Posts Tagged ‘Iowa capital gain deduction’

Tax Roundup, 11/14/14: Teaching biology is one thing, farming is another. And: parsonage allowances live!

Friday, November 14th, 2014 by Joe Kristan

20121108-1

Accounting Today visitors: click here for the story about the pharmacist and the painkillers. 

Cash-rent of farmland not “material participation” for Iowa capital gain exclusion. Iowa has an unusual rule that exempts capital gains of business real estate from Iowa’s income tax if the seller meets two tests:

– Holding the property for at least ten years, and

– materially-participating in the business in which the property was used for at least ten years at the time of the sale.

Iowa defines “material participation” using the federal rules for passive loss material participation. A widow who sold 400 acres she held with her late husband claimed the deduction on her 2006 Iowa 1040.  It didn’t work out.  A recently issued protest denial letter from the Iowa Department of Revenue included these key facts:

– The land was first rented to a tenant, a Mr. Goshorn, in 1966; he cash-rented it until the 2006 sale.

– The taxpayer and her husband got full title to the 400 acres in 1990; it had been held by their family dating back to the 19th century.

– The husband died in 2005.

– The land was sold in 2006.

harvestThe taxpayers certainly met the 10-year holding requirement, but the material participation requirement was a problem, as the Department of Revenue explains (my emphasis):

In the protest you also stated, “the activities of the farmer (tenant) could not have continued were it not for the involvement of the taxpayer.”  No evidence was provided to support this statement.  At the beginning of the period ten years prior to the sale, the tenant had been farming nearly 30 years.  It does not seem reasonable that he would need the landlord to tell him how to farm.  Not only did [late husband] not live in the area, he himself had not farmed for well over 30 years.

 

The taxpayer’s daughter stated, “My parents livelihood depended on the success or failure of the farms.”  One of her parents was a biology teacher and the other an x-ray technician.  The farm was not necessary for their livelihood.  Additionally, her parents had guaranteed income by cash renting the land.  The tenant bears the risks of weather, grain prices, etc.

 

So growing things in petri dishes doesn’t count, then?

In your letter dated June 29, 2012, you stated that “The situation involved risk due to the inexperience of the tenant.”  No explanation was provided as to how or why Mr. Goshorn was inexperienced after thirty or forty years of farming.  Also, your letter dated May 9, 2013 exaggerates the risk of the landlord.  There is always a chance of default by the tenant, but it is negligible.  The landlord has legal recourse against that tenant and could find a new tenant the next year.

Thirty years is “inexperienced?” Wow. That’s strict.

Cash rental of farmland is almost impossible to reconcile with material participation.  If you or your spouse aren’t farming yourself, you probably won’t qualify for a capital gain deduction in Iowa on farmland you own.

 

lizard20140826Permanent Extenders? A report by Tax Analsyts today ($link) raises the possibility that some of the perpetually-expiring provisions up for renewal in the lame-duck Congress might be extended permanently:

Senate Finance Committee Chair Ron Wyden, D-Ore., also suggested that the negotiations over extenders could result in some provisions being made permanent and cited his tax reform proposal as evidence that he supports making the research credit permanent. But he pointed out that the cost of doing so would be nearly double the cost of the entire Senate Finance Committee extenders package.

I love how they reckon “cost” in Congress. They act as if extending the same tax break over and over forever for one or two years at a time is somehow cheaper than just enacting the provision once without an expiration date. If you tried to do something like that on your financial statements, you’d go to jail. In Congress, though, it’s just another day.

Ways and Means member Charles W. Boustany Jr., R-La., also told reporters that Republicans are negotiating for permanency on as many provisions as possible. “We sort of took them in order of importance in some respect,” he said, citing the research credit, section 179 expensing, bonus depreciation, the subpart F active financing exception, and the controlled foreign corporation look-through rule as “the top-level ones in my mind.”

That’s good news for fans of the $500,000 Section 179 deduction, which reverts to $25,000 for 2014 if no extension is enacted.

The article doesn’t say whether the President has softened his prior opposition to permanent extenders.  If he vetoes an extender bill, a tax season that already promises to be awful could get much worse.

 

Peter Reilly, Clergy Housing Tax Break Withstands Challenge – Atheist Group Lacks Standing:

For my readers who have not been following this drama I should explain, that the Internal Revenue Code provides that cash housing allowances paid to “ministers of the gospel”, that are spent on housing, are excluded from taxable income. Unlike, arguably similar exclusions for the military and people working abroad. there are no dollar limits on “parsonage” allowances.  Housing allowances for pastors of mega churches can run into the hundreds of thousands dollars.

 

I confess to some surprise at the outcome. Designating cash payment as “housing” always has seemed like a too-good-to-be-true tax break, but it lives. Staff-parish relations committees everywhere will be relieved at the outcome.

 

20140826-1Fresh Friday Buzz is on tap at Robert D. Flach’s place! Links to discussions of extenders and same-sex marriage filings issues are part of the fun.

Tony Nitti, The Top Ten Tax Cases (And Rulings) Of 2014: #7-Buy A Building, Get An Immediate Deduction?

Jason Dinesen, My Experiences at the NAEA Leadership Academy. Jason, an Enrolled Agent, keeps up the fight:

Because there are so few of us, some would say (and some have said) to just let the group die. This cannot happen. EAs in Iowa are small in number … but that’s all the more reason for us to stick together! Most of the EAs I know are solo operators such as me, and we tend to exist in isolation in our own little silos. The number-one thing EAs in Iowa have told me they want is networking and a sense of community. Keeping the Iowa Society alive will help provide that.

The IRS attempt to create a new Registered Tax Return Preparer designation for those who take minimal CPE and pass a literacy test is a mortal threat to the Enrolled Agent brand. Enrolled Agents have to pass a rigorous exam and meet higher continuing education standards.

 

TaxProf, The IRS Scandal, Day 554

Howard Gleckman, How Did Medical Device MaHkers Become Poster Children for Obamacare Critics (TaxVox). Maybe because the medical device tax is such an obviously bad idea, though Mr. Gleckman seems oblivious to that issue.

 

Is that a code section? ‘Redskins’ cited as basis to revoke NFL’s tax-exempt status (Kay Bell)

 

Share

Tax Roundup, 8/14/14: Department of Revenue says: no SE Tax, no Iowa gain exclusion on CRP ground. Cash rents also fail.

Thursday, August 14th, 2014 by Joe Kristan

20140814-1Cash Rent, failure to pay self-employment tax ruled fatal to Iowa capital gain exclusion.  Iowa has an unusual capital gain exemption on sales of farm and business property for taxpayers meeting both a 10-year holding-period requirement and a ten year “material participation” test.  The Iowa Department of Revenue yesterday released three rulings holding that taxpayers failed to meet the second requirement on sales of farm ground.  The material participation rules are for the most part the same as in the federal “passive loss” rules.

Cash rent.  Document 14201019  holds that you don’t “materially participate” if all you do is rent farm ground:

The issue raised in the protest involves whether a capital gain deduction from the sale of farmland was properly disallowed on the Iowa individual income tax return for the 2009 tax year.  The farmland, which was held in the name of two partnerships, West Side Acres and East Side Acres, was involved in a cash rent arrangement.  There is no dispute that the farmland was held for more than ten years, but the Department contended that the ten year material participation test was not met.

The taxpayers claimed they spent more than 100 hours managing their farm rentals, but the Department said that activity didn’t count (my emphasis):

The Department notes that most of the hours spend by protester in the farming operation that was provided in the January 29, 2014 letter related to maintenance of business financial records, including review of property tax estimates and assessments and payment of expenses.  The Stoos decision stated that actions of paying the mortgage, preparing taxes and other financial work is not materially related to the farming operation, and these hours were considered “investor-type” activities which were not part of the day-to-day operation of the farm.  Therefore, those hours do not count toward material participation, and the 100 hour test has not been met by protester.  

This is the result I would have predicted.  Cash rent of farm land is not normally considered  “farming” under the passive loss rules.

binConservation Reserve and Self-employment Tax.  Documents 14201020 and 14201017 deny the capital gain exclusion to two taxpayers because they failed to pay self-employment tax on CRP payments.  The liability of CRP recipients for self-employment tax is controversial; a pending Eighth Circuit case seems likely to hold that the tax doesn’t apply to CRP recipients who do not otherwise farm.

The rulings say that the Department goes by the treatment of the payments reported on the taxpayers returns: if they taxpayer paid SE tax on CRP payments, they are considered to have materially-participated in those years, but not otherwise.  From Document 14201017 (my emphasis)

The Department first notes that the Federal Court of Appeals for the Sixth Circuit in Weubker v. Commissioner, 205 F.3d 897 (2000) held that CRP payments were net income from self-employment because they were received in exchange for performing tasks “that are intrinsic to the farming trade or business” such as tilling, seeding, fertilizing and weed control. Subsequently, the Internal Revenue Service issued Notice 2006-108 which states that CRP payments either to a farmer who either personally fulfills the CRP obligations or who isn’t an active farmer and fulfills this obligation through a third party are both includible in self-employment income and are not excludible as rentals from real estate.

Therefore, the Department contends that self-employment tax was clearly due on these CRP payments.

Since protester did not pay self-employment tax on this CRP income, the Department contends that the material participation test was not met. In addition, protester does not meet the retired farmer exception regarding material participation for 5 of the 8 years prior to retirement since self-employment tax was not paid on the CRP acres prior to you receiving social security benefits in 2003. Therefore, the Department contends that you do not meet the qualifications for the capital gain exclusion since you did not materially participate in the CRP activity for ten years.

The liability for SE tax on CRP payments was never as open-and-shut as the Department says. Some commentators have argued that Weubker is wrong, and that CRP, by itself, doesn’t constitute farming (see here and here).  Even so, it is also a stretch to say that the minimal maintenance required on CRP ground rises to the level of “material participation.”

The Department here is saying in effect that they will take your word for it — as shown on your tax filings.  If you paid SE tax on your CRP income, you’re a farmer as far as they are concerned, and you qualify for the exclusion.  Given the stratospheric cost of farm ground nowadays, taxpayers may find it worth paying a little SE tax to qualify for the Iowa gain exclusion.

Related:

Material Participation Basics.

Iowa Capital Gain Deduction: an illustration

 

Canadians born in U.S. sue Ottawa over tax fraud law (TheStar.com):

Canada has violated the charter rights of nearly a million Canadians by agreeing to share their financial details with authorities in the United States, two Ontario women allege in a new lawsuit.

FATCA sponsor Charlie Rangel, D-NY

FATCA sponsor Charlie Rangel, D-NY

They are talking about “FATCA,” the outrageous Congressional overreach into the operations of banks around the world.

Gwen Deegan of Toronto and Ginny Hillis of Windsor, Ont., have launched a claim against the Attorney General of Canada.

In it, they accuse Ottawa of breaching the Constitution by complying with a sweeping new American tax fraud law, known as the Foreign Account Tax Compliance Act.

Under the terms of the legislation that took effect last month, banks must share all personal and joint account details of anyone deemed to be a “U.S. person.” This includes American citizens and people born in the U.S., even those with no existing ties to the country.

I wonder what the reaction in the U.S. would be if, say, Russia demanded the bank account information of every American it said was a “Russian person.”  I don’t think it would be popular. Yet our Congress thinks it is entitled to demand that non-U.S. banks cough up whatever information it feels like asking for.

The response has been to make financial life difficult for Americans overseas, as dealing with U.S. persons becomes more of a hassle than their business is worth.  It also restricts employment opportunities abroad for Americans by making their employment inconvenient.

Charlie Rangel was one of the main sponsors of FATCA.  He would know a little about not paying taxes.

 

20140814-2Paul Neiffer, Sale of Gifted Grain Can Be Tax Free:

When the donee sells this grain, it will be reported as a capital gain.  If time after harvest of the grain and the time of sale is less than a year, it is short-term.  If this time is greater than a year, then it is long-term. 

If the donee is in a low-enough bracket, long-term capital gains are taxed at zero.  But watch out for the “Kiddie Tax.”

 

Jason Dinesen, Proper Documentation of Business Expenses:

In most circumstances, you can prove your expenses even if you don’t have a receipt. But again, I feel that receipts AND other documents are the safest way to go.

Absolutely.  Jason has some tips for keeping track of them.

 

Kay Bell, School’s back. So are some, but not all, education tax breaks

 

Andrew Lundeen, Alan Cole, The Inequality Debate Ignores How Incomes Change Over the Life Cycle (Tax Policy Blog):  “Income data from the IRS and the Census Bureau have their uses, but measuring equality isn’t one of them.”

 

Joseph Thorndike, How ISIS Is Using Taxes to Build a Terrorist State (Tax Analysts Blog)

TaxGrrrl, Tax Revenues Still On Pace To Break Records In 2014   

 

TaxProf, The IRS Scandal, Day 462

Career Corner.  Study: Working in a Windowless Cube is Ruining Your Life (Adrienne Gonzalez, Going Concern)

 

Share

Tax Roundup, 3/19/14: Are taxes turning Iowa red? And: Statehouse Update!

Wednesday, March 19th, 2014 by Joe Kristan

Is Iowa really a red state?  According to personal finance site WalletHub, Iowa is a red state.  But didn’t Iowa vote for Obama the last two elections?  Not that kind of red state.  WalletHub’s map has states with the most burdensome taxes as red states, and those with less burdensome taxes as green:

 

WalletHub

From WalletHub:

 WalletHub analyzed how state and local tax rates compare to the national median in the 50 states as well as the District of Columbia.  We compared eight different types of taxation in order to determine:  1) Which states have the highest and lowest tax rates; 2) how those rates compare to the national median; 3) which states offer the most value in terms of low taxation and high cost-of-living adjusted income levels.

WalletHub says Iowans have a tax burden 26% above the national average.  They note, though, that when the rank is adjusted based on our cost of living, Iowa improves 10 places on their rankings.

This is a different measurement than the Tax Foundations well-known Business Tax Climate Indexwhich places Iowa at 11th-worst.  Either way, it’s not a healthy system.  And nothing major is likely to happen to change it anytime soon.  Still, the The Tax Update’s Quick and Dirty Iowa Tax Reform Plan shows the way!

 

20130117-1Supplies sales tax exemption advances.  The Iowa General Assembly isn’t entirely idle on the tax front.  Sometimes that’s a good thing, as in the House passage yesterday of HF 2443, exempting supplies used in manufacturing from sales tax.  Business inputs in general should not be subject to sales tax, as they are likely to be taxed again when the finished product is sold.

Other than that, there isn’t a lot else to report on the Iowa tax legislative scene.  The speedway tax break remains alive.  The bill to broaden the Iowa capital gain “ten and ten” exclusion hasn’t cleared the committee level.  Silly legislation continues to be introduced, like a 50% state tax credit for payments of principal and interest on student loans (HSB 673).  Let’s encourage crushing student debt burdens!

But sometimes its best when the legislature does nothing.  It’s hard to complain that HF 2770, the bill to pay doctors at their average charge rates with tax credits for “volunteering,” has languished.

 

Former IRS Commissioner Shulman, showing how big is legacy is.

Former IRS Commissioner Shulman, showing how big is legacy is.

The TaxProf notes the Death of Former IRS Commissioner Randoph Thrower; Was Fired for Refusing President’s Request to Audit His Enemies, quoting a New York Times story:

The end came in January 1971, after Mr. Thrower requested a meeting with the president, hoping to warn him personally about the pressure White House staff members had been placing on the IRS to audit the tax returns of certain individuals. Beginning with antiwar leaders and civil rights figures, the list had grown to include journalists and members of Congress, among them every Democratic senator up for re-election in 1970, Mr. Thrower told investigators years later. He was certain the president was unaware of this and would agree that “any suggestion of the introduction of political influence into the IRS” could damage his presidency, he said.

Mr. Thrower received two responses. The first was a memo from the president’s appointments secretary saying a meeting would not be possible; the second was a phone call from John D. Ehrlichman, the president’s domestic affairs adviser, telling him he was fired.

I’ll just note here that Doug Shulman, worst commissioner ever, left on his own terms.

 

David Brunori, Hawaii Tax Credit Craziness (Tax Analysts Blog):

According to some excellent reporting in the Honolulu Civil Beat, the Legislature is considering a slew of tax incentives to promote manufacturing in the state. Yes, there are those (particularly established manufacturers) who would like to promote something other than tourism, hosting of naval bases, and pineapple production. The main proposal (SB 3082) would provide tax credits for employee training and some equipment purchases. The goal is to turn Hawaii into 1960s Pittsburgh or Flint Mich., in their heyday. I have my doubts. 

I don’t think that really plays to Hawaii’s strengths.

 

20120817-1Howard Gleckman, A Terrible Response to the Internet Tax Mess (TaxVox)

Under the plan, the federal government would let retailers collect tax based on the levy where the seller is located, no matter where the purchaser resides. This would apply to all retailers, as long as they had no physical presence in the consumer’s state.

A firm could base its “home jurisdiction” on the state where it has the most employees, the most physical assets, or the state it designates as its principal place of business for federal tax purposes.

Given the nature of online sellers, changing locations to a no-sales-tax state would be fairly easy.

Interesting.  I wonder if a “universal mail order sales tax rate” might ultimately be the answer.  You could set this universal rate at, say, the average national sales tax rate, collect it from all buyers, and remit it to the delivery state through a clearinghouse run by the state revenue agencies.

 

Paul Neiffer, Cash Rents Equals Extra 3.8% on Sale. “However, once you are done farming and are simply renting the ground to other farmers (including relatives), then the rental income will be subject to the tax and even worse, selling the farmland for a large gain will result in extra tax.”

Jana Luttenegger, Filing From Home, and Health Insurance Reporting on W-2s (Davis Brown Tax Law Blog)

TaxGrrrl, Taxes From A To Z (2014): J Is For Jury Duty Pay   

 

Everything is spinning out of control! Suburban Cleveland Councilman Denies Getting in Brawl With Liberty Tax Sign Spinner (Going Concern)

 

Share

Tax Roundup, 12/3/2012: Medicare 3.8% tax guidance issued. Meanwhile, to the cliff!

Monday, December 3rd, 2012 by Joe Kristan

The IRS issued proposed regulations for the 3.8% Obamacare tax on investment income Friday.  I will do detailed posts on the in the coming days as I study them.

I’ll note two important items from my first overview of the proposed rules:

  • The rules allow taxpayers a free opportunity to redo their activity “grouping” elections for the passive loss rules for 2013. “Passive” business activities are subject to the the 3.8% tax.  Because “passive” status often depends on how much time a taxpayer spends working in a business, how different operations or locations are grouped can determine whether they are passive.
  • The rules appear to allow you to pro-rate state income taxes in determining “net” investment income.  That’s taxpayer-friendly, but it adds another level of complexity.

For an initial take on the rules, see Anthony Nitti at Forbes.

Related:   Obamacare: it’s a tax!

 

David Brunori of Tax Analysts on the fiscal cliff discussion:

     Everyone knows that taxing the very rich will have no perceptible effect on the deficit. It’s all for show. The president and Democrats in Congress can say they stuck it to the millionaires and billionaires. Fairness will abound. The Republicans can tell the world that they are reasonable people willing to compromise on issues as important as taxes. But Americans will still get more government than they are willing to pay for.

     Some liberals have called for us to go over the cliff and to raise taxes across the board. Like Norquist, they are miscalculating. If everybody had to start paying more, there would be a lot more questioning of massive defense spending, egregious subsidies for industries, and entitlements run amok. But for now, we must be content with the rich paying more so we can get more than we deserve from our government.

You can’t pay for mass welfare benefits with a class tax.  The mania for taxing “the rich” is a distraction from the enormous tax increases on everybody that will be required.  The Rich Guy’s not buying.

 

Why the fiscal cliff is such a big fall.  The Bush Tax Cut Issue in One Chart (Ed Krayewski, Hit and Run):

He adds:

And for those who would say “well of course the government has to spend more when the economy is hurting” only one question applies: has it helped? If you think so, I’ve got a tiger-repellant rock to sell you.

Related:  ‘Fiscal Cliff’ follies: Why it may pay to take deductions early.  My latest post at IowaBiz.com, the Des Moines Business Record blog for entrepreneurs.

Nobody’s serious I:  No ‘fiscal cliff’ deal without higher rates, Geithner says (CNN via Going Concern)

Nobody’s serious, II: Grassley and King push for extension of Wind Energy Tax Credit

 

Iowa admits its capital gain forms were a mess.  A protest rejection released by the Iowa Department of Revenue highlights how badly the Iowa 1040 has been designed with respect to the Iowa deduction for capital gains on the sale of businesses an business real estate.

The taxpayer had excluded regular capital gains from a brokerage account on her tax return.  Iowa properly rejected the deduction, but admitted her mistake was understandable:

Your position relies on the Department’s instructions for completing the tax return.  We found that you are not the only one that made this mistake, so our instructions now clarify that these types of capital gains do not qualify for the deduction as shown above.  In any event, the instructions are not controlling.

Iowa now has better wording on the deduction line and a flow chart to walk taxpayers through whether they should claim the deduction.  It’s a big improvement, but it should be better.  There should be a separate form to compute the deduction, with a checklist to complete to demonstrate eligibility.

The state examines every capital gain exclusion claim.  Taxpayers should be able to submit the information the state asks for with their returns to preclude the examination; even if it would have to be paper-filed, it would save the state the time and money spent on unneeded exams.

Related:  Iowa Capital Gain Break: how it works when you rent property to your business

 

NY Times: States and Cities Shovel $80 Billion/Year in Tax Incentives to Companies, With Little Proof of Their Effectiveness  (TaxProf):

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.

It’s a chump’s game, and we taxpayers are the unwilling chumps.  These things are to economic growth what steroids are to long-term fitness.

 

When you don’t remit withheld taxes, it might not just be a matter of getting your payments caught up.  A New Jersey couple that ran an engineering firm failed to remit over $500,000 in withheld taxes to the IRS.  They were sentenced last week to 44 months in prison after being convicted of charges arising out of the nonpayment.  From the Department of Justice Press Release:

Evidence was also introduced that the DeMuros converted withheld funds for their business and personal use, including more than $280,000 in purchases from QVC, Home Shopping Network and Jewelry Television.

No doubt it was of the best-quality.  Oh, and the couple still has to pay over $1.3 million in restitution to the IRS.

Doug Shulman is no longer IRS Commissioner, but his legacy remains:

 ABC News: Alarming Rise in IRS Refund ID Thefts, Few Prosecuted: GAO Report

Dayton Daily News,  IRS says tax fraud attempts up 39 percent

Greg Mankiw,   Some Advice on Tax Planning

Richard Morrison,   The Tax Rate Paid by the Top 1% Is Double the National Average (Tax Policy Blog)

The Critical Question:  Will the Payroll Tax Cut Fall Silently Off the Cliff? (Elaine Maag, TaxVox)

Kay Bell:  Time to spend down your medical flexible savings account (FSA)

Paul Neiffer,  Senator Baucus Urges Extension of Current Estate Tax Laws

Jim Maule,  Passing the Tax Responsibility Buck

Peter Reilly,  Who Should Be Accelerating Income Into 2012?

Patrick Temple-West,  Most Americans face lower tax burden than in 1980, and more (Tax Break)

Robert D. Flach,  DAMNED IF THEY DO AND DAMNED IF THEY DON’T.

Tragedy:  Lindsay Lohan Has Yet To Settle Tax Bills With IRS, Faces Account Seizures (TaxGrrrl)

The Tax Update is also on Twitter (@joebwan) and Facebook!

Share

Iowa’s Capital Gain Deduction: your capital gains probably don’t qualify

Tuesday, January 31st, 2012 by Joe Kristan

Taxpayers have for years been confused by Iowa’s capital gain deduction. It’s only available for certain business sales when the owner has held the business for at least ten years and has “materially participated” in it for that long. But until this year, there was no indication it was so hard on the face of Iowa’s 1040.
The Iowa Department of Revenue last week released a protest resolution involving one such confused taxpayer (my emphasis):

The Department reviewed your 2006, 2007, and 2008 individual income tax returns and denied the capital gains deduction. The issue in this protest is whether your capital gains from investments, i.e., stock sales, dividends, and distributions reported on forms 1099-B and 1099-DIV qualify for the Iowa capital gains deduction.
The Department

Share

Iowa needs a tax court

Tuesday, August 9th, 2011 by Joe Kristan

humpty.jpg

“When I use a word,” Humpty Dumpty said in a rather scornful tone,” it means just what I choose it to mean — neither more nor less.”

An Iowa district court has ruled that the Iowa Department of Revenue can take the Humpty Dumpty approach to the tax law.
The case covered the pre-1997 version of the Iowa Capital Gain Exclusion. This break exempts some capital gains from income when a taxpayer has both “held” a business asset for 10 years and has also “materially participated” in the business for 10 years
IDOR regulations cooked up a definition of “held” for this purpose that doesn’t appear anywhere else in the tax law — one that ignores holding periods that carry over for other purposes, like gifts or tax-free exchanges. The legislature overrode the IDOR interpretation for post-2006 years, but did not address the pre-2006 regulation.
The Department’s regulation is abusive and ridiculous. As we noted in 2005,

Iowa has had no difficulty adapting federal holding period rules for other “unique” Iowa purposes. For example, Iowa has a special exclusion for farmers for sales of cattle or horses held for 24 months. The Department adopted federal holding period rules for this deduction, which has no direct federal counterpart. (Subrule 40.38(2))
If the legislature doesn’t provide a specific definition of a word when it passes a tax law, the sound and sensible assumption is that it means the same thing that it means elsewhere in the tax law.

Even so, the Iowa District Court upheld this ridiculous reading (footnotes omitted, emphasis added):

This term was not defined within the statute at the time the petitioners filed the return in question. In addition, the term has substantive meaning within the special expertise of the agency relating to when or to what extent an asset is considered a capital asset. This, along with the aforementioned rulemaking and enforcement authority delegated to the agency by the legislature, leads the court to conclude that the interpretation of the term “held” in 422.7(21)(a) has been clearly vested with the agency. Accordingly, the court will affirm the agency unless it concludes that its interpretation of the term is irrational, illogical or wholly unjustifiable.

It is all three, but the court sided with the Department anyway.

(more…)

Share

Department of Revenue: CRP land can qualify for the capital gain exclusion

Tuesday, June 14th, 2011 by Joe Kristan

Good news for gentleman farmers everywhere. From a protest ruling by the Department of Revenue:

The protester owned a share of farmland that was sold in 2005, and claimed a capital gain deduction on the Iowa individual income tax return. The Department denied the deduction and issued a Notice of Assessment. The reason for denial was the protester did not meet the material participation requirement for the deduction.
Our review finds the land was held in CRP for the ten years immediately prior to sale. Department rule 701 IAC 40.38 states that if individuals actively manage farmland placed in the CRP program by directly participating in seeding, mowing, and planting the farmland or by overseeing these activities, the owner will be considered to have had material participation in the farming activity. Therefore, the protester qualifies for the deduction. The Department will cancel the assessment.

Iowa doesn’t tax capital gain income from the sale of a business or of business real estate if the seller has held the property for ten years and has “materially participated” in the business for ten years. This low threshold for CRP land will be very helpful for a lot of taxpayers.
Cite: Parman, Doc. Reference 11201011
Related: Iowa Capital Gain Deduction: an illustration

Share

Iowa Capital Gain Exclusion: You have to own the business for 10 years, not the asset.

Monday, April 19th, 2010 by Joe Kristan

Iowa has a special capital gain exclusion for businesses that hang in there for a long time. If you sell the assets of a business that you have owned at least 10 years, and in which you have materially participated for ten years, you can exclude the capital gain from your Iowa taxable income. This normally requires a sale of “substantially all” of the business assets, but you can also exclude from income gain on business real estate owned in a qualifying business without selling the other assets.
A newly-released letter from the Department of Revenue clarifies that you don’t have to own each asset for ten years for the gain on the sale to qualify. From the letter:

On February 19, 2010, the Department issued a Notice of Assessment for individual income tax. The reason for the assessment was a denial of the capital gains deduction claimed on the 2006 Iowa return. More specifically, the capital gain was from the sale of an asset that had been held less than ten years.
Our review finds the Department erred. The statutory requirements for the deduction are that the business must have been held ten years and the taxpayer must have met the material participation requirements. Rule 701 IAC 40.38(1) addresses the sale of the assets:
b. Assets of a business. Those assets of a business which may qualify for capital gain treatment under rule 40.38(422) if the assets are sold or exchanged under the conditions described in this rule are real property, tangible personal property, or other assets of a business which were held by the business more than one year at the time the assets were sold or exchanged. However, for purposes of this subrule, tangible personal property of a business does not include cattle or horses described in subrule 40.38(2), other livestock described in subrule 40.38(3), or timber which is described in subrule 40.38(4).

(emphasis added)
The rule does not require each individual asset be held more than ten years. Since the asset was held more than one year, the deduction should have been allowed. Therefore, the Department will cancel the assessment.

So: if you liquidate a ten-year business, you can exclude all gain from property held by the business owned at least one year — not just assets held for ten years. And if you sell real property out of your ten-year business, you don’t have to have a ten-year holding period for that property.
Related: IOWA’S SUPER-LONG TERM CAPITAL GAINS DEDUCTION: IF YOU QUIT, DON’T WAIT TOO LONG TO RETIRE
Reblog this post [with Zemanta]

Share