H.F. 466 Section 1. Section 422.7, subsection 21, paragraph a, 1 subparagraph (2), Code 2015, 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 2015, 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 personal representative of the employee-owner’s estate may 34 make the election that would have qualified under subparagraph 35 -1- LSB 2089YH (1) 86 mm/sc 1/ 4

H.F. 466 division (c). 1 (e) The election shall be made by including a written 2 statement with the taxpayer’s state income tax return for 3 the taxable year in which the election is made. The written 4 statement shall identify the qualified corporation that issued 5 the capital stock, the grounds for the election under this 6 paragraph “f” , a statement that the taxpayer elects to have this 7 paragraph “f” apply, and any other information required by the 8 department. The department shall provide appropriate forms 9 for making elections and reporting exclusions pursuant to this 10 paragraph “f” . 11 (3) For purposes of this paragraph: 12 (a) “Capital stock” means common or preferred stock, either 13 voting or nonvoting. “Capital stock” does not include stock 14 rights, stock warrants, stock options, or debt securities. 15 (b) “Employee-owner” means an individual who owns capital 16 stock in a qualified corporation, which capital stock was 17 acquired by the individual on account of employment by such 18 qualified corporation and while employed by such corporation. 19 (c) “Personal representative” means the same as defined in 20 section 633.3, or if there is no such personal representative 21 appointed, then the person legally authorized to perform 22 substantially the same functions. 23 (d) (i) “Qualified corporation” means a corporation 24 which, at the time of the first sale or exchange for which an 25 election is made under this paragraph “f” , meets the following 26 conditions: 27 (A) The corporation has been in existence and actively doing 28 business in this state for at least ten years. 29 (B) The corporation has at least five shareholders. 30 (C) The corporation has at least two shareholders or 31 groups of shareholders who are not related. Two persons are 32 considered related when, under section 318 of the Internal 33 Revenue Code, one is a person who owns, directly or indirectly, 34 capital stock that if directly owned would be attributed to the 35 -2- LSB 2089YH (1) 86 mm/sc 2/ 4

H.F. 466 other person, or is the brother, sister, aunt, uncle, cousin, 1 niece, or nephew of the other person who owns capital stock 2 either directly or indirectly. 3 (ii) A qualified corporation shall include any member 4 of an affiliated group, as defined in section 422.32, if the 5 affiliated group includes a member that has been in existence 6 and actively doing business in this state for at least ten 7 years. 8 (iii) A qualified corporation shall include any corporation 9 that was a party to a reorganization that was entirely or 10 substantially tax free if such reorganization occurred during 11 or after the employment of the employee-owner. 12 Sec. 3. EFFECTIVE UPON ENACTMENT. This Act, being deemed of 13 immediate importance, takes effect upon enactment. 14 Sec. 4. RETROACTIVE APPLICABILITY. This Act applies 15 retroactively to January 1, 2015, for tax years beginning on 16 or after that date. 17 EXPLANATION 18 The inclusion of this explanation does not constitute agreement with 19 the explanation’s substance by the members of the general assembly. 20 This bill grants an employee-owner, as defined in the 21 bill, one irrevocable lifetime election to exclude from state 22 individual income tax the net capital gain from the sale of 23 the capital stock of one qualified corporation. Several 24 requirements must be met for capital stock to qualify as 25 capital stock of a qualified corporation. First, the stock 26 must be either voting or nonvoting, common or preferred 27 stock. Stock rights, stock warrants, stock options, and debt 28 securities do not qualify. Second, the corporation that issued 29 the stock must be in existence and actively doing business 30 in Iowa for at least 10 years. A corporation that is part 31 of an affiliated group will qualify if the affiliated group 32 includes a member that has been in existence and actively doing 33 business in Iowa for at least 10 years. Third, the corporation 34 that issued the stock must have at least five shareholders, 35 -3- LSB 2089YH (1) 86 mm/sc 3/ 4

H.F. 466 two of whom must not be related. Fourth, the stock must have 1 been acquired by the employee-owner on account of employment 2 with the corporation and while employed by the corporation. A 3 corporation will qualify if it is a party to a reorganization 4 that was entirely or substantially tax free as long as the 5 reorganization occurred during or after the employee-owner’s 6 employment. 7 The election shall apply to all subsequent sales of the 8 elected capital stock, provided it is capital stock in the same 9 qualified corporation and was acquired on account of employment 10 by the corporation and while employed by the corporation. 11 The bill provides that the election applies to transfers of 12 the capital stock by inter vivos gift from the employee-owner 13 to a spouse or lineal descendant, or to a trust for the benefit 14 of the employee-owner’s spouse or lineal descendant. The 15 election will apply to a spouse only if the spouse was married 16 to the employee-owner on the date of the sale or the date of the 17 employee-owner’s death. 18 If, after making a valid inter vivos transfer of stock that 19 meets all the requirements for an election, an employee-owner 20 dies without making an election, the surviving spouse, or if 21 there is no surviving spouse, the personal representative of 22 the employee-owner’s estate may make the election. 23 An election is made by including a written statement 24 containing certain required information, as specified in the 25 bill, with the taxpayer’s Iowa income tax return for the 26 taxable year in which the election is made. The department of 27 revenue is required to provide appropriate forms for making 28 elections and reporting exclusions. 29 The bill takes effect upon enactment and applies 30 retroactively to January 1, 2015, for tax years beginning on 31 or after that date. 32 -4- LSB 2089YH (1) 86 mm/sc 4/ 4