Senate File 309 - Introduced SENATE FILE 309 BY SCHULTZ A BILL FOR An Act relating to the exclusion from the individual income 1 tax of certain net capital gains from the sale of real 2 property used in a business, and including effective date 3 and retroactive applicability provisions. 4 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 5 TLSB 1081XS (3) 87 mm/sc/rn

S.F. 309 Section 1. Section 422.7, subsection 21, paragraph a, Code 1 2017, is amended by adding the following new subparagraph: 2 NEW SUBPARAGRAPH . (3) (a) For purposes of determining 3 the material participation of a taxpayer under this paragraph 4 with regard to a partnership, subchapter S corporation, limited 5 liability company, estate, or trust whose capital gain flows 6 through to the owners or beneficiaries for federal income tax 7 purposes, material participation shall be determined at the 8 owner or beneficiary level according to the activities of each 9 owner or beneficiary. 10 (b) Notwithstanding subparagraph division (a), and 11 notwithstanding any contrary provision of section 469(h) of 12 the Internal Revenue Code, or any other contrary provision of 13 law, for purposes of determining the material participation of 14 a taxpayer under this paragraph with regard to the sale of an 15 estate’s or trust’s real property used in a business or rental 16 arrangement, for any year in which the decedent of the estate 17 or one or more settlors, executors, or trustees of the estate 18 or trust, as applicable, is materially participating in the 19 estate’s or trust’s business or, if the estate’s or trust’s 20 real property is leased to another person, is materially 21 participating in the lessee’s business that uses the real 22 property, all the beneficiaries or owners of the estate or 23 trust shall also be treated as materially participating in 24 that business for that year. The requirement in subparagraph 25 (1) of this paragraph that material participation occur for a 26 period of ten years may be satisfied for a beneficiary or owner 27 of an estate or trust by any combination of years of material 28 participation by any decedent, settlor, executor, or trustee of 29 the estate or trust attributable to the beneficiary or owner 30 under this subparagraph division (b), aggregated over the ten 31 years preceding the sale. 32 Sec. 2. REFUNDS. Refunds of taxes, interest, or penalties 33 that arise from claims resulting from the enactment of this 34 Act, for capital gains earned from sales occurring between 35 -1- LSB 1081XS (3) 87 mm/sc/rn 1/ 3

S.F. 309 January 1, 2007, and the effective date of this Act, shall 1 be limited to ten thousand dollars in the aggregate and 2 shall not be allowed unless refund claims are filed prior to 3 October 1, 2017, notwithstanding any other provision of law to 4 the contrary. If the amount of claims totals more than ten 5 thousand dollars in the aggregate, the department of revenue 6 shall prorate the ten thousand dollars among all claimants in 7 relation to the amounts of the claimant’s valid claims. 8 Sec. 3. EFFECTIVE UPON ENACTMENT. This Act, being deemed of 9 immediate importance, takes effect upon enactment. 10 Sec. 4. RETROACTIVE APPLICABILITY. This Act applies 11 retroactively to January 1, 2007, for tax years beginning on 12 or after that date. 13 EXPLANATION 14 The inclusion of this explanation does not constitute agreement with 15 the explanation’s substance by the members of the general assembly. 16 Under current law, a taxpayer’s net capital gain from the 17 sale of a business, or from the sale of real property used in 18 a business, is exempt from the individual income tax if the 19 taxpayer held the real property or the business for a minimum 20 of 10 years, and materially participated in the business for 21 10 years. “Material participation” refers to the level of 22 involvement a taxpayer has in the operations of a business, and 23 whether or not any particular taxpayer materially participates 24 in a business is determined under the Internal Revenue Code. 25 This bill requires that for purposes of determining material 26 participation of a taxpayer for the capital gain tax exemption 27 with regard to a partnership, S corporation, limited liability, 28 estate, or trust whose capital gain flows through to the owners 29 or beneficiaries for federal income tax purposes, material 30 participation shall be determined at the owner or beneficiary 31 level according to the activities of each owner or beneficiary. 32 The bill also provides an exception to this material 33 participation requirement for the sale of real property used 34 in a business which, under certain circumstances, attributes 35 -2- LSB 1081XS (3) 87 mm/sc/rn 2/ 3

S.F. 309 the material participation of certain representatives of an 1 estate or trust to the beneficiaries or owners of that estate 2 or trust. For purposes of determining material participation 3 of a taxpayer with regard to the sale of an estate’s or trust’s 4 real property used in a business or rental arrangement, all the 5 beneficiaries or owners of the estate or trust shall be treated 6 as materially participating in a business for any year that 7 the decedent or one or more settlors, executors, or trustees 8 of the estate or trust is materially participating in the 9 estate’s or trust’s business or, if the real property is leased 10 to another person, is materially participating in the lessee’s 11 business that uses the real property. The bill also provides 12 that the 10-year material participation requirement can be 13 satisfied for a beneficiary or owner of an estate or trust by 14 any combination of years of material participation attributable 15 to the beneficiary or owner under the bill, aggregated over the 16 10 years preceding the sale. 17 The bill limits refunds of tax, interest, or penalties 18 arising from claims resulting from the enactment of the bill 19 for capital gains earned from sales occurring between January 20 1, 2007, and the effective date of the bill to $10,000 in 21 the aggregate, and requires such claims to be filed prior to 22 October 1, 2017. If the aggregate amount of refund claims 23 exceeds $10,000, the department of revenue is required to 24 prorate the $10,000 among all claimants in relation to each 25 claim amount. 26 The bill takes effect upon enactment and applies 27 retroactively to January 1, 2007, for tax years beginning on 28 or after that date. 29 -3- LSB 1081XS (3) 87 mm/sc/rn 3/ 3