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In a win for a New Jersey couple, the New Jersey Tax Court concluded 2024 with a declaration that the couple’s Internal Revue Code (IRC) Section 965 income is not taxable as dividends for purposes of the New Jersey Gross Income Tax (GIT) Act.[1] On December 31, 2024, in a published opinion, the court granted the taxpayer’s summary judgment motion and held that the taxpayers’ undistributed earnings from certain controlled foreign corporations (CFCs), which were reported on their federal Form 1040 as Subpart F income, were not includible as dividends under the plain meaning of N.J.S.A. § 54A:5-1(f).

Amin v. Director involved New Jersey residents who held interests in several CFCs. For tax year 2017, the taxpayers filed a joint federal income tax return and reported their share of post-1986 accumulated income earned by the various CFCs as Subpart F income, as required under Section 965 of the Federal Tax Cuts and Jobs Act (TCJA). The taxpayers did not actually receive, in either cash or property, any portion of the amount earned by the CFCs. Rather, as part of the one-time tax imposed under Section 965, the taxpayers’ pro rata share of the accumulated earnings and profits of the CFCs was deemed repatriated dividends and included in income for federal income tax purposes for 2017.

On their New Jersey GIT return, the taxpayers did not report any portion of this undistributed income. The New Jersey Division of Taxation (Division) audited the taxpayers and adjusted their reported income to include the Section 965 income as dividends. Consistent with its guidance, which was issued in response to the enactment of Section 965, the Division asserted that the deemed repatriation dividends should have been included in New Jersey gross income in the same tax year and in the same amount as reported for federal purposes because dividends are an enumerated category of income for GIT purposes. The Division assessed a GIT deficiency of over $2.1 million, inclusive of interest and penalties.

On appeal to the court, the taxpayers argued that Section 965 income is not an enumerated category of income and is not dividend income and, therefore, cannot be deemed dividend income. Further, the Division’s inclusion of deemed dividends as a subcategory of dividend income constituted invalid rulemaking. In response, the Division maintained that the repatriated income was deemed dividend income for federal income tax purposes and, thus, taxable under the GIT Act. Additionally, the Division asserted that its published guidance on the application of Section 965 obviates the need for formal rulemaking since Section 965 was a new law that imposed a new one-time tax therefore time was of the essence.[2]

In rejecting the Division’s position that the undistributed earnings were dividends, the court recognized that dividends are a specified category of income for purposes of the GIT. However, the plain language of the statute requires a “distribution” in cash or property from current or accumulated earnings and profits in order to be considered a dividend.  Specifically, the GIT Act defines dividends as “any distribution in cash or property made by a corporation . . . (1) out of accumulated earnings and profits, or (2) out of earnings and profits of the year in which such dividend is paid . . . .”[3] Since the taxpayers in Amin did not receive any amount (either in cash or in kind), nor any economic benefit (whether actually or constructively) from the CFCs, no distribution occurred. Even though the taxpayers’ Section 965 income was deemed repatriated dividends for federal purposes, the court reasoned that this did not change the fact that they did not receive any amounts from the CFCs. Because the definition of “dividends” is unambiguous under the GIT, the court was restrained from expanding the definition to include Section 965 deemed repatriation dividend. Moreover, the court reasoned that “deemed” income is not a foreign concept under the GIT Act and had the legislature intended to include undistributed corporate earnings and profits as taxable dividends, it would have done so.

Although the Section 965 deemed dividends are not includable as dividends, the court also noted that once a distribution is made, the taxpayers should report this income.

Similar to New Jersey, dividends are taxable for purposes of the Pennsylvania Personal Income Tax (PIT) and is similarly defined as any distribution in cash or property made by a corporation out of current or accumulated earnings and profits.[4] In the wake of the passage of the TCJA, Pennsylvania also issued guidance on the treatment of Section 965 income under the PIT.[5] Unlike New Jersey, however, Pennsylvania recognizes that, although the federal one-time deemed repatriation tax is imposed even though no actual distribution of cash or property out of earnings and profits occurs, the deemed dividend is not a dividend for PIT purposes because it does not involve an actual distribution of cash. However, if and when an actual distribution of cash out of earnings and profits is made, the distribution will be subject to PIT as a dividend.

[1] Amin v. Director, Division of Taxation, Dkt. No. 007430-2022 (Tax 2024).

[2] See https://www.nj.gov/treasury/taxation/section965.shtml (last updated 04/24/2020).

[3] See N.J.S.A. § 54A:5-1(f).

[4] See 72 P.S. § 7301(f).

[5] See Information Notice Corporation Taxes and Personal Income Tax, 2018-1: Tax Cuts and Jobs Act of 2017 (Apr. 20, 2018).