REPORT TITLE: 
Income Tax


DESCRIPTION:

Conforms Hawaii Income Tax Law to the Internal Revenue Code.
(HB1197 HD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        1197
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 1
TWENTIETH LEGISLATURE, 1999                                
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.   Section 235-2.3, Hawaii Revised Statutes, is
 
 2 amended to read as follows:
 
 3      "235-2.3  Conformance to the federal Internal Revenue Code;
 
 4 general application.(a)  For all taxable years beginning after
 
 5 December 31, [1997,] 1998, as used in this chapter "Internal
 
 6 Revenue Code" means subtitle A, chapter 1 of the federal Internal
 
 7 Revenue Code of 1986, amended as of December 31, [1997,] 1998, as
 
 8 it applies to the determination of gross income, adjusted gross
 
 9 income, ordinary income and loss, and taxable income except those
 
10 provisions of the Internal Revenue Code and federal public laws
 
11 which pursuant to this chapter do not apply or are otherwise
 
12 limited in application.
 
13      Sections 235-2, 235-2.1, and 235-2.2 shall continue to be
 
14 used to determine:
 
15      (1)  The basis of property, if a taxpayer first determined
 
16           the basis of property in a taxable year to which such
 
17           sections apply, and if such determination was made
 
18           before January 1, 1978; and 
 

 
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 1      (2)  Gross income, adjusted gross income, ordinary income
 
 2           and loss, and taxable income for a taxable year to
 
 3           which such sections apply where such taxable year
 
 4           begins before January 1, 1978.
 
 5      (b)  The following Internal Revenue Code subchapters, parts
 
 6 of subchapters, sections, subsections, and parts of subsections
 
 7 shall not be operative for the purposes of this chapter, unless
 
 8 otherwise provided:
 
 9      (1)  Subchapter A (sections 1 to 59A) (with respect to
 
10           determination of tax liability), except, section
 
11           1(h)(3) (relating to net capital gain reduced by the
 
12           amount taken into account as investment income), except
 
13           section 42 (with respect to low-income housing credit),
 
14           and except sections 47 and 48, as amended, as of
 
15           December 31, 1984 (with respect to certain depreciable
 
16           tangible personal property).  For treatment, see
 
17           sections 235-110.7 and 235-110.8;
 
18      (2)  Section 78 (with respect to dividends received from
 
19           certain foreign corporations by domestic  corporations
 
20           choosing foreign tax credit);
 
21      (3)  Section 86 (with respect to social security and tier 1
 
22           railroad retirement benefits);
 

 
 
 
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 1      (4)  Section 103 (with respect to interest on state and
 
 2           local bonds).  For treatment, see section 235-7(b);
 
 3      (5)  Section 120 (with respect to amounts received under
 
 4           qualified group legal services plans).  For treatment,
 
 5           see section 235-7(a)(9) to (11);
 
 6      (6)  Section 122 (with respect to certain reduced uniformed
 
 7           services retirement pay).  For treatment, see section
 
 8           235-7(a)(3);
 
 9      (7)  Section 135 (with respect to income from United States
 
10           savings bonds used to pay higher education tuition and
 
11           fees).  For treatment, see section 235-7(a)(1);
 
12      (8)  Subchapter B (sections 141 to 150) (with  respect to
 
13           tax exemption requirements for state and local bonds);
 
14      (9)  Section 151 (with respect to allowance of deductions
 
15           for personal exemptions).  For treatment, see section
 
16           235-54;
 
17     (10)  Section 196 (with respect to deduction for certain
 
18           unused investment credits);
 
19     (11)  Sections 241 to 247 (with respect to special deductions
 
20           for corporations).  For treatment, see section 235-
 
21           7(c);
 
22     (12)  Section 280C (with respect to certain expenses for
 
23           which credits are allowable);
 

 
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 1     (13)  Section 291 (with respect to special rules relating to
 
 2           corporate preference items);
 
 3     (14)  Section 367 (with respect to foreign corporations); 
 
 4     (15)  Section 501(c)(12), (15), (16) (with respect to exempt
 
 5           organizations);
 
 6     (16)  Section 515 (with respect to taxes of foreign countries
 
 7           and possessions of the United States);
 
 8     (17)  Subchapter G (sections 531 to 565) (with respect to
 
 9           corporations used to avoid income tax on shareholders);
 
10     (18)  Subchapter H (sections 581 to 597) (with respect to
 
11           banking institutions), except section 584 (with respect
 
12           to common trust funds).  For treatment, see chapter
 
13           241;
 
14     (19)  Section 642(a) and (b)(with respect to special rules
 
15           for credits and deductions applicable to trusts).  For
 
16           treatment, see sections 235-54(b) and 235-55; 
 
17     (20)  Section 668 (with respect to interest charge on
 
18           accumulation distributions from foreign trusts);
 
19     (21)  Subchapter L (sections 801 to 848) (with respect to
 
20           insurance companies).  For treatment, see sections
 
21           431:7-202 and 431:7-204;
 
22     (22)  Section 853 (with respect to foreign tax credit allowed
 
23           to shareholders).  For treatment, see section 235-55;
 

 
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 1     (23)  Subchapter N (sections 861 to 999) (with respect to tax
 
 2           based on income from sources within or without the
 
 3           United States), except sections 985 to 989 (with
 
 4           respect to foreign currency transactions).  For
 
 5           treatment, see sections 235-4, 235-5, [and] 235-7(b),
 
 6           and 235-55;
 
 7     (24)  Section 1042(g) (with respect to sales of stock in
 
 8           agricultural refiners and processors to eligible farm
 
 9           cooperatives);
 
10     (25)  Section 1055 (with respect to redeemable ground rents);
 
11     (26)  Section 1057 (with respect to election to treat
 
12           transfer to foreign trust, etc., as taxable exchange);
 
13     (27)  Sections 1291 to 1298 (with respect to treatment of
 
14           passive foreign investment companies);
 
15     (28)  Subchapter Q (sections 1311 to 1351) (with respect to
 
16           readjustment of tax between years and special
 
17           limitations); and
 
18     (29)  Subchapter U (sections 1391 to 1397F) (with respect to
 
19           designation and treatment of empowerment zones,
 
20           enterprise communities, and rural development
 
21           investment areas).  For treatment, see chapter 209E."
 
22     SECTION  2.  Section 235-2.4, Hawaii Revised Statutes, is
 
23 amended to read as follows:
 

 
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 1     "235-2.4  Operation of certain Internal Revenue Code
 
 2 provisions.(a)  Section 63 (with respect to taxable income
 
 3 defined) of the Internal Revenue Code shall be operative for the
 
 4 purposes of this chapter, except that the standard deduction
 
 5 amount in section 63(c) of the Internal Revenue Code shall
 
 6 instead mean:
 
 7     (1)   $1,900 in the case of:
 
 8           (A)  A joint return as provided by section 235-93[,];
 
 9                or
 
10           (B)  A surviving spouse (as defined in section 2(a) of
 
11                the Internal Revenue Code)[,];
 
12     (2)   $1,650 in the case of a head of household (as defined
 
13           in section 2(b) of the Internal Revenue Code)[,];
 
14     (3)   $1,500 in the case of an individual who is not married
 
15           and who is not a surviving spouse or head of
 
16           household[,]; or
 
17     (4)   $950 in the case of a married individual filing a
 
18           separate return.
 
19     Section 63(c)(4) shall not be operative in this State.
 
20 Section 63(c)(5) shall be operative, except that the limitation
 
21 on basic standard deduction in the case of certain dependents
 
22 shall be the greater of $500 or such individual's earned income.
 
23 Section 63(f) shall not be operative in this State.
 

 
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 1     (b)  Section 72 (with respect to annuities; certain proceeds
 
 2 of endowment and life insurance contracts) of the Internal
 
 3 Revenue Code shall be operative for purposes of this chapter and
 
 4 be interpreted with due regard to section 235- 7(a), except that
 
 5 the ten per cent additional tax on early distributions from
 
 6 retirement plans in section 72(t) shall not be operative for
 
 7 purposes of this chapter.
 
 8     (c)  Section 121 (with respect to the exclusion of gain from
 
 9 the sale of principal residence) of the Internal Revenue Code
 
10 shall be operative for purposes of this chapter, except that for
 
11 the election under section 121(f), a reference to section 1034
 
12 treatment means a reference to section 235-2.4(n) in effect for
 
13 taxable year 1997.
 
14     (d)  Section 213 (with respect to medical, dental, etc.,
 
15 expenses) of the Internal Revenue Code shall be operative, except
 
16 that subsections (d)(1)(C) with respect to long-term care
 
17 services, (d)(1)(D) as it applies to long-term care insurance
 
18 contract premiums, (d)(7) as it applies to long-term care
 
19 insurance contract premiums, and (d)(10) as it applies to
 
20 eligible long-term care premiums shall not be operative in this
 
21 State.
 
22     (e)  Section 219 (with respect to retirement savings) of the
 
23 Internal Revenue Code shall be operative for the purpose of this
 

 
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 1 chapter.  For the purpose of computing the limitation on the
 
 2 deduction for active participants in certain pension plans for
 
 3 state income tax purposes, adjusted gross income as used in
 
 4 section 219 as operative for this chapter means federal adjusted
 
 5 gross income.
 
 6     (f)  Section 220 (with respect to medical savings accounts)
 
 7 of the Internal Revenue Code shall be operative for the purpose
 
 8 of this chapter, but only with respect to medical services
 
 9 accounts that have been approved by the secretary of the Treasury
 
10 of the United States.
 
11     (g)  Section 408A (with respect to Roth Individual Retirement
 
12 Accounts) of the Internal Revenue Code shall be operative for the
 
13 purposes of this chapter.  For the purposes of determining the
 
14 aggregate amount of contributions to a Roth Individual Retirement
 
15 Account or qualified rollover contribution to a Roth Individual
 
16 Retirement Account from an individual retirement plan other than
 
17 a Roth Individual Retirement Account, adjusted gross income as
 
18 used in section 408A as operative for this chapter means federal
 
19 adjusted gross income.
 
20     [(g)] (h)  In administering the provisions of sections 410 to
 
21 417 (with respect to special rules relating to pensions, profit
 
22 sharing, stock bonus plans, etc.), sections 418 to 418E (with
 
23 respect to special rules for multiemployer plans), and sections
 

 
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 1 419 and 419A (with respect to treatment of welfare benefit funds)
 
 2 of the Internal Revenue Code, the department of taxation shall
 
 3 adopt rules under chapter 91 relating to the specific
 
 4 requirements under such sections and to such other administrative
 
 5 requirements under those sections as may be necessary for the
 
 6 efficient administration of sections 410 to 419A.
 
 7     In administering sections 401 to 419A (with respect to
 
 8 deferred compensation) of the Internal Revenue Code, Public Law
 
 9 93-406, section 1017(I), shall be operative for the purposes of
 
10 this chapter.
 
11     In administering section 402 (with respect to the taxability
 
12 of beneficiary of employees' trust) of the Internal Revenue Code,
 
13 the tax imposed on lump sum distributions by section 402(e) of
 
14 the Internal Revenue Code shall be operative for the purposes of
 
15 this chapter and the tax imposed therein is hereby imposed by
 
16 this chapter at the rate determined under this chapter.
 
17     [(h)] (i)  Section 468B (with respect to special rules for
 
18 designated settlement funds) of the Internal Revenue Code shall
 
19 be operative for the purposes of this chapter and the tax imposed
 
20 therein is hereby imposed by this chapter at a rate equal to the
 
21 maximum rate in effect for the taxable year imposed on estates
 
22 and trusts under section 235-51.
 

 
 
 
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 1     [(i)] (j)  Section 469 (with respect to passive activities
 
 2 and credits limited) of the Internal Revenue Code shall be
 
 3 operative for the purposes of this chapter.  For the purpose of
 
 4 computing the offset for rental real estate activities for state
 
 5 income tax purposes, adjusted gross income as used in section 469
 
 6 as operative for this chapter means federal adjusted gross
 
 7 income.
 
 8     [(j)] (k)  Sections 512 to 514 (with respect to taxation of
 
 9 business income of certain exempt organizations) of the Internal
 
10 Revenue Code shall be operative for the purposes of this chapter
 
11 as provided in this subsection.
 
12     "Unrelated business taxable income" means the same as in the
 
13 Internal Revenue Code, except that in the computation thereof
 
14 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
15 apply, and in the determination of the net operating loss
 
16 deduction there shall not be taken into account any amount of
 
17 income or deduction which is excluded in computing the unrelated
 
18 business taxable income.  Unrelated business taxable income shall
 
19 not include any income from a prepaid legal service plan.
 
20     For a person described in section 401 or 501 of the Internal
 
21 Revenue Code, as modified by section 235-2.3, the tax imposed by
 
22 section 235-51 or 235-71 shall be imposed upon the person's
 
23 unrelated business taxable income.
 

 
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 1     [(k)] (l)  Section 521 (with respect to cooperatives) and
 
 2 subchapter T (sections 1381 to 1388, with respect to cooperatives
 
 3 and their patrons) of the Internal Revenue Code shall be
 
 4 operative for the purposes of this chapter as to any cooperative
 
 5 fully meeting the requirements of section 421-23, except that
 
 6 Internal Revenue Code section 521 cooperatives need not be
 
 7 organized in Hawaii.
 
 8     [(l)] (m)  Sections 527 (with respect to political
 
 9 organizations) and 528 (with respect to certain homeowners
 
10 associations) of the Internal Revenue Code shall be operative for
 
11 the purposes of this chapter and the taxes imposed in each such
 
12 section are hereby imposed by this chapter at the rates
 
13 determined under section 235-71.
 
14     (n)  Section 530 (with respect to education individual
 
15 retirement accounts) of the Internal Revenue Code shall be
 
16 operative for the purposes of this chapter.  For the purpose of
 
17 determining the maximum amount which a contributor could make to
 
18 an education individual retirement account for state income tax
 
19 purposes, modified adjusted gross income as used in section 530
 
20 for this chapter means federal modified adjusted gross income as
 
21 defined in section 530.
 
22     [(m)] (o)  Section 641 (with respect to imposition of tax) of
 
23 the Internal Revenue Code shall be operative for the purposes of
 
24 this chapter subject to the following:
 

 
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 1     (1)   The deduction for exemptions shall be allowed as
 
 2           provided in section 235-54(b).
 
 3     (2)   The deduction for contributions and gifts in
 
 4           determining taxable income shall be limited to the
 
 5           amount allowed in the case of an individual, unless the
 
 6           contributions and gifts are to be used exclusively in
 
 7           the State.
 
 8     (3)   The tax imposed by section 1(e) of the Internal Revenue
 
 9           Code as applied by section 641 of the Internal Revenue
 
10           Code is hereby imposed by this chapter at the rate and
 
11           amount as determined under section 235-51 on estates
 
12           and trusts.
 
13     [(n)  Section 644 (with respect to special rule for gain on
 
14 property transferred to trust at less than fair market value) of
 
15 the Internal Revenue Code shall be operative for the purposes of
 
16 this chapter and the tax imposed therein is hereby imposed by
 
17 this chapter at the rate determined under this chapter; except
 
18 that the determination of the interest rate established under
 
19 section 6621 of the Internal Revenue Code referred to in section
 
20 644(a)(2) of the Internal Revenue Code shall instead be the
 
21 interest rate established under section 231-39(b)(4).]
 
22     (p)  Section 644 (with respect to taxable year of trusts) of
 
23 the Internal Revenue Code shall be operative for the purposes of
 
24 this chapter.
 

 
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 1     [(o)] (q)  Section 667 (with respect to treatment of amounts
 
 2 deemed distributed by trusts in preceding years) of the Internal
 
 3 Revenue Code shall be operative for the purposes of this chapter
 
 4 and the tax imposed therein is hereby imposed by this chapter at
 
 5 the rate determined under this chapter; except that the reference
 
 6 to tax-exempt interest to which section 103 of the Internal
 
 7 Revenue Code applies in section 667(a) of the Internal Revenue
 
 8 Code shall instead be a reference to tax-exempt interest to which
 
 9 section 235-7(b) applies.
 
10     [(p)] (r)  Section 685 (with respect to treatment of
 
11 qualified funeral trusts) of the Internal Revenue Code shall be
 
12 operative for purposes of this chapter, except that the tax
 
13 imposed under this chapter shall be computed at the tax rates
 
14 provided under section 235-51, and no deduction for the exemption
 
15 amount provided in section 235-54(b)shall be allowed.  The cost-
 
16 of-living adjustment determined under section 1(f)(3) shall be
 
17 operative for the purpose of applying section 685(c)(3) under
 
18 this chapter.
 
19     [(q)] (s)  Section 1212 (with respect to capital loss
 
20 carrybacks and carryforwards) of the Internal Revenue Code shall
 
21 be operative for the purposes of this chapter; except that for
 
22 the purposes of this chapter the capital loss carryback
 
23 provisions of section 1212 shall not be operative and the capital
 

 
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 1 loss carryforward allowed by section 1212(a) shall be limited to
 
 2 five years.
 
 3     [(r)] (t)  Subchapter S (sections 1361 to 1379) (with respect
 
 4 to tax treatment of S corporations and their shareholders) of
 
 5 chapter 1 of the Internal Revenue Code shall be operative for the
 
 6 purposes of this chapter as provided in part VII.
 
 7     (u)  Section 6015 (with respect to relief from joint and
 
 8 several liability on joint return) of the Internal Revenue Code
 
 9 is operative for purposes of this chapter.
 
10     [(s)] (v)  Subchapter C (sections 6221 to 6233) (with respect
 
11 to tax treatment of partnership items) of chapter 63 of the
 
12 Internal Revenue Code shall be operative for the purposes of this
 
13 chapter.
 
14     [(t)] (w)  Subchapter D (sections 6240 to 6255) (with respect
 
15 to simplified audit procedures for electing large partnerships)
 
16 of the Internal Revenue Code shall be operative for the purposes
 
17 of this chapter, with due regard to chapter 232 relating to tax
 
18 appeals.
 
19     (x)  Section 6511(h) (with respect to running of periods of
 
20 limitation suspended while taxpayer is unable to manage financial
 
21 affairs due to disability) of the Internal Revenue Code shall be
 
22 operative for purposes of this chapter, with due regard to
 
23 section 235-111 relating to the limitation period for assessment,
 
24 levy, collection, or credit.
 

 
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 1     [(u)] (y)  Section 7518 (with respect to capital construction
 
 2 fund for commercial fishers) of the Internal Revenue Code shall
 
 3 be operative for the purposes of this chapter.  Qualified
 
 4 withdrawals for the acquisition, construction, or reconstruction
 
 5 of any qualified asset which is attributable to deposits made
 
 6 before the effective date of this section shall not reduce the
 
 7 basis of the asset when withdrawn.  Qualified withdrawals shall
 
 8 be treated on a first- in-first-out basis."
 
 9     SECTION 3.  Section 235-93.5, Hawaii Revised Statutes, is
 
10 repealed.
 
11     ["235-93.5  Innocent spouse relieved of liability in certain
 
12 cases. (a) If a husband and wife have made a joint return under
 
13 this chapter for a taxable year, and:
 
14     (1)   On the return there is a substantial understatement of
 
15           tax attributable to grossly erroneous items of one
 
16           spouse,
 
17     (2)   The innocent spouse establishes that in signing the
 
18           return the innocent spouse did not know, and had no
 
19           reason to know, that there was a substantial
 
20           understatement, and
 
21     (3)   Taking into account all the facts and circumstances, it
 
22           is inequitable to hold the innocent spouse liable for
 
23           the deficiency in tax for the taxable year attributable
 
24           to the substantial understatement, 
 

 
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 1 then the innocent spouse shall be relieved of liability for
 
 2 tax(including interest, penalties, and other amounts) for the
 
 3 taxable year to the extent the liability is attributable to the
 
 4 substantial understatement.
 
 5     (b)  If the spouses adjusted gross income for the
 
 6 preadjustment year is $20,000 or less, this section shall apply
 
 7 only if the liability described in subsection (a) is greater than
 
 8 ten per cent of the spouses adjusted gross income. If the spouses
 
 9 adjusted gross income for the preadjustment year is more than
 
10 $20,000, this section shall apply only if the liability described
 
11 in subsection (a) is greater than twenty-five per cent of the
 
12 spouses adjusted gross income.  If the spouse is married to
 
13 another spouse at the close of the preadjustment year, the
 
14 spouses adjusted gross income shall include the income of the new
 
15 spouse (whether or not they file a joint return).
 
16     (c)  For purposes of this section,
 
17     "Grossly erroneous items" mean, with respect to any spouse,
 
18 any item of gross income attributable to the spouse which is
 
19 omitted from gross income and any claim of a deduction, credit,
 
20 or basis by the spouse in an amount for which there is no basis
 
21 in fact or law.
 
22     "Preadjustment year" means the most recent taxable year of
 
23 the spouse ending before the date the deficiency notice is
 
24 mailed.
 

 
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 1     "Substantial understatement" means any understatement which
 
 2 exceeds $500. Understatement means the excess of:
 
 3     (1)   The amount of the tax required to be shown on the
 
 4           return for the taxable year, over
 
 5     (2)   The amount of the tax imposed which is shown on the
 
 6           return, reduced by any abatement, credit, refund, or
 
 7           other repayment, as was made on the ground that the tax
 
 8           imposed by this chapter was less than the excess of the
 
 9           amount which is the sum of:
 
10           (A)  The amount shown as the tax on the taxpayers
 
11                return, if a return was made by the taxpayer and
 
12                an amount was shown as tax by the taxpayer on the
 
13                return, plus
 
14           (B)  The amounts previously assessed (or collected
 
15                without assessment) as a deficiency,
 
16 over the abatements, credits, refunds, or other repayments
 
17 previously made."]
 
18      SECTION 4.  Statutory material to be repealed is bracketed.
 
19 New statutory material is underscored.
 
20     SECTION 5.  This Act, upon its approval, shall apply to
 
21 taxable years beginning after December 31, 1998.