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September 20, 2023

Nebraska district court denies dividend received deduction for IRC Section 965(a) inclusion income

In Precision Castparts v. Nebraska Department of Revenue,1 the Lancaster County District Court (court) upheld a determination from the Nebraska Department of Revenue (Department) denying a taxpayer's state dividend received deduction (DRD) for IRC Section 965(a) inclusion income.


Neb. Rev. Stat. Section 77-2716(5) provides a subtraction adjustment for dividends "received or deemed to be received" from corporations not subject to the Internal Revenue Code. This provision was enacted in the mid-1980s as part of an overhaul of its corporate tax system in response to the Kellogg 2 Nebraska Supreme Court decision. For over 30 years, subpart F income was treated as eligible for the DRD. In 2018, in response to changes made by the Tax Cuts and Jobs Act, specifically the one-time transition inclusion of IRC Section 965(a), the Department revisited this practice and issued guidance denying DRD treatment to IRC Section 965(a) income (see Tax Alerts 2019-0062, 2019-1639). In 2021, the Department supplemented this guidance in Revenue Ruling 24-21-1 (see Tax Alert 2021-0404), which discussed certain parts of subpart F that are expressly identified as dividends or deemed dividends by Congress and allowed a DRD for those items. Any other items of subpart F income would not be afforded DRD treatment according to the guidance.

The taxpayer filed a refund claim related to its inclusion of deemed repatriated income under IRC Section 965(a) on its amended 2017 return. The Department denied the refund claim and the taxpayer appealed the decision.

Court denies refund claim

In upholding the Department's denial of the refund claim, the court was not persuaded by the taxpayer's reliance on the legislative history of Nebraska's DRD, which, in the context of the general restructuring of its corporate tax system, was intended to reflect a "total domestic approach."3 The court viewed the one-time repatriation of deferred controlled foreign corporation earnings as an event that could not have been considered by the legislature in 1984. Instead, the court focused on the language of the statute and distinguished a "dividend" — a distribution from a corporation out of its earnings and profits — from an increase in federal subpart F income due to a new "inclusion" in IRC Section 965(a). Finally, the court rejected the taxpayer's argument that the IRC Section 965(a) inclusion was a deemed dividend. The court appeared to accept the Department's argument that a "deemed dividend" is an item of income that does not meet the definition of a dividend, but which Congress expressly says should be treated as a dividend. The court noted that neither the Internal Revenue Code nor the federal Treasury Regulations deem IRC Section 965(a) inclusion income as dividend income.


The taxpayer has appealed the court's decision to the Nebraska Court of Appeals. While the decision applies only to whether IRC Section 965(a) inclusion income is Nebraska DRD-eligible, the court's language suggests that it might approve of the broader net cast by the Department against other types of subpart F income in Revenue Ruling 24-21-1. In addition to this case, there are other cases pending against the Department on the same subpart F issue as well as a factor representation issue.

EY will continue to monitor developments in this area.


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

Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor


1 Precision Castparts v. Nebraska Department of Revenue, CI122-2106 (Neb. Dist. Ct., Lancaster Cnty, July 3, 2023).

2 Kellogg Company v. Herrington, 343 N.W.2d 326 (Neb. 1984).

3 See Larry D. Hause, Unitary Taxation: An Analysis of State Taxation of Multijurisdictional Corporations in Nebraska, 64 Neb. Law Rev. 135, 188 (1985).