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June 05, 2014 The Tax Lawyer

Unasked and Unanswered in PPL Corp. v. Commissioner: Why Limit the Foreign Tax Credit to Income Taxes?

Volume 67, No. 3 - Spring 2014

Andrew Walker


    U.S. taxpayers are generally allowed to credit against their U.S. income tax liability foreign taxes on the same income but only if the foreign tax is an “income” tax.  On May 20, 2013, the Supreme Court decided PPL Corporation v. Commissioner (“PPL Corp.”), 569 U.S. __ (2013), rev’g 665 F.3d. 60 (3d Cir. 2011), rev’g 135 T.C. 304 (2010), a case addressing whether the United Kingdom’s windfall profits tax (the “Windfall Tax”) is a creditable “income” tax.  The Windfall Tax was a one-time, retrospective tax imposed to recoup what were viewed as excessive returns enjoyed by private shareholders when various public utilities were privatized due to under-pricing of the utilities’ shares in their initial public offerings and under-regulation of the utilities following privatization.  The Windfall Tax was not imposed explicitly upon net income, but on a tax base equal to the excess of (1) the utility’s “value in profit making terms,” a notional value that was a multiple of the average annual financial accounting profits of the utility based on the four year period immediately following its privatization over (2) the company’s “flotation value” (i.e., the share price at which the utility was first offered to the public.)

    The Supreme Court held that the Windfall Tax was a creditable “income” tax, resolving a split between the Third Circuit which, reversing the Tax Court in PPL Corp, held that the Windfall Tax is not a creditable “income” tax and the Fifth Circuit which in a companion case, Entergy Corp. v. Commissioner (“Entergy Corp.”), 683 F.3d. 233 (5th Cir. 2012), aff’g 100 T.C.M. 202 (2010), had upheld a Tax Court decision that the Windfall Tax is a creditable income tax. 

    This Article analyzes the court decision but focuses primarily on key question, ignored during the court proceedings and in the Supreme Court decision, which has received scant attention more from commentators and in the academic literature.  Why, as a tax policy matter, should the foreign tax credit be limited to “income” taxes in the first instance, and what guidance can the answer to that question provide in future cases addressing foreign taxes that stretch the concept of an “income tax”?   Taking as given that the tax system allows a credit for foreign taxes,this Article comprehensively analyzes for the first time the tax policy advantages and disadvantages of the income tax limitation, considering the equitable and efficiency rationales for the foreign tax credit, the history of the limitation, international comity considerations and the practical concerns faced by the IRS in administering the foreign tax credit regime.

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