Precision Castparts Corp. v. Neb. Dep't of Revenue

1

317 Neb. 481

Precision Castparts Corp., appellant, v. Nebraska Department of Revenue and Tony Fulton, in his official capacity as Tax Commissioner, appellees.

No. S-23-564

Supreme Court of Nebraska

August 30, 2024

1. Administrative Law: Taxation: Final Orders: Appeal and Error. Any final action of the Tax Commissioner may be appealed, and the appeal shall be in accordance with the Administrative Procedure Act.

2. Administrative Law: Judgments: Appeal and Error. In an Administrative Procedure Act review proceeding, the district court reviews the agency's decision de novo on the record of the agency and may affirm reverse, or modify the decision of the agency or remand the cause for further proceedings.

3. __ __: __. In an appeal under the Administrative Procedure Act an appellate court may reverse, vacate, or modify the judgment of the district court for errors appearing on the record.

4. __ __: __. When reviewing an order of a district court under the Administrative Procedure Act for errors appearing on the record, the inquiry is whether the decision conforms to the law, is supported by competent evidence, and is neither arbitrary, capricious, nor unreasonable.

5. Judgments: Appeal and Error. Whether a decision conforms to law is by definition a question of law, in connection with which an appellate court reaches a conclusion independent of that reached by the lower court.

6. Judgments: Statutes: Appeal and Error. When an appeal calls for statutory interpretation or presents questions of law, an appellate court must reach an independent, correct conclusion irrespective of the determination made by the court below.

7. Statutes. Statutory language is to be given its plain and ordinary meaning.

8. Statutes: Words and Phrases. Technical words and phrases and such others as may have acquired a peculiar and appropriate meaning in the law shall be construed and understood according to such peculiar and appropriate meaning.

9. Taxation: Statutes: Judicial Construction. Statutes imposing a tax are strictly construed against the government and in favor of the taxpayer, while exemptions from taxation are to be strictly construed in favor of the government and not extended by judicial construction.

10. Federal Acts: Taxation. Income included in federal taxable income pursuant to 26 U.S.C. § 965 (2018) does not qualify for deduction as "dividends . . . deemed to be received" under Neb. Rev. Stat. § 77-2716(5) (Reissue 2018).

Appeal from the District Court for Lancaster County, Kevin R. McManaman, Judge. Affirmed.

Matthew R. Ottemann and Nicholas K. Niemann, of McGrath North Law Firm, Michael B. Kimberly, Stephen P. Kranz, and Abbey Bowe, of McDermott, Will &Emery, L.L.P., pro hac vice, and Kelly M. Klaus and Rachel G. Miller-Ziegler, of Munger, Tolles &Olson, L.L.P., pro hac vice, for appellant.

Michael T. Hilgers, Attorney General, Eric J. Hamilton, and Zachary B. Pohlman for appellees. Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, Papik, and Freudenberg, JJ.

Miller-Lerman, J.

NATURE OF CASE

In this appeal, taxpayer Precision Castparts Corp. (Precision Castparts) contends that the income, which represented retained earnings of its foreign subsidiaries that were included on its 2017 federal tax return based on federal law, should have been deducted from income on its Nebraska return as "dividends . . . deemed to be received" under Neb. Rev. Stat. § 77-2716(5) (Reissue 2018). In a declaratory order, the Tax Commissioner denied Precision Castparts' request to amend its 2017 Nebraska corporation income tax return to claim a deduction for income included on its federal tax return.

The district court for Lancaster County affirmed that order. Precision Castparts appeals the decision of the district court. Given the language of the Nebraska statute and the characterization of the income at issue by the U.S. Supreme Court, we affirm the order of the district court that affirmed the Commissioner's order denying Precision Castparts' efforts to claim the income as a deduction.

STATEMENT OF FACTS

In 2017, Congress enacted the Tax Cuts and Jobs Act (TCJA) which included, inter alia, an overhaul of federal taxation of U.S. corporations that earn international income. As part of this overhaul, the TCJA changed the taxation of the earnings of a controlled foreign corporation (CFC). Prior to 2017, active business income from a CFC's offshore businesses was not generally taxed by the United States when it was earned, and it was taxable only when the income was repatriated to the United States, generally through a distribution to U.S. shareholders. Certain foreign earnings of a CFC could be taxed through a provision of the federal tax code referred to as "Subpart F" and codified at 26 U.S.C. § 951 et seq. (2018). Under 26 U.S.C. § 951, U.S. shareholders who owned at least 10 percent of a CFC's voting stock could be taxed on a proportionate share of specified categories of undistributed earnings.

"The TCJA transformed U.S. corporate taxation from a worldwide system, where corporations were generally taxed regardless of where their profits were derived, toward a territorial system, where corporations are generally taxed only on their domestic source profits." Moore v. U.S., 36 F.4th 930, 933 (9th Cir. 2022), cert. granted __U.S. __, 143 S.Ct. 2656, 216 L.Ed.2d 1235 (2023). The TCJA "also modified CFC taxes going forward: effective January 1, 2018, a CFC's income taxable under Subpart F includes current earnings from its business." Moore, 36 F.4th at 933. "As part of this change, the TCJA created a new, one-time tax" codified at 26 U.S.C. § 965 (Section 965). Moore, 36 F.4th at 933. Section 965(a) generally provides that for the 2017 tax year, "the subpart F income of such foreign corporation (as otherwise determined for such taxable year under section 952) shall be increased by . . . the accumulated post-1986 deferred foreign income of such corporation."

Precision Castparts is a corporation based in Oregon that sells its products in Nebraska and is subject to income tax in Nebraska. Precision Castparts included income pursuant to Section 965 in its 2017 federal income tax return. Precision Castparts did not include Section 965 income in the taxable base in the original Nebraska corporation tax return it filed for 2017, but it amended the return in December 2021 to include it.

In March 2022, Precision Castparts filed a request with the Nebraska Department of Revenue seeking a declaratory order authorizing Precision Castparts to amend its 2017 Nebraska return to deduct Section 965 income from its taxable base pursuant to § 77-2716(5), which provides a deduction from taxable income for "dividends received or deemed to be received from corporations which are not subject to the Internal Revenue Code." After briefing and oral arguments, the Tax Commissioner filed a declaratory order on May 26, 2022, in which he denied the request on the basis that § 77-2716(5) did not apply to Section 965 inclusion income.

In the declaratory order, the Tax Commissioner reviewed relevant federal income tax law and determined that Section 965 income added to Subpart F income "does not meet the definition of dividend nor is it deemed a dividend in the [Internal Revenue Code] or related Treasury Regulations." The Tax Commissioner cited "Treas. Reg. [§] 1.902-1(a)(11)" and Rodriguez v. CIR, 722 F.3d 306 (5th Cir. 2013), to determine that federal tax law makes "a distinction between a deemed dividend and a deemed inclusion" and that the term "dividend" includes deemed dividends under certain provisions of the Internal Revenue Code but does not include deemed inclusions under other provisions, including the provision of 26 U.S.C. § 951(a) at issue. The Tax Commissioner concluded that Section 965 income was a "deemed inclusion" rather than a "deemed dividend" and that therefore, it was not deductible under § 77-2716(5) as "dividends . . . deemed to be received."

Precision Castparts petitioned the district court for Lancaster County for review of the Tax Commissioner's declaratory order. The district court affirmed the declaratory order. In its order, the district court noted that the Nebraska Legislature had not "legislated with respect to the one-time inclusion of foreign subsidiary earnings from 1986 into the 2017 federal tax base, and the special transition taxation of the same." The court therefore reviewed how Section 965 income should be treated under existing Nebraska tax statutes, including § 77-2716(5).

The district court stated that it was clear that Section 965 income was not a dividend under federal tax law because there had been no distribution. Turning to Nebraska law, the court considered whether Section 965 income qualified as "dividends . . . deemed to be received" under § 77-2716(5). The court reasoned that in order to be under this statutory language, "a legislative body with the power to do so must . . . 'deem' the 965 inclusion income a dividend for it to be treated as a 'deemed dividend,'" and that it was "not enough that Congress merely deem[ed] it as income received." The district court agreed with the Tax Commissioner's reasoning and its citation in the declaratory order to federal tax law that made a distinction between a deemed dividend and a deemed inclusion. The district court reasoned that "Congress knows how to say a certain inclusion income is to be considered and treated as a dividend even when it is not," and it agreed with the Tax Commissioner's conclusion that the Section 965 inclusions are income, "but they do not qualify as 'dividends . . . deemed to be received' under [§ 77-2716(5)]." The district court concluded that Precision Castparts had "failed to establish it is entitled to use the...