REPORT TITLE:
Income tax


DESCRIPTION:
Amends 235-2.3, 235-2.4, and 235-110.91 of the Hawaii Revised
Statutes to conform with the changes to the Internal Revenue
Code. (HB2597 HD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2597
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 1
TWENTIETH LEGISLATURE, 2000                                
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 by amending subsection (a) to read as follows:
 
 3      "(a)  For all taxable years beginning after December 31,
 
 4 [1998,] 1999, as used in this chapter "Internal Revenue Code"
 
 5 means subtitle A, chapter 1 of the federal Internal Revenue Code
 
 6 of 1986, amended as of December 31, [1998,] 1999, as it applies
 
 7 to the determination of gross income, adjusted gross income,
 
 8 ordinary income and loss, and taxable income except those
 
 9 provisions of the Internal Revenue Code and federal public laws
 
10 which pursuant to this chapter do not apply or are otherwise
 
11 limited in application.
 
12      Sections 235-2, 235-2.1, and 235-2.2 shall continue to be
 
13 used to determine:
 
14       (1) The basis of property, if a taxpayer first determined
 
15           the basis of property in a taxable year to which such
 
16           sections apply, and if such determination was made
 
17           before January 1, 1978; and
 
18       (2) Gross income, adjusted gross income, ordinary income
 
19           and loss, and taxable income for a taxable year to
 

 
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 1           which such sections apply where such taxable year
 
 2           begins before January 1, 1978."
 
 3      SECTION  2.  Section 235-2.4, Hawaii Revised Statutes, is
 
 4 amended to read as follows:
 
 5      "235-2.4  Operation of certain Internal Revenue Code
 
 6 provisions.(a)  Section 63 (with respect to taxable income
 
 7 defined) of the Internal Revenue Code shall be operative for the
 
 8 purposes of this chapter, except that the standard deduction
 
 9 amount in section 63(c) of the Internal Revenue Code shall
 
10 instead mean:
 
11      (1)  $1,900 in the case of:
 
12           (A)  A joint return as provided by section 235-93; or
 
13           (B)  A surviving spouse (as defined in section 2(a) of
 
14                the Internal Revenue Code);
 
15      (2)  $1,650 in the case of a head of household (as defined
 
16           in section 2(b) of the Internal Revenue Code);
 
17      (3)  $1,500 in the case of an individual who is not married
 
18           and who is not a surviving spouse or head of household;
 
19           or
 
20      (4)  $950 in the case of a married individual filing a
 
21           separate return.
 
22      Section 63(c)(4) shall not be operative in this State.
 
23 Section 63(c)(5) shall be operative, except that the limitation
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 on basic standard deduction in the case of certain dependents
 
 2 shall be the greater of $500 or such individual's earned income.
 
 3 Section 63(f) shall not be operative in this State.
 
 4      The standard deduction amount for nonresidents shall be
 
 5 calculated pursuant to section 235-5.
 
 6      (b)  Section 72 (with respect to annuities; certain proceeds
 
 7 of endowment and life insurance contracts) of the Internal
 
 8 Revenue Code shall be operative for purposes of this chapter and
 
 9 be interpreted with due regard to section 235-7(a), except that
 
10 the ten per cent additional tax on early distributions from
 
11 retirement plans in section 72(t) shall not be operative for
 
12 purposes of this chapter.
 
13      (c)  Section 121 (with respect to exclusion of gain from
 
14 sale of principal residence) of the Internal Revenue Code shall
 
15 be operative for purposes of this chapter, except that for the
 
16 election under section 121(f), a reference to section 1034
 
17 treatment means a reference to section 235-2.4(n) in effect for
 
18 taxable year 1997.
 
19      (d)  Section 219 (with respect to retirement savings) of the
 
20 Internal Revenue Code shall be operative for the purpose of this
 
21 chapter.  For the purpose of computing the limitation on the
 
22 deduction for active participants in certain pension plans for
 
23 state income tax purposes, adjusted gross income as used in
 

 
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 1 section 219 as operative for this chapter means federal adjusted
 
 2 gross income.
 
 3      (e)  Section 220 (with respect to medical savings accounts)
 
 4 of the Internal Revenue Code shall be operative for the purpose
 
 5 of this chapter, but only with respect to medical services
 
 6 accounts that have been approved by the Secretary of the Treasury
 
 7 of the United States.
 
 8      (f)  Section 408A (with respect to Roth Individual
 
 9 Retirement Accounts) of the Internal Revenue Code shall be
 
10 operative for the purposes of this chapter.  For the purposes of
 
11 determining the aggregate amount of contributions to a Roth
 
12 Individual Retirement Account or qualified rollover contribution
 
13 to a Roth Individual Retirement Account from an individual
 
14 retirement plan other than a Roth Individual Retirement Account,
 
15 adjusted gross income as used in section 408A as operative for
 
16 this chapter means federal adjusted gross income.
 
17      (g)  In administering the provisions of sections 410 to 417
 
18 (with respect to special rules relating to pensions, profit
 
19 sharing, stock bonus plans, etc.), sections 418 to 418E (with
 
20 respect to special rules for multiemployer plans), and sections
 
21 419 and 419A (with respect to treatment of welfare benefit funds)
 
22 of the Internal Revenue Code, the department of taxation shall
 
23 adopt rules under chapter 91 relating to the specific
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 requirements under such sections and to such other administrative
 
 2 requirements under those sections as may be necessary for the
 
 3 efficient administration of sections 410 to 419A.
 
 4      In administering sections 401 to 419A (with respect to
 
 5 deferred compensation) of the Internal Revenue Code, Public Law
 
 6 93-406, section 1017(i), shall be operative for the purposes of
 
 7 this chapter.
 
 8      In administering section 402 (with respect to the taxability
 
 9 of beneficiary of employees' trust) of the Internal Revenue Code,
 
10 the tax imposed on lump sum distributions by section 402(e) of
 
11 the Internal Revenue Code shall be operative for the purposes of
 
12 this chapter and the tax imposed therein is hereby imposed by
 
13 this chapter at the rate determined under this chapter.
 
14      (h)  Section 468B (with respect to special rules for
 
15 designated settlement funds) of the Internal Revenue Code shall
 
16 be operative for the purposes of this chapter and the tax imposed
 
17 therein is hereby imposed by this chapter at a rate equal to the
 
18 maximum rate in effect for the taxable year imposed on estates
 
19 and trusts under section 235-51.
 
20      (i)  Section 469 (with respect to passive activities and
 
21 credits limited) of the Internal Revenue Code shall be operative
 
22 for the purposes of this chapter.  For the purpose of computing
 
23 the offset for rental real estate activities for state income tax
 

 
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 1 purposes, adjusted gross income as used in section 469 as
 
 2 operative for this chapter means federal adjusted gross income.
 
 3      (j)  Sections 512 to 514 (with respect to taxation of
 
 4 business income of certain exempt organizations) of the Internal
 
 5 Revenue Code shall be operative for the purposes of this chapter
 
 6 as provided in this subsection.
 
 7      "Unrelated business taxable income" means the same as in the
 
 8 Internal Revenue Code, except that in the computation thereof
 
 9 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
10 apply, and in the determination of the net operating loss
 
11 deduction there shall not be taken into account any amount of
 
12 income or deduction which is excluded in computing the unrelated
 
13 business taxable income.  Unrelated business taxable income shall
 
14 not include any income from a prepaid legal service plan.
 
15      For a person described in section 401 or 501 of the Internal
 
16 Revenue Code, as modified by section 235-2.3, the tax imposed by
 
17 section 235-51 or 235-71 shall be imposed upon the person's
 
18 unrelated business taxable income.
 
19      (k)  Section 521 (with respect to cooperatives) and
 
20 subchapter T (sections 1381 to 1388, with respect to cooperatives
 
21 and their patrons) of the Internal Revenue Code shall be
 
22 operative for the purposes of this chapter as to any cooperative
 
23 fully meeting the requirements of section 421-23, except that
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 Internal Revenue Code section 521 cooperatives need not be
 
 2 organized in Hawaii.
 
 3      (l)  Sections 527 (with respect to political organizations)
 
 4 and 528 (with respect to certain homeowners associations) of the
 
 5 Internal Revenue Code shall be operative for the purposes of this
 
 6 chapter and the taxes imposed in each such section are hereby
 
 7 imposed by this chapter at the rates determined under section
 
 8 235-71.
 
 9      (m)  Section 530 (with respect to education individual
 
10 retirement accounts) of the Internal Revenue Code shall be
 
11 operative for the purposes of this chapter.  For the purpose of
 
12 determining the maximum amount that a contributor could make to
 
13 an education individual retirement account for state income tax
 
14 purposes, modified adjusted gross income as used in section 530
 
15 for this chapter means federal modified adjusted gross income as
 
16 defined in section 530.
 
17      (n)  Section 641 (with respect to imposition of tax) of the
 
18 Internal Revenue Code shall be operative for the purposes of this
 
19 chapter subject to the following:
 
20      (1)  The deduction for exemptions shall be allowed as
 
21           provided in section 235-54(b).
 
22      (2)  The deduction for contributions and gifts in
 
23           determining taxable income shall be limited to the
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1           amount allowed in the case of an individual, unless the
 
 2           contributions and gifts are to be used exclusively in
 
 3           the State.
 
 4      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
 5           Code as applied by section 641 of the Internal Revenue
 
 6           Code is hereby imposed by this chapter at the rate and
 
 7           amount as determined under section 235-51 on estates
 
 8           and trusts.
 
 9      (o)  Section 667 (with respect to treatment of amounts
 
10 deemed distributed by trusts in preceding years) of the Internal
 
11 Revenue Code shall be operative for the purposes of this chapter
 
12 and the tax imposed therein is hereby imposed by this chapter at
 
13 the rate determined under this chapter; except that the reference
 
14 to tax-exempt interest to which section 103 of the Internal
 
15 Revenue Code applies in section 667(a) of the Internal Revenue
 
16 Code shall instead be a reference to tax-exempt interest to which
 
17 section 235-7(b) applies.
 
18      (p)  Section 685 (with respect to treatment of qualified
 
19 funeral trusts) of the Internal Revenue Code shall be operative
 
20 for purposes of this chapter, except that the tax imposed under
 
21 this chapter shall be computed at the tax rates provided under
 
22 section 235-51, and no deduction for the exemption amount
 
23 provided in section 235-54(b)shall be allowed.  The cost-of-
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 living adjustment determined under section 1(f)(3) of the
 
 2 Internal Revenue Code shall be operative for the purpose of
 
 3 applying section 685(c)(3) under this chapter.
 
 4      (q)  Section 1212 (with respect to capital loss carrybacks
 
 5 and carryforwards) of the Internal Revenue Code shall be
 
 6 operative for the purposes of this chapter; except that for the
 
 7 purposes of this chapter the capital loss carryback provisions of
 
 8 section 1212 shall not be operative and the capital loss
 
 9 carryforward allowed by section 1212(a) shall be limited to five
 
10 years.
 
11      (r)  Subchapter S (sections 1361 to 1379)(with respect to
 
12 tax treatment of S corporations and their shareholders) of
 
13 chapter 1 of the Internal Revenue Code shall be operative for the
 
14 purposes of this chapter as provided in part VII.
 
15      (s)  Section 6015 (with respect to relief from joint and
 
16 several liability on joint return) of the Internal Revenue Code
 
17 is operative for purposes of this chapter.
 
18      (t)  Subchapter C (sections 6221 to 6233)(with respect to
 
19 tax treatment of partnership items) of chapter 63 of the Internal
 
20 Revenue Code shall be operative for the purposes of this chapter.
 
21      (u)  Subchapter D (sections 6240 to 6255)(with respect to
 
22 simplified audit procedures for electing large partnerships) of
 
23 the Internal Revenue Code shall be operative for the purposes of
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 this chapter, with due regard to chapter 232 relating to tax
 
 2 appeals.
 
 3      (v)  Section 6511(h)(with respect to running of periods of
 
 4 limitation suspended while taxpayer is unable to manage financial
 
 5 affairs due to disability) of the Internal Revenue Code shall be
 
 6 operative for purposes of this chapter, with due regard to
 
 7 section 235-111 relating to the limitation period for assessment,
 
 8 levy, collection, or credit.
 
 9      (w)  Section 7518 (with respect to capital construction fund
 
10 for commercial fishers) of the Internal Revenue Code shall be
 
11 operative for the purposes of this chapter.  Qualified
 
12 withdrawals for the acquisition, construction, or reconstruction
 
13 of any qualified asset which is attributable to deposits made
 
14 before the effective date of this section shall not reduce the
 
15 basis of the asset when withdrawn.  Qualified withdrawals shall
 
16 be treated on a first-in-first-out basis.
 
17      (x)  Section 7525 (with respect to confidentiality
 
18 privileges relating to taxpayer communications) of the Internal
 
19 Revenue Code shall be operative for the purposes of this chapter.
 
20 All references to Internal Revenue Code sections within section
 
21 7525 of the Internal Revenue Code shall be operative for purposes
 
22 of this section.  The term "Internal Revenue Service" as used in
 
23 section 7525(a)(2)(A) of the Internal Revenue Code means the
 
24 department; the term "federal court" as used in section
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 7525(a)(2)(B) mean state court; and the terms "United States" as
 
 2 used in section 7525(a)(2)(B) mean State."
 
 3      SECTION 3.  Section 235-110.91, Hawaii Revised Statutes, is
 
 4 amended by amending subsection (a) to read as follows:
 
 5      "(a)  Section 41 (with respect to the credit for increasing
 
 6 research activities) and section 280C(c)(with respect to certain
 
 7 expenses for which the credit for increasing research activities
 
 8 are allowable) of the Internal Revenue Code shall be operative
 
 9 for the purposes of this chapter as provided in this section.  If
 
10 section 41 of the Internal Revenue Code is repealed or terminated
 
11 prior to January 1, 2006, its provisions shall remain in effect
 
12 for purposes of the income tax law of the State as provided for
 
13 in subsection (j)."
 
14      SECTION 4.  Statutory material to be repealed is bracketed.
 
15 New statutory material is underscored.
 
16      SECTION 5.  This Act, upon its approval, shall apply to
 
17 taxable years beginning after December 31, 1999.