- Court: U.S. Supreme Court Certiorari Granted
- Area(s) of Law: Tax Law
- Date Filed: October 29, 2012
- Case #: 12-43
- Judge(s)/Court Below: Court Below: Court of Appeals for the Third Circuit, 665 F.3d 60 (2011)
- Full Text Opinion
Between 1984 and 1996 the government of the United Kingdom sold multiple state-owned companies, including several utilities, to private investors. The U.K. government continued to set public rates for the utilities after the sales, resulting in high profits for the private owners. In response to public outcry, the U.K. government instituted a one-time "windfall tax" in 1997 on each of the privately owned utilities. The windfall tax imposed a 23% tax on the difference between the company's profit-making value and the price at which the U.K. government sold it. Petitioner owned a one-quarter stake in South Western Electricity Board (SWEB), a U.K. utility company subject to the windfall tax. SWEB paid the tax and Petitioner subsequently filed a claim seeking a foreign tax credit under Section 901 of the Internal Revenue Code (IRC) for its share of the tax paid. Section 901 of the IRC provides a tax credit for "the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country."
In 2007, the Internal Revenue Service (IRS) denied the credit. On review, the Tax Court found that Petitioner was entitled to the foreign tax credit for the windfall tax under Section 901. The Court of Appeals for the Third Circuit reversed the decision of the Tax Court, finding that the windfall tax did not meet the definition of an income tax as defined in the IRC and therefore was not creditable. The court of appeals found that IRC regulations specify that a tax must satisfy all three of the requisite requirements—realization, gross receipts, and net income—in order to qualify as creditable, and that Petitioner failed to demonstrate that the windfall tax met the gross receipts requirement.
On appeal Petitioner argues that courts should look at the substance of the tax instead of applying a strict formalistic approach. Petitioner also asks the Court to resolve a circuit split between the Courts of Appeals for the Second and Third Circuits and the Court of Claims.