46th legislature - STATE OF NEW MEXICO - first session, 2003

RELATING TO TAXATION; AMENDING THE INCOME TAX ACT TO PROVIDE A PHASED-IN DEDUCTION FOR NET CAPITAL GAIN ATTRIBUTABLE TO SALE OF A CLOSELY HELD TRADE OR BUSINESS.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF NEW MEXICO:

Section 1. A new section of the Income Tax Act, Section 7-2-36 NMSA 1978, is enacted to read:

"7-2-36. [NEW MATERIAL] DEDUCTION--NET CAPITAL GAIN INCOME FROM SALE OF A CLOSELY HELD TRADE OR BUSINESS.--

A. Except as provided in Subsection B of this section, a taxpayer may claim a deduction from net income in an amount equal to the applicable percentage of the taxpayer's net capital gain from the sale of a closely held trade or business in the taxable year for which the deduction is being claimed if and to the extent the net capital gain is included in the taxpayer's base income. A husband and wife who file separate returns for a taxable year in which they could have filed a joint return may each claim only one-half of the deduction provided in this section that would have been allowed on the joint return.

B. A taxpayer may not claim the deduction provided in Subsection A of this section:

(1) if the taxpayer has claimed the credit provided in Section 7-2D-8.1 NMSA 1978; or

(2) to the extent the taxpayer has claimed a deduction for a net capital gain under Section 7-2-34 NMSA 1978.

C. As used in this section:

(1) "applicable percentage" means:

(a) for a sale of a closely held trade or business occurring in a taxable year beginning in the 2003 calendar year, fifty percent;

(b) for a sale of a closely held trade or business occurring in a taxable year beginning in the 2004 calendar year, seventy-five percent; and

(c) for a sale of a closely held trade or business occurring in a taxable year beginning after the 2005 calendar year, one hundred percent;

(2) "closely held trade or business" means a trade or business operated:

(a) as a sole proprietorship; or

(b) by a corporation, partnership, limited partnership, limited liability company or other legal entity, the equity interests of which are controlled by seventy-five or fewer qualifying owners;

(3) "controlled" means holding equity interests in at least eighty percent of the total combined voting power of all classes of equity interests entitled to vote and at least eighty percent of all other classes of equity interests of the entity;

(4) "equity interest" means the equity ownership of a legal entity, including:

(a) the capital stock of a corporation;

(b) the partnership interest of a general or limited partner in a partnership; or

(c) the membership interest of a member of a limited liability company;

(5) "net capital gain from the sale of a closely held trade or business" means "net capital gain" as defined in Section 1222 (11) of the federal Internal Revenue Code to the extent attributable to:

(a) the sale or exchange of substantially all of the property used in a closely held trade or business; or

(b) the sale or exchange of the taxpayer's entire interest in the equity interests of a closely held trade or business, in a transaction in which substantially all of the equity interests of the closely held trade or business are sold or exchanged;

(6) "qualifying owner" means:

(a) a natural person;

(b) an estate; or

(c) a qualifying trust; and

(7) "qualifying trust" means:

(a) a trust, all of which is treated under Subpart E of Subchapter J of the federal Internal Revenue Code of 1986, as owned by an individual;

(b) a trust, described in Subparagraph (a) of this paragraph, that is in existence immediately before the death of the deemed owner and that continues in existence after the deemed owner's death, but only for the two-year period beginning on the date of the deemed owner's death;

(c) a trust with respect to equity interests transferred to it pursuant to the terms of a will, but only for the two-year period beginning on the day on which such equity interests are transferred to it;

(d) a trust created under the Uniform Transfers to Minors Act; or

(e) a trust created or organized for the exclusive benefit of an individual or his beneficiaries under Section 408 of the Internal Revenue Code.

D. For purposes of Subparagraph (a) of Paragraph (6) of Subsection C of this section, a husband and wife shall be treated as one qualifying owner."

Section 2. APPLICABILITY.--The provisions of this act apply to taxable years beginning on or after January 1, 2003.

Section 3. DELAYED REPEAL.--Section 1 of this act is repealed effective January 1, 2011.