If I got founding stock in a corporation I helped create as an employee, does it qualify for Nebraska's capital gains exclusion?

Plain-English summary

Nebraska gives residents a valuable break: under Neb. Rev. Stat. § 77-2715.09, a resident individual may subtract from federal adjusted gross income the gain from selling capital stock of a corporation they acquired (i) on account of employment by that corporation or (ii) while employed by it. This is Nebraska's "special capital gains" exclusion for employer stock.

This ruling answers a narrower question: does stock a person receives when the corporation is first created — as a founder who is also an employee-investor — qualify for that exclusion?

The holding: yes, it can. Stock received in the creation of a corporation by an employee-investor may qualify for the capital gains income adjustment. The ruling reasons that nothing in the statute limits it to stock acquired after the company already exists — there's no bar to applying it to stock acquired in the corporation's creation. The determining factor is the employment relationship: if the person who receives stock upon incorporation is an employee of the issuing corporation, the gain on that stock qualifies for the exclusion, provided all other statutory requirements are met.

The flip side: stock received by an investor who is not an employee of the issuing corporation does not qualify for the exclusion. Pure investors don't get the break — the employment tie is essential.

Approved by State Tax Commissioner M. Berri Balka in January 1991.

What this means for you

Founders who are also employees of their company

If you took founding stock in a corporation you helped create and you're an employee of that corporation, the gain when you eventually sell that stock can qualify for Nebraska's § 77-2715.09 capital gains exclusion — being a founder doesn't disqualify you, as long as the employment relationship is there and the other statutory requirements are met.

Pure investors in a startup

If you received stock as an outside investor and are not an employee of the issuing corporation, this exclusion is not available to you on that stock.

Tax advisors structuring founder equity

The pivot point is employment with the issuing corporation. Document the employment relationship of anyone claiming the exclusion on founder or early stock, and confirm the other § 77-2715.09 requirements are satisfied.

Common questions

Q: Does founder stock qualify for Nebraska's capital gains exclusion?
A: It can. Stock received in the creation of a corporation by an employee-investor may qualify, because the statute isn't limited to stock acquired after the company exists — the key is being an employee of the issuing corporation.

Q: What if I'm just an investor, not an employee?
A: Stock received by an investor who is not an employee of the issuing corporation does not qualify for the exclusion.

Q: What's the deciding factor?
A: The employment relationship with the issuing corporation. If the recipient is an employee of that corporation, the gain qualifies (if all other statutory requirements are met).

Citations and references

• Neb. Rev. Stat. § 77-2715.09 — lets a resident individual subtract from federal AGI the gain from selling capital stock of a corporation acquired on account of, or while in, employment by that corporation.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr229004_stock_qual.pdf

Original ruling text

Revenue Ruling 22-90-4

STOCK RECEIVED IN THE CREÀTION OF À
Capital Gains Election.
CORPORATION BY ÀN EMPLOYEE- INVESTOR I,fÀY QUÀLIFY FOR THE CÀPTTAL
GAINS INCO}ÍE ADJUSTMENT PROVI DED BY NEBRÀSKÀ LÀVl.

in the creation
Advice has been requested whether stockis received
the
emploYee-of
an
also
of a .o"po"áilor Éy an investor, who
gains
capital
the
qualifyforããrporatio-n issuing'the stock,-TaY by Nebraska law'
eleãtion and income exclusion allowed
section 77-2715.09 0f the Nebraska Revised statutes states:
this section
Every resident individual-may -elect under
gross
income the
ádjusted
to Ëubtract from federal
stock of a
of
capital
exchangg
gain from the sale or
on-account
(i)
individual
the
byõorporation acquired
by suêh corporation or ( ii) while
of
"toptol^"nt'
employed bY such corPoration'
whÍch -prevent it from
There are no limitatj-ons in the statute
of a corporation'
creation
the
in
applying to stãck acquired
relationshÍp-of
the
is
statute
the
in
The determining factoi
incorporation
uPon
received
is
stock
if
employment. iherefore,
issuing
corporation
the
of
employee
an
is
who
b"--#i individuàl
of the
sale
gain
from
the
for
exclus-ion
the stock, the income
siock will apply if all other statutory requirements are met'
who is not an employee of the
Stock received by an investor does
not qualify for the income
the stock
ããipãration i"""iig
exclusion.
APPROVED:

l{. Berri

State Tax Commissioner
January 7L , 1991