Billions on the Line in Supreme Court Case over Foreign Tax Credits

February 21, 2013 — 1 Comment

The U.S. Supreme Court doesn’t typically hear cases on tax law, but an exception was made yesterday when arguments were heard on a high-stakes dispute between major power utility PPL Corp and the Internal Revenue Service (IRS).  The case centers over the firm’s acquisition of a British company in 1997, one of many privatized by former British Prime Minister Margaret Thatcher, and could have serious ramifications in defining what can and cannot be claimed as a foreign tax credit.

After acquiring a British utility, PPL was greeted with a windfall tax bill for about $140 million.  The company paid that and set it against their US tax liability as a foreign credit.  Reuters reports that “The IRS disallowed PPL’s claim in 2007, saying it did not meet the letter-of-the-law tax code statute for the U.S. tax credit in part because British politics interfered with the way the tax was written.”

The case went to the U.S. tax court, which ruled in PPL’s favor.  In its opinion, the court held: “The United Kingdom windfall tax enacted on July 2, 1997, and imposed on certain British utilitiesis a creditable tax under sec. 901, I.R.C.” 

The IRS appealed the decision, and won round two in the 3rd U.S. Circuit Court of Appeals.  There, the “Third Circuit adopted the IRS’s formulaic approach for determining whether a foreign tax is creditable under U.S. law.  [They] refused to consider the practical effect of the UK windfall tax and the intent of its drafters, and instead focused solely on the text of the tax statute, which in its estimation was a tax on excess value and not profits.”

Now the Supreme Court is stepping in.  Yesterday, Assistant Solicitor General Ann O’Connell represented the IRS and squared-off against the man who narrowly failed to defeat Obamacare in the Supreme Court last year – Paul Clement, a partner with Bancroft PLLC.  The outcome could have major consequences for corporations and people who routinely claim foreign tax credits.  Multinational Corporations in particular are holding their breath, as U.S. companies claim nearly $100 billion each year in foreign tax credits.  An opinion is expected sometime in June.

JDKatz: Attorney's At LawJDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

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  1. Close which loopholes? (hint: not the corporate jet one) « The Joy of Tax Law & Litigation - February 26, 2013

    […] these cases (See: Amazon’s Epic Transfer Pricing Strategy) and taking some to court (See: Billions on the Line in Supreme Court Case over Foreign Tax Credits), but without congressional action loopholes in the tax code will continue to let billions slip […]

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