§235-3  Legislative intent, how InternalRevenue Code shall apply, in general.  (a)  It is the intent of thischapter, in addition to the essential purpose of raising revenue, to conformthe income tax law of the State as closely as may be with the Internal RevenueCode in order to simplify the filing of returns and minimize the taxpayer'sburdens in complying with the income tax law.  The rules and regulations, formsand procedures adopted and established under this chapter shall conform asnearly as possible, and unless there is good reason to the contrary, to therules and regulations, forms and procedures adopted and established under theInternal Revenue Code.

(b)  The Internal Revenue Code, so far as madeoperative by this chapter, is a statute adopted and incorporated by reference. The Internal Revenue Code shall be applied using changes in nomenclature andother language, including the omission of inapplicable language, wherenecessary to effectuate the intent of this section.  In the Internal RevenueCode, references to terms such as:

(1)  "Secretary or his delegate" shall referto the director of taxation and the director's duly authorized subordinates;

(2)  "Estate taxes" shall refer to theestate and transfer tax imposed by chapter 236D;

(3)  "The highest rate of tax imposed uponindividuals" or "39.6 per cent" shall refer to the highest rateimposed upon individuals under section 235-51;

(4)  "The highest rate of tax imposed uponcorporations" shall refer to the highest rate imposed upon corporationsunder section 235-71; and

(5)  "Interest at the underpayment rate" or"interest at the overpayment rate" shall refer to the interest rateset forth in section 231-39(b)(4) or section 231-23(d)(1), as the case may be.

(c)  Where, under a provision of the InternalRevenue Code made operative in this chapter, the allowance or disallowance to ataxpayer of a deduction, exclusion, adjustment, credit, or exemption isdependent on whether, under the Internal Revenue Code or a prior applicablefederal income tax law, the following was or was not, is or is not, in relationto the same taxpayer or another taxpayer, for the same taxable year or a priortaxable year, an operative factor:  the imposition or payment of an income tax,an inclusion in gross income, an exclusion from gross income, or a deductionfrom gross income--the allowance or disallowance under this chapter of suchdeduction, exclusion, adjustment, credit, or exemption shall depend on theoperativeness of such factor or factors under this chapter or a priorapplicable income tax law of the State.  This subsection shall govern theapplication of such sections of the Internal Revenue Code as, for example,sections 111, 215, 668(b), and 7852(c) and all matters of a similar nature.

(d)  Whenever, in a taxable year of acorporation or its shareholders not governed by the income tax law of 1957, adistribution of money, stock, securities, or other property (whether incomplete or partial liquidation or otherwise) has been made by a corporation toshareholders owning such shares in the State, or stock, securities, or otherproperty has been transferred to a corporation, or corporate stock orsecurities exchanged, in the course of a corporate organization orreorganization effected under the laws of the State, in the application of theincome tax law of 1957 effect shall be given to the recognition of income bythe income tax laws of 1901 and 1932, if any, to the extent necessary to avoiddouble taxation, for example, in determining the earnings and profits of anycorporation involved or the basis of any stock, securities, or other propertyso received, transferred, or exchanged.  No increase in basis shall be allowedon account of such events in taxable years not governed by the income tax lawof 1957, except as provided by this subsection.  As used in this subsection thewords "double taxation" mean and refer to double taxation of the sametaxpayer, or taxation of both a corporation and its shareholders when thetaxation of both would not have occurred had the income tax law of 1957governed prior taxable years.

(e)  In the determination of the basis oradjusted basis of any stock, securities, or other property:

(1)  If the property was acquired by an exchange(including an involuntary conversion or the sale of an old residence andpurchase of a new residence where both occur within a one-year period) the"cost" thereof to the taxpayer shall be deemed to include among otherthings, any income of the taxpayer recognized by the income tax laws of 1901and 1932 as a result of the exchange;

(2)  If the basis is dependent upon acquisition from adecedent, the property shall be deemed to have been acquired from a decedent ifdeemed so acquired for the purposes of chapter 236 prior to July 1, 1983, orafter June 30, 1983, under this chapter but not otherwise, and the residence ornonresidence of the decedent, the location of the property, and chapter 236 forproperty acquired prior to July 1, 1983, or this chapter where the property hasbeen acquired after June 30, 1983, shall be considered;

(3)  If the basis is dependent upon deductions,exclusions, or exemptions taken or allowable, under the Internal Revenue Codeor a prior applicable federal income tax law, in a prior year, it shall dependupon deductions, exclusions, or exemptions taken or allowable under the incometax law of the State governing such prior years;

(4)  If the basis is dependent upon the electionprovided for by section 307, Internal Revenue Code, it shall be governed by theelection actually made under the Internal Revenue Code for the taxable year,whether or not the taxable year was governed by the income tax law of 1957. [LSp 1957, c 1, pt of §2; am L Sp 1959 2d, c 1, §16; Supp, §121-2; HRS §235-3; amL 1979, c 62, pt of §2; am L 1983, c 217, §7(1), (2); gen ch 1985; am L 1996, c187, §4]