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1 H.827
2 Introduced by Representative Kornheiser of Brattleboro
3 Referred to Committee on
4 Date:
5 Subject: Taxation; income tax; unrealized gains; mark-to-market taxation
6 Statement of purpose of bill as introduced: This bill proposes to apply income
7 tax to 50 percent of the unrealized gain or loss of a taxpayer’s assets. This
8 treatment would only apply to individuals with a net worth of $10,000,000.00
9 or greater. The bill would cap the amount of unrealized gains subject to
10 taxation at 10 percent of the worth of a taxpayer’s net assets in excess of
11 $10,000,000.00 in a tax year.
12 An act relating to applying personal income tax to unrealized gains
13 It is hereby enacted by the General Assembly of the State of Vermont:
14 Sec. 1. 32 V.S.A. chapter 149 is added to read:
15 CHAPTER 149. UNREALIZED GAINS
16 § 5601. DEFINITIONS
17 As used in this chapter:
18 (1) “Commissioner” means the Commissioner of Taxes.
19 (2) “Incremental ODA withholding percentage” means, for the prior tax
20 year, the product of the estimated economy-wide normal rate of return for that VT LEG #373382 v.1
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1 prior tax year and the highest marginal Vermont income tax rate for that prior
2 tax year.
3 (3) “Optional deferral account” or “ODA” means an unliquidated tax
4 reserve account governed by section 5605 of this title.
5 (4) “Phase-in cap amount” means an amount equal to 10 percent of the
6 worth of a taxpayer’s net assets in excess of $10,000,000.00 at the end of the
7 day on the last day of an applicable tax year.
8 (5) “Related person” means any person that is related to the taxpayer
9 under 26 U.S.C. § 267 or § 318, as well as any other person so specified by
10 rules adopted by the Department of Taxes.
11 (6) “Resident individual” means all Vermont residents as determined by
12 subdivision 5811(13) of this title, any Vermont part-year residents as
13 determined by subdivision 5811(10) of this title, and any person who was
14 either a Vermont resident or part–year resident in any of the previous four
15 years.
16 (7) “Taxable income” has the same meaning as in subdivision 5811(21)
17 of this title.
18 (8) “Temporary resident” means a taxpayer who does not qualify as a
19 resident or part-year resident under subdivisions 5811(10) and (13) of this title
20 but who has substantial presence in this State. An individual has substantial VT LEG #373382 v.1
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1 presence in this State if the individual satisfies the criteria of 26 U.S.C. §
2 7701(b)(3) as modified by substituting “this State” for “the United States.”
3 § 5602. TAXATION OF UNREALIZED GAINS
4 (a) Tax is imposed for each taxable year on resident individuals with net
5 assets worth more than $10,000,000.00 at the end of the day on December 31
6 of the taxable year. A taxpayer shall be deemed to realize 50 percent of the
7 gain or loss as though each asset owned was sold for fair market value at the
8 end of the day on that date. A proper adjustment shall be made for assets
9 previously subject to taxation under this section in prior years, pursuant to
10 subsection (b) of this section. All other adjustments to the basis of a taxpayer’s
11 assets shall be made prior to a partial deemed sale under this section. Any
12 resulting net gains from a partial deemed sale, up to the phase-in cap amount,
13 after accounting for losses carried forward, shall be recognized and included in
14 the taxpayer’s taxable income for that taxable year. To the extent that a
15 taxpayer realizes net losses from these partial deemed sales in any tax year,
16 such net losses shall not be recognized in that tax year and shall instead carry
17 forward indefinitely. However, if a taxpayer has net losses carried forward for
18 more than two consecutive years and if the taxpayer previously included in the
19 taxpayer’s income for any prior year net gains from any partial deemed sales
20 under this chapter, the taxpayer may file to claim a refund in the amount of the
21 lesser of either the amount of the taxpayer’s net losses that have been carried VT LEG #373382 v.1
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1 forward for more than two years or the amount of tax the taxpayer paid in prior
2 years as a result of any net gains included in the taxpayer’s income from partial
3 deemed sales. Any additional tax payable as a result of this subsection for any
4 tax year shall be payable along with any other income tax owed for that tax
5 year.
6 (b) Proper adjustments shall be made to the basis of assets subject to
7 taxation under this section, to reflect all losses deemed to be realized and all
8 gains actually recognized.
9 (1) For assets having any built-in gains recognized at the end of a tax
10 year, basis shall be increased for each asset by its pro rata share of the total
11 gains recognized. A pro rata share is determined based on each asset’s built-in
12 gains as a share of the total built-in gains of all assets for which any built-in
13 gain was recognized. For any taxable assets having any built-in gains deemed
14 as realized under subsection (a) of this section, the total gains recognized is the
15 lesser of:
16 (A) 50 percent times the total built-in gains summed across all
17 taxable assets having any built-in gains deemed as realized under subsection
18 (a) of this section; or
19 (B) the phase-in cap amount.
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1 (2) For taxable assets without built-in gains at the end of the tax year,
2 basis shall be decreased by 50 percent of the amount of any built-in losses of
3 the property at the end of the tax year.
4 (3) There shall be further basis adjustments if any of the built-in gains
5 that are deemed to be realized in any tax year are unrecognized due to the
6 phase-in cap amount and are also offset by recognized losses. If the phase-in
7 cap amount is less than 50 percent times the total built-in gains summed across
8 all taxable assets having any built-in gains deemed as realized under subsection
9 (a) of this section, the basis in the built-in gain asset shall be further increased
10 by the basis adjustment amount. For any tax year, the basis adjustment amount
11 is the total built-in losses deemed to be realized in the tax year under
12 subsection (a) of this section, but excluding any unrecognized losses carried
13 forward or backward from other tax years, that are used to offset the total built-
14 in gains deemed to be realized in the tax year for purposes of determining net
15 gains from the partial deemed sales, but only to the extent that the resulting net
16 gains from the partial deemed sales exceed the phase-in cap amount. The basis
17 adjustment amount shall be allocated pro rata to all taxable built-in gain assets,
18 where the pro rata share is determined based on each asset’s built-in gains as a
19 share of the total built-in gains of all assets for which any built-in gain was
20 recognized under subsection (a) of this section.
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1 (c) At the time a return is filed pursuant to section 5861 of this title, every
2 Vermont resident individual required to file shall:
3 (1) declare that the individual’s net assets were worth less than or equal
4 to $10,000,000.00 at the end of the day on the last day of the applicable tax
5 year; or
6 (2) submit forms created by the Vermont Department of Taxes for
7 calculating whether any additional tax is owed under this chapter and the
8 amount of any such additional tax owed.
9 (d) Credit shall be provided in the amount of income tax paid another state
10 or jurisdiction if a taxpayer subject to the tax imposed by this chapter can show
11 that any portion of the net gains that would otherwise be subject to income tax
12 as a result of this chapter was accumulated prior to the taxpayer becoming a
13 resident individual of this State and if the taxpayer can also show that the
14 portion of those gains was previously subject to income tax by any prior state
15 or jurisdiction in which the taxpayer was a resident prior to becoming a
16 resident or part-year resident of this State. Any credits provided by this
17 subsection, however, shall not exceed the lesser of the total tax owed under this
18 subsection on such gains and the income tax imposed on such gains by such
19 other prior states or jurisdictions in which the taxpayer was a resident prior to
20 becoming a resident or part-year resident of this State.
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1 § 5603. APPORTIONMENT
2 (a) Any resulting net gains from the partial deemed sales under subsection
3 5602(a) of this chapter shall be multiplied by a fraction, the numerator of
4 which shall be years of residence in Vermont during the previous four years,
5 and the denominator of which shall be four. The amount so calculated, up to
6 the phase-in cap amount, shall be included in the taxpayer’s income for the
7 applicable tax year.
8 (b) For the purpose of calculating the numerator described in subsection (a)
9 of this section:
10 (1) any part-year of residence, as determined under subdivision
11 5811(10) of this title, shall be included in the numerator; and
12 (2) any period as a temporary resident shall be included in the
13 numerator.
14 (c) A taxpayer may request, and the Commissioner may require, the use of
15 an alternative apportionment method if the method used pursuant to subsection
16 (a) of this section does not fairly represent the extent of the gain that occurred
17 while the taxpayer was a resident in this State. An alternative apportionment
18 method may used for all or part of a taxpayer’s unrealized gains.
19 (1) When requesting alternative apportionment, a taxpayer shall
20 demonstrate by clear and convincing evidence that the standard method is
21 unfair and that a more fair and reasonable method is available.
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1 (2) The Commissioner may develop and publish guidelines for
2 determining alternative apportionment methods for recurring fact patterns.
3 (3) Full-time postsecondary students not engaged in more than de
4 minimis employment shall not have any gains deemed as accumulated in
5 Vermont while students.
6 (d) A taxpayer shall demonstrate, using clear and convincing evidence, the
7 taxpayer’s basis in each asset subject to the partial deemed sales under
8 subsection (a) of this section. The basis shall be deemed to be zero unless the
9 taxpayer substantiates such basis by adequate records or by clear and
10 convincing evidence corroborating the taxpayer’s own statement.
11 (e) Debts and other liabilities owed by the taxpayer shall be taken into
12 account for purposes of determining whether a Vermont resident individual has
13 net assets worth more than $10,000,000.00 at the end of the day on the last day
14 of a tax year. Debts and liabilities taken into account shall be genuine and
15 subject to the following limitations:
16 (1) Recourse debts for which the taxpayer is fully personally liable,
17 without any limitations other than those arising from bankruptcy law, shall be
18 fully taken into account for purposes of determining whether a Vermont
19 resident individual has net assets worth more than the threshold exemption
20 amount at the end of the day on the last day of a tax year.
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1 (2) Nonrecourse debts and other liabilities for which the taxpayer is not
2 fully personally liable without any limitations other than those arising from
3 bankruptcy law may be taken into account for purposes of determining whether
4 a Vermont resident individual has net assets worth more than $10,000,000.00
5 at the end of the day on the last day of a tax year. For each such debt or
6 liability, the amounts that may be taken into account in any tax year shall not
7 exceed the amounts included in the taxpayer’s net assets in that tax year, for
8 purposes of determining whether a Vermont resident individual has net assets
9 worth more than the threshold exemption amount at the end of the day on the
10 last day of a tax year, on account of the assets serving as collateral for the debt
11 or liability. The amount of each debt or liability shall be reduced by the fair
12 market value of any assets owned by another and also used to secure the debt
13 or liability.
14 (3) No debt or liability described in subdivisions (1) and (2) of this
15 subsection shall be taken into account, for purposes of determining whether a
16 Vermont resident individual has net assets worth more than the threshold
17 exemption amount at the end of the day on the last day of a tax year, if the debt
18 or liability is owed to a related person or persons, is contingent on future
19 events that are uncertain to occur or that are uncertain to occur within the
20 subsequent two years, or was not negotiated for at arm’s length. Additionally,
21 no amounts shall be taken into account for any such debt or liability unless VT LEG #373382 v.1
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1 market rates of interest are being charged to the taxpayer. No amounts shall be
2 taken into account for any debt or liability for which payment of the liability
3 itself or the interest thereon, or similar periodic payment charged in connection
4 with the debt or liability, is contingent on future events that are uncertain to
5 occur or that are uncertain to occur within the subsequent two years.
6 (4) Any debts or liabilities of a taxpayer for which a taxpayer is entitled
7 to receive future benefits or future ownership rights, such as a contractual
8 obligation to contribute to an entity at a future date, shall only be taken into
9 account, for purposes of determining whether a Vermont resident individual
10 has net assets worth more than the threshold exemption amount at the end of
11 the day on the last day of a tax year, to the extent that:
12 (A) the value of those future benefits or ownerships rights is included
13 in the taxpayer’s net assets for such purposes; or
14 (B) the taxpayer can demonstrate that the amount owed under the
15 debt or liability is in excess of any future benefits or ownership rights that are
16 not included in the taxpayer’s net assets for such purposes.
17 (f) If any provision of this section is found to be invalid,
18 unconstitutional, or otherwise unenforceable, that finding shall not affect the
19 enforceability of any other provision of this section. If the sourcing rule of
20 subsection (a) of this section is found by a court to be invalid, unconstitutional,
21 or otherwise unenforceable, 100 percent of unrealized gains under VT LEG #373382 v.1
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1 subsection 5602(a) of this chapter are to be sourced to Vermont as to Vermont
2 residents. A pro rata share of 100 percent of unrealized gains, based on the
3 period of partial or temporary residency, are to be sourced to Vermont for part-
4 year residents and temporary residents.
5 § 5604. VALUATION; EXCLUSIONS
6 (a) Unless otherwise specified by the Commissioner, and except as
7 otherwise specified in in this section, the fair market value of each asset owned
8 by a taxpayer is the price at which the asset would change hands between a
9 willing buyer and a willing seller, neither being under any compulsion to buy
10 or to sell, and both having reasonable knowledge of relevant facts. The
11 location of an asset shall be taken into account wherever appropriate. For an
12 asset that is generally obtained by the public in the retail market, the fair
13 market value of the asset is the price at which the item or a comparable item
14 would be sold at retail. The fair market value of an asset shall not be: