House File 2311 - Introduced HOUSE FILE 2311 BY BRANDENBURG A BILL FOR An Act providing an exemption from the computation of the state 1 individual income tax of certain dividends and net capital 2 gain from the sale or exchange of qualified capital stock 3 and including effective date and retroactive applicability 4 provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 5158YH (1) 84 mm/sc

H.F. 2311 Section 1. Section 422.7, Code Supplement 2011, is amended 1 by adding the following new subsection: 2 NEW SUBSECTION . 57. a. Subtract, to the extent included, 3 the extraordinary dividends from, and net capital gain from 4 the sale or exchange of, the capital stock of the qualified 5 corporation for which an election is made pursuant to paragraph 6 “b” . 7 b. (1) A resident individual is entitled to make one 8 irrevocable lifetime election to exclude the extraordinary 9 dividends from, and net capital gain from the sale or exchange 10 of, the capital stock of one qualified corporation which 11 capital stock was acquired by the resident individual on 12 account of employment by such qualified corporation or while 13 employed by such qualified corporation. 14 (2) The election shall apply to all subsequent 15 extraordinary dividends and sales or exchanges of the elected 16 capital stock, provided it is capital stock in the same 17 qualified corporation and was acquired on account of employment 18 by such qualified corporation or while employed by such 19 qualified corporation. 20 (3) The election shall apply to transfers of the capital 21 stock by inter vivos gift from the electing individual to the 22 electing individual’s spouse or lineal descendants, or to a 23 trust for the benefit of the individual’s spouse or lineal 24 descendants. This subparagraph shall apply to a spouse only if 25 the spouse was married to the electing individual on the date 26 of the extraordinary dividend or sale or exchange or the date 27 of death of the electing individual. 28 (4) If a resident individual dies without making an 29 election, the surviving spouse or, if there is no surviving 30 spouse, the oldest surviving lineal descendant may make the 31 election that would have qualified under subparagraph (3). 32 (5) The election shall be made by including a written 33 statement with the taxpayer’s state income tax return for 34 the taxable year in which the election is made. The written 35 -1- LSB 5158YH (1) 84 mm/sc 1/ 5

H.F. 2311 statement shall identify the qualified corporation that issued 1 the capital stock, the grounds for the election under this 2 paragraph, a statement that the taxpayer elects to have this 3 paragraph apply, and any other information required by the 4 department. The department shall provide appropriate forms 5 for making elections and reporting exclusions pursuant to this 6 subsection. 7 c. For purposes of this subsection: 8 (1) “Capital stock” means common or preferred stock, either 9 voting or nonvoting. “Capital stock” does not include stock 10 rights, stock warrants, stock options, or debt securities. 11 (2) “Electing individual” means a resident individual who 12 makes an election under paragraph “b” , subparagraph (1). 13 (3) “Extraordinary dividend” means any dividend paid on 14 capital stock exceeding twenty percent of the fair market value 15 of the capital stock as of the date the dividend is declared. 16 (4) “Lineal descendant” means children of the electing 17 individual, including legally adopted children and biological 18 children, stepchildren, grandchildren, great-grandchildren, and 19 any other lineal descendants of the electing individual. 20 (5) (a) “Qualified corporation” means a corporation which, 21 at the time an election is made under paragraph “b” , meets the 22 following conditions: 23 (i) The corporation has been in existence and actively doing 24 business in this state for at least three years. 25 (ii) The corporation has at least five shareholders. 26 (iii) The corporation has at least two shareholders or 27 groups of shareholders who are not related and who each 28 own at least ten percent of the capital stock. Two persons 29 are considered to be related when, under section 318 of the 30 Internal Revenue Code, one is a person who owns, directly or 31 indirectly, capital stock that if directly owned would be 32 attributed to the other person, or is the brother, sister, 33 aunt, uncle, cousin, niece, or nephew of the other person who 34 owns capital stock either directly or indirectly. 35 -2- LSB 5158YH (1) 84 mm/sc 2/ 5

H.F. 2311 (b) A qualified corporation shall include any member of 1 an affiliated group, as defined in section 422.32, if the 2 affiliated group includes a member that has been in existence 3 and actively doing business in this state for at least three 4 years. 5 (c) A qualified corporation shall include any corporation 6 that was a party to a reorganization that was entirely or 7 substantially tax free if such reorganization occurred during 8 or after the employment of the electing individual. 9 Sec. 2. EFFECTIVE UPON ENACTMENT. This Act, being deemed of 10 immediate importance, takes effect upon enactment. 11 Sec. 3. RETROACTIVE APPLICABILITY. This Act applies 12 retroactively to January 1, 2012, for tax years beginning on 13 or after that date. 14 EXPLANATION 15 This bill grants an Iowa resident one irrevocable 16 lifetime election to exclude from state income taxation the 17 extraordinary dividends and net capital gain from the sale or 18 exchange of the capital stock of one qualified corporation. 19 Several requirements must be met for stock to qualify as 20 capital stock of a qualified corporation. First, the stock 21 must be either voting or nonvoting, common or preferred 22 stock. Stock rights, stock warrants, stock options, and debt 23 securities do not qualify. Second, the corporation that issued 24 the stock must be in existence and actively doing business in 25 Iowa for at least three years. A corporation that is part of an 26 affiliated group will qualify if the affiliated group includes 27 a member that has been in existence and actively doing business 28 in Iowa for at least three years. Third, the corporation that 29 issued the stock must have at least five shareholders, and two 30 of the shareholders must not be related and must each own at 31 least 10 percent of the stock. Fourth, the stock must have 32 been acquired by the Iowa resident on account of employment 33 with the corporation or while employed by the corporation. A 34 corporation will qualify if it is a party to a reorganization 35 -3- LSB 5158YH (1) 84 mm/sc 3/ 5

H.F. 2311 that was entirely or substantially tax free as long as the 1 reorganization occurred during or after the Iowa resident’s 2 employment. 3 The election shall apply to all subsequent extraordinary 4 dividends and sales of the elected capital stock, provided 5 it is capital stock in the same qualified corporation and 6 was acquired on account of employment by the corporation or 7 while employed by the corporation. “Extraordinary dividends” 8 are defined as any dividend which exceeds 20 percent of the 9 fair market value of the stock as of the date the dividend is 10 declared. 11 The bill provides that the election applies to transfers 12 of the capital stock by inter vivos gift from the electing 13 individual to a spouse or lineal descendant, or to a trust for 14 the benefit of the taxpayer’s spouse or lineal descendant. The 15 election will apply to a spouse only if the spouse was married 16 to the electing individual on the date of the extraordinary 17 dividend or sale or exchange or the date of the individual’s 18 death. 19 If, after making a valid inter vivos transfer of stock that 20 meets all the requirements for an election, an Iowa resident 21 dies without making an election, the surviving spouse, or if 22 there is no surviving spouse, the oldest surviving lineal 23 descendant may make the election. 24 An election is made by including a written statement with the 25 taxpayer’s Iowa income tax return for the taxable year in which 26 the election is made. The written statement shall identify 27 the qualified corporation that issued the capital stock, the 28 grounds for the election, a statement that the taxpayer elects 29 to have the exclusion apply, and any other information required 30 by the department of revenue. The department of revenue is 31 required to provide appropriate forms for making elections and 32 reporting exclusions. 33 The bill takes effect upon enactment and applies 34 retroactively to January 1, 2012, for tax years beginning on 35 -4- LSB 5158YH (1) 84 mm/sc 4/ 5

H.F. 2311 or after that date. 1 -5- LSB 5158YH (1) 84 mm/sc 5/ 5