20 May 2013

Law in Plain English: PPL Corp. and Subsidiaries v. Commissioner of Internal Revenue

This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

PPL Corp. and Subsidiaries v. Commissioner of Internal Revenue

One of PPL's British subsidiaries was subject to a one-time windfall tax in the United Kingdom. When PPL paid the tax, it claimed a foreign tax credit pursuant to section 901(b)(1) of the Internal Revenue Code, which applies to "income, war profits, and excess profits." The Tax Court found for PPL, but the Third Circuit reversed. The question before the Court was whether, in determining the creditability of the foreign windfall tax, courts should employ a formalistic approach that looks solely at the form of the foreign tax statute and ignores how the tax actually operates, or should employ a substance-based approach that considers factors such as the practical operation and intended effect of the foreign tax. In a unanimous decision, the Supreme Court ruled that the UK tax was creditable under section 901 because its "predominant character" was that of an excess profits tax. As a result, PPL (and other companies similarly situated) can take advantage of the foreign tax credit. The practical impact of this decision is that in determining the creditability of the foreign taxes, courts should look not to the way a foreign government characterizes its tax but how the tax would appear if it was enacted in the United States.
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