United States Supreme Court Holds United Kingdom Windfall Profits Tax Creditable For U.S. Income Tax Purposes

In PPL Corporation & Subsidiaries, 111 AFTR 2d ¶2013-723 (5/20/2013), the Supreme Court, in an unanimous decision, per Justice Thomas, resolved a split of authority between the Fifth and Third Circuits, and held that the United Kingdom's one-time "windfall tax" paid by the taxpayer through a U.K. based partnership, were creditable foreign taxes under §901(a). The Supreme Court agreed with the Tax Court below and the taxpayer that the windfall tax in issue had the predominant characteristic of an "excess profits tax" within the meaning of Treas. Reg. §1.901-2(a) and therefore was creditable under §901. Thus, the Court reversed the decision of the Third Circuit Court of Appeals holding to the contrary.

The "windfall tax" in issue was imposed under a new Labour Party adopted rule when it took over control of the Parliament in 1997. Previously, the Labour Party objected to the concept of privatization embraced by the Conservative wing. The new tax was imposed on 32 U.K. companies that were authorized to privatize between 1984 and 1996 by the Conservative government. PP&L Resources, Inc. (PP&L) was a global energy company. Through various subsidiary corporations, it produced electricity, sold wholesale and retail electricity, and delivered electricity to customers. It provided such services in the United States in the Mid-Atlantic and Northeast regions and also in the United Kingdom. During 1997, South Western Electricity plc (SWEB) a U.K. private limited liability company, was PP&L's indirect subsidiary. Its principle activities at the time included distribution of electricity to 1.5 million customers in England.

In 1990, the U.K. privatized 12 regional electric companies including SWEB. The ordinary shares or common stock of these companies were sold to the public as part of a "flotation". Some of the companies were required to continue providing services for a fixed period at the same rates offered under government (pre-privatized) control. Many of these companies became far more efficient and earned substantial profits in the process of the privatization. The one-time windfall profits tax was 23% of the difference between each company's "profit-making value" and its "flotation value," the price for which the U.K. government sold the stock which many British subjects felt was priced below value.

The relevant statute defined each company's "profit-making value" as its average annual profit times its price-to-earnings ratio. Average annual...