Briefing Completed in PPL

July 7, 2011 by  
Filed under International, PPL

[Note:  Miller & Chevalier represents amicus curiae American Electric Power Co. in this case.]

The PPL case is now fully briefed in the Third Circuit and ready for oral argument, which has been tentatively scheduled for September 22.  PPL’s response brief addresses in detail the considerable evidence presented to the Tax Court regarding the operation and effect of the U.K. windfall tax, arguing that the evidence conclusively shows that the tax operated like a typical U.S. excess profits tax and therefore should qualify for a foreign tax credit.  Amerian Electric Power Co. filed an amicus curiae brief in support of PPL that focuses primarily on discussing the precedents that call for courts to consider the kind of extrinsic evidence introduced by PPL.  The government’s reply brief, like the one it filed in the companion Entergy case (see here), backs away from its previous argument that the court cannot ever consider extrinsic evidence.  The government maintains, however, that PPL’s evidence was not probative and that the Tax Court should have denied creditability because the UK windfall tax describes the tax as being on “value.”

PPL – Taxpayer’s Response Brief

PPL – Amicus Brief for AEP

PPL – Government’s Reply Brief

Briefing Completed in Entergy

June 14, 2011 by  
Filed under Entergy, International

The government has filed its reply brief in the Fifth Circuit in Entergy.  (See our initial report on the case here.)  The reply brief puts forth a somewhat less disapproving attitude towards the examination of extrinsic evidence in foreign tax credit cases than previously advanced, stating as follows:  “The Commissioner does not contend (as he did below) that extrinsic evidence has no relevance in determining creditability under Treas. Reg. § 1.901-2(b).  Rather, our argument is that it was improper for the Tax Court to supplant an analysis of the windfall-tax statute with an analysis of extrinsic evidence.”

The bottom line, however, is the same.  The government maintains that the text of the U.K. Windfall Tax statute, by describing the tax using the term “value,” conclusively establishes that the tax is not an “income” tax in the U.S. sense and therefore is not creditable.

The case will now await an order from the Fifth Circuit setting a date for the oral argument, which is likely a few months away.

Entergy – Government’s Reply Brief

Government Brief Filed in PPL

May 23, 2011 by  
Filed under International, PPL

The government has filed its brief in the Third Circuit in PPL.  The brief is virtually identical to the brief filed a few weeks ago in the Fifth Circuit in Entergy that addresses the same issue of the creditability of the U.K. Windfall Tax under Code section 901.  See our initial report here.  The only significant differences are addressing PPL’s facts instead of Entergy’s and placing more weight on Third Circuit precedent instead of Fifth Circuit precedent.  The essence of the government’s argument is that the section 901 determination should be based entirely on the text of the foreign statute, and therefore the Tax Court erred in considering extrinsic evidence of how the tax operates.  Because the U.K. statute uses the term “profit-making value,” the government says that it is a tax on “value,” not an “income” tax, and therefore it should not be creditable.

PPL’s brief is due June 9.

PPL – Government’s Opening Brief

Taxpayer Brief Filed in Entergy

May 13, 2011 by  
Filed under Entergy, International

The taxpayer has filed its answering brief in Entergy defending the Tax Court’s decision that the U.K. windfall tax is a creditable tax for purposes of the foreign tax credit under Code section 901.  See our original report here.  According to the taxpayer, the essence of the government’s argument is that “the creditability of a foreign tax can be determined only by the literal text of the foreign tax statute, and that the consideration of any other evidence is legal error.”  This position, the taxpayer argues, is rebutted by “overwhelming authority establishing that the predominant character of a foreign tax is measured by its intent and effect,” which requires resort to evidence beyond the text of the foreign statute. 

The taxpayer also argues that the government has mischaracterized the Tax Court’s decision in stating that the court ignored the three-part regulatory test for creditability.  Instead, the Tax Court correctly heard evidence of the intent and effect of the U.K. tax to determine its predominant character — namely, a tax on excess profits — and then applied the three-part test to that predominant character.

The government’s reply brief is due May 31.

Entergy – Taxpayer’s Answering Brief

Government Opening Brief Filed in Entergy

April 14, 2011 by  
Filed under Entergy, International

The government has filed its opening brief in the Fifth Circuit in Entergy, seeking reversal of the Tax Court’s holding that the U.K. windfall tax is a “creditable” tax for purposes of the U.S. foreign tax credit.  See our previous report here.  The government argues that the Tax Court misapplied a three-part test set forth in the regulations for determining whether a foreign tax is creditable.  That test assesses whether the foreign tax has the “predominant character” of an income tax by examining whether it satisfies each of three requirements — relating to “realization,” “gross receipts,” and “net income.”  According to the government, the U.K. windfall tax did not meet any of the three requirements because the tax was imposed on “value,” not realized “income,” and because gross receipts and expenses were not “components of the tax base.”  The brief goes on to criticize the Tax Court for investigating the legislative purpose of the tax, rather than restricting its inquiry to the text of the statute.

The taxpayer’s brief is due May 16.

Entergy- Government’s Opening Brief

Briefing Schedules Line Up on UK Tax Creditability Issue

March 3, 2011 by  
Filed under Entergy, International, PPL

The Third Circuit has now issued a briefing schedule in the PPL case that makes the government’s opening brief due on April 5.  This schedule should have the case marching along in fairly close parallel with Entergy, the companion case presenting the same UK tax creditability issue to the Fifth Circuit.  (See our previous post here.)  In Entergy, the government recently requested an extension to file its opening brief.  The court granted an extension, but for less time than requested.  The brief is now due April 13, after a 30-day extension.   That date will likely hold, since the court has already cut back an unopposed extension request.  In PPL, by contrast, it is quite possible that the government will get some additional time.

Two Circuits to Consider Creditability of U.K. Windfall Tax

February 8, 2011 by  
Filed under Entergy, International, PPL

We present here a guest post from our colleague Kevin Kenworthy, who has considerable experience representing taxpayers on the issue of creditable foreign taxes.

The Tax Court’s two companion decisions in PPL Corp. v. Commissioner, 135 T.C. No. 8 (Sept. 9, 2010) and Entergy v. Commissioner, T.C. Memo 2010-166 (Sept. 9, 2010), raise an important question  concerning whether a 1997 Windfall Tax imposed by the U.K. government on previously privatized industries is a creditable income tax under U.S. rules.  The cases were tried separately before Judge Halpern and addressed in companion opinions issued simultaneously that ruled for the taxpayer (with the analysis contained in the PPL opinion).  The opinions are linked below.  The government has now appealed these cases to the Third and Fifth Circuits respectively.  (The Tax Court cases, in opinions issued a few weeks earlier, also addressed an issue concerning the appropriate recovery period for depreciation of an electric utility’s lighting assets, but it appears at this point that the government does not plan to contest that issue on appeal.)

Under section 901 of the Code and related provisions, a U.S. taxpayer can elect to credit, rather than deduct, qualifying income taxes paid to a foreign country.  Only income taxes are eligible for this credit; non-income taxes can only be deducted in computing taxable income.  In determining whether a foreign tax is creditable, the ultimate inquiry is whether the levy is an income tax in the U.S. sense of the term.  The governing regulations provide a specific framework for assessing whether a foreign tax meets this test, including requirements that the foreign tax meet a three-part test aimed at determining whether the tax will reach net gain in the ordinary circumstances in which it applies.  Treas. Reg. §  1.901-2.

The U.K. Windfall Tax is an unconventional levy in some respects, resulting in part from its unique origins in British politics.  In the early 1990s, Conservative governments continued a policy of privatizing what had previously been government-owned monopolies, including regional electricity companies, through a series of public stock offerings.  The privatizations were anathema to traditional Labour Party tenets.  Moreover, the newly privatized entities, although they continued to be subject to price regulation, proved to be quite profitable in the years following privatization.  In 1997, the new Labour government announced a tax aimed at “windfall profits” previously realized by the formerly government-owned enterprises.  The tax was justified by assertions that windfall profits resulted from the prior government’s decision to sell off the companies at too low a price, compounded by its failure to subject the privatized companies to adequate regulation.

The Windfall Tax was designed as a one-time, retrospective tax imposed on the privatized utilities.  The new tax was imposed on the basis of a unique formula that started with the average book profits of these enterprises over the first four years following privatization multiplied by nine, an amount characterized by the statute as the “value in profit-making terms.”  Tax at a rate of 23% was then imposed on the excess of this artificial earnings multiple over the initial market capitalization (the “flotation value”) of the shares.  The tax was imposed on the companies directly, rather than on the initial private shareholders, many of whom had long ago sold their shares.

The taxpayers argued that the creditability of the Windfall Tax could be established by examining the actual operation and effect of the tax.  The taxpayers showed that the statutory formula could be restated algebraically to reveal that the Windfall Tax operated in almost all cases equivalently to a tax imposed at a rate of roughly 50% on profits realized over a four-year period.  Based in large part on this equivalence, the taxpayers argued that the Windfall Tax was essentially an income tax and satisfied the regulatory test for creditability.  The IRS countered that the creditability of the Windfall Tax could be evaluated only by reference to the statutory language and that resort to extrinsic evidence of the type offered by the taxpayers was inappropriate.  Further, the IRS argued that the statute’s apparent reference to valuation principles, rather than to conventional measures of net income, leads to the conclusion that the Windfall Tax is not creditable.  Drawing ample support from the regulations themselves and from prior court decisions, the Tax Court refused to limit the creditability inquiry in this manner and found the Windfall Tax to be creditable.

The government’s opening brief in Entergy is due March 14, 2011.  No briefing schedule has yet been established in PPL.

Tax Court Decision in PPL 

Tax Court Decision in Entergy

« Previous Page