The Nebraska Supreme Court has upheld the Nebraska Department of Revenue’s denial of a claimed dividends received deduction for a corporation’s Internal Revenue Code (“IRC”) Section 965 inclusion income. Precision Castparts Corp. v. Nebraska Dep’t of Rev., 317 Neb. 481 (Neb. Sup. Ct., Aug. 30, 2024). The decision upholds Nebraska’s narrow interpretation of what constitutes deductible “deemed” dividends, which may have implications beyond such income.

Facts: Precision Castparts Corp. (“Precision Castparts”) is a corporation based in Oregon and is subject to the Nebraska corporation income tax. It had foreign subsidiaries, controlled foreign corporations (“CFCs”), with non-U.S. earnings accumulated over many years that were retained abroad and as a result were not subject to federal income tax. Under the federal Tax Cuts and Jobs Act of 2017, IRC § 965(a) was amended to require a one-time mandatory repatriation tax on such undistributed income (“inclusion income”). As a result, Precision Castparts was required to pay a one-time federal “transition tax” for the 2017 tax year on the retained (and untaxed) foreign earnings of the CFCs as if such earnings were distributed and repatriated to the United States.

On its originally filed 2017 Nebraska return, Precision Castparts did not report its Section 965 inclusion income, but three years later filed an amended Nebraska return to include it. Shortly thereafter, Precision Castparts requested a declaratory order from the Nebraska Department of Revenue authorizing it to deduct the amounts under Neb. Rev. Stat. 77-2716(5), which provides a deduction for “dividends received or deemed to be received” from corporations which are not subject to the IRC. The Department concluded that the cited provision did not apply to Section 965 inclusion income because it was neither an actual dividend nor a dividend “deemed” to be received. A Nebraska district court judge agreed with the Department’s interpretation, and this appeal to the Nebraska Supreme Court followed.

Decision: The Nebraska Supreme Court upheld the Department’s denial of the deduction under the language of IRC § 965, concluding that the inclusion income did not qualify as deductible “dividends . . . deemed to be received” under Nebraska law.

The court quickly disposed of any argument that the Section 965 inclusion income was a “dividend,” noting that no actual distribution of property was made by the CFCs or received by Precision Castparts. The court then addressed whether the inclusion income qualified as “dividends . . . deemed to be received.” It found nothing in the language of Section 965 that treated the income inclusion as a dividend or that “deemed” the income to have been distributed.

The court then considered the U.S. Supreme Court’s analysis of Section 965 in Moore v. United States, 144 S. Ct. 1680 (2024), where the Supreme Court rejected a constitutional challenge to Section 965. It noted that in Moore, the Supreme Court indicated that Section 965 did not operate by “deeming” a distribution to have been made to shareholders. Rather, Section 965 operated by treating the inclusion income “as pass-through income,” which did not require a “distribution” of earnings to shareholders. Accordingly, the court held that the inclusion income did not qualify as deductible “dividends . . . deemed to be received” under Nebraska law.

Takeaway: While the non-deductibility of the one-time mandatory Section 965 inclusion income is now settled law in Nebraska—resulting in non-U.S. income being included in the Nebraska corporate income tax base—the implications of the decision may extend further. The Department has taken a similar approach in limiting the deductibility of other Subpart F inclusion amounts only to those that are specifically “deemed” to be dividends under the IRC (for example, IRC § 954(c)(1)(A) foreign personal holding company dividends). More broadly, the Nebraska court’s analysis may cause other states to reexamine their interpretations treating Subpart F income as qualifying for a dividends received deduction under their tax laws.