December 28, 2012
Goldin: Reconsidering Substance Over Form in PPL
The controversy surrounding PPL v Commissioner has framed the issue as one of substance versus form, accepting that the tax in question is economically equivalent to a tax on income. However, the fact that the tax is levied on the basis of average profits rather than total profits causes it to differ from conventional income taxes in important ways.
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The author, law student cum economist, argues that because the UK windfall profit tax is measured by "average profit" instead of profit, it is not a tax on income in the U.S. sense for purposes of the foreign tax credit. His refutation of the taxpayers' substance over form arguments ignores the fact that the guage for the tax is actual profits. He argues that because different taxpayers tax was calculated differently, it is not a true income tax and hence not eligible for the FTC. He would also probably argue that the Texas margin tax is not really an income tax (prohibited by the Texas constitution) because it taxes the "margin", the increase in surplus from the previous year. Common sense tells us otherwise.
Posted by: TexEcon | Dec 28, 2012 12:18:48 PM
Contrary to "TexEcon" above, Goldin offers an incisive economic analysis of the tax issue presented by the PPL and Entergy cases. As far as the references to the Texas constitution and margin tax are concerned, I wonder if TexEcon was even born way back when Texans debated and legislated such matters. (If "TexEcon" is a pseudonym affected by former Senator Gramm, I heartily apologize for my impertinence.)
Posted by: Jake | Dec 28, 2012 4:16:48 PM
Mr. Goldin's article is flawed. He acknowledges that the substantive effect of the Windfall Tax is a tax on income if one only considers the companies that have an initial period of 4 full years. However, he points to language in the regs. that a tax either is or is not FTC-eligible for all taxpayers to argue that the Windfall Tax cannot be creditable if its effect is that of an income tax "for only some taxpayers." Mr. Goldin either hasn't read the case law or is being disingenuous. If he had read the case law, he would know that courts have held that the reg. language he cites is satisfied if the effect applies to the majority of the taxpayers (about 80%). Over 90% of the companies subject to the Windfall Tax had initial periods of 4 years (a bit more than "only some").
Posted by: Bruin Law | Jan 7, 2013 8:28:38 AM