Tax Court Rules in Favor of Taxpayers in Foreign Tax Credit Cases

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In PPL Corp. v. Commissioner, 135 T.C. No. 8 (Sept. 9, 2010), found here and Entergy v. Commissioner, T.C. Memo 2010-166 (Sept. 9, 2010), found here, the Tax Court addressed whether a Windfall Tax imposed by the U.K. government is a creditable income tax under the Internal Revenue Code. Under section 901 of the Code and related provisions, a U.S. taxpayer can elect to credit qualifying income taxes paid to a foreign country. Section 901 can be found here. Only income taxes are eligible for this credit, and the determination of whether a foreign tax is an income tax depends on whether it is the equivalent of an income tax as defined in the Internal Revenue Code.

The U.K. tax at issue is atypical because it was a one-time tax on formerly public utilities. The taxpayers argued that the creditability of the U.K. tax was the equivalent of an income tax imposed at a rate of roughly 50% on profits earned over a four-years, and as such, the taxpayers argued that the U.K. tax at issue was an income tax and subject to the foreign tax credit regime of the Internal Revenue Code.

Ultimately Judge Halpern ruled that “The United Kingdom windfall tax enacted on July 2, 1997, and imposed on certain British utilities is a creditable tax under sec. 901, I.R.C.”

The attorneys at Fuerst Ittleman, PL have extensive experience in international tax litigation including litigating foreign tax credits.