Nebraska Justices Dissect Tax Deduction Sought by Berkshire Unit

Several Nebraska justices strove at oral arguments Monday to understand the contours of how the state treats income repatriated under the 2017 tax law.

Precision Castparts Corp. wants the high court to reverse a July trial court opinion upholding the Department of Revenue’s decision to deny its request to deduct income generated since 1986 by its foreign subsidiaries on its amended 2017 tax return. The case could be the first of many on how Nebraska implements the 2017 law, and how other states handle it.

Nebraska law allows corporate taxpayers to deduct from their federal taxable income “dividends received or deemed to be received from corporations which are not subject to the Internal Revenue Code.” Precision attorney Michael B. Kimberly of McDermott, Will & Emery argued that the income repatriated under Internal Revenue Code Section 965 is a dividend deemed to be received, which it differentiated from the phrase “deemed dividend” used in federal law.

So “dividends deemed to be received” is just “Nebraska-speak” and “deemed dividend” appears in federal law, Justice Lindsey Miller-Lerman said. “I’m not sure that I’ve enlightened us but we are at the stage of focusing on words.”

Kimberly responded that “it is one of the most basic rules of statutory construction that when a legislature uses different language, the presumption is that difference is intentional and reflects a purpose apart from the alternative language.”

Justice Jeffrey J. Funke asked the state’s attorney whether its position that deemed dividends and those deemed to be received are synonymous runs afoul of the “principles of statutory interpretation that generally say differences in the wording are accorded different effect.”

Eric J. Hamilton of the Nebraska Department of Justice’s Office of the Solicitor General answered that “received” limits who gets the deduction. “It isn’t the party that’s distributing the fictional income,” he said.

“Deem” is a formal word that “denotes the use of magic words to create some sort of legal fiction,” Hamilton said. There’s no language in Section 965 “deeming” anything to be anything, he said.

Change of Position?

Kimberly argued that the department thinks all of Precision’s Section 965 income is taxable in Nebraska, contrary to its position for 37 years. “It’s only upon the adoption of this change in federal law that it changed its position,” he said.

Miller-Lerman noted Nebraska’s statute didn’t change, and asked whether the federal government just added something new.

Kimberly agreed there was no change in state law, and said the federal tax authorities really didn’t change anything either. It’s just an increase in Subpart F income, which has been around since 1962, he said. Subpart F requires shareholders of US corporations to pay taxes on the passive income of the corporations’ foreign affiliates, even if it isn’t paid to the parent company.

Heavican gave Hamilton a chance to respond to Precision’s accusation that the department changed its position. Hamilton said the department never took an official position on the taxability of Subpart F until 2021.

Chief Justice Michael G. Heavican asked, “Can the department change its mind on a determination without a change from the legislature?”

The department is always interpreting the legislature’s statutes, Hamilton answered. But regardless, Section 965 and GILTI are expressly excluded from the definition of Subpart F income in the Internal Revenue Code, he said. Global intangible low-taxed income, also created by the 2017 tax law, is the US minimum tax on a company’s foreign income.

Effect of Moore

Miller-Lerman asked Kimberly what happens to this case if the US Supreme Court holds Section 965 is unconstitutional. It’s considering the question in Moore v. United States, about whether the Sixteenth Amendment authorizes the federal government to tax undistributed earnings.

“This case is live unless and until there is a change in the federal taxable income that is the starting point for Nebraska’s tax scheme for Precision Castparts,” Kimberly said. “Unless and until that happens, this case is live and the court needs to decide the issue.”

Justice William B. Cassel asked Hamilton about the potential effect of Moore. which involves individual taxpayers. Hamilton argued it wouldn’t have any effect on this case because the Supreme Court has held corporate income taxes are really excise taxes and therefore aren’t covered by the 16th Amendment.

Justices Stephanie F. Stacy, Jonathan J. Papik, and John R. Freudenberg also served on the panel.

The case is Precision Castparts Corp. v. Dep’t of Revenue, Neb., No. S-23-564, argued 4/1/24.