Berkshire Tax Case Lays Path for Other States to Follow Nebraska

Reproduced with permission. Copyright September 5th, 2024 by Bloomberg Industry Group, Inc. (800-372-1033) http://www.bloombergindustry.com

The Nebraska Supreme Court’s ruling in a tax case involving a Berkshire Hathaway Inc. subsidiary shakes the justification behind other states’ decisions not to tax income from multinationals’ foreign affiliates.

The justices upheld the Nebraska Department of Revenue’s decision to deny Precision Castparts Corp.'s request to deduct income generated since 1986 by its foreign subsidiaries as if it was an untaxed dividend.

The decision has the taxpayer community “totally freaking out,” according to Bruce Fort, senior counsel at the Multistate Tax Commission.

States have been treating income from controlled foreign corporations—referred to as Subpart F income from its location in the Internal Revenue Code—virtually the same as nontaxable dividends, Fort said. The Nebraska justices read the US Supreme Court’s June ruling in Moore v. United States to say Subpart F income is pass-through income, which is taxed.

“I would keep my eyes open,” EY managing director Bill Nolan said of other states looking to the Nebraska opinion and revisiting their stances on Subpart F, particularly where it’s been more a matter of policy than enshrined in statute. “What we learned was, policy can change,” he said, noting the court turned a blind eye to the department’s shift on the position it relied on for three decades.

Effect on Apportionment

Precision Castparts amended its 2017 Nebraska corporation income tax return in December 2021 to include previously unreported repatriation income under IRC Section 965 to claim a deduction for “dividends deemed to be received,” decreasing its state tax by $228. Section 965 was added to Subpart F under the 2017 tax law.

Attorneys who represent taxpayers were disappointed in the Nebraska court’s refusal to allow the deduction, which covers dividends deemed to be received from foreign corporations not subject to the Internal Revenue Code.

“The court grabbed on to a few sound bites from a few cases and really failed to do the work of looking at what the Nebraska statute was intended to do and failed to understand what 965 is,” Greenberg Traurig LLP shareholder Nikki Dobay said of what she called a “flawed decision.”

Jones Walker LLP partner Alysse McLoughlin said the court “entirely ignored the legislative history of that deduction which plainly supports that foreign income such as 965 income was not intended to be taxed by Nebraska.”

The court’s reliance on Moore and the pass-through income characterization supports the argument that the department should include the foreign income in the formula for deciding how much of a company’s worldwide income is taxable in Nebraska, McLoughlin said.

The same approach should apply to all Subpart F income and global intangible low-taxed income, or GILTI—a component of the 2017 law designed to broaden the tax base—she said. Including the income in the formula’s denominator could dilute Nebraska’s share of the tax base.

Joseph Schmidt, tax director at Ryan LLC, pushed further, suggesting Precision Castparts ask the justices to reconsider their ruling and remand the case so that pass-through treatment could be applied to redetermine the tax bill. “That could be an indirect way to achieve a complete or partial victory,” he said.

Lingo Shift

Nolan noted this is just one of several cases that the revenue department put on pause, many of which involve far bigger dollar figures.

Fort questioned how much money can really be at stake because Nebraska’s status as a separate entity state means there are various ways for a company to repatriate income to an entity that doesn’t have nexus, or an economic connection, with Nebraska. Separate-reporting states allow tax returns for each business entity in an affiliated group.

But the Precision Castparts case has removed the “cloud of uncertainty” that hung over whether Subpart F income could be taxed by a state that doesn’t tax domestic dividends generally, he said.

Regardless of what happens in Nebraska and other states, Nolan said tax practitioners may have to adjust their lingo. Over his 30-year career, he’s always referred to Subpart F income as a “deemed dividend,” he said.

“It was our slang and we always thought of it that way,” Nolan said. “Credit to the Nebraska Department of Revenue—they challenged that presupposition, and were successful.”

McDermott Will & Emery LLP and McGrath North Law Firm represented Precision Castparts.

The case is Precision Castparts Corp. v. Dep’t of Revenue, Neb., No. S-23-564, 8/30/24.

To contact the reporter on this story: Perry Cooper in New Bern, N.C. at pcooper@bloombergindustry.com

To contact the editors responsible for this story: Benjamin Freed at bfreed@bloombergindustry.com; Amy Lee Rosen at arosen@bloombergindustry.com