Tax News Update    Email this document    Print this document  

On September 13, 2019, the Nebraska Department of Revenue (Department) issued a general information letter (GIL 24-19-1), which revises and supersedes guidance issued in December 2018 (see Tax Alert 2019–0062), 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.

GIL 24-19-1 reiterates the Department's position, discussed in the 2018 guidance, that the IRC Section 965 inclusion is not a dividend or deemed dividend deductible under Neb. Rev. Stat. Section 77-2716(5). In addition, the Department gives instructions for reporting the IRC Section 965(a) inclusion amount and taking the corresponding IRC Section 965(c) deduction. The 2019 guidance drops the requirement that any taxpayer claiming a deduction for the net IRC Section 965(a) income must attach a legal analysis supporting the deduction. Instead, GIL 24-19-1 simply says any dividend deduction claimed for the IRC Section 965(a) income will be disallowed.

Unlike the 2018 guidance, GIL 24-19-1 addresses apportionment factor representation. The Department clarifies that the realization of deferred earnings and profits of controlled foreign corporations since 1986, and the corresponding recognition of this income in a single year, is a unique and non-recurring factual situation allowing the Department to use special apportionment under Neb. Rev. Stat. Section 77-2734.15(2). Accordingly, for the last tax year ending before January 1, 2018, taxpayers must include the IRC Section 965(a) income in their sales factor denominator and exclude it from their sales factor numerator.

Finally, GIL 24-19-1 says that any taxpayer that did not report IRC Section 965(a) income or improperly computed its sales factor should file an amended return. Taxpayers filing an amended 2017 Nebraska income tax return by December 31, 2019, will receive a waiver or abatement of any penalty or interest. If the taxpayer writes "Amended pursuant to GIL 24-19-1" at the top of the amended return, the Department will automatically waive the interest and penalty.

Implications

GIL 24-19-1, which is interpretive and expresses the views of the Department, could arguably be inconsistent with certain Nebraska case law and administrative authorities in this area of state income taxation. 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." The Department has also historically treated subpart F income as a deemed dividend deducted on Schedule II, Line 5 of Nebraska Form 1120N. Under IRC Section 965(a), a taxpayer's subpart F income, as otherwise determined under IRC Section 952, increases by the amount described in IRC Section 965. These provisions arguably create a previously undefined category of subpart F income or, at a minimum, evidence a legislative intent to make IRC Section 965 income indistinguishable from subpart F income. However, the Department has already issued assessments on some 2017 returns on which taxpayers took the deduction, and some of those taxpayers are in the process of appealing those assessments.

Further, taxpayers taking the deduction in 2018 must consider this guidance when filing their 2018 Nebraska returns. Taxpayers that took the deduction in 2017, or did not take the deduction and failed to properly report the IRC Section 965(a) income in their receipts factor denominator, should also consider this guidance in deciding whether to amend 2017 returns.

EY will continue to monitor developments in this area.

———————————————

———————————————
ENDNOTES

¹ The Tax Cuts and Jobs Act (P.L. 115-97), enacted in 2017, amended IRC Section 965 to require taxpayers to include in income an amount (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.