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On December 21, 2018, the Nebraska Department of Revenue (Department) issued GIL 24-18-1 in response to taxpayer inquiries regarding Nebraska's state income tax treatment of IRC Section 965¹ repatriation income for tax year 2017. The Department's guidance is advisory in nature, but is binding on the Department until amended.

The guidance notes that Nebraska law conforms to IRC Section 965, except the election to pay the tax in installments or defer the tax. The guidance requires corporate taxpayers to report the IRC Section 965(a) inclusion amount on Schedule A, Line 8 of the Nebraska Form 1120N. The IRC Section 965(c) deduction is to be reported on Schedule A, Line 18 of the Nebraska Form 1120N. The guidance reflects the Department's "position" that the net IRC Section 965 inclusion amount is not an otherwise deductible foreign dividend. The Department's position seems to be based on its view that federal guidance and forms referencing "inclusion" versus "dividend" or "deemed dividend" make it unclear that the IRC Section 965 income is a dividend or deemed dividend. Finally, the guidance requires any taxpayer deducting IRC Section 965 income to provide a legal analysis supporting its contention that the income is a foreign dividend under the IRC and/or Treasury Regulations.

The guidance appears contrary to Nebraska authorities in this area. Nebraska Rev. Stat. Section 77-2714 provides that terms used in the Nebraska tax law shall have the same meaning when used in a comparable context in the laws of the United States relating to federal income tax, unless a different context is required. Nebraska Rev. Stat. Section 77-2716(5) provides a subtraction adjustment for "dividends received or deemed to be received from corporations [that] are not subject to the Internal Revenue Code." Nebraska has historically treated subpart F income as a deemed dividend deducted on Schedule II, Line 5 of the Nebraska Form 1120N. IRC Section 965(a) provides that a taxpayer's subpart F income, as otherwise determined under IRC Section 952, increases by the amount described in IRC Section 965. These provisions create a previously undefined category of subpart F income or, at a minimum, evidence of a legislative intent to make IRC Section 965 income indistinguishable from subpart F income.

Implications

While the Department's guidance may not carry the weight of law, it represents the Department's position on this matter. The guidance is silent on the issue of whether a taxpayer taking the deduction on its 2017 return is required to amend its return or whether there will be focused audit activity in this area. Taxpayers taking the deduction in 2018 will need to consider this guidance when filing their 2018 Nebraska returns, particularly the somewhat unique requirement to attach a legal analysis supporting the deduction. The guidance is also silent on the subject of apportionment-factor treatment. Further guidance in this area is anticipated when the Department issues the 2018 Form 1120N and related instructions.

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ENDNOTES

¹ The Tax Cuts and Jobs Act (P.L. 115-97), enacted in 2017, amended IRC Section 965, requiring taxpayers to include in income an amount (i.e., the IRC Section 965(a) inclusion) based on the accumulated post-1986 deferred foreign income of certain foreign corporations that they own either directly or indirectly through other entities. IRC Section 965(c) allows a deduction intended to reduce the applicable tax rate on the IRC Section 965(a) inclusion amount to 15.5% on a portion of the inclusion amount that represented cash or cash equivalents and 8% on the remainder.