Does Subpart F income qualify for Nebraska's dividend and deemed-dividend deduction?

Plain-English summary

The question is how much of a corporation's or fiduciary's Subpart F income (income of a controlled foreign corporation that U.S. shareholders must include) can be taken as part of Nebraska's dividend and deemed-dividend deduction from federal taxable income.

The Department's answer: Subpart F income is not categorically a dividend or deemed dividend. Drawing on IRC § 316 and Rodriguez v. C.I.R., 722 F.3d 306 (5th Cir. 2013), the ruling reasons that a true dividend requires a distribution and a change in ownership of value, while Subpart F inclusions exist precisely where the foreign corporation makes no such transfer -- and Congress deems items to be dividends only when it says so explicitly. So the inclusion, as a whole, is not deductible.

But the pieces that federal law does designate as dividends remain deductible: IRC § 964(e)(4) gains on a CFC's sale of stock in another foreign corporation, IRC § 245A(e)(2) hybrid dividends, and IRC § 954(c)(1)(A) Foreign Personal Holding Company dividends -- reported on lines 16a, 16b, and 16c of Schedule C, Form 1120. Because Nebraska follows the federal dividend designations, those amounts qualify for the deduction under Neb. Rev. Stat. § 77-2716(5). For Foreign Personal Holding Company dividends, the amount must be specifically identified on Nebraska Schedule II, Form 1120N, with Worksheet A, Schedule I of Form 5471 attached. Any Subpart F deduction claimed as a dividend other than these designated items will be disallowed.

What this means for you

Corporations with controlled foreign corporations

Do not deduct your entire Subpart F inclusion as a Nebraska dividend -- most of it does not qualify. Isolate the specifically-designated dividend pieces (IRC §§ 964(e)(4), 245A(e)(2), and 954(c)(1)(A), on Schedule C lines 16a-16c) and deduct only those.

Documenting Foreign Personal Holding Company dividends

Line 16c mixes FPHC dividends with 'other inclusions from CFCs under Subpart F,' so you must separately identify the FPHC dividends on Nebraska Schedule II, Form 1120N and attach Worksheet A, Schedule I of Form 5471. Without that identification the deduction is at risk.

Tax professionals

The reasoning tracks federal dividend law (IRC § 316; Rodriguez): no distribution, no change in ownership, no dividend -- unless a Code section explicitly deems it one. Anything claimed beyond the designated inclusions will be disallowed.

Common questions

Q: Is all Subpart F income deductible under Nebraska's dividend deduction?
A: No. Subpart F income is not categorically a dividend, so only the portions federal law specifically designates as dividends qualify.

Q: Which Subpart F inclusions qualify?
A: IRC § 964(e)(4) gains, IRC § 245A(e)(2) hybrid dividends, and IRC § 954(c)(1)(A) Foreign Personal Holding Company dividends -- lines 16a, 16b, and 16c of Schedule C, Form 1120.

Q: What documentation is required for Foreign Personal Holding Company dividends?
A: Identify the amount on Nebraska Schedule II, Form 1120N and attach Worksheet A, Schedule I of Form 5471. Any other Subpart F amount claimed as a dividend is disallowed.

Q: Can I rely on this Revenue Ruling?
A: A Nebraska Revenue Ruling is a general guidance document that is "advisory in nature but is binding on the Nebraska Department of Revenue until amended," and it applies generally rather than to a single taxpayer. But it can be superseded or made obsolete by a later ruling or a change in statute or regulation, so confirm you are looking at the current version before relying on it.

Citations and references

Statutes and authorities:

• Neb. Rev. Stat. § 77-2716(5) and § 77-2734.04(23) (Nebraska dividend and deemed-dividend deduction)
• Neb. Rev. Stat. § 77-2714 (federal meaning of tax terms)
• IRC § 316 / § 243 (dividend definition); IRC §§ 964(e)(4), 245A(e)(2), 954(c)(1)(A) (Subpart F inclusions designated as dividends)
• Rodriguez v. C.I.R., 722 F.3d 306 (5th Cir. 2013) (a dividend requires a distribution and change in ownership; Subpart F inclusions are not, as a whole, dividends)

Forms: Schedule C, Form 1120 (lines 16a-16c); Nebraska Schedule II, Form 1120N; Worksheet A, Schedule I, Form 5471.

Source

• Landing page: Nebraska Revenue Rulings
• Original PDF: 24-21-1

Original ruling text

Revenue Ruling 24-21-1
Corporate Income Tax

February 17, 2021

Subpart F Income
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.

Issue
To what extent does Subpart F income qualify as a dividend or deemed dividend for purposes of
the Nebraska dividend and deemed dividend deduction from federal adjusted gross income, or
for corporations and fiduciaries federal taxable income?

Conclusion
Subpart F income is not categorically a dividend or deemed dividend. However, those portions of
Subpart F income that are dividends or deemed dividends can be deducted from federal adjusted
gross income or federal taxable income pursuant to the Nebraska dividend and deemed dividend
deduction.

Analysis
The rules concerning Subpart F income in the Internal Revenue Code (IRC), Subt. A, Ch. 1,
Subch. N, Pt. III, Subpt. F, were first enacted as part of the Revenue Act of 1962, and were
significantly expanded as part of the Tax Reform Act of 1986. Subpart F income provisions
eliminate deferral of U.S. tax on certain categories of foreign income by taxing U.S. persons that
own 10% or more of a controlled foreign corporation (CFC) on their pro rata share of some income
of the CFC. Subpart F provisions require the shareholders of CFCs to include in gross income their
pro rata share of the CFC’s income. Nebraska law allows a deduction from federal adjusted gross
income, or for a corporation or fiduciary federal taxable income, for dividends received or deemed
to be received from corporations that do not meet the requirements of IRC § 243. Neb. Rev. Stat.
§§ 77-2716(5) and 77-2734.04(23).
Nebraska law does not define the term “dividend or deemed dividend.” However, for purposes
of Nebraska income tax, terms “have the same meaning as when used in a comparable context
in the laws of the United States relating to federal income taxes, unless a different meaning
is clearly required.” Neb. Rev. Stat. § 77-2714. The IRC defines dividend as “any distribution of
property made by a corporation to its shareholders…” IRC § 316. “[A]ctual dividends require a
distribution by a corporation and receipt by the shareholder.” Rodriguez v. C.I.R., 722 F.3d 306,
309 (5th Cir. 2013). “There must be a change in ownership of something of value.” Id. Subpart F
inclusions “exist specifically to account for instances where CFCs do not make transfers of value

Nebraska Department of Revenue, PO Box 94818, Lincoln, Nebraska 68509-4818

Revenue Ruling 24-21-1

February 17, 2021

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to shareholders.” Id. at 310. Because the Subpart F inclusions do not involve any distribution
or change in ownership, the inclusions are not actual dividends. Id. There are instances where
Congress will authorize items of income to be treated as a dividend. Id. at 311. However, “when
Congress decides to treat certain inclusions as dividends, it explicitly states as much.” Id. See
IRC § 851(b) language stating inclusions “shall be treated as dividends.” There are no statutory
provisions which deem Subpart F income, as a whole, to be a dividend. This statutory silence
combined with the instances in which the statutory language deems other items of income to be
treated as dividends supports the DOR determination that Congress did not intend that Subpart F
income, as a whole, be treated as a dividend. Id. at 311. Subpart F income, as a whole, is neither a
dividend nor deemed dividend under federal law. Id. at 309. Consequently, it is also not a dividend
or deemed dividend under Nebraska law.
Some Subpart F inclusions are specifically deemed to be dividends in the IRC. They are as follows:
• IRC § 964(e)(4) gains on the sale or exchange by a CFC of stock in another foreign
corporation. For tax year 2019, this is reported on line 16a, Schedule C, Form 1120.
• IRC § 245A(e)(2) hybrid dividends. For tax year 2019, this is reported on line 16b,
Schedule C, Form 1120.
• IRC § 954(c)(1)(A) Foreign Personal Holding Company dividends. For tax year 2019, this
is included on line 16c, Schedule C, Form 1120.
Because Nebraska law follows the IRC’s dividend designations, the gross income reported under
these subsections are dividends or deemed dividends for purposes of the Nebraska dividend and
deemed dividend deduction provided in Neb. Rev. Stat. § 77-2716(5).
In addition to the Foreign Personal Holding Company dividends, line 16c, Schedule C, Form 1120
includes “[o]ther inclusions from CFCs under Subpart F.” Therefore, Nebraska deductions for
Foreign Personal Holding Company dividends included on line 16c, Schedule C, Form 1120 must
be specifically identified on the Nebraska Schedule II, Form 1120N. To claim the Nebraska dividend
deduction for Foreign Personal Holding Company dividends, taxpayers must attach Worksheet A,
Schedule I, Form 5471 to the Form 1120N as well as documents or worksheets that specifically
identify the amount of Foreign Personal Holding Company dividends claimed.
Any deduction for Subpart F income claimed as a dividend or deemed dividend other than those
specifically designated above will be disallowed.

Apportionment
If a corporate taxpayer is taxable in 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 entire federal
taxable income of a corporate taxpayer is subject to apportionment except for “adjustments
required to be made under the Nebraska Revenue Act of 1967.” Neb. Rev. Stat. § 77‑2734.06. The
sales factor shall not include any “sales that are a part of the production of income that is not
subject to apportionment.” Neb. Rev. Stat. § 77-2734.10(4). Sales includes all gross receipts of
the taxpayer. Neb. Rev. Stat. Neb. Rev. Stat. § 77-2734.04(20). Thus, the denominator of the sales
factor should include the Subpart F income included in gross income of the corporate taxpayer
and exclude the part of Subpart F income that is deducted as dividends received or deemed
received pursuant to the Neb. Rev. Stat. § 77-2716(5).
Under Subpart F income provisions, a U.S. shareholder of a CFC computes an amount of the
CFC’s income that must be included in its gross income. Subpart F income provisions do not

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define the income as a sale of tangible personal property. Therefore, Subpart F income is sourced
to Nebraska under the provisions for sales other than sales of tangible personal property. Sales
other than sales of tangible personal property are in the numerator of the sales factor as provided
in Neb. Rev. Stat. § 77-2734.14(3)(a) through (k). Subdivisions (a) through (j) deal with sales
of services, interest and dividends from intangible assets held in connection with a treasury
function, interest and fees from loans, credit cards and other financial instruments, and licenses
and rentals. Those subdivisions do not address the sourcing of Subpart F income. Subdivision
(k) states “Sales other than sales of tangible personal property not specifically addressed in this
subsection must be sourced so as to fairly represent the extent of the taxpayer’s business activity
in this state.” In the event that there is not a way to identify how much activity, that results in
Subpart F income, is associated with Nebraska to “fairly represent the extent of the taxpayer’s
business activity in this state,” then taxpayers must include Subpart F income in their sales factor
denominator, and exclude this income from their sales factor numerator. See Neb. Rev. Stat.
§ 77‑2734.14(3)(k). 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.
For information on the treatment of 965 repatriated income and GILTI, see GIL 24-19-1, Income
Tax: Section 965 Transition Tax For Tax Year 2017, and GIL 24-20-1, Income Tax: Global Intangible
Low-Taxed Income and Foreign-Derived Intangible Income.

APPROVED:

Tony Fulton
Tax Commissioner
February 17, 2021