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June 28, 2021

Nebraska trial court dismisses COST challenge to Department of Revenue's policy statement on IRC 965 inclusion income

On June 17, 2021, the District Court of Lancaster County, Nebraska (court) ruled that the Council on State Taxation (COST) could not challenge a General Information Letter (GIL) issued by the Nebraska Department of Revenue (Department), which asserted that taxpayers may not claim a dividends received deduction (DRD) under Neb. Rev. Stat. Section 77-2716(5) for IRC Section 965(a) inclusion income (Council on State Taxation v. Nebraska Dept. of Revenue, No CI 20-4124 (Neb. Dist. Ct. June 17, 2021). The court reasoned that it did not have subject matter jurisdiction to hear COST's challenge because the GIL was a guidance document, not a regulation.

It is unknown at this time whether COST will appeal the court's decision.


Nebraska Rev. Stat. Section 77-2716(5) requires a subtraction adjustment for "dividends received or deemed to be received from corporations [that] are not subject to the Internal Revenue Code" (IRC). Since its enactment in 1984, the Department generally applied Neb. Rev. Stat. Section 77-2716(5) to treat Subpart F income as a deemed dividend eligible for the state's DRD.

The Tax Cuts and Jobs Act (TCJA) amended IRC Section 965 to require taxpayers to include in income an amount (i.e., the IRC Section 965(a) inclusion amount) based on the accumulated post-1986 deferred foreign income of certain foreign corporations that they own either directly or indirectly through other entities. The Department subsequently issued GIL 24-18-1 in December 2018, and GIL 24-19-1 in September 2019, taking the position that income from an IRC Section 965(a) inclusion is not a dividend or deemed dividend deductible under Neb. Rev. Stat. Section 77-2716(5). The Department has been issuing assessments1 against taxpayers that have deducted IRC Section 965(a) inclusion income when computing taxable income.

In November 2020, COST petitioned the court for a declaratory judgment that the Department's position in GIL 24-19-1 is contrary to Nebraska law and should not be enforced. The Department filed a motion to dismiss the petition for lack of subject matter jurisdiction and failure to state a claim.

Court's decision

The court granted the Department's motion to dismiss, concluding that it did not have subject matter jurisdiction because the Department had only issued a guidance document.

The court said Nebraska follows the Uniform Declaratory Judgments Act, codified in Neb. Rev. Stat. Section 25-21,150, under which any person whose rights are affected by a statute can sue for a declaration of the statute's construction or validity. The state's sovereign immunity (a state can only be sued with its consent), however, precludes COST from suing the Department to declare that net IRC Section 965(a) inclusion income qualifies as dividends received or deemed to be received under Neb. Rev. Stat. Section 77-2716(5).

In response to COST's argument that Neb. Rev. Stat. Section 84-911 allows a similar petition to challenge the validity of a state rule or regulation, the court held that the GIL did not qualify as a rule or regulation under the statute. In support of its conclusion, the court noted that:

  • The GIL was not binding
  • The GIL merely stated the Department's interpretation of the applicable statute
  • Taxpayers that received assessments based on the GIL could challenge those assessments before the Department and then the courts
  • COST, or any plaintiff, could ask the Department to review the GIL and convert it into a regulation under Nebraska law

Even if the GIL were a rule or regulation, the court observed, it would be invalid based on its failure to comply with the statutory procedures for adoption. Accordingly, the court would not have to decide whether it was consistent with Neb. Rev. Stat. Section 77-2716(5).


The court's decision, while ruling against COST, is nonetheless helpful in pointing out that GIL 24-20-1 is a guidance document that is not binding and does not carry the weight of law. More importantly, it does not directly address the merits of COST's claims that the Department's position may be inconsistent with Nebraska's tax statutes. Regardless, the Department has issued, and is likely to continue issuing, assessments on this issue. Taxpayers therefore will have to evaluate whether to challenge the Department's position in appeals and, likely, in the courts.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
   • Bill Nolan (


1 In February 2021, the Department expanded the scope of its position when it issued Revenue Ruling 24-21-1 indicating that only certain categories of subpart F income expressly treated as a deemed dividend by federal law are entitled to the Nebraska deduction under Neb. Rev. Stat. 77-2716(5). This more recent position was not a subject of COST's petition. See Tax Alert 2021-0404.