Third Circuit reverses tax court
PHILADELPHIA (Legal Newsline) - The Third Circuit Court of Appeals ruled that an appeal by the Internal Revenue Service (IRS) of a U.S. Tax Court holding that PPL Corporation, a Pennsylvania company, was entitled to a foreign tax credit for the 1997 tax year.
The three-judge panel said that the foreign tax does not qualify for a foreign tax credit and reversed the tax court.
PPL held a 25 percent stake in SWEB (formerly South Western Electricity Board), a British utility. SWEB was subject to a one-time "windfall tax." After it paid that tax, PPL claimed under I.R.S. ' 901 a foreign tax credit on its United States tax return.
The court needed to determine if the U.K. windfall tax was "an "income, war profits, [or] excess profits" tax within the meaning of ' 901(b)(1)."
The windfall tax was a result of the Labour Party's resentment of the privatization of British utilities and transit operators when the Conservative Party was in control.
The private utilities, including SWEB, increased the efficiency and the utilities' profits and their share prices increased. Executive compensation, which was a function of share prices, also increased. The profits and compensation packages, together with the government mandated fixed costs made British citizens discontented with the private utilities.
The new tax was enacted by Labour Party leaders to keep a promise they made during the election campaign. The calculation of the tax was such that the Third Circuit believed that PPL's deduction was not valid because the British tax did not satisfy the "gross receipts" requirement of the IRS tax code.
The Third Circuit said the "tax fails to satisfy at least the gross receipts requirement. Without changing the tax rate, the calculation of the tax base begins with an amount greater than gross receipts. And we may not manipulate the tax rate to address a question about the tax base."
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