A recent decision by the New Jersey Tax Court has significant implications for taxpayers with controlled foreign corporations (CFCs). In Amin v. Division of Taxation (N.J. Tax Ct., Dkt. No. 007430-2022, Dec. 31, 2024), the court ruled that deemed distributions of earnings and profits from CFCs, as required under Internal Revenue Code (IRC) § 965, are not considered taxable dividends for New Jersey gross income tax purposes.
Background: IRC § 965 and the Tax Cuts and Jobs Act
IRC § 965, introduced by the Tax Cuts and Jobs Act of 2017, mandates that certain accumulated earnings and profits of CFCs be treated as deemed dividends for federal tax purposes. This provision aimed to repatriate previously untaxed offshore earnings, taxing them as if distributed to U.S. shareholders.
For federal purposes, this reclassification has tax implications, as these deemed dividends are included in a taxpayer’s income. However, New Jersey’s gross income tax statutes diverge from federal tax law in their treatment of dividends.
Key Statutory Interpretation: N.J. Rev. Stat. § 54A:5-14
Under New Jersey law, dividends are defined as “any distribution in cash or property made by a corporation or treated as a corporation that is not an S corporation of accumulated earned and profits or earnings and profits in the year in which the dividend is paid.” This definition emphasizes actual, tangible distributions, such as cash or property.
The Tax Court determined that since deemed distributions under IRC § 965 do not involve the actual transfer of cash or property, they do not meet New Jersey’s statutory definition of dividends. Furthermore, the court found that such deemed distributions do not fall within any other taxable income categories under New Jersey law.
Implications of the Ruling
This decision provides clarity for taxpayers who faced the potential of double taxation—first at the federal level and again under New Jersey’s gross income tax. By ruling that deemed distributions under IRC § 965 are not taxable as dividends in New Jersey, the court alleviates this concern for affected taxpayers.
The case also underscores the importance of understanding the nuanced differences between federal and state tax systems, particularly for individuals with complex international tax structures.
Moving Forward
Taxpayers with CFCs should review their past New Jersey gross income tax filings to assess whether they included deemed dividends under IRC § 965. If so, the Amin decision could provide a basis for amending prior returns to seek refunds for taxes paid on amounts that are now determined to be non-taxable.
For advice tailored to your specific circumstances, consult with a tax professional familiar with New Jersey tax law and international tax issues.
For more information, please contact Martin D. Hauptman at (973) 243-7912 or via email at mhauptman@mblawfirm.com