This summer, in Precision Castparts v. Nebraska Department of Revenue,1 the Lancaster County District Court agreed with the Department of Revenue (“Department”) and denied state dividend received deduction (DRD) treatment for Internal Revenue Code § 965(a) inclusion income to a Berkshire Hathaway subsidiary.
In its decision, the Court disagreed with the taxpayer’s reliance on 30 years of legislative history of the DRD and focused instead on the language of the statute and distinguished a dividend from an increase in federal subpart F income (foreign-source income). The Court also disagreed with the argument that the § 965(a) inclusion income was a deemed dividend.
The aerospace parts manufacturer filed a brief with the state Court of Appeals contesting the deduction denial as well as a petition to the state Supreme Court requesting a direct hearing, stating that the case involves a matter of first impression and has significant public impact. Prior to the Tax Cuts and Jobs Act (TCJA) in 2017, Nebraska required taxpayers to deduct subpart F income from their federal taxable income. After the TCJA enacted § 965(a), Nebraska issued guidance denying DRD treatment to § 965(a) inclusion amounts.
In its petition, Precision Castparts makes the following arguments:
- The plain language of the statute 77-2716(5) requires the subtraction of “federal taxable income dividends received or deemed to be received from corporations which are not subject to the [federal] Internal Revenue Code.”
- The statute is unambiguous, and the word “deemed” means “treated as if.”
- Even if the statute was ambiguous, the purpose of the statute was to exclude all foreign-source income from subsidiaries from taxation under the corporate income tax structure.
- The Court should accord persuasive deference to the Department’s long-standing position from pre-2017 to exclude subpart F income.
This development is particularly interesting in light of the U.S. Supreme Court granting certiorari on June 26, 2023 in Moore v. United States. Oral arguments are to be heard on December 5, 2023 as to whether § 965(a) violates the U.S. Constitution. Ryan will keep you updated on both cases, and as we suggested in our release dated September 19, 2023, taxpayers may wish to file a refund claim in Nebraska as well as their federal income tax return should § 965(a) be held unconstitutional. Contact the Ryan experts listed below, if you’d like to explore your options in advance of the decision.
1 Precision Castparts v. Nebraska Department of Revenue, CI122-2106 (Neb. Dist. Ct., Lancaster County, July 3, 2023).
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Mark L. Nachbar
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