Legislators propose to exempt employer stock gains from employee Iowa income tax. S.F. 2043 would exclude from taxation capital gains from stock received by an “employee-owner” of a company “on account of employment” with the corporation, and acquired while the taxpayer was still employed.. While it isn’t entirely clear from the legislation, it would appear to include long or short-term gains, and would include stock acquired by exercise of options or stock bonus plans. It’s not clear that it would apply to gains on ESOP shares, which are generally issued to owners or redeemed on retirement, but I suspect it would.
It’s an astonishingly broad exclusion. Once elected, it would apply to stock gifted by the employee-owner to spouses and lineal descendants. It wouldn’t apply to many family owned companies, because it requires five shareholders, at least two unrelated under IRC Section 318 attribution. Interestingly, the bill misstates Sec. 318, saying:
Two persons are considered related when, under section 318 of the Internal Revenue Code, one is a person who owns, directly or indirectly, capital stock that if directly owned would be attributed to the other person, or is the brother, sister, aunt, uncle, cousin, niece, or nephew of the other person who owns capital stock either directly or indirectly.
his spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and
(ii) his children, grandchildren, and parents.
No siblings, nieces or nephews to be seen. If they can’t even read the Code, should they really be messing with the state income tax?
If the Iowa income tax is so awful that we need to carve out a special exemption to executive stockholders to get them to come to Iowa, we should fix it for everyone, not just for them. Does anybody really doubt that Iowa would be more attractive to business with no corporate income tax and a 4% top individual income tax rate than with the current system plus a new executive spiff? Come on, legislators: take the Tax Update’s Quick and Dirty Iowa Tax Reform Plan off the shelf!
Related: Iowa House advances one-time stock gain bill, on a similar bill introduced last year.
David Henderson, Steve Moore’s Alternative Maximum Tax (Econlog). Governor Branstad floated a plan to allow taxpayers to choose between Iowa’s current baroque income tax and a simpler one with lower rates, before abandoning it prior to the opening of the legislative session. I thought I was being clever by calling an alternative maximum tax. David reports that Steve Moore came up with both the idea and the name for a proposal he made for the federal tax system in the 1990s.
I still don’t care for it. In practice we would be computing the tax both ways and paying the lesser amount. By adding another computation to the process, it would actually make things harder. The only way it would work would be if it resulted in lower taxes for everyone; then in a few years they could repeal the regular income tax without anyone noticing.
The 200th edition of the Cavalcade of Risk is up! This milestone edition of the long-lived roundup of insurance and risk management posts is at Rootfin. Congratulations to Hank Stern, the evil genius behind the Cavalcade; he participates in this edition with Hacktastic!, on the security troubles of Healthcare.gov, and government’s efforts to hush them up:
See, the problem isn’t the wide-open portal, it’s the folks trying to alert the folks who run it that there is, in fact, a problem. I’m reminded of a certain Middle East river.
More alarming still, though, is that that it’s not just the state folks yelling “burn the witch:” now the FBI has warned Mr Hermansen to zip his lips. That’ll sure make the problem go away.
Your healthcare is in the very best of hands.
Jim Maule, How Not to Compute a Casualty Loss Deduction:
The taxpayer claimed a $12,020 casualty loss deduction on account of the loss of the vehicle. The taxpayer computed the deduction by subtracting the $48,000 from $60,020, the original value of the vehicle. However, the first step in computing the amount of a casualty loss deduction is to subtract the insurance recovery from the difference between the value of the property immediately before the casualty and the value of the property immediately after the casualty, unless the taxpayer chooses to use cost of repairs as a substitute measure, though that was not relevant in this case. Because the taxpayer did not provide evidence of those values, and because the Tax Court was unwilling to assume that the vehicle’s value immediately before the accident was the same as its value when it was new, it upheld the determination of the IRS that the taxpayer was not entitled to a casualty loss deduction.
The IRS often examines casualty loss deductions, so you need to do your legwork on getting the valuations documented before you file.
Jason Dinesen, Small Businesses — Review Those Benefit Programs “When was the last time your small business reviewed the benefit programs your business offers?”
William Perez weighs in on Finding the Right Tax Professional.
Kay Bell, Tax season is tax scam, tax identity theft season. “If you get any unexpected communication in any form that is purportedly from the IRS, especially at the start of tax season, be wary.” And they will never initiate contact by phone or email.
Paul Neiffer, Cash Does Not Equal Gain. You can’t make taxable gain go away by using it to pay off loans.
Trish McIntire, Kansas Taxes – Sneaky Changes.
Robert D. Flach brings the Friday Buzz!
Kyle Pomerleau, High-Income Taxpayers Could Face a Top Marginal Tax Rate over 50 percent this Tax Season. Be glad we don’t take it all, serf! He computes Iowa’s top combined rate at 47.4%.
Christopher Bergin, Fortress Secrecy – No News Here (Tax Analysts Blog).
Anyone familiar with my writing knows that I have bent over backwards to give the IRS the benefit of the doubt in this black eye some call the “exemption scandal.” I must admit I’m getting a little tired of bending.
Back in the day, as the saying goes, I often referred to the IRS as Fortress Secrecy, a term meant to describe the agency’s obsession with hiding as much of its operations as it can get away with. I am not a casual observer, and I have never seen things this bad. Everything the IRS has done in addressing the exemption scandal leads to just one conclusion: that this agency now believes it is accountable to no one other than itself.
Because shut up, peasant.
TaxProf, The IRS Scandal, Day 260
Howard Gleckman, Fiscal Magic: Paying for New Highways by Cutting Corporate Taxes (TaxVox)
Frank Agostino, Jairo G. Cano, and Crystal Loyer. Guest posters at Procedurally Taxing, including the prolific Tax Court litigator Frank Agostino, discuss how IRS rules against giving false testimony bolstered an IRS man’s own case, in Section 1203 to Bolster a Taxpayer’s Credibility at Trial.
Jack Townsend, Required Records IRS Summons Enforced Again
News from the Profession. Pulling Back the Curtain on Making Partner in a Big 4 Firm. Just sell, baby!
TaxGrrrl has Fun With Taxes: Tax Haiku 2014.
I’ll try it.
Here comes tax season
April 15 arrives swiftly
I need a stiff drink.
OK, I’ll keep the day job.
Tags: Alternative Minimum Tax, cavalcade of risk, Christopher Bergen, Chrystal Loyer, David Henderson, Frank Agostino, Hank Stern, Jack Townsend, Jairo Cano, Jason Dinesen, Kay Bell, Kyle Pomerleau, maule, Paul Neiffer, Quick and Dirty Iowa Tax Reform Plan, Robert D Flach, S.F. 2043, Steve Moore, TaxProf, William Perez