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Senate File 309 - IntroducedA Bill ForAn Act 1relating to the exclusion from the individual income
2tax of certain net capital gains from the sale of real
3property used in a business, and including effective date
4and retroactive applicability provisions.
5BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:
1 Section 1. Section 422.7, subsection 21, paragraph a, Code
22017, is amended by adding the following new subparagraph:
3 NEW SUBPARAGRAPH. (3) (a) For purposes of determining
4the material participation of a taxpayer under this paragraph
5with regard to a partnership, subchapter S corporation, limited
6liability company, estate, or trust whose capital gain flows
7through to the owners or beneficiaries for federal income tax
8purposes, material participation shall be determined at the
9owner or beneficiary level according to the activities of each
10owner or beneficiary.
11(b) Notwithstanding subparagraph division (a), and
12notwithstanding any contrary provision of section 469(h) of
13the Internal Revenue Code, or any other contrary provision of
14law, for purposes of determining the material participation of
15a taxpayer under this paragraph with regard to the sale of an
16estate’s or trust’s real property used in a business or rental
17arrangement, for any year in which the decedent of the estate
18or one or more settlors, executors, or trustees of the estate
19or trust, as applicable, is materially participating in the
20estate’s or trust’s business or, if the estate’s or trust’s
21real property is leased to another person, is materially
22participating in the lessee’s business that uses the real
23property, all the beneficiaries or owners of the estate or
24trust shall also be treated as materially participating in
25that business for that year. The requirement in subparagraph
26(1) of this paragraph that material participation occur for a
27period of ten years may be satisfied for a beneficiary or owner
28of an estate or trust by any combination of years of material
29participation by any decedent, settlor, executor, or trustee of
30the estate or trust attributable to the beneficiary or owner
31under this subparagraph division (b), aggregated over the ten
32years preceding the sale.
33 Sec. 2. REFUNDS. Refunds of taxes, interest, or penalties
34that arise from claims resulting from the enactment of this
35Act, for capital gains earned from sales occurring between
-1-1January 1, 2007, and the effective date of this Act, shall
2be limited to ten thousand dollars in the aggregate and
3shall not be allowed unless refund claims are filed prior to
4October 1, 2017, notwithstanding any other provision of law to
5the contrary. If the amount of claims totals more than ten
6thousand dollars in the aggregate, the department of revenue
7shall prorate the ten thousand dollars among all claimants in
8relation to the amounts of the claimant’s valid claims.
9 Sec. 3. EFFECTIVE UPON ENACTMENT. This Act, being deemed of
10immediate importance, takes effect upon enactment.
11 Sec. 4. RETROACTIVE APPLICABILITY. This Act applies
12retroactively to January 1, 2007, for tax years beginning on
13or after that date.
14EXPLANATION
15The inclusion of this explanation does not constitute agreement with
16the explanation’s substance by the members of the general assembly.
17Under current law, a taxpayer’s net capital gain from the
18sale of a business, or from the sale of real property used in
19a business, is exempt from the individual income tax if the
20taxpayer held the real property or the business for a minimum
21of 10 years, and materially participated in the business for
2210 years. “Material participation” refers to the level of
23involvement a taxpayer has in the operations of a business, and
24whether or not any particular taxpayer materially participates
25in a business is determined under the Internal Revenue Code.
26This bill requires that for purposes of determining material
27participation of a taxpayer for the capital gain tax exemption
28with regard to a partnership, S corporation, limited liability,
29estate, or trust whose capital gain flows through to the owners
30or beneficiaries for federal income tax purposes, material
31participation shall be determined at the owner or beneficiary
32level according to the activities of each owner or beneficiary.
33The bill also provides an exception to this material
34participation requirement for the sale of real property used
35in a business which, under certain circumstances, attributes
-2-1the material participation of certain representatives of an
2estate or trust to the beneficiaries or owners of that estate
3or trust. For purposes of determining material participation
4of a taxpayer with regard to the sale of an estate’s or trust’s
5real property used in a business or rental arrangement, all the
6beneficiaries or owners of the estate or trust shall be treated
7as materially participating in a business for any year that
8the decedent or one or more settlors, executors, or trustees
9of the estate or trust is materially participating in the
10estate’s or trust’s business or, if the real property is leased
11to another person, is materially participating in the lessee’s
12business that uses the real property. The bill also provides
13that the 10-year material participation requirement can be
14satisfied for a beneficiary or owner of an estate or trust by
15any combination of years of material participation attributable
16to the beneficiary or owner under the bill, aggregated over the
1710 years preceding the sale.
18The bill limits refunds of tax, interest, or penalties
19arising from claims resulting from the enactment of the bill
20for capital gains earned from sales occurring between January
211, 2007, and the effective date of the bill to $10,000 in
22the aggregate, and requires such claims to be filed prior to
23October 1, 2017. If the aggregate amount of refund claims
24exceeds $10,000, the department of revenue is required to
25prorate the $10,000 among all claimants in relation to each
26claim amount.
27The bill takes effect upon enactment and applies
28retroactively to January 1, 2007, for tax years beginning on
29or after that date.
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2tax of certain net capital gains from the sale of real
3property used in a business, and including effective date
4and retroactive applicability provisions.
5BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:
1 Section 1. Section 422.7, subsection 21, paragraph a, Code
22017, is amended by adding the following new subparagraph:
3 NEW SUBPARAGRAPH. (3) (a) For purposes of determining
4the material participation of a taxpayer under this paragraph
5with regard to a partnership, subchapter S corporation, limited
6liability company, estate, or trust whose capital gain flows
7through to the owners or beneficiaries for federal income tax
8purposes, material participation shall be determined at the
9owner or beneficiary level according to the activities of each
10owner or beneficiary.
11(b) Notwithstanding subparagraph division (a), and
12notwithstanding any contrary provision of section 469(h) of
13the Internal Revenue Code, or any other contrary provision of
14law, for purposes of determining the material participation of
15a taxpayer under this paragraph with regard to the sale of an
16estate’s or trust’s real property used in a business or rental
17arrangement, for any year in which the decedent of the estate
18or one or more settlors, executors, or trustees of the estate
19or trust, as applicable, is materially participating in the
20estate’s or trust’s business or, if the estate’s or trust’s
21real property is leased to another person, is materially
22participating in the lessee’s business that uses the real
23property, all the beneficiaries or owners of the estate or
24trust shall also be treated as materially participating in
25that business for that year. The requirement in subparagraph
26(1) of this paragraph that material participation occur for a
27period of ten years may be satisfied for a beneficiary or owner
28of an estate or trust by any combination of years of material
29participation by any decedent, settlor, executor, or trustee of
30the estate or trust attributable to the beneficiary or owner
31under this subparagraph division (b), aggregated over the ten
32years preceding the sale.
33 Sec. 2. REFUNDS. Refunds of taxes, interest, or penalties
34that arise from claims resulting from the enactment of this
35Act, for capital gains earned from sales occurring between
-1-1January 1, 2007, and the effective date of this Act, shall
2be limited to ten thousand dollars in the aggregate and
3shall not be allowed unless refund claims are filed prior to
4October 1, 2017, notwithstanding any other provision of law to
5the contrary. If the amount of claims totals more than ten
6thousand dollars in the aggregate, the department of revenue
7shall prorate the ten thousand dollars among all claimants in
8relation to the amounts of the claimant’s valid claims.
9 Sec. 3. EFFECTIVE UPON ENACTMENT. This Act, being deemed of
10immediate importance, takes effect upon enactment.
11 Sec. 4. RETROACTIVE APPLICABILITY. This Act applies
12retroactively to January 1, 2007, for tax years beginning on
13or after that date.
14EXPLANATION
15The inclusion of this explanation does not constitute agreement with
16the explanation’s substance by the members of the general assembly.
17Under current law, a taxpayer’s net capital gain from the
18sale of a business, or from the sale of real property used in
19a business, is exempt from the individual income tax if the
20taxpayer held the real property or the business for a minimum
21of 10 years, and materially participated in the business for
2210 years. “Material participation” refers to the level of
23involvement a taxpayer has in the operations of a business, and
24whether or not any particular taxpayer materially participates
25in a business is determined under the Internal Revenue Code.
26This bill requires that for purposes of determining material
27participation of a taxpayer for the capital gain tax exemption
28with regard to a partnership, S corporation, limited liability,
29estate, or trust whose capital gain flows through to the owners
30or beneficiaries for federal income tax purposes, material
31participation shall be determined at the owner or beneficiary
32level according to the activities of each owner or beneficiary.
33The bill also provides an exception to this material
34participation requirement for the sale of real property used
35in a business which, under certain circumstances, attributes
-2-1the material participation of certain representatives of an
2estate or trust to the beneficiaries or owners of that estate
3or trust. For purposes of determining material participation
4of a taxpayer with regard to the sale of an estate’s or trust’s
5real property used in a business or rental arrangement, all the
6beneficiaries or owners of the estate or trust shall be treated
7as materially participating in a business for any year that
8the decedent or one or more settlors, executors, or trustees
9of the estate or trust is materially participating in the
10estate’s or trust’s business or, if the real property is leased
11to another person, is materially participating in the lessee’s
12business that uses the real property. The bill also provides
13that the 10-year material participation requirement can be
14satisfied for a beneficiary or owner of an estate or trust by
15any combination of years of material participation attributable
16to the beneficiary or owner under the bill, aggregated over the
1710 years preceding the sale.
18The bill limits refunds of tax, interest, or penalties
19arising from claims resulting from the enactment of the bill
20for capital gains earned from sales occurring between January
211, 2007, and the effective date of the bill to $10,000 in
22the aggregate, and requires such claims to be filed prior to
23October 1, 2017. If the aggregate amount of refund claims
24exceeds $10,000, the department of revenue is required to
25prorate the $10,000 among all claimants in relation to each
26claim amount.
27The bill takes effect upon enactment and applies
28retroactively to January 1, 2007, for tax years beginning on
29or after that date.
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