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Nebraska Special Capital Gain Election

October 19, 2016

On Friday, October 14, 2016, the Nebraska Supreme Court ruled in Stewart v. Nebraska Dept. of Revenue that the Nebraska Special Capital Gain Election does not require a business purpose or economic substance for transaction entered into for the purpose of creating a qualified corporation. This ruling creates tax savings opportunities for Nebraska resident individuals who are contemplating selling stock of closely held businesses.

Overview

The Nebraska Special Capital Gain/Extraordinary Dividend Election allows resident taxpayers to make one election during his or her lifetime to exclude from federal adjusted gross income the extraordinary dividends paid on and the capital gain from the sale or exchange of capital stock of a corporation acquired by the individual (a) on account of employment by such corporation or (b) while employed by such corporation. A qualified corporation is one that, at the time of the first sale or exchange of capital stock or declaration of extraordinary dividend on capital stock for which the election is made:

Has been in existence and actively doing business in Nebraska for at least 3 years;
Has at least five shareholders; and
Has no more than 90% of the capital stock held by any single shareholder or group of related shareholders.

The Nebraska Department of Revenue has been challenging the Election whenever a corporation has entered into transactions for the purpose of meeting the five shareholder and two groups of unrelated shareholder tests. The basis for the Department’s challenge was lack of business purpose and economic substance. The Stewart case makes it clear that the plain language of the statute requires only that the three requirements be met in order to be a qualified corporation. Business purpose and economic substance are not required. Please contact your Lutz advisor with questions.

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