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PAG LIN 1 1 DIVISION I 1 2 IOWA FUND OF FUNDS 1 3 Section 1. NEW SECTION. 15E.221 FINDINGS PURPOSE. 1 4 The general assembly finds the following: Fundamental 1 5 changes have occurred in national and international financial 1 6 markets and in the financial markets of this state. A 1 7 critical shortage of seed and venture capital resources exists 1 8 in the state, and such shortage is impairing the growth of 1 9 commerce in the state. A need exists to increase the 1 10 availability of venture equity capital for emerging, 1 11 expanding, and restructuring enterprises in Iowa. Such 1 12 investments will create jobs for Iowans and will help to 1 13 diversify the state's economic base. 1 14 This division is enacted to fulfill the following purposes: 1 15 1. To mobilize private investment in a broad variety of 1 16 venture capital partnerships in diversified industries and 1 17 locales. 1 18 2. To retain the private-sector culture of focusing on 1 19 rate of return in the investing process. 1 20 3. To secure the services of the best managers in the 1 21 venture capital industry, regardless of location. 1 22 4. To facilitate the organization of the Iowa fund of 1 23 funds in which to seek such private investment and to create 1 24 interest in such investments by offering state incentives for 1 25 private persons to make investments in the Iowa fund of funds. 1 26 5. To enhance the venture capital culture and 1 27 infrastructure in the state of Iowa so as to increase venture 1 28 capital investment within the state and to promote venture 1 29 capital investing within Iowa. 1 30 6. To accomplish these purposes in such a manner as to 1 31 minimize any appropriations by the state of Iowa. 1 32 7. To effectuate specific, measurable results, including 1 33 all of the following: 1 34 a. The creation of five new venture capital fund offices 1 35 in Iowa within three years of the effective date of this Act. 2 1 b. The investment of a minimum of twenty-five million 2 2 dollars in Iowa businesses within three years of the effective 2 3 date of this Act. 2 4 c. A cumulative rate of return on venture investments of 2 5 the Iowa fund of funds equal to at least seventeen percent by 2 6 the end of five years following the effective date of this 2 7 Act. 2 8 Sec. 2. NEW SECTION. 15E.222 DEFINITIONS. 2 9 As used in this division, unless the context otherwise 2 10 requires: 2 11 1. "Board" means the Iowa capital investment board created 2 12 in section 15E.223. 2 13 2. "Certificate" means a contract between the board and a 2 14 designated investor pursuant to which a tax credit is 2 15 available and issued to the designated investor. 2 16 3. "Designated investor" means a person, other than the 2 17 Iowa capital investment corporation, who purchases an equity 2 18 interest in the Iowa fund of funds or a transferee of a 2 19 certificate or tax credit. 2 20 4. "Iowa capital investment corporation" means a private, 2 21 nonprofit corporation created pursuant to section 15E.224. 2 22 5. "Iowa fund of funds" means a private, for-profit 2 23 limited partnership or limited liability company established 2 24 by the Iowa capital investment corporation pursuant to section 2 25 15E.225 in which a designated investor purchases an equity 2 26 interest. 2 27 6. "Tax credit" means a contingent tax credit issued 2 28 pursuant to section 15E.226 that is available against tax 2 29 liabilities imposed by chapter 422, divisions II, III, and V, 2 30 and by chapter 432. 2 31 Sec. 3. NEW SECTION. 15E.223 IOWA CAPITAL INVESTMENT 2 32 BOARD. 2 33 1. The Iowa capital investment board is created as a state 2 34 governmental board and the exercise by the board of powers 2 35 conferred by this division shall be deemed and held to be the 3 1 performance of essential public purposes. The purpose of the 3 2 board shall be to mobilize venture equity capital for 3 3 investment in such a manner that will result in a significant 3 4 potential to create jobs and to diversify and stabilize the 3 5 economy of the state. 3 6 2. The board shall consist of five voting members and two 3 7 nonvoting advisory members. The five voting members shall be 3 8 appointed by the governor and confirmed by the senate pursuant 3 9 to section 2.32. The five voting members shall be appointed 3 10 to five-year staggered terms that shall be structured to allow 3 11 the term of one member to expire each year. One nonvoting 3 12 member shall be appointed by the majority leader of the senate 3 13 after consultation with the president of the senate and the 3 14 minority leader of the senate. One nonvoting member shall be 3 15 appointed by the speaker of the house of representatives after 3 16 consultation with the majority and minority leaders of the 3 17 house of representatives. The nonvoting members shall be 3 18 appointed for two-year terms which shall expire upon the 3 19 convening of a new general assembly. Vacancies shall be 3 20 filled in the same manner as the appointment of the original 3 21 members. Members shall be compensated by the board for direct 3 22 expenses and mileage but members shall not receive a 3 23 director's fee, per diem, or salary for service on the board. 3 24 Members shall be selected based upon demonstrated expertise 3 25 and competence in the supervision of investment managers, in 3 26 the fiduciary management of investment funds, or in the 3 27 management and administration of tax credit allocation 3 28 programs. Members shall not have an interest in any person to 3 29 whom a tax credit is allocated and issued by the board. 3 30 3. The board shall have the power to engage consultants, 3 31 expend funds, invest funds, contract, bond or insure against 3 32 loss, or perform any other act necessary to carry out its 3 33 purpose, provided, however, that the board shall not hire 3 34 employees. 3 35 4. Members of the board shall be indemnified against loss 4 1 to the broadest extent permissible under chapter 669. 4 2 5. Meetings of the board shall, except to the extent 4 3 necessary to protect confidential information with respect to 4 4 investments in and investments made by the Iowa fund of funds, 4 5 be subject to chapter 21. 4 6 6. The board shall, in cooperation with the department of 4 7 revenue and finance, establish criteria and procedures for the 4 8 allocation and issuance of tax credits to designated investors 4 9 by means of certificates issued by the board. The criteria 4 10 shall include the contingencies that must be met for a 4 11 certificate to be redeemable by a designated investor or 4 12 transferee in order to receive a tax credit. The 4 13 contingencies to redemption shall be tied to the scheduled 4 14 rates of return and scheduled redemptions of equity interests 4 15 purchased by designated investors in the Iowa fund of funds. 4 16 The procedures established by the board, in cooperation with 4 17 the department of revenue and finance, shall relate to the 4 18 procedures for the issuance of the certificates and the 4 19 related tax credits, for the transfer of a certificate and 4 20 related tax credit by a designated investor, and for the 4 21 redemption of a certificate and related tax credit by a 4 22 designated investor or transferee. The board shall also 4 23 establish criteria and procedures for assessing the likelihood 4 24 of future certificate redemptions by designated investors and 4 25 transferees, including, without limitation, criteria and 4 26 procedures for evaluating the value of investments made by the 4 27 Iowa fund of funds and the returns from the Iowa fund of 4 28 funds. 4 29 7. Pursuant to section 15E.226, the board shall issue 4 30 certificates which may be redeemable for tax credits to 4 31 provide incentives to designated investors to make equity 4 32 investments in the Iowa fund of funds. The board shall issue 4 33 the certificates so that not more than twenty million dollars 4 34 of tax credits may be initially redeemable in any fiscal year. 4 35 8. The board may charge a placement fee to the Iowa fund 5 1 of funds with respect to the issuance of a certificate and 5 2 related tax credit to a designated investor, but the fee shall 5 3 be charged only to pay for reasonable and necessary costs of 5 4 the board and shall not exceed one-half of one percent of the 5 5 equity investment of the designated investor. 5 6 9. The board shall, in consultation with the Iowa capital 5 7 investment corporation, publish an annual report of the 5 8 activities conducted by the Iowa fund of funds, and present 5 9 the report to the governor and the general assembly. The 5 10 annual report shall include a copy of the audit of the Iowa 5 11 fund of funds and a valuation of the assets of the Iowa fund 5 12 of funds, review the progress of the investment fund 5 13 allocation manager in implementing its investment plan, and 5 14 describe any redemption or transfer of a certificate issued 5 15 pursuant to this division, provided, however, that the annual 5 16 report shall not identify any specific designated investor who 5 17 has redeemed or transferred a certificate. Every five years, 5 18 the board shall publish a progress report which shall evaluate 5 19 the progress of the state of Iowa in accomplishing the 5 20 purposes stated in section 15E.221. 5 21 10. The board shall redeem a certificate submitted to the 5 22 board by a designated investor and shall calculate the amount 5 23 of the allowable tax credit based upon the investment returns 5 24 received by the designated investor and its predecessors in 5 25 interest and the provisions of the certificate. Upon 5 26 submission of a certificate for redemption, the board shall 5 27 issue a verification to the department of revenue and finance 5 28 setting forth the maximum tax credit which may be claimed by 5 29 the designated investor with respect to the redemption of the 5 30 certificate. 5 31 11. The board shall adopt rules pursuant to chapter 17A 5 32 necessary to administer the duties of the board. 5 33 Sec. 4. NEW SECTION. 15E.224 IOWA CAPITAL INVESTMENT 5 34 CORPORATION. 5 35 1. An Iowa capital investment corporation may be organized 6 1 as a private, not-for-profit corporation under chapter 504A. 6 2 The Iowa capital investment corporation is not a public 6 3 corporation or instrumentality of the state and shall not 6 4 enjoy any of the privileges and shall not be required to 6 5 comply with any of the requirements of a state agency. Except 6 6 as otherwise provided in this division, this division does not 6 7 exempt the corporation from the requirements under state law 6 8 which apply to other corporations organized under chapter 6 9 504A. The purposes of an Iowa capital investment corporation 6 10 shall be to organize the Iowa fund of funds, to select a 6 11 venture capital investment fund allocation manager to select 6 12 venture capital fund investments by the Iowa fund of funds, to 6 13 negotiate the terms of a contract with the venture capital 6 14 investment fund allocation manager, to execute the contract 6 15 with the selected venture capital investment fund manager on 6 16 behalf of the Iowa fund of funds, to receive investment 6 17 returns from the Iowa fund of funds, and to reinvest the 6 18 investment returns in additional venture capital investments 6 19 designed to result in a significant potential to create jobs 6 20 and to diversify and stabilize the economy of the state. The 6 21 corporation shall not exercise governmental functions and 6 22 shall not have members. The obligations of the corporation 6 23 are not obligations of this state or any political subdivision 6 24 of this state within the meaning of any constitutional or 6 25 statutory debt limitations, but are obligations of the 6 26 corporation payable solely and only from the corporation's 6 27 funds. The corporation shall not pledge the credit or taxing 6 28 power of this state or any political subdivision of this state 6 29 or make its debts payable out of any moneys except those of 6 30 the corporation. 6 31 2. To facilitate the organization of an Iowa capital 6 32 investment corporation, the following persons shall serve as 6 33 incorporators as provided in section 504A.28: 6 34 a. The chairperson of the Iowa finance authority. 6 35 b. The chairperson of the Iowa economic development board. 7 1 c. The chairperson of the board of directors of the 7 2 association of business and industry. 7 3 3. After incorporation, the initial board of directors 7 4 shall be elected by the incorporators. The initial board of 7 5 directors shall consist of five members. The persons elected 7 6 to the initial board of directors by the incorporators shall 7 7 include persons who have an expertise in the areas of the 7 8 selection and supervision of investment managers or in the 7 9 fiduciary management of investment funds, and other areas of 7 10 expertise as deemed appropriate by the incorporators. After 7 11 the election of the initial board of directors, vacancies in 7 12 the board of directors of the corporation shall be elected by 7 13 the remaining directors of the corporation. Members of the 7 14 board of directors shall be subject to any restrictions on 7 15 conflicts of interest specified in the organizational 7 16 documents and shall have no interest in any venture capital 7 17 investment fund allocation manager selected by the corporation 7 18 pursuant to the provisions of this division or in any 7 19 investments made by the Iowa fund of funds. 7 20 4. The incorporators shall exercise due care to assure 7 21 that persons elected to the initial board of directors have 7 22 the requisite financial experience necessary in order to carry 7 23 out the duties of the corporation as established in this 7 24 division, including in areas related to venture capital 7 25 investment, investment management, and supervision of 7 26 investment managers and investment funds. 7 27 5. The department of economic development shall assist the 7 28 incorporators in any manner determined necessary and 7 29 appropriate by the incorporators. 7 30 6. After incorporation, the Iowa capital investment 7 31 corporation shall conduct a national solicitation for 7 32 investment plan proposals from qualified venture capital 7 33 investment fund allocation managers for the raising and 7 34 investing of capital by the Iowa fund of funds in accordance 7 35 with the requirements of this division. Any proposed 8 1 investment plan shall address the applicant's level of 8 2 experience, quality of management, investment philosophy and 8 3 process, probability of success in fund-raising, prior 8 4 investment fund results, and plan for achieving the purposes 8 5 of this division. The selected venture capital investment 8 6 fund allocation manager shall be a person with substantial, 8 7 successful experience in the design, implementation, and 8 8 management of seed and venture capital investment programs and 8 9 in capital formation. The corporation shall only select a 8 10 venture capital investment fund allocation manager with 8 11 demonstrated expertise in the management and fund allocation 8 12 of investments in venture capital funds. The corporation 8 13 shall select the venture capital investment fund allocation 8 14 manager deemed best qualified to generate the amount of 8 15 capital required by this division and to invest the capital of 8 16 the Iowa fund of funds. 8 17 7. The Iowa capital investment corporation may charge a 8 18 management fee on assets under management in the Iowa fund of 8 19 funds. The fee shall be in addition to any fee charged to the 8 20 Iowa fund of funds by the venture capital investment fund 8 21 allocation manager selected by the corporation, but the fee 8 22 shall be charged only to pay for reasonable and necessary 8 23 costs of the Iowa capital investment corporation and shall not 8 24 exceed one-half of one percent per year of the value of assets 8 25 under management. 8 26 8. Directors of the Iowa capital investment corporation 8 27 shall be compensated for direct expenses and mileage but shall 8 28 not receive a director's fee or salary for service as 8 29 directors. 8 30 9. The Iowa capital investment corporation shall have the 8 31 power to engage consultants, expend funds, invest funds, 8 32 contract, bond or insure against loss, or perform any other 8 33 act necessary to carry out its purpose. However, the 8 34 corporation shall not hire staff as employees except to 8 35 administer the rural and small business loan guarantee program 9 1 of the Iowa fund of funds. 9 2 10. Upon the dissolution of the Iowa fund of funds, the 9 3 Iowa capital investment corporation shall be liquidated and 9 4 dissolved, and any assets owned by the corporation shall be 9 5 distributed to the state of Iowa and deposited in the general 9 6 fund. 9 7 Sec. 5. NEW SECTION. 15E.225 IOWA FUND OF FUNDS. 9 8 1. The Iowa capital investment corporation shall organize 9 9 the Iowa fund of funds. The Iowa fund of funds shall be 9 10 authorized to make investments in private seed and venture 9 11 capital partnerships or entities in a manner which will 9 12 encourage the availability of a wide variety of venture 9 13 capital in the state, strengthen the economy of the state, 9 14 help business in Iowa gain access to sources of capital, help 9 15 build a significant, permanent source of capital available to 9 16 serve the needs of Iowa businesses, and accomplish all these 9 17 benefits in a way that minimizes the use of tax credits. 9 18 2. The Iowa capital investment corporation shall organize 9 19 the Iowa fund of funds in the following manner: 9 20 a. The Iowa fund of funds shall be organized as a private, 9 21 for-profit, limited partnership or limited liability company 9 22 under Iowa law pursuant to which the Iowa capital investment 9 23 corporation shall be the general partner or manager. The 9 24 entity shall be organized so as to provide for equity 9 25 interests for designated investors which provide for a 9 26 designated scheduled rate of return and a scheduled redemption 9 27 which shall occur not less than five years following the 9 28 issuance of such equity interests. The interest of the Iowa 9 29 capital investment corporation in the Iowa fund of funds shall 9 30 be to serve as general partner or manager and to be paid a 9 31 management fee for the service as provided in section 15E.224, 9 32 subsection 7, and to receive investment returns of the Iowa 9 33 fund of funds in excess of those payable to designated 9 34 investors. Any returns in excess of those payable to 9 35 designated investors shall be reinvested by the Iowa capital 10 1 investment corporation by being held in the Iowa fund of funds 10 2 as a revolving fund for reinvestment in venture capital funds 10 3 or investments until the termination of the Iowa fund of 10 4 funds. Any returns received from these reinvestments shall be 10 5 deposited in the revolving fund. 10 6 b. The Iowa fund of funds shall principally make 10 7 investments in high-quality venture capital funds managed by 10 8 investment managers who have made a commitment to consider 10 9 equity investments in businesses located within the state of 10 10 Iowa and which have committed to maintain a physical presence 10 11 within the state of Iowa. The investments by the Iowa fund of 10 12 funds shall be focused principally on partnership interests in 10 13 private venture capital funds and not in direct investments in 10 14 individual businesses. The Iowa fund of funds shall invest in 10 15 venture capital funds with experienced managers or management 10 16 teams with demonstrated expertise and a successful history in 10 17 the investment of venture capital funds. The Iowa fund of 10 18 funds may invest in newly created venture capital funds as 10 19 long as the managers or management teams of the funds have the 10 20 experience, expertise, and a successful history in the 10 21 investment of venture capital funds described in this 10 22 paragraph. 10 23 c. The Iowa fund of funds shall establish and administer a 10 24 program to provide loan guarantees and other related credit 10 25 enhancements on loans to rural and small business borrowers 10 26 within the state of Iowa. The Iowa fund of funds shall invest 10 27 a minimum of five percent of its assets in investments for 10 28 this program. 10 29 d. The Iowa fund of funds shall have the power to engage 10 30 consultants, expend funds, invest funds, contract, bond or 10 31 insure against loss, or perform any other act necessary to 10 32 carry out its purpose, including, without limitation, engaging 10 33 and agreeing to compensate a venture capital investment fund 10 34 allocation manager. Such compensation shall be in addition to 10 35 the management fee paid to the Iowa capital investment 11 1 corporation. However, the Iowa fund of funds shall not hire 11 2 employees except to administer its rural and small business 11 3 loan guarantee and credit enhancement program. 11 4 e. The Iowa fund of funds may issue debt and borrow such 11 5 funds as may be needed to accomplish its goals. However, such 11 6 debt shall not be secured by tax credits issued by the board. 11 7 The Iowa fund of funds may open and manage bank and short-term 11 8 investment accounts as deemed necessary by the venture capital 11 9 investment fund allocation manager. 11 10 f. The Iowa fund of funds may expend moneys to secure 11 11 investment ratings for investments by designated investors in 11 12 the Iowa fund of funds. 11 13 g. The Iowa fund of funds shall engage a certified public 11 14 accountant to conduct an annual audit of the activities of the 11 15 Iowa fund of funds. The audit shall be delivered to the Iowa 11 16 capital investment corporation and the board each year and 11 17 shall include a valuation of the assets owned by the Iowa fund 11 18 of funds as of the end of each year. 11 19 h. Fifty years after the organization of the Iowa fund of 11 20 funds, the Iowa capital investment corporation shall cause the 11 21 Iowa fund of funds to be liquidated with all of its assets 11 22 distributed to its owners in accordance with the provisions of 11 23 its organizational documents. 11 24 Sec. 6. NEW SECTION. 15E.226 CERTIFICATES AND TAX 11 25 CREDITS. 11 26 1. The board may issue certificates and related tax 11 27 credits to designated investors which, if redeemed for the 11 28 maximum possible amount, shall not exceed a total aggregate of 11 29 one hundred million dollars of tax credits. The certificates 11 30 shall be issued contemporaneously with an investment in the 11 31 Iowa fund of funds by a designated investor. A certificate 11 32 issued by the board shall have a specific calendar year 11 33 maturity date designated by the board of not less than five 11 34 years after the date of issuance and shall be redeemable on a 11 35 schedule similar to the scheduled redemption of investments by 12 1 designated investors. A certificate and the related tax 12 2 credit shall be transferable by the designated investor. A 12 3 tax credit shall not be claimed or redeemed except by a 12 4 designated investor or transferee in accordance with the terms 12 5 of a certificate from the board. A tax credit shall be 12 6 claimed for a tax year that begins during the calendar year 12 7 maturity date stated on the certificate. An individual may 12 8 claim the credit of a partnership, limited liability company, 12 9 S corporation, estate, or trust electing to have the income 12 10 taxed directly to the individual. The amount claimed by the 12 11 individual shall be based upon the pro rata share of the 12 12 individual's earnings from the partnership, limited liability 12 13 company, S corporation, estate, or trust. Any tax credit in 12 14 excess of the taxpayer's tax liability for the tax year may be 12 15 credited to the tax liability for the following seven years, 12 16 or until depleted, whichever is earlier. 12 17 2. The board shall certify the maximum amount of a tax 12 18 credit which could be issued to a designated investor and 12 19 identify the specific calendar year the certificate may be 12 20 redeemed pursuant to this division. The amount of the tax 12 21 credit shall be limited to an amount equivalent to any 12 22 difference between the scheduled aggregate return to the 12 23 designated investor at rates of return authorized by the board 12 24 and aggregate actual return received by the designated 12 25 investor and any predecessor in interest of capital and 12 26 interest on the capital. The rates, whether fixed rates or 12 27 variable rates, shall be determined pursuant to a formula 12 28 stipulated in the certificate. The board shall clearly 12 29 indicate on the certificate the schedule, the amount of equity 12 30 investment, the calculation formula for determining the 12 31 scheduled aggregate return on invested capital, and the 12 32 calculation formula for determining the amount of the tax 12 33 credit that may be claimed. Once moneys are invested by a 12 34 designated investor, the certificate shall be binding on the 12 35 board and the department of revenue and finance and shall not 13 1 be modified, terminated, or rescinded. 13 2 3. If a designated investor elects to redeem a 13 3 certificate, the certificate shall be redeemed on June 30 of 13 4 the calendar year maturity date stated on the certificate. At 13 5 the time of redemption, the board shall determine the amount 13 6 of the tax credit that may be claimed by the designated 13 7 investor based upon the returns received by the designated 13 8 investor and its predecessors in interest and the provisions 13 9 of the certificate. The board shall issue a verification to 13 10 the department of revenue and finance setting forth the 13 11 maximum tax credit which can be claimed by the designated 13 12 investor with respect to the redemption of the certificate. 13 13 4. The board shall, in conjunction with the department of 13 14 revenue and finance, develop a system for registration of any 13 15 certificate and related tax credit issued or transferred 13 16 pursuant to this section and a system that permits 13 17 verification that any tax credit claimed upon a tax return is 13 18 valid and that any transfers of the certificate and related 13 19 tax credit are made in accordance with the requirements of 13 20 this division. 13 21 5. The board shall issue the tax credits in such a manner 13 22 that not more than twenty million dollars of tax credits may 13 23 be initially redeemable in any fiscal year. 13 24 6. A certificate or tax credit issued or transferred 13 25 pursuant to this division shall not be considered a security 13 26 pursuant to chapter 502. 13 27 7. In determining the one hundred million dollar maximum 13 28 limit in subsection 1 and the twenty million dollar limitation 13 29 in subsection 5, the board shall use the cumulative amount of 13 30 scheduled aggregate returns on certificates issued by the 13 31 board to designated investors. However, certificates and 13 32 related tax credits which have expired shall not be included 13 33 and certificates and related tax credits which have been 13 34 redeemed shall be included only to the extent of tax credits 13 35 actually allowed. 14 1 Sec. 7. NEW SECTION. 15E.227 POWERS AND EFFECTIVENESS. 14 2 This division shall not be construed as a restriction or 14 3 limitation upon any power which the board might otherwise have 14 4 under any other law of this state and the provisions of this 14 5 division are cumulative to such powers. This division shall 14 6 be construed to provide a complete, additional, and 14 7 alternative method for performing the duties authorized and 14 8 shall be regarded as supplemental and additional powers 14 9 conferred by any other laws. The level, timing, or degree of 14 10 success of the Iowa fund of funds or the investment funds in 14 11 which the Iowa fund of funds invests in, or the extent to 14 12 which the investment funds are invested in Iowa venture 14 13 capital projects, or are successful in accomplishing any 14 14 economic development objectives, shall not compromise, 14 15 diminish, invalidate, or affect the provisions of any contract 14 16 entered into by the board or the Iowa fund of funds. 14 17 Sec. 8. NEW SECTION. 15E.228 PERMISSIBLE INVESTMENTS. 14 18 Investments by designated investors in the Iowa fund of 14 19 funds shall be deemed permissible investments for state- 14 20 chartered banks and for domestic insurance companies under 14 21 applicable state laws. 14 22 DIVISION II 14 23 NEW ECONOMY EMPLOYMENT INITIATIVE 14 24 Sec. 9. Section 422.7, Code Supplement 2001, is amended by 14 25 adding the following new subsection: 14 26 NEW SUBSECTION. 38. a. For purposes of this subsection: 14 27 (1) "Capital stock" means voting and nonvoting common and 14 28 preferred stock and stock options issued pursuant to an 14 29 incentive stock option plan. "Capital stock" does not include 14 30 stock rights, stock warrants, or debt securities, and does not 14 31 include stock or stock options issued by a corporation which 14 32 does not offer incentive stock options to all full-time 14 33 employees. A corporation does not offer incentive stock 14 34 options to all full-time employees unless each of those 14 35 employees is issued at least a number of incentive stock 15 1 options equal to twenty percent of all issued outstanding 15 2 incentive stock options divided by the number of full-time 15 3 employees. 15 4 (2) "Corporation" means any of the following: 15 5 (a) A corporation which at the time of the first sale or 15 6 exchange for which an election is made under paragraph "c" has 15 7 been in existence and actively doing business for at least 15 8 three years and is not a personal holding company as defined 15 9 in section 542(a) of the Internal Revenue Code. 15 10 (b) A corporation which is a member of an affiliated 15 11 group, as defined in section 1504(a) of the Internal Revenue 15 12 Code, which group includes a corporation described in 15 13 subparagraph subdivision (a) and which group has been in 15 14 existence and actively doing business for at least three 15 15 years. 15 16 (c) A predecessor or successor corporation of a 15 17 corporation described in subparagraph subdivision (a). A 15 18 corporation is a predecessor or successor corporation if the 15 19 corporation was a party to a reorganization that was entirely 15 20 or substantially income tax free and that occurred during or 15 21 after the employment of the taxpayer making an election under 15 22 paragraph "c". 15 23 (3) "Incentive stock option" means the same as defined in 15 24 section 422(b) of the Internal Revenue Code. 15 25 b. For purposes of this subsection, the corporation 15 26 issuing capital stock for which an election under paragraph 15 27 "c" is made must, at the time of the first sale or exchange 15 28 for which the election is made, have at least five 15 29 shareholders and at least two shareholders or groups of 15 30 shareholders who are not related to each other and each of 15 31 which owns at least five percent of the capital stock. 15 32 For purposes of this paragraph "b", two persons shall be 15 33 considered to be related when, under section 318 of the 15 34 Internal Revenue Code, one is a person who owns, directly or 15 35 indirectly, capital stock that if directly owned would be 16 1 attributed to the other person or is the spouse, child, 16 2 parent, grandparent, brother, sister, aunt, uncle, cousin, 16 3 niece, or nephew of the other person who owns capital stock 16 4 either directly or indirectly. 16 5 c. (1) In the manner provided in paragraph "d", an 16 6 individual may elect to subtract one-half of the capital gain 16 7 from the sale or exchange of capital stock of a corporation 16 8 acquired by the individual on account of employment with that 16 9 corporation. However, for tax years beginning in the 2002 16 10 calendar year, the amount that may be subtracted is one-fourth 16 11 of such capital gain. 16 12 (2) (a) Each individual shall be entitled to two 16 13 elections under subparagraph (1) during the individual's 16 14 lifetime for the capital stock of two different corporations. 16 15 (b) The election applies only to the tax year for which 16 16 the election was made and applies to all sales and exchanges 16 17 in the tax year for which the election was made of capital 16 18 stock in the same corporation which was acquired as provided 16 19 in subparagraph (1). 16 20 (c) After the individual makes an election for the tax 16 21 year, the election shall also apply to the sale or exchange in 16 22 that tax year of capital stock of the corporation which had 16 23 been transferred by inter vivos gift from the individual to 16 24 the individual's spouse if the capital stock was acquired as 16 25 provided in subparagraph (1). This provision applies in the 16 26 case of the spouse, only if the spouse was married to such 16 27 individual on the date of sale or exchange or the date of 16 28 death of the individual and if the spouse and individual file 16 29 a joint Iowa income tax return on which the election is made. 16 30 If the individual dies without making an election, the 16 31 surviving spouse may make the election for capital stock that 16 32 would have qualified under this subparagraph subdivision. 16 33 However, if there is no surviving spouse, the oldest surviving 16 34 issue who owns capital stock that would have qualified under 16 35 this subparagraph subdivision may make the election. 17 1 d. An election under paragraph "c" shall be made by 17 2 including a written statement with the taxpayer's Iowa income 17 3 tax return for the tax year for which the election is made. 17 4 The written statement shall identify the corporation that 17 5 issued the capital stock, the grounds for the election under 17 6 this subsection, and that the taxpayer elects to have this 17 7 subsection apply to sales and exchanges in that tax year. 17 8 (1) In order for the taxpayer to claim the benefits of the 17 9 partial deduction of the capital gain under this subsection, 17 10 the taxpayer must completely fill out the tax return, 17 11 determine the taxpayer's income tax liability without the 17 12 benefit of this subsection, and pay the amount of tax owed. 17 13 The taxpayer shall recompute the taxpayer's income tax 17 14 liability, by applying the provisions of this subsection on a 17 15 special return. This special return shall be filed under 17 16 rules of the director and constitutes a claim for refund of 17 17 the difference between the amount of tax the taxpayer paid as 17 18 determined without the application of the provisions of this 17 19 subsection and the amount of tax determined with the 17 20 application of the provisions of this subsection. 17 21 (2) This subsection shall not affect the amount of the 17 22 taxpayer's checkoff to the Iowa election campaign fund under 17 23 section 56.18, the checkoff for the state fish and game 17 24 protection fund in section 456A.16, the credits from tax 17 25 provided in sections 422.10, 422.11A, and 422.12 and the 17 26 allocation of these credits between spouses if the taxpayers 17 27 filed separate returns or separately on combined returns. 17 28 (3) For any tax year, the aggregate amount of refund 17 29 claims that shall be paid pursuant to this subsection shall 17 30 not exceed three million dollars. If, for a tax year, the 17 31 aggregate amount of refund claims filed pursuant to this 17 32 subsection exceeds three million dollars, each claim for 17 33 refund shall be paid on a pro rata basis so that the aggregate 17 34 amount of refund claims paid does not exceed three million 17 35 dollars. In the case where refund claims are not paid in 18 1 full, the amount of the refund to which the taxpayer is 18 2 entitled under this subsection is the pro rata amount that was 18 3 paid and the taxpayer is not entitled to a refund of the 18 4 unpaid portion and is not entitled to carry that amount 18 5 forward or backward to another tax year. Taxpayers shall not 18 6 use refunds as estimated payments for the succeeding tax year. 18 7 Taxpayers whose tax years begin on January 1 must file their 18 8 refund claims by October 31 of the calendar year following the 18 9 end of their tax years to be eligible for refunds. Taxpayers 18 10 whose tax years begin on a date other than January 1 must file 18 11 their refund claims by the end of the tenth month following 18 12 the end of their tax years to be eligible. The department 18 13 shall determine on February 1 of the second succeeding 18 14 calendar year if the total amount of claims for refund exceeds 18 15 three million dollars for the tax year. Notwithstanding any 18 16 other provision, interest shall not be due on any refund 18 17 claims that are paid by the last day of February of the second 18 18 succeeding calendar year. If the claim is not payable on 18 19 February 1 of the second succeeding calendar year, because the 18 20 taxpayer is a fiscal year filer, the claim shall be considered 18 21 a claim for the following tax year. 18 22 e. The deduction under this subsection is in lieu of any 18 23 deduction allowable under section 1202 of the Internal Revenue 18 24 Code for the capital gain from the sale or exchange of the 18 25 same capital stock. 18 26 Sec. 10. EFFECTIVE AND RETROACTIVE APPLICABILITY DATE. 18 27 This division of this Act, being deemed of immediate 18 28 importance, takes effect upon enactment and applies 18 29 retroactively to January 1, 2002, for tax years beginning on 18 30 or after that date. 18 31 DIVISION III 18 32 SMALL BUSINESS GROWTH INITIATIVE 18 33 Sec. 11. Section 422.8, subsection 2, paragraph b, 18 34 subparagraph (2), Code 2001, is amended to read as follows: 18 35 (2) Any cash or the value of property distributions which 19 1 are made only to the extent that they are paid from income 19 2 upon which Iowa income tax has not been paid, as determined 19 3 under rules of the director, reduced by
fifty percent ofthe 19 4 amount of any of these distributions that are made to enable 19 5 the shareholder to pay federal income tax on items of income, 19 6 loss, and expenses from the corporation. 19 7 Sec. 12. APPLICABILITY PROVISION. This division of this 19 8 Act applies retroactively to January 1, 2002, for tax years 19 9 beginning on or after that date. 19 10 EXPLANATION 19 11 This bill relates to economic stimulus measures for 19 12 businesses. The bill is divided into three divisions with 19 13 division I relating to a venture capital initiative, division 19 14 II relating to a new economy employment initiative, and 19 15 division III relating to a small business growth initiative. 19 16 Division I - Division I of this bill creates a state 19 17 governmental entity, the Iowa capital investment board, and 19 18 authorizes the organization of a private, not-for-profit 19 19 corporation, the Iowa capital investment corporation, and the 19 20 organization of a for-profit, limited partnership or limited 19 21 liability company, the Iowa fund of funds. The division also 19 22 authorizes the issuance of tax credits to investors in the 19 23 Iowa fund of funds. 19 24 The division creates the Iowa capital investment board as a 19 25 governmental entity. The division provides that the board 19 26 shall consist of five voting members and two nonvoting 19 27 members. The division provides the board with powers to carry 19 28 out its purpose and prohibits the board from hiring employees. 19 29 The division provides that board members are indemnified 19 30 against loss under Code chapter 669. The division provides 19 31 that board meetings shall comply with open meetings laws, 19 32 except to the extent necessary to protect confidential 19 33 information with respect to investments in and investments 19 34 made by the Iowa fund of funds. The division provides that 19 35 the board, in cooperation with the department of revenue and 20 1 finance, shall establish criteria and procedures for the 20 2 allocation and issuance of tax credits to designated investors 20 3 by means of certificates issued by the board. The division 20 4 provides that the board shall issue certificates which may be 20 5 redeemable for tax credits as incentives to designated 20 6 investors to make equity investments. The division provides 20 7 that the board shall issue the certificates so that not more 20 8 than $20 million of tax credits may be initially redeemable in 20 9 any fiscal year. The division provides that the board may 20 10 charge a placement fee to the Iowa fund of funds with respect 20 11 to the issuance of a certificate and related tax credit. The 20 12 division provides that the board, in consultation with the 20 13 Iowa capital investment corporation, shall publish an annual 20 14 report of the activities conducted by the Iowa fund of funds. 20 15 The division provides that the board shall redeem a 20 16 certificate submitted by a designated investor, shall 20 17 calculate the amount of the allowable tax credit, and issue a 20 18 verification to the department of revenue and finance setting 20 19 forth the maximum tax credit which may be claimed. The 20 20 division requires the board to adopt administrative rules 20 21 necessary to administer the duties of the board. 20 22 The division authorizes the organization of an Iowa capital 20 23 investment corporation as a private, not-for-profit 20 24 corporation. The division provides a method for 20 25 incorporation, including providing for incorporators and an 20 26 initial board of directors. The division provides that the 20 27 department of economic development shall assist the 20 28 incorporators in any manner determined necessary and 20 29 appropriate. The division provides that the corporation shall 20 30 conduct a national solicitation for an investment plan 20 31 proposal. The division provides that the corporation may 20 32 charge a management fee on assets under management in the Iowa 20 33 fund of funds which shall not exceed one-half of 1 percent per 20 34 year of the value of the assets under management. The 20 35 division provides that the directors of the corporation shall 21 1 be compensated for direct expenses and mileage, but shall not 21 2 receive a director's fee or salary for their service. The 21 3 division provides the corporation with various business- 21 4 related powers. The division provides that, upon the 21 5 dissolution of the Iowa fund of funds, the corporation shall 21 6 be liquidated and dissolved, and any assets owned by it shall 21 7 be distributed to the state of Iowa. 21 8 The division provides for the organization of the Iowa fund 21 9 of funds by the Iowa capital investment corporation. The 21 10 division provides that the Iowa fund of funds shall be 21 11 organized as a for-profit limited partnership or limited 21 12 liability company to which the Iowa capital investment 21 13 corporation shall be the general partner or manager. The 21 14 division provides that the Iowa fund of funds shall be 21 15 organized so as to provide for equity interests for designated 21 16 investors which provide for a designated scheduled rate of 21 17 return and a scheduled redemption which shall occur not less 21 18 than five years following the issuance of such equity 21 19 interests. 21 20 The division provides that the Iowa fund of funds shall 21 21 principally make investments in high-quality venture capital 21 22 funds managed by investment managers who have made a 21 23 commitment to consider equity investments in businesses 21 24 located within the state of Iowa and which have committed to 21 25 maintain a physical presence within the state of Iowa. The 21 26 division provides that the Iowa fund of funds shall invest a 21 27 minimum of 5 percent of its assets in investments in the form 21 28 of loan guarantees and other related credit enhancements on 21 29 loans to rural and small business borrowers within the state 21 30 of Iowa. The division provides the Iowa fund of funds with 21 31 certain business-related powers. The division provides that 21 32 the Iowa fund of funds may issue debt and borrow and may open 21 33 and manage bank and short-term investment accounts. The 21 34 division provides that the Iowa fund of funds may expend 21 35 moneys to secure investment ratings for investments by 22 1 designated investors. The division provides that the Iowa 22 2 fund of funds shall engage a certified public accountant to 22 3 conduct an annual audit. The division provides that the Iowa 22 4 fund of funds shall be liquidated 50 years following the 22 5 organization of the Iowa fund of funds. 22 6 The division provides that the Iowa capital investment 22 7 board may issue to designated investors certificates and 22 8 related tax credits which shall not exceed a total aggregate 22 9 of $100 million of tax credits. The division provides the 22 10 certificates shall be issued contemporaneously with an 22 11 investment in the Iowa fund of funds by a designated investor. 22 12 The division provides that the certificates and tax credits 22 13 are transferable. The division provides that a tax credit 22 14 shall be claimed for a tax year that begins during the 22 15 calendar year maturity date stated on the certificate. The 22 16 division provides that the amount of the tax credit shall be 22 17 limited to the equivalent of any difference between the 22 18 scheduled aggregate return to the designated investor and the 22 19 aggregate return on invested capital at rates of return 22 20 authorized by the board. The division provides that any tax 22 21 credit in excess of the designated investor's tax liability 22 22 for the tax year may be credited to the tax liability for the 22 23 following seven years, or until depleted, whichever is 22 24 earlier. The division provides that the board, in conjunction 22 25 with the department of revenue and finance, develop a system 22 26 for registration of any certificate and related tax credit 22 27 issued or transferred and a verification system. The division 22 28 provides that the board shall issue tax credits in such a 22 29 manner that not more than $20 million of tax credits may be 22 30 initially redeemable in any fiscal year. The division 22 31 provides that a certificate or tax credit issued pursuant to 22 32 the division is not considered a security. 22 33 The division provides provisions relating to statutory 22 34 construction and the powers of the Iowa capital investment 22 35 board. 23 1 The division provides that investments by designated 23 2 investors in the Iowa fund of funds shall be deemed 23 3 permissible investments for state-chartered banks and for 23 4 domestic insurance companies under applicable state laws. 23 5 Division II - Division II of this bill provides a deduction 23 6 under the individual income tax of 50 percent (25 percent for 23 7 the 2002 tax year) of the capital gain from the sale or 23 8 exchange of capital stock of a corporation acquired by the 23 9 taxpayer on account of employment with the corporation. The 23 10 taxpayer must make an election to take the deduction and the 23 11 election only applies for that tax year. The election is made 23 12 by a written statement filed with the department. In 23 13 addition, the benefits of the deduction are realized by means 23 14 of a refund claim. This involves the taxpayer filing a return 23 15 with tax liability determined without deduction for the 23 16 capital gain and a special return with tax liability 23 17 determined with the deduction for the capital gain. The 23 18 reduction in tax liability will be treated as a claim for 23 19 refund of the amount of the reduction. However, not more than 23 20 $3 million in tax refunds may be allowed for any tax year. If 23 21 more refunds are claimed, then each refund claim is payable at 23 22 a pro rata amount, which is the final amount of the taxpayer's 23 23 actual refund. A taxpayer may make two elections for two 23 24 different corporations during the taxpayer's lifetime. The 23 25 election would also apply to stock sold during that tax year 23 26 which was previously granted to a spouse of the taxpayer but 23 27 only if they file a joint Iowa income tax return. The 23 28 election would not apply to capital gains from stock or stock 23 29 options unless the corporation issuing the options offered 23 30 them to all full-time employees. 23 31 The deduction is in lieu of the deduction that may be 23 32 allowable under the Internal Revenue Code for sale or exchange 23 33 of stock in a small business held for five years. 23 34 The division takes effect upon enactment and applies 23 35 retroactively to January 1, 2002, for tax years beginning on 24 1 or after that date. 24 2 Division III - Under the state individual income tax, 24 3 resident shareholders of S corporations doing business within 24 4 and without the state are allowed to allocate income between 24 5 Iowa and other states in determining their state income tax. 24 6 As part of the allocation procedure, under current law, 50 24 7 percent of the amount of an S corporation distribution 24 8 received by a shareholder, which is used to pay federal income 24 9 tax, is not allocated to Iowa. Division III of the bill 24 10 increases this percentage to 100 percent. 24 11 The division applies retroactively to January 1, 2002, for 24 12 tax years beginning on or after that date. 24 13 LSB 5762SV 79 24 14 tm/sh/8
Text: SF02024 Text: SF02026 Text: SF02000 - SF02099 Text: SF Index Bills and Amendments: General Index Bill History: General Index
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