February 26, 1998


RE: Dividends Received Deduction
Under current law, section 235-7(c), Hawaii Revised Statutes (HRS) (1993), provides for a 70% deduction for dividends received from: (1) corporations that are 95% owned by one or more corporations doing business in Hawaii; (2) banks or insurance companies organized and doing business in Hawaii; or (3) corporations that attribute at least 15% of their business to Hawaii.

Based on cases litigated in other jurisdictions, the Department of Taxation (Department) recognizes that section 235-7(c), HRS, is likely to be found unconstitutional in limiting the 70% dividends deduction to dividends received from payor corporations having a threshold presence in Hawaii, a minimum percentage of ownership by Hawaii corporations, or from banks or insurance companies doing business in Hawaii. As such, the Department announces that it is administering section 235-7(c), HRS, without regard to the threshold requirement of Hawaii activity, ownership, or presence, for claiming the 70% dividends received deduction. Therefore, corporations that do not qualify for the 100% dividends received deduction allowed under 235-7(c), HRS, may claim a 70% deduction for dividends received from foreign or domestic corporations. The Department is seeking legislation this year to remove these conditions to the allowance of the 70% dividends received deduction.

Corporations that qualify for the 70% dividends received deduction, as administered by the Department, may claim the deduction as "Other deductions or adjustments," on line 10 of schedule J of the 1997 Form N-30.

Forms and other tax information may be obtained by mail or fax. Forms may be ordered by calling the Department's Forms Request Line at 808-587-7572 or 1-800-222-7575, or downloaded from the Department's website at http://www.state.hi.us/tax/tax.html. If you have any questions, please call Administrative Rules Specialist Iris Kitamura at (808) 587-1570.

Director of Taxation