Appeal from the Decision of the United States Tax Court Docket No. 07-25393 Tax Court Judge: Honorable James S. Halpern
The opinion of the court was delivered by: Ambro, Circuit Judge
Argued September 22, 2011
Before: AMBRO, CHAGARES and GARTH, Circuit Judges
* Participated in Video Conference
The Commissioner of Internal Revenue appeals a decision of the United States Tax Court holding that PPL Corporation was entitled to a foreign tax credit for the 1997 tax year under § 901 of the Internal Revenue Code. We agree with the Commissioner that the foreign tax before us does not qualify for a foreign tax credit, and thus reverse.
PPL is a Pennsylvania corporation. In 1997, it held a 25% stake in SWEB (formerly South Western Electricity Board), a utility in the United Kingdom. SWEB was one of 32 United Kingdom companies subject to a one-time "windfall tax." After it paid that tax, PPL claimed under I.R.C. § 901 a foreign tax credit on its United States tax return. We must decide whether the U.K. windfall tax is an "income, war profits, [or] excess profits" tax within the meaning of § 901(b)(1).
The windfall tax emerged from a backlash against the privatization of British utilities and transit operators. The U.K.'s Government, then controlled by the Conservative Party, sold SWEB and 31 other state-owned companies to private investors between 1984 and 1996. Though privately owned, the utilities remained regulated. In particular, the U.K. Government set the rates at which the utilities would sell electricity to customers. With the pricing scheme, it induced the new private owners to provide electricity more efficiently; every pound sterling that the owners could save would go to them as profit rather than to customers as lower prices. Most of the utilities, including SWEB, increased efficiency to a greater degree than the U.K. Government had expected. As a result, the utilities' profits and their share prices increased. Executive compensation also increased, as it was tied in many cases to share prices. These high profits and compensation packages, coupled with the fixed costs that customers paid under the regulatory scheme, left the public unhappy with the utilities and their executives.
The opposition Labour Party sought to capitalize on this public discontent by introducing a new tax. Party leaders promised a "windfall levy on the excess profits of the privatised utilities," in the words of Labour's 1997 Election Manifesto. They put Geoffrey Robinson, a Labour Member of Parliament, in charge of the plan. He hired accounting firm Arthur Andersen to develop a series of proposals. Robinson and the Andersen team rejected simpler proposals, including taxes on gross receipts or on profits, and instead selected the "windfall tax" now at issue. Gordon Brown, then the Shadow Chancellor of the Exchequer, approved Robinson's windfall tax proposal, and Parliament enacted it without substantive change after Labour won the 1997 elections.
In concept, the windfall tax was a one-time 23% tax on the difference between each company's "profit-making value" and its "flotation value," the price for which the U.K. Government had sold it. (The public believed that the Government had sold the companies too cheaply, hence the "windfall.") The tax statute defined each company's "profit- making value" as its average annual profit multiplied by its price-to-earnings ratio. It defined average annual profit as the company's average profit per day over a statutorily defined "initial period" (which for SWEB and most others was the first four years after privatization) multiplied by 365. Rather than using the companies' actual price-to-earnings ratios, the statute imputed a ratio of 9 for all companies. This "ratio," a U.K. Government document explained, "approximates to the lowest average sectoral price-to-earnings ratio of the companies liable to the tax." J.A. at 264. We may express the tax algebraically in this way:
Tax = 23% x [(365 x (P / D) x 9) - FV], where 23% is the tax rate, P is the company's total profit over the "initial period," D is the length of the initial period in days, and FV is the company's flotation value (to repeat, the price for which the U.K. Government sold the company).
SWEB paid the windfall tax, and PPL filed with the IRS a claim for refund seeking a foreign tax credit for PPL's share of the windfall tax paid. In 2007, the IRS denied PPL's claim for refund and issued a notice of deficiency. PPL then filed a petition in the Tax Court to challenge the IRS's determination that it was not entitled to a credit under I.R.C. § 901 for PPL's share of SWEB's windfall tax. The Tax Court held a trial and, after post-trial briefing and further testimony, agreed with PPL that it was entitled to a foreign tax credit. The Commissioner timely appealed to our Court, asserting that § 901 does not cover the windfall tax.
The Tax Court had jurisdiction under I.R.C. §§ 6213 and 6214, and our Court has jurisdiction under I.R.C. § 7482(a)(1). "We have plenary review over the Tax Court's legal conclusions, and may set aside findings of fact if they are clearly ...