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                                                        2597
HOUSE OF REPRESENTATIVES                H.B. NO.           
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
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________________________________________________________________


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

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

 
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 1 (with respect to special rules relating to pensions, profit
 
 2 sharing, stock bonus plans, etc.), sections 418 to 418E (with
 
 3 respect to special rules for multiemployer plans), and sections
 
 4 419 and 419A (with respect to treatment of welfare benefit funds)
 
 5 of the Internal Revenue Code, the department of taxation shall
 
 6 adopt rules under chapter 91 relating to the specific
 
 7 requirements under such sections and to such other administrative
 
 8 requirements under those sections as may be necessary for the
 
 9 efficient administration of sections 410 to 419A.
 
10      In administering sections 401 to 419A (with respect to
 
11 deferred compensation) of the Internal Revenue Code, Public Law
 
12 93-406, section 1017(I), shall be operative for the purposes of
 
13 this chapter.
 
14      In administering section 402 (with respect to the taxability
 
15 of beneficiary of employees' trust) of the Internal Revenue Code,
 
16 the tax imposed on lump sum distributions by section 402(e) of
 
17 the Internal Revenue Code shall be operative for the purposes of
 
18 this chapter and the tax imposed therein is hereby imposed by
 
19 this chapter at the rate determined under this chapter.
 
20      (i)  Section 468B (with respect to special rules for
 
21 designated settlement funds) of the Internal Revenue Code shall
 
22 be operative for the purposes of this chapter and the tax imposed
 
23 therein is hereby imposed by this chapter at a rate equal to the
 

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

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

 
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 1 Internal Revenue Code shall be operative for the purposes of this
 
 2 chapter subject to the following:
 
 3      (1)  The deduction for exemptions shall be allowed as
 
 4           provided in section 235-54(b).
 
 5      (2)  The deduction for contributions and gifts in
 
 6           determining taxable income shall be limited to the
 
 7           amount allowed in the case of an individual, unless the
 
 8           contributions and gifts are to be used exclusively in
 
 9           the State.
 
10      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
11           Code as applied by section 641 of the Internal Revenue
 
12           Code is hereby imposed by this chapter at the rate and
 
13           amount as determined under section 235-51 on estates
 
14           and trusts.
 
15      (p)  Section 667 (with respect to treatment of amounts
 
16 deemed distributed by trusts in preceding years) of the Internal
 
17 Revenue Code shall be operative for the purposes of this chapter
 
18 and the tax imposed therein is hereby imposed by this chapter at
 
19 the rate determined under this chapter; except that the reference
 
20 to tax-exempt interest to which section 103 of the Internal
 
21 Revenue Code applies in section 667(a) of the Internal Revenue
 
22 Code shall instead be a reference to tax-exempt interest to which
 
23 section 235-7(b) applies.
 

 
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 1      (q)  Section 685 (with respect to treatment of qualified
 
 2 funeral trusts) of the Internal Revenue Code shall be operative
 
 3 for purposes of this chapter, except that the tax imposed under
 
 4 this chapter shall be computed at the tax rates provided under
 
 5 section 235-51, and no deduction for the exemption amount
 
 6 provided in section 235-54(b)shall be allowed.  The cost-of-
 
 7 living adjustment determined under section 1(f)(3) shall be
 
 8 operative for the purpose of applying section 685(c)(3) under
 
 9 this chapter.
 
10      (r)  Section 1212 (with respect to capital loss carrybacks
 
11 and carryforwards) of the Internal Revenue Code shall be
 
12 operative for the purposes of this chapter; except that for the
 
13 purposes of this chapter the capital loss carryback provisions of
 
14 section 1212 shall not be operative and the capital loss
 
15 carryforward allowed by section 1212(a) shall be limited to five
 
16 years.
 
17      (s)  Subchapter S (sections 1361 to 1379) (with respect to
 
18 tax treatment of S corporations and their shareholders) of
 
19 chapter 1 of the Internal Revenue Code shall be operative for the
 
20 purposes of this chapter as provided in part VII.
 
21      (t)  Section 6015 (with respect to relief from joint and
 
22 several liability on joint return) of the Internal Revenue Code
 
23 is operative for purposes of this chapter.
 

 
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 1      (u)  Subchapter C (sections 6221 to 6233) (with respect to
 
 2 tax treatment of partnership items) of chapter 63 of the Internal
 
 3 Revenue Code shall be operative for the purposes of this chapter.
 
 4      (v)  Subchapter D (sections 6240 to 6255) (with respect to
 
 5 simplified audit procedures for electing large partnerships) of
 
 6 the Internal Revenue Code shall be operative for the purposes of
 
 7 this chapter, with due regard to chapter 232 relating to tax
 
 8 appeals.
 
 9      (w)  Section 6511(h) (with respect to running of periods of
 
10 limitation suspended while taxpayer is unable to manage financial
 
11 affairs due to disability) of the Internal Revenue Code shall be
 
12 operative for purposes of this chapter, with due regard to
 
13 section 235-111 relating to the limitation period for assessment,
 
14 levy, collection, or credit.
 
15      (x)  Section 7518 (with respect to capital construction fund
 
16 for commercial fishers) of the Internal Revenue Code shall be
 
17 operative for the purposes of this chapter.  Qualified
 
18 withdrawals for the acquisition, construction, or reconstruction
 
19 of any qualified asset which is attributable to deposits made
 
20 before the effective date of this section shall not reduce the
 
21 basis of the asset when withdrawn.  Qualified withdrawals shall
 
22 be treated on a first-in-first-out basis.
 
23      (y)  Section 7525 (with respect to confidentiality
 

 
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 1 privileges relating to taxpayer communications) of the Internal
 
 2 Revenue Code shall be operative for the purposes of this chapter.
 
 3 All references to Internal Revenue Code sections within section
 
 4 7525 of the Internal Revenue Code shall be operative for purposes
 
 5 of this section.  The words "Internal Revenue Service" as used in
 
 6 section 7525(a)(2)(A) of the Internal Revenue Code mean the
 
 7 department; the words "Federal court" as used in section
 
 8 7525(a)(2)(B) mean state court; and the words "United States" as
 
 9 used in section 7525(a)(2)(B) mean State."
 
10      SECTION 3.  Section 235-110.91, Hawaii Revised Statutes, is
 
11 amended by amending subsection (a) to read as follows:
 
12      "(a)  Section 41 (with respect to the credit for increasing
 
13 research activities) and section 280C(c) (with respect to certain
 
14 expenses for which the credit for increasing research activities
 
15 are allowable) of the Internal Revenue Code shall be operative
 
16 for the purposes of this chapter as provided in this section.  If
 
17 Section 41 of the Internal Revenue Code is repealed or terminated
 
18 prior to January 1, 2006, its provisions shall remain in effect
 
19 for purposes of the income tax law of the State as provided for
 
20 in subsection (j)."
 
21      SECTION 4.  Statutory material to be repealed is bracketed.
 
22 New statutory material is underscored.
 
23      SECTION 5.  This Act, upon its approval, shall apply to
 

 
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 1 taxable years beginning after December 31, 1999.
 
 2 
 
 3                           INTRODUCED BY:  _______________________
 

 
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