## Facts

- The United Kingdom enacted a one-time 1997 “windfall tax” on 32 privatized utilities and similar companies sold by share “flotation” between 1984 and 1996.
- The tax applied at a stated 23% rate to an amount computed by a statutory formula using a “profit-making value” and the company’s flotation price.
- PPL Corporation, a U.S. utility and part-owner of an affected U.K. company, bore its share of the U.K. windfall tax and claimed a U.S. foreign tax credit on its 1997 return under I.R.C. § 901(b)(1).
- Treasury Regulation § 1.901-2 allows a credit only if the foreign levy’s “predominant character” is that of an income tax “in the U.S. sense,” i.e., it is likely to reach “net gain” in normal operation.
- The IRS disallowed the credit, asserting the windfall tax was not an “income, war profits, or excess profits tax” within § 901.
- The Tax Court ruled for PPL; the Third Circuit reversed; the Supreme Court granted certiorari.

## Issues

1. Whether the U.K.’s 1997 windfall tax is a creditable “income, war profits, or excess profits tax” under I.R.C. § 901 and Treasury Regulation § 1.901-2.
2. Whether creditability turns on the tax’s economic operation under U.S. income-tax concepts rather than the foreign statute’s label and formal structure.

## Decision

- The Supreme Court unanimously reversed the Third Circuit and held the U.K. windfall tax was creditable under § 901.
- Applying the “predominant character” standard, the Court concluded the levy functioned as an excess profits tax, a category of income tax in the U.S. sense.
- The Court treated the statute’s formula as susceptible to algebraic restatement and found it imposed a high effective rate on profits above a threshold, consistent with an excess profits tax.
- The Court determined the tax, in normal circumstances, was likely to reach realized net gain and therefore satisfied the regulatory net-gain requirement.

## Legal Principles

- A foreign tax is creditable against U.S. income tax when, if enacted in the United States, it would be an “income, war profits, or excess profits tax” under § 901.
- Treasury Regulation § 1.901-2 makes creditability depend on a foreign levy’s “predominant character,” defined by the tax’s normal manner of application to most taxpayers.
- Creditability is assessed under U.S. income-tax concepts; foreign labels, characterizations, and drafting choices do not control.
- A levy has the required predominant character if it is likely to reach “net gain” in normal operation, meaning realized gross receipts reduced by significant associated costs and expenses (net income).
- Courts may re-express a foreign tax base to determine its substantive operation and whether it taxes net income or excess profits.

## Conclusion

The Court held the U.K. windfall tax was creditable because its substantive operation, evaluated under Treasury Regulation § 1.901-2 and U.S. income-tax concepts, was that of an excess profits tax that generally reached realized net gain despite being framed in valuation terms.


PPL Corp. v. Comm’r, 569 U.S. 329 (2013)