REPORT TITLE:
Conformity to IRC


DESCRIPTION:
Amends Hawaii's Income Tax Law to conform with the changes to the
Internal Revenue Code.  (SB2938 HD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 2000                                H.D. 1
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO CONFORMITY OF THE HAWAII INCOME TAX LAW TO THE
   INTERNAL REVENUE CODE.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  Chapter 235, Hawaii Revised Statutes, is amended
 
 2 by adding a new section to be appropriately designated and to
 
 3 read as follows:
 
 4      "235-     Operation of certain Internal Revenue Code
 
 5 provisions; sections 641 to 7525.  (a)  Section 641 (with respect
 
 6 to imposition of tax) of the Internal Revenue Code shall be
 
 7 operative for the purposes of this chapter subject to the
 
 8 following:
 
 9      (1)  The deduction for exemptions shall be allowed as
 
10           provided in section 235-54(b);
 
11      (2)  The deduction for contributions and gifts in
 
12           determining taxable income shall be limited to the
 
13           amount allowed in the case of an individual, unless the
 
14           contributions and gifts are to be used exclusively in
 
15           the State; and
 
16      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
17           Code as applied by section 641 of the Internal Revenue
 
18           Code is hereby imposed by this chapter at the rate and
 

 
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 1           amount as determined under section 235-51 on estates
 
 2           and trusts.
 
 3      (b)  Section 667 (with respect to treatment of amounts
 
 4 deemed distributed by trusts in preceding years) of the Internal
 
 5 Revenue Code shall be operative for the purposes of this chapter
 
 6 and the tax imposed therein is hereby imposed by this chapter at
 
 7 the rate determined under this chapter; except that the reference
 
 8 to tax-exempt interest to which section 103 of the Internal
 
 9 Revenue Code applies in section 667(a) of the Internal Revenue
 
10 Code shall instead be a reference to tax-exempt interest to which
 
11 section 235-7(b) applies.
 
12      (c)  Section 685 (with respect to treatment of qualified
 
13 funeral trusts) of the Internal Revenue Code shall be operative
 
14 for purposes of this chapter, except that the tax imposed under
 
15 this chapter shall be computed at the tax rates provided under
 
16 section 235-51, and no deduction for the exemption amount
 
17 provided in section 235-54(b) shall be allowed.  The cost-of-
 
18 living adjustment determined under section 1(f)(3) of the
 
19 Internal Revenue Code shall be operative for the purpose of
 
20 applying section 685(c)(3) under this chapter.
 
21      (d)  Section 1212 (with respect to capital loss carrybacks
 
22 and carryforwards) of the Internal Revenue Code shall be
 
23 operative for the purposes of this chapter; except that for the
 

 
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 1 purposes of this chapter the capital loss carryback provisions of
 
 2 section 1212 shall not be operative and the capital loss
 
 3 carryforward allowed by section 1212(a) shall be limited to five
 
 4 years.
 
 5      (e)  Subchapter S (sections 1361 to 1379) (with respect to
 
 6 tax treatment of S corporations and their shareholders) of
 
 7 chapter 1 of the Internal Revenue Code shall be operative for the
 
 8 purposes of this chapter as provided in part VII.
 
 9      (f)  Section 6015 (with respect to relief from joint and
 
10 several liability on joint return) of the Internal Revenue Code
 
11 is operative for purposes of this chapter.
 
12      (g)  Subchapter C (sections 6221 to 6233) (with respect to
 
13 tax treatment of partnership items) of chapter 63 of the Internal
 
14 Revenue Code shall be operative for the purposes of this chapter.
 
15      (h)  Subchapter D (sections 6240 to 6255) (with respect to
 
16 simplified audit procedures for electing large partnerships) of
 
17 the Internal Revenue Code shall be operative for the purposes of
 
18 this chapter, with due regard to chapter 232 relating to tax
 
19 appeals.
 
20      (i)  Section 6511(h) (with respect to running of periods of
 
21 limitation suspended while taxpayer is unable to manage financial
 
22 affairs due to disability) of the Internal Revenue Code shall be
 
23 operative for purposes of this chapter, with due regard to
 

 
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 1 section 235-111 relating to the limitation period for assessment,
 
 2 levy, collection, or credit.
 
 3      (j)  Section 7518 (with respect to capital construction fund
 
 4 for commercial fishers) of the Internal Revenue Code shall be
 
 5 operative for the purposes of this chapter.  Qualified
 
 6 withdrawals for the acquisition, construction, or reconstruction
 
 7 of any qualified asset which is attributable to deposits made
 
 8 before the effective date of this section shall not reduce the
 
 9 basis of the asset when withdrawn.  Qualified withdrawals shall
 
10 be treated on a first-in-first-out basis.
 
11      (k)  Section 7525 (with respect to confidentiality
 
12 privileges relating to taxpayer communications) of the Internal
 
13 Revenue Code shall be operative for the purposes of this chapter.
 
14 All references to Internal Revenue Code sections within section
 
15 7525 of the Internal Revenue Code shall be operative for purposes
 
16 of this section.  The term "Internal Revenue Service" as used in
 
17 section 7525(a)(2)(A) of the Internal Revenue Code means the
 
18 department; the term "federal court" as used in section
 
19 7525(a)(2)(B) means state court; and the term "United States" as
 
20 used in section 7525(a)(2)(B) means State."
 
21      SECTION 2.  Section 235-2.3, Hawaii Revised Statutes, is
 
22 amended by amending subsection (a) to read as follows:
 

 
 
 
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 1      "(a)  For all taxable years beginning after December 31,
 
 2 [1998,] 1999, as used in this chapter "Internal Revenue Code"
 
 3 means subtitle A, chapter 1 of the federal Internal Revenue Code
 
 4 of 1986, amended as of December 31, [1998,] 1999, as it applies
 
 5 to the determination of gross income, adjusted gross income,
 
 6 ordinary income and loss, and taxable income except those
 
 7 provisions of the Internal Revenue Code and federal public laws
 
 8 which pursuant to this chapter do not apply or are otherwise
 
 9 limited in application.
 
10      Sections 235-2, 235-2.1, and 235-2.2 shall continue to be
 
11 used to determine:
 
12       (1) The basis of property, if a taxpayer first determined
 
13           the basis of property in a taxable year to which such
 
14           sections apply, and if such determination was made
 
15           before January 1, 1978; and
 
16       (2) Gross income, adjusted gross income, ordinary income
 
17           and loss, and taxable income for a taxable year to
 
18           which such sections apply where such taxable year
 
19           begins before January 1, 1978."
 
20      SECTION  3.  Section 235-2.4, Hawaii Revised Statutes, is
 
21 amended to read as follows:
 
22      "235-2.4  Operation of certain Internal Revenue Code
 
23 provisions[.]; sections 63 to 530.  (a)  Section 63 (with respect
 
24 to taxable income defined) of the Internal Revenue Code shall be
 

 
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 1 operative for the purposes of this chapter, except that the
 
 2 standard deduction amount in section 63(c) of the Internal
 
 3 Revenue Code shall instead mean:
 
 4      (1)  $1,900 in the case of:
 
 5           (A)  A joint return as provided by section 235-93; or
 
 6           (B)  A surviving spouse (as defined in section 2(a) of
 
 7                the Internal Revenue Code);
 
 8      (2)  $1,650 in the case of a head of household (as defined
 
 9           in section 2(b) of the Internal Revenue Code);
 
10      (3)  $1,500 in the case of an individual who is not married
 
11           and who is not a surviving spouse or head of household;
 
12           or
 
13      (4)  $950 in the case of a married individual filing a
 
14           separate return.
 
15      Section 63(c)(4) shall not be operative in this State.
 
16 Section 63(c)(5) shall be operative, except that the limitation
 
17 on basic standard deduction in the case of certain dependents
 
18 shall be the greater of $500 or such individual's earned income.
 
19 Section 63(f) shall not be operative in this State.
 
20      The standard deduction amount for nonresidents shall be
 
21 calculated pursuant to section 235-5.
 
22      (b)  Section 72 (with respect to annuities; certain proceeds
 
23 of endowment and life insurance contracts) of the Internal
 

 
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 1 Revenue Code shall be operative for purposes of this chapter and
 
 2 be interpreted with due regard to section 235-7(a), except that
 
 3 the ten per cent additional tax on early distributions from
 
 4 retirement plans in section 72(t) shall not be operative for
 
 5 purposes of this chapter.
 
 6      (c)  Section 121 (with respect to exclusion of gain from
 
 7 sale of principal residence) of the Internal Revenue Code shall
 
 8 be operative for purposes of this chapter, except that for the
 
 9 election under section 121(f), a reference to section 1034
 
10 treatment means a reference to section 235-2.4(n) in effect for
 
11 taxable year 1997.
 
12      (d)  Section 219 (with respect to retirement savings) of the
 
13 Internal Revenue Code shall be operative for the purpose of this
 
14 chapter.  For the purpose of computing the limitation on the
 
15 deduction for active participants in certain pension plans for
 
16 state income tax purposes, adjusted gross income as used in
 
17 section 219 as operative for this chapter means federal adjusted
 
18 gross income.
 
19      (e)  Section 220 (with respect to medical savings accounts)
 
20 of the Internal Revenue Code shall be operative for the purpose
 
21 of this chapter, but only with respect to medical services
 
22 accounts that have been approved by the Secretary of the Treasury
 
23 of the United States.
 

 
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 1      (f)  Section 408A (with respect to Roth Individual
 
 2 Retirement Accounts) of the Internal Revenue Code shall be
 
 3 operative for the purposes of this chapter.  For the purposes of
 
 4 determining the aggregate amount of contributions to a Roth
 
 5 Individual Retirement Account or qualified rollover contribution
 
 6 to a Roth Individual Retirement Account from an individual
 
 7 retirement plan other than a Roth Individual Retirement Account,
 
 8 adjusted gross income as used in section 408A as operative for
 
 9 this chapter means federal adjusted gross income.
 
10      (g)  In administering the provisions of sections 410 to 417
 
11 (with respect to special rules relating to pensions, profit
 
12 sharing, stock bonus plans, etc.), sections 418 to 418E (with
 
13 respect to special rules for multiemployer plans), and sections
 
14 419 and 419A (with respect to treatment of welfare benefit funds)
 
15 of the Internal Revenue Code, the department of taxation shall
 
16 adopt rules under chapter 91 relating to the specific
 
17 requirements under such sections and to such other administrative
 
18 requirements under those sections as may be necessary for the
 
19 efficient administration of sections 410 to 419A.
 
20      In administering sections 401 to 419A (with respect to
 
21 deferred compensation) of the Internal Revenue Code, Public Law
 
22 93-406, section 1017(i), shall be operative for the purposes of
 
23 this chapter.
 

 
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 1      In administering section 402 (with respect to the taxability
 
 2 of beneficiary of employees' trust) of the Internal Revenue Code,
 
 3 the tax imposed on lump sum distributions by section 402(e) of
 
 4 the Internal Revenue Code shall be operative for the purposes of
 
 5 this chapter and the tax imposed therein is hereby imposed by
 
 6 this chapter at the rate determined under this chapter.
 
 7      (h)  Section 468B (with respect to special rules for
 
 8 designated settlement funds) of the Internal Revenue Code shall
 
 9 be operative for the purposes of this chapter and the tax imposed
 
10 therein is hereby imposed by this chapter at a rate equal to the
 
11 maximum rate in effect for the taxable year imposed on estates
 
12 and trusts under section 235-51.
 
13      (i)  Section 469 (with respect to passive activities and
 
14 credits limited) of the Internal Revenue Code shall be operative
 
15 for the purposes of this chapter.  For the purpose of computing
 
16 the offset for rental real estate activities for state income tax
 
17 purposes, adjusted gross income as used in section 469 as
 
18 operative for this chapter means federal adjusted gross income.
 
19      (j)  Sections 512 to 514 (with respect to taxation of
 
20 business income of certain exempt organizations) of the Internal
 
21 Revenue Code shall be operative for the purposes of this chapter
 
22 as provided in this subsection.
 

 
 
 
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 1      "Unrelated business taxable income" means the same as in the
 
 2 Internal Revenue Code, except that in the computation thereof
 
 3 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
 4 apply, and in the determination of the net operating loss
 
 5 deduction there shall not be taken into account any amount of
 
 6 income or deduction which is excluded in computing the unrelated
 
 7 business taxable income.  Unrelated business taxable income shall
 
 8 not include any income from a prepaid legal service plan.
 
 9      For a person described in section 401 or 501 of the Internal
 
10 Revenue Code, as modified by section 235-2.3, the tax imposed by
 
11 section 235-51 or 235-71 shall be imposed upon the person's
 
12 unrelated business taxable income.
 
13      (k)  Section 521 (with respect to cooperatives) and
 
14 subchapter T (sections 1381 to 1388, with respect to cooperatives
 
15 and their patrons) of the Internal Revenue Code shall be
 
16 operative for the purposes of this chapter as to any cooperative
 
17 fully meeting the requirements of section 421-23, except that
 
18 Internal Revenue Code section 521 cooperatives need not be
 
19 organized in Hawaii.
 
20      (l)  Sections 527 (with respect to political organizations)
 
21 and 528 (with respect to certain homeowners associations) of the
 
22 Internal Revenue Code shall be operative for the purposes of this
 

 
 
 
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 1 chapter and the taxes imposed in each such section are hereby
 
 2 imposed by this chapter at the rates determined under section
 
 3 235-71.
 
 4      (m)  Section 530 (with respect to education individual
 
 5 retirement accounts) of the Internal Revenue Code shall be
 
 6 operative for the purposes of this chapter.  For the purpose of
 
 7 determining the maximum amount that a contributor could make to
 
 8 an education individual retirement account for state income tax
 
 9 purposes, modified adjusted gross income as used in section 530
 
10 as operative for this chapter means federal modified adjusted
 
11 gross income as defined in section 530.
 
12      [(n)  Section 641 (with respect to imposition of tax) of the
 
13 Internal Revenue Code shall be operative for the purposes of this
 
14 chapter subject to the following:
 
15      (1)  The deduction for exemptions shall be allowed as
 
16           provided in section 235-54(b).
 
17      (2)  The deduction for contributions and gifts in
 
18           determining taxable income shall be limited to the
 
19           amount allowed in the case of an individual, unless the
 
20           contributions and gifts are to be used exclusively in
 
21           the State.
 
22      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
23           Code as applied by section 641 of the Internal Revenue
 

 
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 1           Code is hereby imposed by this chapter at the rate and
 
 2           amount as determined under section 235-51 on estates
 
 3           and trusts.
 
 4      (o)  Section 667 (with respect to treatment of amounts
 
 5 deemed distributed by trusts in preceding years) of the Internal
 
 6 Revenue Code shall be operative for the purposes of this chapter
 
 7 and the tax imposed therein is hereby imposed by this chapter at
 
 8 the rate determined under this chapter; except that the reference
 
 9 to tax-exempt interest to which section 103 of the Internal
 
10 Revenue Code applies in section 667(a) of the Internal Revenue
 
11 Code shall instead be a reference to tax-exempt interest to which
 
12 section 235-7(b) applies.
 
13      (p)  Section 685 (with respect to treatment of qualified
 
14 funeral trusts) of the Internal Revenue Code shall be operative
 
15 for purposes of this chapter, except that the tax imposed under
 
16 this chapter shall be computed at the tax rates provided under
 
17 section 235-51, and no deduction for the exemption amount
 
18 provided in section 235-54(b) shall be allowed.  The cost-of-
 
19 living adjustment determined under section 1(f)(3) of the
 
20 Internal Revenue Code shall be operative for the purpose of
 
21 applying section 685(c)(3) under this chapter.
 
22      (q)  Section 1212 (with respect to capital loss carrybacks
 
23 and carryforwards) of the Internal Revenue Code shall be
 
24 operative for the purposes of this chapter; except that for the
 

 
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 1 purposes of this chapter the capital loss carryback provisions of
 
 2 section 1212 shall not be operative and the capital loss
 
 3 carryforward allowed by section 1212(a) shall be limited to five
 
 4 years.
 
 5      (r)  Subchapter S (sections 1361 to 1379) (with respect to
 
 6 tax treatment of S corporations and their shareholders) of
 
 7 chapter 1 of the Internal Revenue Code shall be operative for the
 
 8 purposes of this chapter as provided in part VII.
 
 9      (s)  Section 6015 (with respect to relief from joint and
 
10 several liability on joint return) of the Internal Revenue Code
 
11 is operative for purposes of this chapter.
 
12      (t)  Subchapter C (sections 6221 to 6233) (with respect to
 
13 tax treatment of partnership items) of chapter 63 of the Internal
 
14 Revenue Code shall be operative for the purposes of this chapter.
 
15      (u)  Subchapter D (sections 6240 to 6255) (with respect to
 
16 simplified audit procedures for electing large partnerships) of
 
17 the Internal Revenue Code shall be operative for the purposes of
 
18 this chapter, with due regard to chapter 232 relating to tax
 
19 appeals.
 
20      (v)  Section 6511(h) (with respect to running of periods of
 
21 limitation suspended while taxpayer is unable to manage financial
 
22 affairs due to disability) of the Internal Revenue Code shall be
 

 
 
 
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 1 operative for purposes of this chapter, with due regard to
 
 2 section 235-111 relating to the limitation period for assessment,
 
 3 levy, collection, or credit.
 
 4      (w)  Section 7518 (with respect to capital construction fund
 
 5 for commercial fishers) of the Internal Revenue Code shall be
 
 6 operative for the purposes of this chapter.  Qualified
 
 7 withdrawals for the acquisition, construction, or reconstruction
 
 8 of any qualified asset which is attributable to deposits made
 
 9 before the effective date of this section shall not reduce the
 
10 basis of the asset when withdrawn.  Qualified withdrawals shall
 
11 be treated on a first-in-first-out basis.]"
 
12      SECTION 4.  Section 235-110.91, Hawaii Revised Statutes, is
 
13 amended by amending subsection (a) to read as follows:
 
14      "(a)  Section 41 (with respect to the credit for increasing
 
15 research activities) and section 280C(c) (with respect to certain
 
16 expenses for which the credit for increasing research activities
 
17 are allowable) of the Internal Revenue Code shall be operative
 
18 for the purposes of this chapter as provided in this section.  If
 
19 section 41 of the Internal Revenue Code is repealed or terminated
 
20 prior to January 1, 2006, its provisions shall remain in effect
 
21 for purposes of the income tax law of the State as provided for
 
22 in subsection (j)."
 

 
 
 
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 1      SECTION 5.  Statutory material to be repealed is bracketed.
 
 2 New statutory material is underscored.
 
 3      SECTION 6.  This Act, upon its approval, shall apply to
 
 4 taxable years beginning after December 31, 1999.