On October 5, 2018, the Comptroller of Maryland (Comptroller) issued a tax alert to provide guidance on reporting and taxation of IRC Section 965 repatriation income for tax year 2017 (the Alert). Section 965, as amended by the "Tax Cuts and Jobs Act" (P.L. 115-97), generally imposes a one-time transition tax on a US shareholder on certain previously untaxed post-1986 accumulated earnings of its relevant foreign corporate subsidiaries. The Comptroller has determined that the revenue impact of Section 965 will be less than $5 million;¹ thus, the auto-decoupling provision in Md. Code Ann., Tax-Gen Section 10-108 is not triggered and Section 965 income reported at the federal level also must be included in the calculation of Maryland taxable income.

In the Alert, the Comptroller instructed that Section 965 income is included on 2017 Maryland forms as follows:

• Corporations: Section 965 income is reported on the federal IRC 965 Transition Tax Statement; for Maryland purposes, the net Section 965 amount must be included on Line 1a of a US shareholder's Maryland Form 500, with a copy of the IRC 965 Transition Tax Statement attached.
• Individuals: Section 965(a) income (as well as the Section 965(c) deduction) included on Line 21, Other Income, of the US shareholder's federal Form 1040 will flow through to Line 1 of the US shareholder's Maryland Form 502.
• Fiduciary: Net Section 965 income distributed to the beneficiary is included on Line 8, Other Income, of the US shareholder's federal Form 1041, and the amount will flow through to Line 1 of the US shareholder's Maryland Form 504. If the net Section 965 income is not distributed to the beneficiary, it must be included on Line 1 of the US shareholder's Maryland Form 504.
• Partnerships and S corporations: Section 965(a) income and Section 965(c) deduction is reported as other income/other deduction on a US shareholder's pro rata share of income/deduction, and the net Section 965 amount (Section 965(a) income less Section 965(c) deductions) is reported on Line 2 of the US shareholder's Maryland Form 510. The Section 965 net calculation must be reported on the US shareholder's Maryland Schedule K-1 (as either a written statement or in a footnote)
• Partnerships and S corporations: For federal tax purposes Section 965(a) income and any Section 965(c) deduction are reported as other income/other deduction on a US shareholder's pro rata share of income/deduction. For Maryland tax purposes, the net Section 965 amount (Section 965(a) income less Section 965(c) deductions) is reported on Line 2 of the US shareholder's Maryland Form 510. This Section 965 net calculation must be reported on the US shareholder's Maryland Schedule K-1 (as either a written statement or in a footnote)

Implications

For Maryland corporate income tax purposes, Section 965(a) income falls within the definition of subpart F income that is eligible for a subtraction modification for dividends received. Accordingly, Maryland corporate taxpayers that receive Section 965 income are allowed a subtraction modification for dividends received from the paying corporation, if: (1) they own, directly or indirectly, 50% or more of the paying corporation's outstanding shares of capital stock; and (2) the paying corporation is organized under the laws of a foreign government.

Further, if inclusion of Section 965 income results in a distortion of Maryland taxable income, taxpayers can request to use an alternative apportionment formula. The request should be submitted at the time the return is filed. The request must be in writing, and include the proposed alternative apportionment calculation and a copy of the Maryland income tax return and IRC 965 Transition Tax Statement.

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ENDNOTES

¹ Under Md. Code Ann., Tax-Gen Section 10-108, an amendment to the IRC enacted in the same calendar year as the tax year the amendment affects, will not impact the calculation of Maryland taxable income unless the Comptroller determines the impact of Maryland tax revenue is less than $5 million. If the impact is $5 million or more, Maryland's state tax law automatically decouples from the federal provision.