Tax — foreign windfall taxes

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U.S. Supreme Court

Civil

Tax — foreign windfall taxes

A windfall tax imposed by the United Kingdom is creditable under Internal Revenue Code sec. 901.

The U. K. windfall tax’s predominant character is that of an excess profits tax, a category of income tax in the U. S. sense. The Labour government’s conception of “profit-making value” as a backward-looking analysis of historic profits is not a typical valuation method. Rather, it is a tax on realized net income disguised as a tax on the difference between two values, one of which is a fictitious value calculated using an imputed price-to-earnings ratio. The substance of the windfall tax confirms this conclusion. When rearranged, the U. K’s formula demonstrates that the windfall tax is economically equivalent to the difference between the profits each company actually earned and the amount the Labour government believed it should have earned given its flotation value. For most of the relevant companies, the U. K. formula’s substantive effect was to impose a 51.71 percent tax on all profits above a threshold, a classic excess profits tax. The Commissioner claims that any algebraic rearrangement is improper because U. S. courts must take the foreign tax rate as written and accept whatever tax base the foreign tax purports to adopt. But such a rigid construction cannot be squared with the black-letter principle that “tax law deals in economic realities, not legal abstractions.” Commissioner v. Southwest Exploration Co., 350 U. S. 308. Given the artificiality of the U. K.’s calculation method, this Court follows substance over form and recognizes that the windfall tax is nothing more than a tax on actual profits above a threshold.

665 F. 3d 60, reversed.

12-43 PPL Corp. v. CIR

Thomas, J.; Sotomayor, J., concurring.