Briefing Complete in PPL

February 13, 2013 by  
Filed under International, PPL, Supreme Court

[Note:  Miller & Chevalier filed an amicus brief in this case on behalf of American Electric Power Co. in support of PPL.]

PPL has filed its reply brief in the Supreme Court, thus completing the briefing.  The brief responds at length to the government’s contention that the U.K. Windfall Tax should be viewed as a tax on value because it assertedly resembles “familiar” and “well-established” methods of measuring value.  In fact, the reply brief maintains, the tax “is a tax on value in name only.”  The reply brief observes that the tax involves “a backward-looking calculation driven entirely by actual, realized profits” and that it is “imposed on the income-generating companies themselves,” rather than on “the holder of the valuable asset.”  The reply brief then states that the rest of the government’s arguments “all depend on the flawed premise that form trumps substance when it comes to the base of a foreign tax.”  The difficulties with that premise were addressed extensively in PPL’s opening brief and are further addressed in the reply brief.

Oral argument is set for February 20.

PPL – Taxpayer’s Supreme Court Reply Brief

 

Amicus Brief Filed in Support of the Government in PPL

February 3, 2013 by  
Filed under International, PPL, Supreme Court

[Note:  Miller & Chevalier filed amicus briefs in this case on behalf of American Electric Power Co. in support of PPL in both the Third Circuit and the Supreme Court.]

A group of legal academics, led by Professor Michael Graetz of Columbia who authored the brief, has filed an amicus brief in PPL in support of the government.  The brief argues that the UK tax should be treated as a tax on value, in line with the labels attached to it by Parliament, because it “was designed to redress both undervaluation at privatization . . . and subsequent lax regulation.”  Maintaining that adopting PPL’s position “would open the door to claims of foreign tax credits for foreign levies based on value, not income,” the brief advances a somewhat creative policy rationale for affirming the Third Circuit that goes beyond anything argued by the government.  Taking a perhaps unduly optimistic view of the political process, the brief claims that a reversal by the Supreme Court “would provide a road map to foreign governments, encouraging them to shift the costs of privatization to U.S. taxpayers by initially undervaluing public assets and companies sold to private interests and subsequently imposing a retroactive levy to compensate for the previous undervaluation.”

Although he has spent most of his career in academia (serving stints at Treasury from 1969-72 and 1990-92), Professor Graetz is not without Supreme Court experience.  He briefed and argued Hernandez v. Commissioner, 490 U.S 680 (1989) on behalf of the taxpayer, arguing (unsuccessfully) for the position that adherents of the Church of Scientology were entitled to a charitable contribution deduction for payments made to the Church for “auditing” and “training” services.

Also linked below is the amicus brief filed by Patrick Smith, et al., which was noted in an earlier post, but was not available in an electronic version at the time.

PPL – Supreme Court Amicus Brief of Law Professors in Support of the Government

PPL – Supreme Court Amicus Brief of Patrick Smith, et al. in Support of PPL

Government Brief Filed in PPL

January 15, 2013 by  
Filed under International, PPL, Supreme Court

[Note:  Miller & Chevalier filed amicus briefs in this case on behalf of American Electric Power Co. in support of PPL in both the Third Circuit and the Supreme Court.]

The government has filed its response brief in the Supreme Court in PPL.  The arguments in the brief do not closely track the analysis of the Third Circuit’s opinion.  Indeed, the government pointedly distances itself from the Third Circuit’s heavy reliance on Treas. Reg. § 1.901-2(b)(3)(ii), Ex. 3.  The Third Circuit had suggested that PPL’s position was foreclosed by Example 3, but the government’s Supreme Court brief suggests only that the example provides a “useful analogy,” while acknowledging that “the example is not directly applicable because it analyzes imputed gross receipts rather than actual gross receipts.”  [See our prior observations on Example 3 here.]

Instead, the government’s brief asks the Supreme Court to accept the characterization of the U.K. Windfall Tax as “a tax on value,” rather than an income tax.  According to the government, “[t]hat is so both because the U.K. government wrote it as a tax on value and because a company’s windfall tax liability is determined pursuant to a method of valuing property that is familiar to U.S. tax law,” where “it is common to calculate the value of property by taking into account the property’s ability to generate income.”  The brief stops short of declaring that the label attached to the tax by Parliament is “determinative,” but asserts that “the ‘labels’ and ‘form’ that a foreign government uses to formulate a tax are relevant.”

PPL’s reply brief is due February 13, with oral argument scheduled for February 20.

PPL- Supreme Court Brief for the Commissioner

Supreme Court Briefing Underway in PPL

January 4, 2013 by  
Filed under International, PPL, Supreme Court

[Note:  Miller & Chevalier filed amicus briefs in this case on behalf of American Electric Power Co. in both the Third Circuit and the Supreme Court.]

The taxpayer has filed its opening brief in the Supreme Court in PPL Corp. v. Commissioner, No. 12-43, a foreign tax credit case that we have covered extensively on its journey to the Court.  PPL’s brief heavily criticizes the formalism of the government’s position, stating that “the Commissioner would have the labels and form a foreign country employs, and not the substance of the tax it imposes, determine how the tax should be treated for purposes of U.S. tax law.”  Once that formalistic approach is rejected, PPL argues, this becomes an “easy case” because “[t]here is no real dispute that the U.K. windfall tax is, in substance, an excess profits tax in the U.S. sense.”

Two other companies with current disputes regarding the creditability of the U.K windfall tax — Entergy Corp. and American Electric Power Co. — filed amicus briefs in support of PPL.  The Entergy brief contains a detailed description of how the U.K. windfall tax came to be enacted in its particular form, and it states that the Third Circuit decision “disregards the real operation of the tax at issue.”  The AEP brief contains a detailed description of the prior administrative treatment of excess profits taxes and argues that the operation and effect of the U.K. windfall tax is akin to that of a traditional U.S. excess profits tax that has always been regarded as creditable.

Another amicus brief was filed by the Southeastern Legal Foundation, the Chamber of Commerce, the Cato Institute, and the Goldwater Institute.  That brief criticizes the government’s position as “opportunistic and inconsistent with the government’s usual emphasis on substance over form.”  Patrick Smith also filed an amicus brief focusing on the operation of the regulations.

The government’s brief in response is due January 14.  Oral argument has been scheduled for February 20.

PPL – Supreme Court opening brief for PPL

PPL – Supreme Court Amicus Brief of American Electric Power Co.

PPL – Supreme Court Entergy Amicus Brief

PPL – Supreme Court Amicus Brief of Southeastern Legal Foundation, et al.

Opening Briefs Filed in Rodriguez

November 21, 2012 by  
Filed under International, Rodriguez

The parties have now filed their opening briefs in the Fifth Circuit in Rodriguez, an appeal from the Tax Court’s decision that section 951 inclusion income is not to be taxed at the lower rate applicable to qualified dividends.  See our prior report here.

As they argued in the Tax Court, the taxpayers emphasize a policy argument, stating that “Subpart F’s general purpose and mechanics should govern” and “Subpart F treats the amount included in the U.S. shareholder’s gross income essentially like a dividend.”  The taxpayer also invokes substance vs. form principles and statements in the legislative history of Subpart F characterizing section 951 inclusions as deemed dividends.  The taxpayers also point to GCMs, private letter rulings, and Internal Revenue Manual sections that support deemed dividend treatment.

The government’s response, like the Tax Court, focuses mostly on the text of the Code.  It argues that the section 951 inclusion income is not literally a dividend; that the Code decrees that it should be treated as a dividend for other purposes but makes no such provision concerning the qualified dividend tax rate; and that there are some contexts in which section 951 inclusion income is not treated as a dividend, such as the earnings and profits calculation.

With respect to policy, the government asserts that the policy underlying enactment of the favorable tax rate for qualified dividends was to provide “an incentive for corporations to distribute their earnings to shareholders instead of retaining them.”  Accordingly, the government argues, it does not advance that policy to provide the preferential tax rate in a situation where the corporation did not distribute the earnings.

Finally, the government urges the court to ignore the taxpayers’ argument that the IRS had previously treated section 951 inclusions as dividends in prior pronouncements.  It states that those pronouncements did not specifically address the preferential tax rate question at issue here and that they are not the kind of IRS pronouncements that can be cited as authoritative precedent.  In any event, the government states, the Commissioner “may change an erroneous administrative interpretation if he determines that such a position is incorrect.”

Rodriguez – Taxpayers’ Opening Brief

Rodriguez – Government’s Response Brief

 

Supreme Court Agrees to Hear Foreign Tax Credit Issue in PPL

October 29, 2012 by  
Filed under Entergy, International, PPL, Supreme Court

The Supreme Court this morning granted PPL’s petition for certiorari and will decide the question of the availability of the foreign tax credit for payments of the U.K. Windfall Tax on which we have reported extensively before.  See here and here. The Court took no action on the government’s petition for certiorari in the companion Entergy case from the Fifth Circuit.  That is a common practice for the Court when two cases present the same issue.  The Court will “hold” (that is, continue to take no action on it) the Entergy petition until it issues a decision in PPL, and then it will dispose of the Entergy petition as appropriate in light of the PPL decision.

PPL’s brief is due December 13.  The case likely will be argued in February or March, and a decision can be expected before the end of June.

(In case you are wondering why the Court is issuing orders on a day when the rest of Washington is shut down because of a hurricane, it is something of a Court tradition to stay open when the rest of the government is closed.  In 1996, the Court heard oral arguments (as it is also doing today) on a day when the city was hit with a paralyzing blizzard.  The Court sent out four-wheel drive vehicles to bring the Justices to the Court.)

Supreme Court Expected to Act on Windfall Tax Petitions in Late October

October 4, 2012 by  
Filed under Entergy, International, PPL, Supreme Court

In our previous post discussing the pending requests for Supreme Court review of the question of the creditability of the U.K. Windfall Tax, we noted that the Court had scheduled consideration of the PPL cert petition for its October 5 conference.  The Court has now postponed that consideration until its October 26 conference.  The reason for the change is to allow the Court to consider the PPL petition in tandem with the government’s petition in Entergy.

This postponement allows the Court to consider the issue with the benefit of an adversarial presentation.  As you will recall, the government “acquiesced” in PPL’s cert petition on the theory that the Court should resolve the circuit conflict, and therefore there are no briefs in that case arguing that the Court should deny certiorari.  The same is not true in Entergy, where the taxpayer vigorously argues that the Court should deny certiorari in both cases because the issue is not sufficiently significant to warrant Supreme Court review.  Entergy notes that there are only three taxpayers directly affected by the Windfall Tax issue and asserts that the Third Circuit and Fifth Circuit, though reaching different outcomes on the specific issue, do not disagree “on matters of fundamental principle” regarding the foreign tax credit provisions.  Rather, Entergy characterizes the circuit conflict as reflecting “an exceedingly narrow and technical disagreement” limited to how those principles should apply to the U.K. Windfall Tax.  In its reply brief, the government acknowledges that there are only three directly affected taxpayers, but argues that there is a difference between the two circuits on the “proper analytical approach” to foreign tax credit issues that could potentially lead to disparate results in cases involving other foreign taxes.

As a result of the schedule change, the Court will likely announce whether it will review the issue on its October 29 order list.  It is possible, if certiorari is granted, that the Court would make that announcement on October 26 in order to give the parties a head start on the briefing.

Entergy – Taxpayer’s Brief in Opposition to Certiorari

Entergy – Government Reply Brief in Support of Certiorari

Government Urges Supreme Court to Consider Foreign Tax Credit Issue

September 5, 2012 by  
Filed under Entergy, International, PPL, Supreme Court

As previously reported here a few weeks ago, PPL filed a petition for certiorari asking the Supreme Court to review the Third Circuit’s decision denying a foreign tax credit for U.K. Windfall Tax payments.  Given that the Fifth Circuit had decided the same issue in the opposite way in the Entergy case, there was a significant possibility that the government would not oppose certiorari, but instead would urge the Court to resolve the circuit conflict.

The government has now decided that its interests in resolving the conflict and potentially securing a reversal in Entergy outweigh its interest in preserving its victory in PPL, and accordingly it has filed an “acquiescence” in PPL urging the Court to hear the case.  In that brief, the Solicitor General makes his case for why he believes PPL was correctly decided and also for why the issue is sufficiently important to justify Supreme Court review.

On the first point, the government’s brief rejects the characterization of the U.K. Windfall Tax as an “excess profits” tax.  Instead, the government says, it is “a tax on the difference between the price at which each company was sold at flotation and the price at which it should have been sold, based on its ability to generate income.”

On the latter point, the government acknowledges both that the “specific question presented in this case is . . . unlikely to recur or to have significance for a large number of U.S. taxpayers” and that, “[b]y their nature, issues regarding the regulatory tests set forth in 26 C.F.R. 1.901-2(b) will necessarily arise in cases involving specific foreign tax laws that are unlikely to affect a large number of Americans.”  But the government concludes that, “[n]evertheless, this Court’s guidance on the correct analytical approach for evaluating foreign taxes under Section 901 and the Treasury regulation may have significant administrative importance beyond the specific foreign tax law at issue here” and that the interest in uniform enforcement of the tax laws further justifies Supreme Court review.

Concurrent with its filing in PPL, the government filed a “protective” petition for certiorari in Entergy.  In accordance with the Solicitor General’s common practice in situations where two different cases present the same issue, that document does not ask the Court to take immediate action.  Instead, it asks the Court to hold the petition and to dispose of it as appropriate in light of the final disposition of the PPL case.  The Court is likely to follow that advice, which means that if the PPL petition is denied, or if the decision is overturned, the Court will just deny the Entergy petition.  If the PPL decision is affirmed, the Court would then grant the Entergy petition, vacate the Fifth Circuit’s decision, and remand the case for reconsideration in light of the Court’s intervening decision in PPL.

But that is getting ahead of things.  First, the Court must decide whether to hear the issue at all.  It has no obligation to do so, even though both parties recommend certiorari.  Presumably, the Justices have not been dreaming about the opportunity to wade through the foreign tax credit regulations, and their inherent interest (or lack thereof) in the subject matter could tip the balance if they believe the question of importance of Supreme Court review is a close call.

The PPL petition is scheduled to be considered at the Court’s October 5 conference.  An announcement of whether certiorari will be granted will most likely issue either on that date or on October 9.

PPL – Government Brief Acquiescing in Certiorari

Entergy – Government Petition for Certiorari

 

Fifth Circuit to Consider Whether Section 951 Inclusions Are Qualified Dividends

August 6, 2012 by  
Filed under International, Rodriguez

The taxpayers have appealed to the Fifth Circuit from the Tax Court’s decision in Rodriguez v. Commissioner, No. 13909-08 (Dec. 7, 2011), which rejected qualified dividend treatment for certain amounts included in their income pursuant to Code Section 951.  In 2003, Congress established a preferential tax rate for “qualified dividend income,” which includes dividends received from a qualified foreign corporation.  Separately, section 951 contains provisions designed to limit tax deferrals by a “controlled foreign corporation” (CFC).  Section 951 requires a taxpayer to include in income earnings of a CFC that are derived from investments in U.S real estate.  The taxpayers in this case included such earnings in their income but sought to have them taxed at the favorable qualified dividend rate.  In a comprehensive opinion, the Tax Court held that they were not “dividends” and hence should be taxed as ordinary income.

The taxpayers’ position was largely policy-based, arguing that the effect of the income inclusion was similar to that of a dividend, but their argument lacked strong direct support in the statutory text.  As the Tax Court noted, legislative history and case law had described the section 951 inclusions as substantially equivalent to receiving dividends.  See, e.g., Gulf Oil Corp. v. Commissioner, 87 T.C. 548, 571 (1986) (“Subpart F treats the amount of the increased investment much like a constructive dividend to the U.S. shareholders”).  But the Tax Court concluded that this similarity did not resolve the case, observing that “to say that section 951 treats a CFC’s investments in U.S. property ‘much like’ a constructive dividend is a far cry from saying that such amounts actually constitute dividends.”

Instead, the Tax Court focused on a textual analysis.  First, the court said that the section 951 inclusion did not meet the statutory definition of a dividend (Code section 316(a)) because there was no “distribution” by the corporation; a distribution cannot occur unless there is a “change in ownership of corporate property.”  The court noted that the Code expressly provides that section 951 inclusions should be treated as a dividend for certain other purposes, but there is no such express provision for qualified dividend rates.  See I.R.C. §§ 851(b), 904(d)(3)(G), 960(a)(1).  The court also pointed to several provisions directing that other kinds of non-dividend income, such as redemptions and undistributed foreign personal holding company income, should be treated as dividends.  See, e.g., I.R.C. §§ 302(a), 551(b).  Given these examples of explicit dividend treatment elsewhere in the Code, the Tax Court concluded that the lack of an explicit textual basis for dividend treatment was a fatal flaw in the taxpayers’ position.

The Tax Court acknowledged that the taxpayers’ position drew support from the original 1962 Senate Report, which explained that, under Subpart F, “earnings brought back to the United States are taxed to the shareholders on the grounds that this is substantially the equivalent of a dividend being paid to them.”  S. Rep. No. 1881, 87th Cong., 2d Sess. 794 (1962).  But the court found that this sentence was not controlling, pointing to other ways in which treatment of section 951 inclusions differs from dividends (for example, effect on earnings and profits).  The court added that affording qualified dividend treatment would not advance the stated legislative purpose for the preferential interest rate.

The impact of this decision is not necessarily confined to the context of qualified dividends.  Rather, its reasoning seems applicable to other contexts in which one might argue that section 951 inclusions should be treated as dividends, but where there is no explicit provision to that effect.  And the shoe might be on the other foot.  For example, the new health care surtax on investment income for taxpayers earning more than $250,000 defines “net investment income” as including “income from interest, dividends, annuities, royalties, and rents.”  I.R.C. § 1411(c)(1)(A)(i).  If the IRS would like to impose the surtax on section 951 inclusion income, its victory in Rodriguez would appear to pose an obstacle to that position.

Rodriguez Tax Court decision

 

Supreme Court Asked to Resolve Circuit Split on Foreign Tax Creditability of U.K. Windfall Tax

August 1, 2012 by  
Filed under Entergy, International, PPL, Supreme Court

[Note:  Miller & Chevalier filed an amicus brief on behalf of American Electric Power in the PPL case.]

We have fallen behind in updating the progress of the litigation concerning the creditability of the U.K. Windfall Tax that was imposed on British utilities in the 1990s.  As we previously reported, the Tax Court held in two companion cases that this tax was equivalent to an income tax in the U.S. sense of the term and hence creditable.  The government took two appeals — to the Third Circuit in PPL and to the Fifth Circuit in Entergy.  Those courts reached opposite conclusions, and PPL has now asked the Supreme Court to grant certiorari to resolve the conflict.  (See here and here for previous posts on the parties’ briefing in these cases.)

The Third Circuit was first to rule, in December 2011, and it rejected the Tax Court’s decision in an opinion that rested in large part on arguments not made in the government’s brief.  The Third Circuit focused heavily on the details of the three-part test set forth in the regulations, stating that, in focusing on the “predominant character” language in those regulations, the Tax Court had erroneously suggested that the regulation “appl[y] a ‘predominant character standard’ independent of the three requirements.”  In that connection, the Third Circuit dismissed the relevance of case law that predated those regulations, notwithstanding language in the preamble indicating that Treasury did not intend to depart from that prior case law.  The Third Circuit also criticized PPL’s position that the “flotation value” component of the calculation was not relevant to the three-part test because it merely defined what part of the company’s profits would be taxed as “excess.”  The Third Circuit did not deny that this approach would appear to prevent any “excess profits” tax from meeting the test, but it explained that “this argument merely suggests that the regulation misinterprets the statute,” and it was too late for PPL to argue that the regulation is invalid.  Finally, the court surprisingly held that the Tax Court’s decision could not be squared with Treas. Reg. § 1.901-2(b)(3)(ii), Ex. 3, an example that illustrates how the gross receipts part of the regulatory test applies in a situation where the tax base is derived indirectly from a quantity that is “deemed” to reflect gross receipts.  This example is of dubious relevance to the Windfall Tax, which was based on actual profits, not a “deemed” quantity; the example was not raised in the Tax Court proceedings and was mentioned only tangentially in the government’s brief.

The Fifth Circuit had heard oral argument in Entergy a couple of months before PPL was decided, but did not issue its opinion until June 2012.  The Fifth Circuit stated that “the Commissioner’s assertion that we should rely exclusively, or even chiefly, on the text of the Windfall Tax” was contrary to settled case law establishing that the form of the foreign tax is not determinative.  “Viewed in practical terms,” the court continued, “the Windfall Tax clearly satisfies the realization and net income requirements.”  With respect to the gross receipts part of the test, the Fifth Circuit was “persuaded by the Tax Court’s astute observations as to the Windfall Tax’s predominant character” – namely, to claw back the utilities’ excess profits.

The Fifth Circuit then addressed itself directly to the Third Circuit’s PPL decision, characterizing the latter court’s reasoning as exemplifying “the form-over-substance methodology that the governing regulation and case law eschew.”  The example in the regulations relied upon by the Third Circuit is “facially irrelevant,” the Fifth Circuit observed, because “[t]he Windfall Tax relies on no Example 3-type imputed amount, nor indeed on any imputation, for calculating gross receipts.”  Thus, although noting that it is “always chary to create a circuit split,” the Fifth Circuit concluded that it had to disagree with the Third Circuit and find the Windfall Tax creditable.

After its petition for rehearing en banc was denied, PPL filed a petition for certiorari on July 9.  The petition emphasizes the need to resolve the circuit conflict in order to achieve uniform administration of the tax law and heavily criticizes the Third Circuit for elevating the form of the tax over its substance.  For its part, the government has chosen not to seek rehearing in Entergy, bringing the schedules of the cases closer together again.  A petition for certiorari in Entergy is now due on September 4.  The government’s response to PPL’s cert petition is currently due August 8, but a 30-day extension is likely, which would make the response due on September 7.

The position that the government decides to take in these cases is an important factor in assessing the prospects for a grant of certiorari.  Most federal tax cases heard by the Supreme Court involve clear conflicts in the circuits, and it is impossible to deny the existence of such a conflict here.  But the Court does not hear every tax case that involves a circuit conflict.  Rather, it agrees to hear a case only when it believes that resolution of the conflict is sufficiently important, particularly to the uniform administration of the tax laws. Historically, the Court has afforded considerable deference to the government’s advice on the question of importance.  As a repeat litigant at the Court, the government is very selective in asking for Supreme Court review, on the theory that if it does not ask too often, the Court is more likely to grant its requests when it really matters.  And the Court does grant a high percentage (in the neighborhood of 70%) of the government’s petitions for certiorari.  Thus, in deciding whether to ask the Court to resolve this conflict, the government will weigh its own interests, including estimating its prospects for success if the Court hears the case, and make a judgment about whether it views this issue as important enough to tax administration or to the government’s bottom line to justify using one of its precious “chits.”

Although one might think that the government’s monetary interests could induce it to oppose certiorari in PPL even if were to file a cert petition in Entergy, the Solicitor General’s long-term interest in maintaining credibility with the Supreme Court would trump those short-term monetary interests.  Thus, there are two likely courses of action open to the government.  Either it will oppose PPL’s petition and not push for Supreme Court review in Entergy or it will file a certiorari petition in Entergy and not oppose PPL’s petition.  Unless there are additional extensions, we should know in early September how the government will approach the conflict.  The Supreme Court will give its answer several weeks after that.

PPL Third Circuit opinion

Entergy Fifth Circuit Decision

PPL Petition for Certiorari

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