Policy letter; capital gains deduction; May21,2001
Topic Code: C012 Capital Gains Deduction Document Reference: 01201151
May 21, 2001
We have received your letter of May 1, 2001 which asked a number of questions about the Iowa deduction for sales and ex changes of assets of a business pursuant to Iowa Code § 422.7(21) and Administrative Rule 701-40.38.In your letter you mentioned a phone conversation that we had sometime earlier this year in which I supposedly advised you that a capital gain received as a result of liquidation of a Subchapter C corporation pursuant to § 331 of the Internal Revenue Code would qualify for the Iowa capital gains deduction even if there was no sale of assets by the corporation but the liquidation was of retained profits of the corporation. If I told you this I advised you in error. I must have misunderstood your question.Code § 422.7 (21) a. (1) states in relative part "Net capital gain from the sale of real property used in a business, in which the taxpayer materially participated for ten years, as defined in section 469(h) of the Internal Revenue Code, and which has been held for a minimum of ten years, or from the sale of a business, as defined in section 422.42, in which the taxpayer was employed or in which the taxpayer materially participated for ten years, as defined in section 469(h) of the Internal Revenue Code, and which has been held for a minimum of ten years. The sale of a business means the sale of all or substantially all of the tangible personal property or service of the business...."When the above statute is considered in relation to liquidations of corporations, it appears that in order for a liquidation to qualify for the capital gain deduction, the liquidation must involve sales of substantially all of the tangible personal property and intangible personal property of the business. An example of a liquidation that would qualify for the Iowa capital gain deduction is the proposed liquidation described in the Declaratory Order for Lester W. III and Jane Hambly. A copy of this Declaratory Order is enclosed.Another issue related to the Iowa capital gain deduction for which you requested an opinion pertained to a liquidation of an S corporation which included accumulated C corporation earnings from tax years before the S election was made. If this liquidation includes sales of assets of the corporation as discussed above; the portion of the liquidation that was attributable to the accumulated earnings would presumably qualify for the capital gain deduction. However, when the Administrative Rule 701-40.38 Liquidations was adopted, I do not believe that the accumulated earnings issue was considered.Finally, you asked for the Department's position on whether capital gain income generated from an involuntary conversion would qualify for the Iowa capital gain deduction? This involved a building destroyed by fire that the taxpayer elected not to replace where proceeds from insurance exceeded the taxpayer's basis in the property. We do not believe that the capital gain from an involuntary conversion will qualify for the Iowa capital gain deduction. We do not feel that this type of capital gain is covered by Iowa Code § 422.7 (21) or any of the Administrative rules under 40-38 which support this statute.Please contact me if you have any questions about my response. My telephone number is 515-281-4777.Sincerely,James D. HamiltonTax Specialist, Policy SectionCompliance Divisionenc.