SB2121 102ND GENERAL ASSEMBLY

LRB102 14999 HLH 20354 b

102ND GENERAL ASSEMBLY
State of Illinois
2021 and 2022
SB2121

Introduced 2/26/2021, by Sen. Robert Peters

SYNOPSIS AS INTRODUCED:

New Act

Creates the Extremely High Wealth Mark-to-Market Tax Act. Contains provisions concerning gains or losses of assets for individual taxpayers with net assets worth $50,000,000 or more. Creates a Task Force on mark-to-market tax administration. Sets forth penalties. Effective immediately.

FISCAL NOTE ACT MAY APPLY

A BILL FOR

AN ACT concerning revenue.

Be it enacted by the People of the State of Illinois, represented in the General Assembly:

Section 1. Short title. This Act may be cited as the Extremely High Wealth Mark-to-Market Tax Act.

Section 5. Tax imposed; tax years beginning on or after January 1, 2020 and beginning prior to January 1, 2021.

(a) Notwithstanding any other provision of law, resident individual taxpayers with net assets worth more than the exemption allowance of $50,000,000, as specified in Section 15, or more on December 31, 2020, shall recognize gain or loss as if each asset owned by the individual taxpayer were sold for its fair market value on that date. Any resulting net gains from these deemed sales, up to the phase-in cap amount, shall be included in the taxpayer's income for tax years beginning on or after January 1, 2020 and beginning prior to January 1, 2021. Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gains or losses taken into account under this subsection. At the taxpayer's option, the tax payable as a result of this Section shall either be payable in one installment or else shall be payable annually in 10 equal installments beginning in the year of the effective date of this Act and with all such installment payments commencing after the initial installment payment also being subject to an annual nondeductible deferral charge at a rate to be determined and published by the Department of Revenue, that conservatively estimates the borrowing cost that the State of Illinois would incur to borrow the present value of the deferred payments over a ten-year term. For resident individual taxpayers who would recognize net gains as a result of this Section except for the operation of this sentence, if the taxpayer can show that any portion of such gains was accumulated prior to the taxpayer becoming a resident individual of Illinois, and if the taxpayer can also show that such portion of such gains was previously taxed by any prior state or jurisdiction in which the taxpayer was a resident prior to becoming a resident individual of Illinois, then credit shall be provided in the amount of any such tax on such gains paid to any such prior states or jurisdictions in which the taxpayer was a resident prior to becoming a resident individual of Illinois. Any credits so provided by this subsection, however, shall not exceed the lesser of the total tax owed under this Section on such gains and the tax imposed on such gains by such other prior states or jurisdictions in which the taxpayer was a resident prior to becoming a resident individual of Illinois.

(b) For tax years included in this Section, whether an individual is a resident individual for purposes of this Act shall be determined using the pursuant to the criteria in the Illinois Income Tax Act.

Section 10. Tax imposed; subsequent years. For taxable years beginning on or after January 1, 2021, resident individual taxpayers with net assets that are worth more than the exemption-allowance amount of $50,000,000, as specified in Section 15, at the end of the last day of any tax year shall recognize gain or loss as if each asset owned by such taxpayer at the end of the last day of the tax year were sold for its fair market value on such date, but with adjustment made for tax paid on gain in previous years. Any resulting net gains from these deemed sales, up to the phase-in cap amount, shall be included in the taxpayer's income for such taxable year. Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. To the extent that the losses of a taxpayer exceed such taxpayer's gains, such net losses shall not be recognized in such taxable year and shall instead carry forward indefinitely. Notwithstanding the prior sentence, if a taxpayer has such net losses carried forward for more than five consecutive years, and if the taxpayer previously included in the taxpayer's income for any prior year net gains from any deemed sales as a result of this Act, then the taxpayer may file to claim a refund in the amount of lesser of either one fifth of the amount of the taxpayer's net losses that have been carried forward for more than 5 years or the amount of tax the taxpayer paid in prior years as a result of any net gains included in the taxpayer's income from deemed sales as a result of this Act. For resident individual taxpayers who would recognize net gains as a result of this Section except for the operation of this sentence, but who were not resident individuals for all of the preceding five tax years, solely for purposes of deemed sales pursuant to this Section, the tax basis of each asset owned on the last day of the last tax year before the resident individual became an Illinois resident shall be the fair market value of the asset as of that day.

Section 15. Exemption-allowance amount and phase-in cap amount.

(a) The exemption-allowance amount shall be $50,000,000.

(b) The phase-in cap amount, for each date on which gains or losses are recognized as a result of this Act, shall be equal to a quarter of the extent to which the worth of a taxpayer's net assets exceeds the exemption-allowance amount on such date.

Section 20. Net worth calculation. For the purposes of determining whether a resident individual taxpayer has net assets worth more than the exemption-allowance amount, the term "assets" shall include all of the following, but only to the extent allowable under the Illinois Constitution, the United States Constitution, and any other governing federal law: all owned real or personal, tangible or intangible, property, wherever situated, (1) owned by the taxpayer, (2) owned by the taxpayer's spouse, minor children, or any trust or estate of which the taxpayer is a beneficiary, (3) contributed by the taxpayer, or the taxpayer's spouse, minor children, or any trust or estate of which the taxpayer is a beneficiary, to any private foundation, donor advised fund, and any other entity described in Section 501(c) or Section 527 of the Internal Revenue Code of which the taxpayer, or the taxpayer's spouse, minor children, or any trust or estate of which the taxpayer is a beneficiary, is a substantial contributor (as such term is defined in Section 4958(c)(3)(B)(i) of the Internal Revenue Code), and (4) without duplication, all gifts and donations made within the past five years by the taxpayer, or the taxpayer's spouse, minor children, or any trust or estate of which the taxpayer is a beneficiary, as if such gifts and donations were still owned by the taxpayer. For the purpose of this Section, "net assets" shall include the fair market value of assets less the fair market value of liabilities of the taxpayer and, in appropriate cases as determined by the Department of Revenue, liabilities of such other persons described in the definition of assets.

Section 25. Determining Valuations.

(a) The Department of Revenue shall adopt rules for determining the fair market value of assets for all purposes of this Act. Such rules may require the use of formulaic valuation approaches for designated assets, including formulaic approaches based on proxies for determining presumptive valuations (such as, for example, requiring that privately held business entities be valued based on a blended formula of book value plus a multiple of book profits), formulaic approaches based on prospective adjustments from purchase prices or other prior events, or formulaic approaches based on retrospectively adding deferral charges based on eventual sale prices or other specified later events indicative of valuation.

(b) Except as might otherwise be specified through rules adopted by the Department of Revenue, the fair market value of each asset owned by the taxpayer shall be the price at which such asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts. The value of a particular asset shall not be the price that a forced sale of the property would produce. Further, the fair market value of an asset shall not be the sale price in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate. In the case of an asset which is generally obtained by the public in the retail market, the fair market value of such an asset shall be the price at which such item or a comparable item would be sold at retail.

(c) For purposes of this Section, any feature of an asset, such as a poison pill, that was added with the intent, and has the effect, of reducing the value of the asset shall be disregarded, and no valuation or other discount shall be taken into account if it would have the effect of reducing the value of a pro rata economic interest in an asset below the pro rata portion of the value of the entire asset.

Section 30. Administration.

(a) The Department of Revenue shall amend or create tax forms as necessary for the reporting of gains by assets. Assets shall be listed with: (i) a description of the asset; (ii) the asset category; (iii) the year the asset was acquired; (iv) the adjusted Illinois basis of the asset as of December 31 of the tax year; (v) the fair market value of the asset as of December 31 of the tax year; and (vi) the amount of gain that would be taxable under this Act; unless the Department shall determine that one or more categories is not appropriate for a particular type of asset.

(b) Asset categories separately listed shall include, but not be limited to, the following:

(1) stock held in any publicly traded corporation;

(2) stock held in any private traded C corporation;

(3) stock held in any S corporation;

(4) interests in any private equity or hedge fund organized as a partnership;

(5) interests in any other partnerships;

(6) interests in any other noncorporate businesses;

(7) bonds and interest bearing savings accounts, cash and deposits;

(8) interests in mutual funds or index funds;

(9) put and call options;

(10) futures contracts;

(11) financial assets held offshore reported on IRS tax form 8938;

(12) real property;

(13) art and collectibles;

(14) pension funds;

(15) other assets;

(16) debts and liabilities; and

(17) assets not owned by the taxpayer but which count toward the $50,000,000 threshold pursuant to Section 20.

(b) The Department shall specifically request the filing of such forms by any resident individual expected to have net assets in excess of the exemption-allowance amount. Such taxpayers shall include, but not be limited to, taxpayers with an adjusted gross income summed over the previous ten years in excess of three fifths of the exemption-allowance amount and any taxpayer with adjusted gross income of more than $10,000,000 for the tax year (as calculated prior to accounting for any gains or losses recognized as a result of this Act).

Section 35. Mark-to-market in other states. If any resident individual taxpayer becomes an Illinois resident subsequent to paying tax to another state as a result of recognizing gain or loss pursuant to any mark-to-market or deemed-realization regime of that other state, proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under such mark-to-market or deemed-realization regime of that other state for purposes of computing gain or loss under Sections 5 or 10 of this Act.

Section 40. Collection. The Department of Revenue shall collect the mark-to-market taxes imposed by this Act. Money collected, after deducting amounts necessary for administration and enforcement by the Department, shall be paid into the General Revenue Fund in the State treasury.

Section 45. Task Force on administration and enforcement.

(a) There is established a Task Force on mark-to-market tax administration.

(b) The purpose of the Task Force will be to assure adequate funding and staffing for the administration of the mark-to-market tax. Adequate funding should result in an audit rate for taxpayers with net worth of $1,000,000,000 or greater of 100%. Adequate funding should result in an audit rate for taxpayers with net worth between $50,000,000 and $1,000,000 of at least 25%. Adequate funding should additionally make it both possible and feasible for the Department of Revenue to hire any outside experts or outside counsel as appropriate and helpful for vigorously enforcing this Act.

For the first two years of operation, $50,000,000 or 1% of all projected revenues from the mark-to-market tax, whichever is greater, shall be deposited in the Tax Compliance and Administration Fund for the purpose of setting up the administration and enforcement of the mark-to-market tax.

The Task Force shall recommend prudently spending down any excess funds deposited into the Tax Compliance and Administration Fund under this provisions of this subsection.

(c) The Task Force shall propose an appropriate level of funding for mark-to-market tax administration annually, with the first proposal due 6 months after the effective date of this Act.

(d) The Governor, the Comptroller, the Treasurer, the General Assembly, and the Director of Revenue shall each appoint one member from each of the following 3 categories: (1) a current or retired Illinois revenue official; (2) a taxpayer representative; (3) a policy analyst or academic.

(e) All appointments shall be made within 40 days after the effective date of this Act. If any of the appointments are not completed within that time, the Task Force shall proceed to operate with the appointments that are in place, provided that at least 60% of the appointments have been made.

Forty-five days after the effective date of this Act, the Director of Revenue shall convene a meeting of the appointed members of the Task Force to elect a chairperson and vice chairperson from among the individuals nominated pursuant to subsection (d).

The members shall serve 8-year terms. Members shall serve a maximum of 2 terms.

If a vacancy occurs within a term, the appointing authority shall appoint a replacement member within 90 days to serve the remainder of the term.

When a term expires, the appointing authority shall appoint a member within 90 days. Task Force members shall continue to serve until their replacements are appointed.

Actions of the Task Force may be taken only by a majority vote of a quorum of the Task Force.

Section 50. Penalties.

(a) A taxpayer subject to the tax imposed under this Act with an understatement of tax for any taxable year shall be subject to the penalty imposed under this Section if that understatement exceeds the greater of the following:

(1)$1,000,000; or

(2)20% of the tax shown on an original return or shown on an amended return filed on or before the original or extended due date of the return for the taxable year.

(b) The penalty under this Section shall be an amount equal to 20% of any understatement of tax. For purposes of this Section, "understatement of tax" means the amount by which the tax imposed by this Act exceeds the amount of tax shown on an original return or shown on an amended return filed on or before the original or extended due date of the return for the taxable year.

The penalty under this Section shall be an amount equal to 40% of any understatement of tax if that understatement was substantially the result of not reporting an asset required to be listed under Section 30.

(c) The penalty imposed by this Section shall be in addition to any other penalty imposed under the personal income tax or other relevant provision of law.

(d) A refund or credit for any amounts paid to satisfy a penalty imposed under this Section may be allowed only on the grounds that the amount of the penalty was not properly computed by the Department of Revenue.

(e) No penalty shall be imposed under this Section on any understatement to the extent that the understatement is attributable to any of the following:

(1)A change in law that is enacted, adopted, issued, or becomes final after the earlier of either of the following dates:

(A) the date the taxpayer files the return for the taxable year for which the change is operative; or

(B) the extended due date for the return of the taxpayer for the taxable year for which the change is operative.

For purposes of this Section, a "change of law" means a statutory change or an interpretation of law or rule of law by regulation, legal ruling of counsel, or a published federal or Illinois court decision.

The Department of Revenue shall implement this Section in a reasonable manner.

(f) No penalty shall be imposed under this Section to the extent that a taxpayer's understatement is attributable to the taxpayer's reasonable reliance on written advice of the Department of Revenue, but only if the written advice was a formal legal ruling.

Section 55. Rules. The Department of Revenue shall adopt rules necessary or appropriate to carry out the purposes of this Act, including rules to prevent the use of year-end transfers, related parties, or other arrangements to avoid its provisions.

Section 99. Effective date. This Act takes effect upon becoming law.