Nebraska’s special capital gains exclusion was adopted in 1987 as part of the Employment and Investment Growth Act. This allows individual taxpayers to make a one-time election to exclude Nebraska income capital gains from the sale of the stock of a qualified corporation.

Definitions

A qualified corporation is defined at the time of the first sale or exchange for which an election is made:

• Have at least five shareholders; and
• No more than 90% of the capital stock can be held by any single shareholder or group of related shareholders; and
• Have been doing business in Nebraska for at least three years

Qualified stock acquired by the individual must meet the following requirements:

• The shares were acquired on account of employment by the corporation; or
• The shares were acquired while employed by the corporation

Planning

Often a family-owned business does not meet the requirements above. If the business wants to sell and take advantage of the special capital gains exclusion, planning techniques are available. Since 1987, accountants, in conjunction with the business and their attorneys, have been using these planning techniques, often challenged by the Nebraska Department of Revenue on the grounds of “economic substance”. 

In 2008, the uncertainty regarding this pre-transaction planning was settled by the Nebraska Supreme Court in Stewart v. Nebraska Dept. of Rev. In Stewart, the court ruled that the federal “economic substance” and “sham transaction” doctrines do not apply in determining whether a corporation is a qualified corporation for purposes of Nebraska’s special capital gains exclusion. This ruling effectively solidified the pre-transaction planning.

If you are a Nebraska business considering a sale, contact us for professional tax planning assistance. Done properly, you could earn up to 6.84% in potential tax savings. You can also learn more about our State and Local Tax services here.