Friday, February 15, 2013
Michael Knoll (Pennsylvania), Economic and Legal Arguments in PPL v. Commissioner:
In late February 2013, the U.S. Supreme Court will hear oral argument in PPL Corp. v. Commissioner.
The Court took that case, which involves a claim by a U.S. corporation
for foreign tax credits for taxes paid in accordance with the 1997 U.K.
Windfall Profit Tax Act, in order to resolve a conflict between the
Third Circuit, which denied the credit in PPL, and the Fifth Circuit, which allowed the credit in Entergy Corp. v. Commissioner.
Nominally, the U.K. Act imposed a tax on recently privatized regulated
companies of 23 percent of the difference between their estimated
market value and the price at which they were sold to the public. The
Act calculated each company’s market value by multiplying average
earnings over a period of up to four years by 9 (a multiplier described
as a conservative estimate of the market capitalization rate for such
companies). The Fifth Circuit allowed the credit on the grounds that
the substance of the tax imposed by the Act is a tax on the four prior
years’ earnings, albeit at an effective rate higher than the statutory
rate. In contrast, the Third Circuit denied the credit on the ground
that the Act imposed a tax on a difference in values, not on income, as
required by the Code and the applicable Treasury Regulation for the
foreign tax to be creditable. This essay examines the economic and
legal arguments that have been raised in PPL.