Corporate Close-Up: Does Utah Have an I.R.C. § 965 Deemed Repatriation Problem?


On March 21, 2018, Utah Gov. Gary Herbert (R) signed S.B. 244, enacting Utah Code Ann. § 59-7-118. The new code section allows corporate taxpayers making I.R.C. § 965(h) installment payments on their federal deemed repatriated dividend liabilities to set up an identical installment plan for I.R.C. § 965 income apportioned to Utah. The bill gives corporate taxpayers guidance on how to pay tax on apportionable deemed repatriated income in the state of Utah, but it may also leave taxpayers wondering on what basis Utah envisions corporate taxpayers will allocate that income to Utah in the first place.

In Utah, the starting point for determining a corporation’s taxable base is a corporation’s federal taxable income before the net operating loss deduction and special deductions; taxpayers familiar with the U.S. corporate income tax return turn to federal Form 1120, line 28 for that information. Line 28 includes dividends reported from Schedule C (line 4 of 1120) and other income (line 10 of 1120). However, IRS reporting instructions outlined in the publication “Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns” specify that the total deferred foreign dividend income under I.R.C. § 965(a) should be excluded from Form 1120. Further adding fuel to the repatriation fire, the IRS also instructs filers to exclude all I.R.C. § 965 deductions from Form 1120 and requests that filers only include their computation of the total I.R.C. § 965 net tax liability in their total tax calculation on line 31. The I.R.C. § 965 income amounts are reported on federal filers’ “I.R.C. 965 Transition Tax Statement,” excluded from the federal filers’ Form 1120 base. This creates a question as to what mechanism Utah is using to collect corporate income tax on repatriated foreign dividend income that does not appear in a Utah filer's base calculations. 

The 2017 tax act creates more questions for state revenue departments and corporate compliance experts than appear to have answers. However, in Utah’s case it is clear the Legislature envisioned deemed repatriated foreign dividends as an additional source of income, but it’s not clear if the mechanics of Utah’s tax regime allow the state to collect tax on that income. Whether Utah enacts additional legislation, releases additional guidance, or taxpayers file future litigation regarding § 965 repatriated dividends remains to be seen.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How should Utah respond to questions about taxable base calculations excluding foreign sourced income?

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.

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