In Apple Inc. v. Nebraska Department of Revenue (Case No. CI 24-4186, July 13, 2026), the Nebraska District Court for Lancaster County (court), declined to apply the state's statutory apportionment methodology to accumulated post-1986 deferred foreign income under IRC Section 965(a), holding that an alternative apportionment formula is required. The court, however, found the alternative apportionment methods proposed by both the Nebraska Department of Revenue (Department) and the taxpayer were inequitable, and remanded the case to the Department's Tax Commissioner with instructions for developing an appropriate formula.

This decision follows the Nebraska Supreme Court's August 2024 ruling in Precision Castparts¹ (see Tax Alert 2024-1778), which held that IRC Section 965(a) income does not qualify for Nebraska's dividend-received deduction (DRD). Together, these cases establish that IRC Section 965(a) income is not allowed a DRD and warrants alternative apportionment. However, the appropriate apportionment methodology remains unresolved.

Background

The Tax Cuts and Jobs Act of 2017 (TCJA) imposed a one-time transition tax under IRC Section 965(a) on accumulated post-1986 deferred foreign income of certain foreign corporations. This provision required US shareholders of controlled foreign corporations (CFCs) to include in their income their pro rata share of post-1986 accumulated foreign earnings, regardless of whether those earnings were actually distributed.

In 2019, the Department issued General Information Letter 24-19-1, which stated that the IRC Section 965(a) inclusion was not entitled to a Nebraska DRD (see Tax Alert 2019-1639). The guidance also indicated that the IRC Section 965(a) amount included in the tax base was to be included in the taxpayer's sales factor denominator. The Department later issued Revenue Ruling 24-21-1, which outlined similar treatment for most types of Subpart F² inclusions (see Tax Alert 2021-0404).

In Precision Castparts Corp., the Nebraska Supreme Court held that IRC Section 965(a) income does not qualify for the state's DRD under Neb. Rev. Stat. Section 77-2716(5) because it is not a dividend nor deemed dividend as contemplated by the statute. The court characterized IRC Section 965(a) as using "pass-through treatment" to attribute controlled foreign corporation (CFC) earnings to shareholders without deeming an actual distribution, distinguishing it from traditional dividends.

The apportionment issue

In Apple Inc., the Department reviewed the taxpayer's 2017 Nebraska return and proposed adding the IRC Section 965(a) inclusion amount to the taxpayer's sales factor denominator. The taxpayer countered by proposing to add its total CFC sales from 2005–2017 to the sales factor denominator, thereby reducing its sales factor.

The court found that the TCJA's one-time transition tax presents a "unique and nonrecurring factual situation" triggering Nebraska's alternative apportionment authority under Neb. Rev. Stat. Section 77-2734.15. The court observed that the statutory denominator reflects only 2017 sales, while the income being apportioned includes accumulated CFC earnings from 2005–2017 — creating a fundamental mismatch. Thus, the court found that the standard sales factor cannot fairly represent the taxpayer's taxable income reasonably attributable to its business operations conducted in Nebraska.

The court observed a "structural deficit" present in both the Department and the taxpayer's proposed alternative apportionment methodologies. Each party — in its own way — proposed a sales factor that measured a single year of domestic activity against 13 years of foreign activity.

The court identified two further issues with the Department's prescribed methodology. First, the Department's method represents CFC activity using an income figure (the IRC Section 965(a) inclusion amount) rather than gross receipts. Because gross receipts substantially exceed the income they generate, using an income proxy systematically underrepresents foreign market activity and inflates Nebraska's apportioned share. Second, the Department's method added the gross IRC Section 965(a) inclusion to the denominator, though the apportionable income tax base reflected only the net inclusion amount after the IRC Section 965(c) deduction. The court reasoned that the denominator did not fairly relate to either the CFC gross receipts that generated the income or to the net income subject to apportionment.

The court then turned to the taxpayer's proposed method. The court first acknowledged the common "temporal mismatch" discussed above, noting the taxpayer's method pairs 13 years of CFC gross receipts (denominator inclusion) against a single year of Nebraska sales (numerator inclusion). The court concluded that this inflates the denominator relative to the numerator. The court cited a second defect, repeating its observations about the calibration of gross versus net income as indicated in its discussion of the Department's methodology and noting the taxpayer's proposed denominator reflected CFC gross receipts associated with gross IRC Section 965(a) income.

The taxpayer referenced the "pass-through" characterization in Precision Castparts in arguing that CFC receipts should be treated as partnership receipts included in the statutory sales factor. The court noted that this "pass-through" characterization addressed only income attribution, not entity classification. However, the court concluded that Neb. Rev. Stat. Section 77-2734.15(1) grants authority to employ "any other method to effectuate an equitable apportionment" and is broad enough to permit consideration of CFC receipts in a properly structured alternative formula.

The court remanded the case to the Tax Commissioner with instructions to represent CFC activity using gross receipts, not income figures, and to account for the IRC Section 965(c) deduction in the amount added to the denominator, thus corresponding to the net income entering the apportionable tax base. The court also said that receipts from periods other than 2017 may be considered only if the Department articulates a principled basis consistent with equitable apportionment and does not apply different tax years to the numerator and denominator.

Finally, while the taxpayer raised arguments under the Commerce Clause and Due Process Clause of the US Constitution, the court declined to address them, having resolved the case on statutory grounds.

Implications

While the court's decision indicates that any apportionment methodology for IRC Section 965(a) income should represent CFC activity using CFC gross receipts (rather than an income proxy), the precise apportionment methodology remains an open question pending the Department's action on remand, or on further appeal. Taxpayers with similar IRC Section 965(a) apportionment appeals should monitor the remand proceedings and consider whether to stay their cases pending resolution.

While this decision is specific to Nebraska, other states with similar alternative apportionment provisions may face analogous challenges in IRC Section 965(a) income. In addition, the principles articulated in this case may extend to other Subpart F inclusions, including those under IRC Section 951A.