Keywords: tax credit, income, war-profits, IRS regulations
Section 901 of the Internal Revenue Code, 26 U.S.C. § 901, allows United States corporations a tax credit for any "income, war profits, or excess profits" tax paid to another country. IRS regulations provide that a foreign tax assessment qualifies as a tax on "income, war profits or excess profits" for purposes of Section 901 if the tax is, among other things, imposed on gross receipts or an amount not greater than gross receipts, less the costs and expenses incurred in earning those receipts. Treas. Reg. § 1.902-2 (b)(3) & (4). Today, the Supreme Court granted certiorari in PPL Corporation & Subsidiaries v. Commissioner of Internal Revenue, No. 12-43, to resolve a circuit split about whether courts assessing the creditability of a foreign tax should focus solely on the form of the foreign tax statute or should instead also consider the practical operation and intended effect of the foreign tax.
This issue is important to the business community because its determination will directly affect United States corporations' ability to receive credit for income taxes paid in foreign countries.
Petitioner PPL Corporation claimed a tax credit under Section 901 for a tax known as a "windfall tax" that its subsidiary, South Western Electricity plc, paid in the United Kingdom. Nominally, the amount of the U.K.'s windfall tax is derived by comparing the value of a company at the time of its privatization in the U.K. to its value at the end of the four-year period following privatization. The latter figure, however, is based on a formula that uses the company's actual realized profits during the four years immediately following privatization. The Internal Revenue Service disallowed the credit that PLL claimed, on the ground that the U.K. windfall tax is not one of the three kinds of taxes for which a credit is available under Section 901. PPL petitioned the Tax Court for review, arguing that the windfall tax, in substance, operates as a tax on income. The Tax Court agreed with PPL that the windfall tax should be considered a creditable foreign tax because "the design and incidence of the tax ... is that of a tax on excess profits." 135 T.C. 304. On the same day, the Tax Court issued an opinion in a materially identical case, relying on its PPL opinion to hold Entergy Corporation's windfall-tax payment creditable under Section 901 as well. See Entergy Corp. v. Comm'r, 100 T.C.M. (CCH) 202 (2010).
The Third Circuit reversed the Tax Court's PPL decision, holding that the windfall tax is not a tax on "income, war profits, or excess profits," as required by Section 901, because the formula used to determine the amount of tax owed takes into consideration an amount greater than "gross receipts," in violation of Treasury Regulation § 1.902-2, and therefore that PPL was not entitled to a credit under Section 901. 665 F.3d 60. Shortly thereafter, the Fifth Circuit took an opposite approach in the Entergy Corp. case, holding that the windfall tax in substance is one on profits, and is therefore properly creditable under Section 901. 683 F.3d 233. In doing so, the Fifth Circuit rejected the Third Circuit's reasoning as "exemplify[ying] the form-over-substance methodology" renounced in the governing tax law and legal precedent. Id. at 237.
Barring extensions of time, amicus briefs in support of petitioner are due on November 28, 2012, and amicus briefs in support of respondent are due on December 28, 2012.
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Earlier this month and today, the Supreme Court invited the Solicitor General to file briefs expressing the views of the United States in the following cases of interest to the business community:
Lawson v. FMR, LLC, No.12-3: The question presented is whether Section 806 of the Sarbanes-Oxley Act of 2002, which provides protection to whistleblowers, applies only to employees of publicly traded companies. Mayer Brown LLP is co-counsel for the respondents in this case.
Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., No. 11-1507: The questions presented are (1) whether disparate impact claims are cognizable under the Fair Housing Act and (2) whether, if such claims are cognizable, they should be analyzed under a burden shifting approach, a balancing test, a hybrid approach, or some other test.
Originally published October 29, 2012
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