How did Nebraska report, deduct, and apportion IRC section 965 transition-tax income for the 2017 tax year?

Plain-English summary

Nebraska followed the federal IRC § 965(a) income inclusion and permitted the federal § 965(c) deduction, but it did not treat the net inclusion as a deductible foreign dividend. The state did not conform to federal elections to pay the transition tax in installments or defer it.

Reporting the inclusion and deduction

Taxpayers included § 965(a) income on the appropriate Nebraska return when it appeared on the federal return. C corporations, S corporations, and partnerships used specified Nebraska Schedule A lines. Individuals made no separate adjustment because Nebraska began with federal adjusted gross income.

The federally allowed § 965(c) deduction also carried to Nebraska. The taxpayer had to attach the IRC § 965 Transition Tax Statement. Individuals again made no separate modification because the deduction was already reflected in federal adjusted gross income.

No foreign-dividend deduction

Nebraska allowed a deduction for qualifying foreign dividends included in the federal base, but the Department concluded that net § 965 income was subpart F income rather than a dividend or deemed dividend under the Code and Treasury regulations.

Any foreign-dividend deduction claimed for the net § 965 inclusion was therefore disallowed.

Special apportionment and expired relief

For the last taxable year beginning before January 1, 2018, every corporate taxpayer had to include § 965(a) income in the sales-factor denominator and exclude it from the numerator. The Tax Commissioner adopted that special method because either omitting the income entirely or including it in the numerator would produce incongruous results.

An entity that filed a qualifying amended return by December 31, 2019 could receive automatic penalty and interest relief for incorrect 2017 treatment. It had to write “Amended pursuant to GIL 24-19-1” on the return; Forms 21 and 21A were not required. That deadline has passed.

Common questions

Q: Did Nebraska exclude section 965(a) income?

A: No. Income included on the federal return also had to be included on the Nebraska return.

Q: Did Nebraska allow the section 965(c) deduction?

A: Yes, when allowed federally, with the required transition-tax statement attached.

Q: Was the net inclusion deductible as a foreign dividend?

A: No. The GIL concluded it was not a dividend or deemed dividend.

Q: How did corporations apportion the inclusion for the specified year?

A: They included it in the sales-factor denominator and excluded it from the numerator.

Q: Is the GIL's automatic amended-return relief still available?

A: No. The filing deadline was December 31, 2019.

Citations and references

• IRC § 965(a) and (c) — transition-tax inclusion and deduction
• IRC § 316 — dividend definition
• Neb. Rev. Stat. § 77-2716(5) — foreign-dividend deduction
• Neb. Rev. Stat. §§ 77-2734.05 through 77-2734.15 — corporate apportionment
• Neb. Rev. Stat. § 77-2734.15(2) — special apportionment authority
• Nebraska GIL 24-19-1 — clarification and supersession of GIL 24-18-1

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/general-information-letters-gils
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/gil/GIL24-19-01_Section_965.pdf

Original ruling text

GIL 24-19-1 Income Tax: Section 965 Transition Tax for Tax Year 2017
Supersedes GIL 24-18-1, issued December 21, 2018

This guidance document is advisory in nature but is binding on the Nebraska Department of Revenue (DOR)
until amended. A guidance document does not include internal procedural documents that only affect the internal
operations of DOR and does not impose additional requirements or penalties on regulated parties or include
confidential information or rules and regulations made in accordance with the Administrative Procedure Act. If
you believe that this guidance document imposes additional requirements or penalties on regulated parties, you
may request a review of the document.
This guidance document may change with updated information or added examples. DOR recommends you do
not print this document. Instead, sign up for the subscription service at revenue.nebraska.gov to get updates on
your topics of interest.

                                    September 13, 2019

Dear XXXX,
This guidance is in response to several inquiries regarding Nebraska’s treatment of Internal Revenue
Code Section 965 repatriation income. Based on the information provided in those requests we are
providing this General Information Letter (GIL), which clarifies and supersedes GIL 24-18-1.
GILs address general questions; provide analysis of issues; and direct taxpayers to the Nebraska statutes,
DOR regulations, revenue rulings, or other sources of information to help answer a question. A GIL is a
statement of current DOR policy, and taxpayers may rely on DOR to follow the principles or procedures
described in a GIL until it is rescinded or superseded. You may also find current regulations, revenue
rulings, information guides, taxpayer rulings, and other GILs at revenue.nebraska.gov that may be
helpful to you.
The Tax Cuts and Jobs Act (TCJA), enacted in 2017, amended IRC § 965. The amendment required
taxpayers to include in income an amount (IRC § 965(a) inclusion amount) based on the accumulated
post-1986 deferred foreign income of certain foreign corporations that they own either directly or
indirectly through other entities. Other taxpayers may have inclusions in income under IRC § 965(a) due
to ownership of deferred foreign income corporations (DFICs) through U.S. shareholder pass‑through
entities. IRC § 965 also allows for a deduction (IRC § 965(c) deduction).
Nebraska law conforms to the IRC § 965 provisions, except for the elections to pay the tax in installments
or to defer the tax.
IRC § 965(a) Inclusion Income on Nebraska Returns.
Any IRC § 965(a) income included in the taxpayer’s federal return must also be included in its Nebraska
return. Report the IRC § 965(a) income on the appropriate lines of the Nebraska returns as follows:
C corporations: Line 8, Nebraska Schedule A, Form 1120N.
S corporations: Line 6, Nebraska Schedule A, Form 1120-SN.
Partnerships: Line 7, Nebraska Schedule A, Form 1065N.
Individuals: An individual should not modify the federal adjusted gross income (AGI) reported to the
IRS. Nebraska taxation begins with federal AGI, which includes the inclusion amount.

GIL 24-19-1

Page 2 of 3

IRC § 965(c) deduction on Nebraska Returns.
Any IRC § 965(c) deduction allowed on the taxpayer’s federal return may also be deducted on its
Nebraska return. The taxpayer must attach a copy of the IRC § 965 Transition Tax Statement to
the Nebraska return when filed. Report the IRC § 965(c) deduction on the appropriate Nebraska
returns as follows:
C corporations: Line 18, Nebraska Schedule A, Form 1120N.
S corporations: Line 16, Nebraska Schedule A, Form 1120-SN.
Partnerships: Line 17, Nebraska Schedule A, Form 1065N.
Individuals: An individual cannot modify the federal AGI reported to the IRS. Nebraska taxation
begins with federal AGI, which includes the deduction amount.
Foreign Dividends Deduction on Nebraska Returns.
Nebraska law allows a deduction from federal taxable income or federal adjusted gross income, to
the extent so included, for any dividends or deemed dividends treated as foreign dividends under
the IRC and related Treasury Regulations (Neb. Rev. Stat. § 77-2716(5)). Examination of the
IRC, Treasury Regulations, and related Tax Court cases establish that the net IRC § 965 inclusion
income (IRC § 965(a) inclusion – IRC § 965(c) deduction) is not a foreign dividend. Under the
IRC, a dividend generally is a distribution of property out of its earnings and profits made by a
corporation to its shareholders under specific rules. See I.R.C. § 316. Income recognized under
IRC § 965(a) is added to subpart F income and does not meet the definition of dividend nor is it
deemed a dividend in the IRC or related Treasury Regulations. Any dividend deduction claimed
for the net IRC § 965(a) income will be disallowed.
Apportionment.
If the corporate taxpayer is taxable in both Nebraska and one or more other states, the income
of the corporate taxpayer must be apportioned to Nebraska based on the Nebraska receipts as
compared to all receipts as provided by Neb. Rev. Stat. §§ 77-2734.05 to 77-2734.15.
The realization of deferred earnings and profits of controlled foreign corporations since 1986
and the corresponding recognition of this income in a single year is a unique and non-recurring
factual situation supporting a decision by the Tax Commissioner to allow special apportionment
under the provisions of Neb. Rev. Stat. § 77-2734.15(2). The Tax Commissioner has determined
that excluding IRC § 965(a) from a corporate taxpayer’s sales factor altogether, or including
this income in the sales factor numerator would produce incongruous results relative to other
taxpayers. Therefore, for the last taxable year which begins before January 1, 2018 all corporate
taxpayers must include the IRC § 965(a) income in their sales factor denominator, and exclude
this income from their sales factor numerator. All other items of income must be apportioned
according to the provisions of Neb. Rev. Stat. §§ 77-2734.01 through 77-2734.14 and the
regulations adopted thereunder.

GIL 24-19-1

Page 3 of 3

Amended Return.
An entity should file an amended return if it improperly reported its IRC § 965(a) income or
improperly computed its sales factor. If an entity files an amended return by December 31, 2019,
DOR will waive or abate any penalty or interest resulting from an entity’s incorrect treatment of
its IRC § 965(a) income on its 2017 Nebraska income tax return. Write “Amended pursuant to GIL
24-19-1” at the top of the amended return and DOR will automatically waive interest and penalty.
There is no need to file a Form 21 or 21A to receive this relief.
For the Tax Commissioner

                        George Kilpatrick

Manager, Tax Policy
Nebraska Department of Revenue