665 F.3d 60
3rd Cir.2011Background
- PPL Corporation held 25% of SWEB (UK utility) in 1997 and paid a one-time windfall tax abroad.
- SWEB’s windfall tax was designed as a 23% levy on the excess profits arising from privatization.
- PPL claimed a foreign tax credit under §901 for its share of SWEB’s windfall tax.
- IRS denied the credit; Tax Court held in favor of PPL that the windfall tax could be creditable.
- Court reviews whether the windfall tax is an income tax under Treas. Reg. 1.901-2 and whether it satisfies its three requirements (realization, gross receipts, net income).
- Court reverses Tax Court, holds windfall tax is not creditable under §901.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the windfall tax qualifies as a creditable tax under §901(b)(1). | PPL contends substance over form shows excess profits tax. | Commissioner argues regulation treats it as an income tax under 1.901-2. | Not creditable; windfall tax fails §901(b)(1) criteria. |
| Whether the windfall tax base satisfies the gross receipts requirement of the regulation. | Substance over form shows base tied to profits, not gross receipts. | Tax base includes gross receipts-like amount and expenses; complies with regulation only if tied to receipts. | Fails gross receipts requirement. |
| Whether realization and net income requirements are satisfied given the tax base and flotation adjustment. | If treated as 23% of 2.25×P, realization on initial-period profit is met. | Base includes FV and D; not realized as income; cannot be redefined by rate manipulation. | Realization and net income requirements not satisfied; tax not creditable. |
Key Cases Cited
- Phillips Petroleum Co. v. Comm'r, 104 T.C. 256 (1995) (discusses §901(b)(1) and regulatory interpretation)
- Bank of Am. Nat'l Trust & Sav. Ass'n v. Comm'r, 61 T.C. 752 (1974) (early treatment of 901 b(1) interpretation)
- Texasgulf, Inc. v. Comm'r, 172 F.3d 209 (2d Cir. 1999) (treatment of 901(b)(1) with regulation-based test)
- Amoco Corp. v. Comm'r, 138 F.3d 1139 (7th Cir. 1998) (application of 1.901-2 to creditability)
- Inland Steel Co. v. United States, 677 F.2d 72 (Ct.Cl.1982) (pre-regulation approach to §901; contrasted in circuit split)
- Eisner v. Macomber, 252 U.S. 189 (1920) (realization requirement conceptually linked to income realization)