H.F. 336 Section 1. Section 422.7, subsection 21, paragraph a, 1 subparagraph (2), Code 2013, is amended to read as follows: 2 (2) For purposes of this paragraph subsection , “lineal 3 descendant” means children of the taxpayer, including legally 4 adopted children and biological children, stepchildren, 5 grandchildren, great-grandchildren, and any other lineal 6 descendants of the taxpayer. 7 Sec. 2. Section 422.7, subsection 21, Code 2013, is amended 8 by adding the following new paragraph: 9 NEW PARAGRAPH . f. (1) Net capital gain from the sale or 10 exchange of capital stock of a qualified corporation for which 11 an election is made by an employee-owner. 12 (2) (a) An employee-owner is entitled to make one 13 irrevocable lifetime election to exclude the net capital 14 gain from the sale or exchange of capital stock of one 15 qualified corporation which capital stock was acquired by the 16 employee-owner on account of employment by such qualified 17 corporation and while employed by such qualified corporation. 18 (b) The election shall apply to all subsequent sales or 19 exchanges of the elected capital stock, provided it is capital 20 stock in the same qualified corporation and was acquired on 21 account of employment by such qualified corporation and while 22 employed by such qualified corporation. 23 (c) The election shall apply to transfers of the capital 24 stock by inter vivos gift from the employee-owner to the 25 employee-owner’s spouse or lineal descendants, or to a trust 26 for the benefit of the employee-owner’s spouse or lineal 27 descendants. This subparagraph division (c) shall apply to a 28 spouse only if the spouse was married to the employee-owner on 29 the date of the sale or exchange or the date of death of the 30 employee-owner. 31 (d) If the employee-owner dies without making an election, 32 the surviving spouse or, if there is no surviving spouse, the 33 oldest surviving lineal descendent may make the election that 34 would have qualified under subparagraph division (c). 35 -1- LSB 2096HH (3) 85 mm/sc 1/ 4

H.F. 336 (e) The election shall be made by including a written 1 statement with the taxpayer’s state income tax return for 2 the taxable year in which the election is made. The written 3 statement shall identify the qualified corporation that issued 4 the capital stock, the grounds for the election under this 5 paragraph “f” , a statement that the taxpayer elects to have this 6 paragraph “f” apply, and any other information required by the 7 department. The department shall provide appropriate forms 8 for making elections and reporting exclusions pursuant to this 9 paragraph “f” . 10 (3) For purposes of this paragraph: 11 (a) “Capital stock” means common or preferred stock, either 12 voting or nonvoting. “Capital stock” does not include stock 13 rights, stock warrants, stock options, or debt securities. 14 (b) “Employee-owner” means an individual who owns capital 15 stock in a qualified corporation, which capital stock was 16 acquired by the individual on account of employment by such 17 qualified corporation and while employed by such corporation. 18 (c) (i) “Qualified corporation” means a corporation 19 which, at the time of the first sale or exchange for which an 20 election is made under this paragraph “f” , meets the following 21 conditions: 22 (A) The corporation has been in existence and actively doing 23 business in this state for at least ten years. 24 (B) The corporation has at least five shareholders. 25 (C) The corporation has at least two shareholders or 26 groups of shareholders who are not related. Two persons are 27 considered related when, under section 318 of the Internal 28 Revenue Code, one is a person who owns, directly or indirectly, 29 capital stock that if directly owned would be attributed to the 30 other person, or is the brother, sister, aunt, uncle, cousin, 31 niece, or nephew of the other person who owns capital stock 32 either directly or indirectly. 33 (ii) A qualified corporation shall include any member 34 of an affiliated group, as defined in section 422.32, if the 35 -2- LSB 2096HH (3) 85 mm/sc 2/ 4

H.F. 336 affiliated group includes a member that has been in existence 1 and actively doing business in this state for at least ten 2 years. 3 (iii) A qualified corporation shall include any corporation 4 that was a party to a reorganization that was entirely or 5 substantially tax free if such reorganization occurred during 6 or after the employment of the employee-owner. 7 Sec. 3. EFFECTIVE UPON ENACTMENT. This Act, being deemed of 8 immediate importance, takes effect upon enactment. 9 Sec. 4. RETROACTIVE APPLICABILITY. This Act applies 10 retroactively to January 1, 2013, for tax years beginning on 11 or after that date. 12 EXPLANATION 13 This bill grants an employee-owner, as defined in the 14 bill, one irrevocable lifetime election to exclude from state 15 individual income tax the net capital gain from the sale of 16 the capital stock of one qualified corporation. Several 17 requirements must be met for capital stock to qualify as 18 capital stock of a qualified corporation. First, the stock 19 must be either voting or nonvoting, common or preferred 20 stock. Stock rights, stock warrants, stock options, and debt 21 securities do not qualify. Second, the corporation that issued 22 the stock must be in existence and actively doing business 23 in Iowa for at least 10 years. A corporation that is part 24 of an affiliated group will qualify if the affiliated group 25 includes a member that has been in existence and actively doing 26 business in Iowa for at least 10 years. Third, the corporation 27 that issued the stock must have at least five shareholders, 28 two of whom must not be related. Fourth, the stock must have 29 been acquired by the employee-owner on account of employment 30 with the corporation and while employed by the corporation. A 31 corporation will qualify if it is a party to a reorganization 32 that was entirely or substantially tax free as long as the 33 reorganization occurred during or after the employee-owner’s 34 employment. 35 -3- LSB 2096HH (3) 85 mm/sc 3/ 4

H.F. 336 The election shall apply to all subsequent sales of the 1 elected capital stock, provided it is capital stock in the same 2 qualified corporation and was acquired on account of employment 3 by the corporation and while employed by the corporation. 4 The bill provides that the election applies to transfers of 5 the capital stock by inter vivos gift from the employee-owner 6 to a spouse or lineal descendant, or to a trust for the benefit 7 of the employee-owner’s spouse or lineal descendant. The 8 election will apply to a spouse only if the spouse was married 9 to the employee-owner on the date of the sale or the date of the 10 employee-owner’s death. 11 If, after making a valid inter vivos transfer of stock that 12 meets all the requirements for an election, an employee-owner 13 dies without making an election, the surviving spouse, or if 14 there is no surviving spouse, the oldest surviving lineal 15 descendant may make the election. 16 An election is made by including a written statement 17 containing certain required information, as specified in the 18 bill, with the taxpayer’s Iowa income tax return for the 19 taxable year in which the election is made. The department of 20 revenue is required to provide appropriate forms for making 21 elections and reporting exclusions. 22 The bill takes effect upon enactment and applies 23 retroactively to January 1, 2013, for tax years beginning on 24 or after that date. 25 -4- LSB 2096HH (3) 85 mm/sc 4/ 4