The New Jersey Tax Court determined that a New Jersey-based couple was not required to include Section 965 amounts in New Jersey income, as deemed repatriated dividends are not subject to the New Jersey Gross Income Tax (GIT), New Jersey’s personal income tax.
The taxpayers owned several interests in controlled foreign corporations (CFCs) and in accordance with Section 965, included nearly $17 million in income on their federal Form 1040, despite not receiving any portion of this amount in cash or property. For New Jersey purposes, however, the taxpayers did not report any portion of the Section 965 income that was included in their federal taxable income. The Division audited the taxpayers, assessing a nearly $2.1 million deficiency.
The taxpayers appealed the deficiency directly to the New Jersey Tax Court, arguing that Section 965 income is not a specified category of taxable income under the GIT Act. The taxpayers further asserted that because Section 965 income is not dividend income, it cannot be considered a “deemed” dividend. In contrast, the Division asserted that Section 965 income is considered a deemed dividend at the federal level, and as such, should be taxable under the GIT Act.
The court ruled in favor of the taxpayers, noting that Federal taxable income is not used as the starting point for computing a taxpayer’s New Jersey GIT. Instead, when the state legislature enacted the GIT, it made a conscious decision not to incorporate the federal income tax model of including income from all sources and chose instead to limit income to specific categories. The GIT includes “dividends” as a specific category of income to be included in income, and defines a “dividend” to include only “distributions” in cash or kind. N.J.S.A. 54A:5-1(f). Because the amounts required to be recognized under section 965 did not represent actual distributions of cash or property, the court determined that they were not “dividends” and that the taxpayers were therefore not required to include Section 965 income in their New Jersey income. The court also rejected the Division’s alternative argument that the amounts should be treated as “deemed” dividends, pointing out that the definition of “dividend” in section 54A:5-1(f) does not embrace “deemed” payments, in marked contrast to other provisions of the GIT.
Amin v. Director, Div of Tax., Docket No. 007430-2022 (N.J. Tax Ct. December 31, 2024).