 50 percent ownership interest in the real property. This can be rebutted with documentation proving a different ownership percentage. (2) A retired farmer who owns real property used in a farming business jointly with someone who is not the retired farmer’s spouse may only exclude qualifying income from that real property to the extent of the retired farmer’s ownership interest held in the real property. 302.87(4) Net capital gains from the sale of real property used in a farming business. Net capital gains from the sale of real property used in a farming business may be excluded from the owner’s Iowa net income if the owner held the real property used in a farming business for ten or more years and materially participated in a farming business for at least ten years. If the taxpayer is a retired farmer, the taxpayer must make the election described in subrule 302.87(3) to exclude qualifying capital gains. It is not required that the property be located in Iowa for the owner to qualify for the deduction. a. Material participation means the same as “materially participated” as defined in Iowa Code section 422.7(13) and described in detail in subrule 302.87(2). If the taxpayer is a retired farmer and materially participated in a farming business for ten or more years in the aggregate, then the taxpayer will meet the material participation requirements. If the taxpayer is not a retired farmer, the taxpayer must have materially participated in a farming business for the ten years immediately preceding the sale. When determining whether a taxpayer is no longer materially participating to meet the definition of a retired farmer, the material participation test in subparagraph 302.87(2)“e”(5) shall not apply and the participation of the spouse of the taxpayer does not count as participation by the taxpayer. b. If the taxpayer has held the real property used in a farming business and sells the property to a relative of the taxpayer, the net capital gain from the sale may be excluded from net income regardless of whether the taxpayer met the material participation or holding period requirements. c. In situations in which real property was sold by a partnership, S corporation, limited liability company, estate, or trust and the capital gain from the sale of the real property flows through to the owners of the business entity for federal income tax purposes, the owners may exclude the capital gain from their net incomes if the real property was held for ten or more years and the owners had materially participated in a farming business for ten years prior to the date of sale of the real property, or ten years in the aggregate if the owner is a retired farmer. d. Installments received in the tax year from installment sales of real property used in a farming business are eligible for the exclusion of capital gains from net income if all relevant criteria were met at the time of the installment sale. e. Capital gains from the sale of real property by a C corporation do not qualify for the capital gain deduction. f. The following noninclusive examples illustrate how this subrule applies: 302.87(5) Net capital gains from the sale of cattle or horses used for certain purposes and held for 24 months by taxpayers who are retired farmers. Net capital gains from the sale of cattle or horses held for 24 months or more for draft, breeding, dairy, or sporting purposes may be excluded from the taxpayer’s Iowa net income if the taxpayer is a retired farmer and the taxpayer made the election described in subrule 302.87(3). The retired farmer must have materially participated in the farming business in which the cattle or horses were held for five of the eight years preceding the retired farmer’s retirement or disability and must have sold all or substantially all of the retired farmer’s interest in the farming business by the time the election is made. For purposes of this subrule and subrule 302.87(6), “substantially all” means 90 percent of the interest in the farming business. a. Material participation means the same as “materially participated” as defined in Iowa Code section 422.7(13) and described in detail in subrule 302.87(2). When determining whether a taxpayer is no longer materially participating to meet the definition of a retired farmer, the material participation test in subparagraph 302.87(2)“e”(5) shall not apply and the participation of the spouse of the taxpayer does not count as participation by the taxpayer. b. Whether cattle or horses sold by the taxpayer after the taxpayer has held them 24 months or more were held for draft, breeding, dairy, or sporting purposes may be determined from federal court cases on such sales and the standards and examples included in 26 CFR Section 1.1231-2. Proper records should be kept showing purchase and birth dates of cattle and horses. The absence of records may make it impossible for the owner to show that the owner held a particular animal for the necessary holding period. Whether cattle or horses are held for draft, breeding, dairy, or sporting purposes depends on all the facts and circumstances of each case. c. Capital gains from sales of qualifying cattle or horses by an S corporation, partnership, or limited liability company, where the capital gains flow through to the owners of the respective business entity for federal income tax purposes, qualify for the capital gain deduction to the extent the owners receiving the capital gains are retired farmers who meet all the relevant criteria. d. Capital gains from sales of qualifying cattle or horses by a C corporation are not eligible for the capital gain deduction. 302.87(6) Net capital gains from the sale of breeding livestock, other than cattle or horses, held for 12 or more months by taxpayers who are retired farmers. Net capital gains from the sale of breeding livestock, other than cattle or horses, held for 12 or more months may be excluded from the taxpayer’s Iowa net income if the taxpayer is a retired farmer and the taxpayer made the election described in subrule 302.87(3). The retired farmer must have materially participated in the farming business in which the breeding livestock, other than cattle or horses, were held for five of the eight years preceding the retired farmer’s retirement or disability. The retired farmer must have sold all or substantially all of the retired farmer’s interest in the farming business by the time the election is made. a. Material participation means the same as “materially participated” as defined in Iowa Code section 422.7(13) and described in detail in subrule 302.87(2). When determining whether a taxpayer is no longer materially participating to meet the definition of a retired farmer, the material participation test in subparagraph 302.87(2)“e”(5) shall not apply and the participation of the spouse of the taxpayer does not count as participation by the taxpayer. b. If livestock other than cattle or horses is considered to have been held for breeding purposes under the criteria established in 26 CFR Section 1.1231-2, the livestock will also be deemed to have been breeding livestock for purposes of this rule. Proper records should be kept showing purchase and birth dates of breeding livestock. The absence of records may make it impossible for the owner to show that the owner held a particular animal for the necessary holding period. Whether livestock are held for breeding purposes depends on all the facts and circumstances of each case. c. Capital gains from sales of qualifying livestock other than cattle or horses by an S corporation, partnership, or limited liability company, where the capital gains flow through to the owners of the respective business entity for federal income tax purposes, qualify for the capital gain deduction to the extent the owners receiving the capital gains are retired farmers who meet all the relevant criteria. d. Capital gains from the sale of breeding livestock other than cattle or horses by a C corporation are not eligible for the capital gain deduction. 302.87(7) Installments from sales consummated before January 1, 2023. Installments from sales that were consummated before January 1, 2023, that result in net capital gains qualify for the capital gain deduction if the requirements of Iowa Code section 422.7(21) and rule 701—302.38(422), as they existed prior to January 1, 2023, were met at the time the sale was consummated. This rule is intended to implement Iowa Code section 422.7(13).

ITEM 3. Adopt the following new rule 701—302.88(422):

701—302.88(422) Net income from a farm tenancy agreement covering real property. An eligible individual may elect to exclude net income from a farm tenancy agreement covering real property held by the individual for ten or more years from the computation of net income, if the eligible individual materially participated in a farming business for ten or more years. 302.88(1) Definitions. Unless otherwise indicated in this rule or required by the context, all words and phrases used in this rule that are defined under Iowa Code section 422.7(14) shall have the same meaning as provided to them under that Iowa Code section. "Disabled individual" means an individual who is receiving benefits as a result of retirement from employment or self-employment due to disability. In addition, a person is considered to be a disabled individual if the individual is determined to be disabled in accordance with criteria established by the Social Security Administration or other federal or state governmental agency. "Held" shall be determined with reference to the holding period provisions of Section 1223 of the Internal Revenue Code and the federal regulations pursuant thereto. 302.88(2) Material participation. Material participation for the purposes of this rule is determined pursuant to subrule 302.87(2) and the definition of “materially participated” in Iowa Code section 422.7(14). An eligible individual meets the material participation requirements if the individual materially participated in a farming business for ten years or more in the aggregate. When determining whether an eligible individual has stopped materially participating, the material participation test in subparagraph 302.87(2)“e”(5) and the material participation of a spouse shall not apply. 302.88(3) Lifetime election. An eligible individual may make a single lifetime election on a form prescribed by the department to exclude net income pursuant to a farm tenancy agreement covering real property. If an eligible individual makes the election described in this subrule, the eligible individual is not eligible to make an election to exclude the capital gain from the sale of real property used in a farming business or certain livestock under Iowa Code section 422.7(13) and rule 701—302.87(422) or claim the beginning farmer tax credit under Iowa Code section 422.11E in the same tax year or any subsequent tax year. The election is irrevocable once made. a. Beginning farmer tax credit.A retired farmer shall not utilize an unclaimed amount of a beginning farmer tax credit in the same tax year the retired farmer is making an election described in this subrule or in subrule 302.87(3) or in any subsequent tax year. b. Surviving spouses.A surviving spouse of a deceased eligible individual may make the election described in this subrule or the election described in subrule 302.87(3) subject to the provisions of subrule 302.87(3). For purposes of this subrule, “retired farmer” as used in subrule 302.87(3) has the same meaning as “eligible individual.” c. Joint owners.An eligible individual may exclude income pursuant to the election described in this subrule or the election described in subrule 302.87(3) to the extent of the eligible individual’s ownership interest in the real property subject to the provisions of subrule 302.87(3). For purposes of this subrule, “retired farmer” as used in subrule 302.87(3) has the same meaning as “eligible individual.” 302.88(4) Amount of exclusion. An eligible individual that has made the election described in subrule 302.88(3) may exclude the amount of net income received from a farm tenancy agreement covering real property. An eligible individual may exclude net income from any qualifying farm tenancy agreement covering real property if the holding period requirements are met with respect to the real property in question, including agreements that are entered into after the single lifetime election is made. The amount of the exclusion cannot exceed the fair profits which would normally arise from a farm tenancy agreement between two parties operating at arm’s length. This rule is intended to implement Iowa Code section 422.7(14). [Filed 9/29/23, effective 11/22/23][Published 10/18/23]Editor’s Note: For replacement pages for IAC, see IAC Supplement 10/18/23.

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