Economic and Legal Arguments in PPL v. Commissioner

Abstract

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.

Keywords: UK Windfall Profit Tax Act of 1997, foreign tax credits, privatization of British utilities, corporate valuation, historical earnings vs. expected value of earnings, creditable tax

JEL Classification: G32, H25, K34