                                                PPL CORPORATION & SUBSIDIARIES, PETITIONER v.
                                                    COMMISSIONER OF INTERNAL REVENUE,
                                                               RESPONDENT
                                                        Docket No. 25393–07.                 Filed September 9, 2010.

                                                 Held: 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.

                                      304




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                                      (304)                 PPL CORP. & SUBS. v. COMMISSIONER                                      305


                                        Richard E. May, Mark B. Bierbower, and Timothy L.
                                      Jacobs, for petitioner.
                                        Melissa D. Arndt, Allan E. Lang, Michael C. Prindible, and
                                      R. Scott Shieldes, for respondent.
                                         HALPERN, Judge: PPL Corp. (petitioner) is the common
                                      parent of an affiliated group of corporations (the group)
                                      making a consolidated return of income. By notice of defi-
                                      ciency, respondent determined a deficiency of $10,196,874 in
                                      the group’s Federal income tax for its 1997 taxable (calendar)
                                      year and also denied a claim for refund of $786,804. The
                                      issues for decision are whether respondent properly (1)
                                      denied the claim for the refund, which is related to the cred-
                                      itability of the United Kingdom (U.K.) windfall tax paid by
                                      petitioner’s indirect U.K. subsidiary (the windfall tax issue),
                                      (2) included as dividend income a distribution that petitioner
                                      received from the same indirect U.K. subsidiary, but which,
                                      within a few days, the subsidiary rescinded and petitioner
                                      repaid (the dividend rescission issue), and (3) denied depre-
                                      ciation deductions that petitioner’s U.S. subsidiary claimed
                                      for street and area lighting assets. We disposed of the third
                                      issue in a previous report, PPL Corp. & Subs. v. Commis-
                                      sioner, 135 T.C. 176 (2010), and we dispose of the remaining
                                      issues here.
                                         Unless otherwise stated, all section references are to the
                                      Internal Revenue Code in effect for 1997, and all Rule ref-
                                      erences are to the Tax Court Rules of Practice and Proce-
                                      dure. With respect to the two issues before us here, peti-
                                      tioner bears the burden of proof. See Rule 142(a). 1

                                                                          FINDINGS OF FACT

                                      Stipulations
                                        The parties have entered into a first, second, and third
                                      stipulation of facts. The facts stipulated are so found. The
                                      stipulations, with accompanying exhibits, are incorporated
                                      herein by this reference.

                                         1 Petitioner has not raised the issue of sec. 7491(a), which shifts the burden of proof to the

                                      Commissioner in certain situations. We conclude that sec. 7491(a) does not apply because peti-
                                      tioner has not produced any evidence that it has satisfied the preconditions for its application.
                                      See sec. 7491(a)(2).




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                                      306                 135 UNITED STATES TAX COURT REPORT                                       (304)


                                      Petitioner’s Business and Its U.K. Operation
                                         Petitioner is a Pennsylvania corporation that was known
                                      during 1997 as PP&L Resources, Inc. It is a global energy
                                      company. Through its subsidiaries, it produces electricity,
                                      sells wholesale and retail electricity, and delivers electricity
                                      to customers. It provides energy services in the United States
                                      (in the Mid-Atlantic and the Northeast) and in the United
                                      Kingdom. During 1997, South Western Electricity plc (SWEB),
                                      a U.K. private limited liability company, was petitioner’s
                                      indirect subsidiary. 2 Its principal activities at the time
                                      included the distribution of electricity. It delivered electricity
                                      to approximately 1.5 million customers in its 5,560-square-
                                      mile service area from Bristol and Bath to Land’s End in
                                      Cornwall. SWEB also owned electricity-generating assets.
                                      Privatization of U.K. Companies
                                         The Conservative Party won control of the U.K. Parliament
                                      in the 1979 elections. It retained control through May 1997,
                                      under the leadership of Margaret Thatcher and John Major.
                                         Between 1979 and 1983, the Conservatives privatized
                                      mostly companies that were not monopolies (e.g., manufac-
                                      turing companies) and, for that reason, did not require spe-
                                      cific economic regulation. Between 1984 and 1996, however,
                                      the U.K. Government privatized more than 50 Government-
                                      owned companies, many of which were monopolies.
                                         The U.K. Government privatized those companies largely
                                      through public flotations (share offerings) at fixed price
                                      offers, which involved the transfer of those Government-
                                      owned enterprises to new public limited companies (plcs), fol-
                                      lowed by what was essentially a sale of all or some of the
                                      shares in the new plcs to the public. 3 The plcs then became
                                         2 SWEB was originally incorporated as a U.K. public limited liability company in 1987, but,

                                      as described infra, it was privatized in 1990. The appendix shows SWEB’s relationship to peti-
                                      tioner in 1997.
                                         3 The U.K. Government hired investment banks and other advisers to assist it in setting the

                                      initial share prices, structuring the offers, and marketing the shares to investors. The new plcs
                                      were not subject to a gains tax on transfers of stock to the general public, a result made possible
                                      by an amendment to the then-existing U.K. law.
                                         Under sec. 171 of the U.K. Taxation of Chargeable Gains Act, 1992 (TCGA), companies within
                                      a group (generally, a parent and its 75-percent-owned subsidiaries) may transfer assets between
                                      members of the group without incurring a capital gains charge. The effect of TCGA sec. 171
                                      is to defer the chargeable gain on asset appreciation until a group member transfers the asset
                                      outside the group, at which point the gain becomes chargeable to that transferor. Under the
                                      TCGA as originally enacted, however, the transfer outside the group of the stock of a group
                                      member holding an appreciated asset would not trigger any capital gains charge to the trans-




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                                      (304)                     PPL CORP. & SUBS. v. COMMISSIONER                                              307


                                      publicly traded companies listed on the London Stock
                                      Exchange. In most cases, the floated shares opened for
                                      trading at a substantial premium over the price the flotation
                                      investors paid for the shares.
                                        In December 1990, the U.K. Government privatized 12
                                      regional electric companies (RECs), including SWEB. The ordi-
                                      nary shares of each REC were offered to the public at £2.40
                                      per share in connection with the flotation of those shares.
                                        The 32 U.K. Government-owned companies that were
                                      privatized and that ultimately became liable for the windfall
                                      tax (the privatized utilities or windfall tax companies) and
                                      the years in which they were privatized are as follows:

                                                                           Company                                                      Year

                                           50.2 percent of British Telecommunications plc (British
                                             Telecom) ............................................................................      1984
                                           British Gas plc .....................................................................        1986
                                           British Airports Authority ..................................................                1987
                                           10 water and sewerage companies (the WASCs) ..............                                   1989
                                           The 12 RECs ........................................................................         1990
                                           60 percent of National Power plc and Powergen plc (the
                                             generating companies) .....................................................                1991
                                           Scottish Power plc and Scottish Hydro-Electric plc (the
                                             Scottish electricity companies) ........................................                   1991
                                           Northern Ireland Electricity (NIE) .....................................                     1993
                                           Railtrack plc (Railtrack) ......................................................             1996
                                           88.5 percent of British Energy plc (British Energy)
                                             which owned U.K. nuclear generating stations) ............                                 1996

                                      Regulation of the Windfall Tax Companies
                                         The Electricity Act of 1989, c. 29, sec. 1, created the posi-
                                      tion of U.K. Director General of Electricity Supply, a position
                                      that Professor Stephen C. Littlechild (Professor Littlechild)
                                      held from its creation in 1989 through 1998. 4
                                      feror. (The nongroup transferee, meanwhile, would receive a basis in the stock that would reflect
                                      the value of the underlying asset.) TCGA sec. 179 was enacted to make the tax consequences
                                      of the stock transfer similar to those of the asset transfer, although only if the transfer of the
                                      stock of the group member holding the asset occurred within 6 years of that member’s acquisi-
                                      tion of the asset. Because the transfers of the stock of the privatized utilities to the general pub-
                                      lic pursuant to the flotations of that stock would have triggered the application of TCGA sec.
                                      179 and taxation of the appreciation inherent in the assets the companies received from the var-
                                      ious U.K. Government-owned enterprises, Parliament specifically exempted the privatization
                                      share transfers from the application of that provision.
                                         4 Professor Littlechild was professor of commerce and head of the Department of Industrial

                                      Economics and Business Studies, University of Birmingham (on leave, 1989 to 1994) from 1975
                                      to 1994 (and honorary professor from 1994 until 2004).




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                                      308                 135 UNITED STATES TAX COURT REPORT                                       (304)


                                         Before that appointment, in 1983, the U.K. Secretary of
                                      State asked Professor Littlechild for his advice on how to
                                      regulate British Telecom in the light of its impending
                                      privatization. Professor Littlechild recommended a regulatory
                                      scheme which regulated prices rather than, as in the United
                                      States, maximum profits or rates of return. The premise of
                                      the scheme, which became known as ‘‘RPI – X’’, 5 was that, if
                                      the Government fixed prices (but not profits) for a set
                                      number of years, the privatized companies would have an
                                      incentive to reduce costs to maximize profits during that
                                      period. Prices would be reset (presumably downward) at the
                                      start of the next regulatory period, to garner for consumers
                                      the fruits of the prior period’s cost reductions. Profits might
                                      in a sense become excessive during any regulatory period
                                      (because a company achieved greater-than-anticipated
                                      savings and there was no mechanism for mid-period correc-
                                      tion), but balance would be reestablished at the start of the
                                      next period. The goal was to increase efficiency, encourage
                                      competition, and protect consumers. Under RPI – X, prices
                                      were not allowed to increase during the regulatory period,
                                      except to allow for inflation (i.e., increases in RPI) less an
                                      amount (the X factor, which did not vary during the period)
                                      intended to reflect expected, increasing efficiency.
                                         The U.K. Government set the X factors for the first regu-
                                      latory periods, just before the initial privatization, to be effec-
                                      tive for what was, in most cases, the 5-year period after
                                      privatization. Industry regulators subsequently reset the X
                                      factors, typically every 4 or 5 years. In some cases, particu-
                                      larly where investment requirements were high (e.g., in the
                                      case of companies that had underinvested while under public
                                      ownership), the X factor might be positive (RPI + X). That
                                      was the case for most of the RECs and WASCs.
                                         Each of the regulatory bodies for the privatized utilities
                                      followed the RPI – X regulatory method, which was adopted
                                      for 29 of the 32 windfall tax companies, the exceptions being
                                      the generating companies. On March 31, 1990, the RPI – X
                                      methodology as applied to the RECs came into effect for the
                                      5-year period ending March 31, 1995. As noted supra,
                                      because the RECs were in need of large capital expenditures
                                        5 RPI, which stands for retail price index, is comparable to the CPI (consumer price index)

                                      used for various purposes in the United States.




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                                      (304)                 PPL CORP. & SUBS. v. COMMISSIONER                                      309


                                      during the initial 5-year period, the U.K. Government set
                                      price controls for the RECs in the form of RPI + X; i.e., it pro-
                                      vided for annual increases in electricity distribution charges
                                      above the rate of inflation rather than reductions in those
                                      charges.
                                      Utility Profits, Share Prices, and Executive Compensation
                                      During the Initial Postprivatization Period
                                         During the initial postprivatization period (the initial
                                      period), the privatized utilities were able to increase effi-
                                      ciency and reduce operating costs to a greater degree than
                                      had been expected when the initial price controls were estab-
                                      lished. That ability led to higher-than-anticipated profits, 6
                                      which, in turn, led to higher-than-anticipated dividends and
                                      share price increases for the privatized utilities. The large
                                      profits, dividends, and share price increases resulted in
                                      sharply increased compensation for utility directors and
                                      executives, which, in some cases, arose through their share
                                      ownership and through bonus schemes. The popular press
                                      referred to those executives as ‘‘fat cats’’.
                                         The public viewed the privatized utilities’ initial period
                                      profits as excessive in relation to their flotation values. It
                                      also viewed the initial period compensation paid to the direc-
                                      tors and executives of those companies as excessive. Those
                                      concerns, as well as the increases in dividends and share
                                      prices, resulted in considerable public pressure on the utility
                                      industry regulators to intervene and take action that would
                                      result immediately in lower prices, before the expiration of
                                      the initial 5-year period. But because the incentive for
                                      increased efficiency (and, ultimately, lower prices) depended
                                      on the regulators’ not intervening until the end of the defined
                                      price control period, the regulators resisted that pressure and
                                      did not act until the end of the initial period, at which point
                                      they did tighten price controls and thereby transfer the ben-
                                      efit of reduced prices to utility customers. Despite those price
                                      adjustments, the public retained a strong feeling that the
                                      privatized utilities had unduly profited from privatization
                                        6 Among the privatized utilities, the RECs and the WASCs were particularly profitable during

                                      the initial period in that they recovered nearly all (over 90 percent for the WASCs and over
                                      80 percent for the RECs) of their shareholders’ initial investment at flotation within the first
                                      4 years.




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                                      310                 135 UNITED STATES TAX COURT REPORT                                       (304)


                                      and that customers had not shared equally in the gains
                                      therefrom.
                                      Development of the Windfall Tax
                                         Although the Labour Party had been fundamentally
                                      opposed to privatization, particularly with respect to the
                                      utilities, by 1992 the party reasoned that, because it would
                                      be costly and, given that much of the voting public had
                                      embraced share ownership, potentially unpopular, re-
                                      nationalization of those companies (when the party regained
                                      control of the Government) was unrealistic. The issue, then,
                                      was how the party might best channel the public concerns
                                      into developing policy.
                                         As early as 1992, the British press reported that the policy
                                      of an incoming Labour Party might include ‘‘a ‘windfall’ tax
                                      on the profits of privatized utilities such as gas and elec-
                                      tricity.’’ By 1994 the idea of a windfall tax had become a reg-
                                      ular feature in all Labour Party speeches and programs, and,
                                      in 1997, the party campaigned on a platform promising that
                                      it would (1) impose a windfall tax on the previously
                                      privatized utilities and (2) implement a welfare-to-work
                                      youth employment training program that the windfall tax
                                      would fund. Specifically, the Labour Party’s 1997 Election
                                      Manifesto contained the following promise:
                                      We will introduce a Budget * * * to begin the task of equipping the
                                      British economy and reforming the welfare state to get young people and
                                      the long-term unemployed back to work. This welfare-to-work programme
                                      will be funded by a windfall levy on the excess profits of the privatised
                                      utilities * * *.

                                         In May 1996, before the issuance of that manifesto, certain
                                      members of the Labour Party’s shadow treasury team, which
                                      included Geoffrey Robinson (Mr. Robinson), a Member of Par-
                                      liament, began designing the U.K. windfall tax legislation
                                      that the party would introduce to Parliament in the likely
                                      event that it won the 1997 election. To that end, Mr. Robin-
                                      son commissioned members of the tax consulting firm Arthur
                                      Andersen (the Andersen team) to assist the Labour Party’s
                                      shadow treasury team in developing the tax. The Andersen
                                      team consisted principally of Stephen Hailey, Christopher
                                      Osborne (Mr. Osborne), and Christopher Wales (Dr. Wales).
                                      The tax that the Andersen team devised was essentially the




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                                      (304)                 PPL CORP. & SUBS. v. COMMISSIONER                                      311


                                      windfall tax that Parliament enacted in July 1997. Mr.
                                      Osborne and Dr. Wales were the most involved members of
                                      the Andersen team.
                                         During their initial consideration of the design of the wind-
                                      fall tax, the Andersen team proposed three ‘‘simple’’ and
                                      three ‘‘complex’’ solutions for structuring the tax. The
                                      ‘‘simple’’ solutions were to tax either (1) turnover (gross
                                      receipts), (2) assets, or (3) profits. The ‘‘complex’’ solutions
                                      were to tax (1) excess profits, (2) excess shareholder returns,
                                      or (3) a ‘‘windfall’’ amount. The team members rejected the
                                      three ‘‘simple’’ solutions and the first two ‘‘complex’’ solutions
                                      for a variety of reasons. For example, they considered that a
                                      straightforward tax on profits, if prospective, would pose a
                                      risk of financial manipulation by the target companies (and,
                                      therefore, uncertainty as to its yield), a risk of public percep-
                                      tion that it would compromise existing corporate tax reliefs,
                                      and, if retrospective, a risk of criticism that it constituted a
                                      second tax on the same profits. And although Mr. Robinson
                                      and the Andersen team considered that there was ample
                                      rationale for a straightforward tax on either excess profits or
                                      excess shareholder returns, they concluded that the negative
                                      aspects (e.g., the difficulty in computing the ‘‘excess’’
                                      amounts, the need for a retrospective tax to be assured of
                                      raising a target amount, and, in the case of a tax on excess
                                      shareholder returns, the likelihood of taxing the wrong
                                      shareholders, i.e., shareholders who did not realize those
                                      returns) outweighed the positive ones.
                                         As a result of the perceived difficulties with the other
                                      approaches, Mr. Robinson and the Andersen team settled on
                                      the idea of a tax that would be a one-time (or, in U.K. par-
                                      lance, a ‘‘one-off ’’) tax on the ‘‘windfall’’ to the privatized
                                      utilities on privatization. The approach would be to impute
                                      a value to each company at privatization, using an appro-
                                      priate price-to-earnings ratio for each company’s profits
                                      during the first 5 years after flotation, recognize the ‘‘wind-
                                      fall’’ (the difference between the imputed value and the flota-
                                      tion price) as value forgone by taxpayers, and tax the
                                      privatized utilities on that ‘‘windfall’’ using established prin-
                                      ciples from capital gains tax legislation. 7 They reasoned that
                                        7 In November 1996, in a presentation to Gordon Brown (Labour’s next Chancellor of the Ex-

                                      chequer) and the Labour Party’s shadow treasury team, the Andersen team set forth the aver-
                                                                                               Continued




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                                      312                 135 UNITED STATES TAX COURT REPORT                                        (304)


                                      such a tax would factor in the privatized utilities’ ‘‘excess’’
                                      profitability, the discount on privatization, the unanticipated
                                      efficiency gains, and the perceived weakness of the initial
                                      regulatory regime.
                                         In November 1996, the foregoing proposal was reviewed
                                      and approved by Gordon Brown (who became Chancellor of
                                      the Exchequer when Labour returned to power in 1997) and
                                      the Labour Party’s shadow treasury team, and, after the
                                      Labour Party regained power in 1997, by the U.K. Treasury
                                      Department, Inland Revenue, and the Parliamentary
                                      drafters (who drafted the actual legislative language), after
                                      which the draft legislation was disseminated to members of
                                      Parliament and enacted in July 1997.
                                      Description of the Windfall Tax
                                        On July 31, 1997, Parliament enacted the windfall tax. It
                                      constituted part I of chapter 58, Finance (No. 2) Act 1997
                                      (the Act), and provided, in clause 1, as follows:
                                        1.—(1) Every company which, on 2nd July 1997, was benefitting from a
                                      windfall from the flotation of an undertaking whose privatisation involved
                                      the imposition of economic regulation shall be charged with a tax (to be
                                      known as the ‘‘windfall tax’’) on the amount of that windfall.
                                        (2) Windfall tax shall be charged at the rate of 23 per cent.
                                        (3) Schedule 1 to this Act (which sets out how to quantify the windfall
                                      from which a company was benefitting on 2nd July 1997) shall have effect.

                                      Clause 2 makes clear that the windfall tax is to apply to the
                                      32 privatized utilities, clause 3 provides for the administra-
                                      tion of the tax by the Commissioners of Inland Revenue,
                                      clause 4 covers the relationship between the windfall tax and
                                      profit-related pay schemes under the then-existing U.K. law,
                                      and clause 5 sets forth the definitions of terms used in part
                                      I.
                                         Paragraphs 1 and 2 of schedule 1, referred to in clause
                                      1(3), provide in pertinent part as follows:
                                      age price-to-earnings ratios for the various privatized utility groups during the first 5 years after
                                      privatization, which ranged from a high of 12.7 after-tax and 9.4 pre-tax (both for the Scottish
                                      Electricity companies) to a low of 9.4 after-tax (for the WASCs) and 7.3 pre-tax (for the RECs).
                                      The presentation also set forth the potential revenue yield from using price-to-pre-tax earnings
                                      ratios of 6 through 8 to ascertain the imputed values of the companies and showed that a poten-
                                      tial revenue yield of £6.4 billion could be achieved by using for that purpose either a pre-tax
                                      ratio of 6 or an after-tax ratio of 8.25 coupled with a 33-percent windfall tax rate on the excess
                                      of the imputed value over the flotation price.




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                                         1.—(1) * * * where a company was benefitting on 2nd July 1997 from
                                      a windfall from the flotation of an undertaking whose privatisation
                                      involved the imposition of economic regulation, the amount of that windfall
                                      shall be taken for the purposes of this Part to be the excess (if any) of the
                                      amount specified in sub-paragraph (2)(a) below over the amount specified
                                      in sub-paragraph (2)(b) below.
                                         (2) Those amounts are the following amounts * * *, that is to say—
                                         (a) the value in profit-making terms of the disposal made on the occasion
                                      of the company’s flotation; and
                                         (b) the value which for privatisation purposes was put on that disposal.
                                                             Value of a disposal in profit-making terms
                                        2.—(1) * * * the value in profit-making terms of the disposal made on
                                      the occasion of a company’s flotation is the amount produced by multi-
                                      plying the average annual profit for the company’s initial period by the
                                      applicable price-to-earnings ratio.
                                        (2) For the purposes of this paragraph the average annual profit for a
                                      company’s initial period is the amount produced by the following formula—
                                                                                A = 365 × P/D
                                      Where—
                                      A is the average annual profit for the company’s initial period;
                                      P is the amount * * * of the total profits for the company’s initial period;
                                      and
                                      D is the number of days in the company’s initial period.
                                        (3) For the purposes of this paragraph the applicable price-to-earnings
                                      ratio is 9.

                                         Paragraph 3 defines ‘‘value put on a disposal for
                                      privatisation purposes’’; i.e., the flotation value. Paragraph 4
                                      provides for an appropriate percentage reduction of a com-
                                      pany’s ‘‘value in profit-making terms’’ and its flotation value
                                      where less than 85 percent of the company’s ordinary share
                                      capital was ‘‘offered for disposal on the occasion of the com-
                                      pany’s flotation.’’ Paragraph 5 sets forth the criteria for
                                      determining a company’s ‘‘total profits for a company’s initial
                                      period’’ and generally provides that those profits are its after-
                                      tax profits for financial reporting purposes as determined
                                      under relevant provisions of the U.K. Companies Act 1985. 8
                                      Paragraph 6 defines the term ‘‘initial period’’ in relation to
                                      a company as the period encompassing the company’s 4
                                      financial years after flotation or such lesser period of exist-
                                        8 The parties stipulate that profit for a windfall tax company’s initial period was equal to the

                                      company’s ‘‘profit on ordinary activities after tax’’ as determined under U.K. financial accounting
                                      principles and standards and as shown in the company’s profit and loss accounts prepared in
                                      accordance with the U.K. Companies Act of 1985, as amended.




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                                      ence for companies operating for less than 4 financial years
                                      after privatization and before April 1, 1997. 9 Paragraph 7
                                      provides for the apportionment of the windfall amount sub-
                                      ject to tax between companies that previously had been a
                                      single privatized company. Lastly, paragraph 8 defines the
                                      term ‘‘financial year’’ and other terms for purposes of the
                                      windfall tax legislation.
                                        The Act required that affected companies pay the windfall
                                      tax in two installments: one-half on or before December 1,
                                      1997, and the other half on or before December 1, 1998.
                                      Public Statements Regarding the Windfall Tax
                                        On July 2, 1997, Gordon Brown, then Chancellor of the
                                      Exchequer, gave the Budget Speech announcing the windfall
                                      tax, and he described the windfall tax as follows:
                                        Our reform to the welfare state—and the programme to move the
                                      unemployed from welfare to work—is funded by a new and one-off windfall
                                      tax on the excess profits of the privatised utilities.

                                                               *   *  *    *   *    *   *
                                        In determining the details of the tax, I believe I have struck a fair bal-
                                      ance between recognising the position of the utilities today and their
                                      under-valuation and under-regulation at the time of privatisation.
                                        The windfall tax will be related to the excessively high profits made
                                      under the initial regime.
                                        A company’s tax bill will be based on the difference between the value
                                      that was placed on it at privatisation, and a more realistic market valu-
                                      ation based on its after-tax profits for up to the first 4 full accounting
                                      years following privatisation.

                                       Also on July 2, 1997, Inland Revenue issued an announce-
                                      ment describing the tax as follows:
                                      The Chancellor today announced the introduction of the proposed windfall
                                      tax on the excess profits of the privatised utilities. The one-off tax will
                                      apply to companies privatised by flotation and regulated by statute. The
                                      tax will be charged at a rate of 23 per cent on the difference between com-
                                      pany value, calculated by reference to profits over a period of up to four
                                      years following privatisation, and the value placed on the company at the
                                      time of flotation. The expected yield is around 5.2 billion Pounds.

                                        The Inland Revenue announcement also stated that the
                                      price-to-earnings ratio of 9 ‘‘approximates to the lowest aver-
                                        9 From this point forward, the term ‘‘initial period’’ refers to the 4-year windfall tax initial

                                      period rather than the 5-year initial postprivatization period under the RPI – X regulatory re-
                                      gime.




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                                      age price/earnings ratio of the taxpaying companies during
                                      the relevant periods, grouped by sector.’’
                                        Around that same time, Her Majesty’s Treasury issued a
                                      publication entitled ‘‘Explanatory Notes: Summer Finance
                                      Bill 1997’’, which describes in detail the various clauses of
                                      the windfall tax, and which contains a section entitled ‘‘Back-
                                      ground’’, stating:
                                        The introduction of the windfall tax is in accordance with the commit-
                                      ment in the Government’s Election Manifesto to raise a tax on the excess
                                      profits of the privatised utilities.
                                        The profits made by these companies in the years following privatisation
                                      were excessive when considered as a return on the value placed on the
                                      companies at the time of their privatisation by flotation. This is because
                                      the companies were sold too cheaply and regulation in the relevant periods
                                      was too lax.
                                        The windfall tax will raise around £5.2 billion and fund the Govern-
                                      ment’s welfare to work programme.

                                      Parliamentary Debate Preceding Enactment of the Windfall
                                      Tax
                                        Mr. Robinson, in opening the debate in the House of Com-
                                      mons on the windfall tax legislation, offered the following
                                      introductory observations:
                                      Clause 1 heads a group of provisions that together introduce the windfall
                                      tax, thus meeting the commitment that we made in our election manifesto
                                      to introduce a windfall levy on the excess profits of the privatised utilities.
                                      Those companies were sold too cheaply, so the taxpayer got a bad deal.
                                      Their initial regulation in the period immediately following privatisation
                                      was too lax, so the customer got a bad deal.
                                      As a result, the companies were able to make profits that represented an
                                      excessive return on the value placed on them at the time of their flotation.
                                      We are now putting right the failures of the past by levying a one-off tax.
                                      The yield of around £5.2 billion will fund our welfare-to-work programme,
                                      and the new deal that we have announced for the young long-term
                                      unemployed and schools.
                                      Clause 1 provides a one-off charge, set at a rate of 23 per cent. It also gives
                                      effect to schedule 1, which will be debated in Standing Committee. It may
                                      be helpful if I set the clause in context by explaining briefly how the wind-
                                      fall tax works.
                                      Windfall tax is charged on the difference between the value of the com-
                                      pany, calculated by reference to the profits made in the initial period after
                                      privatisation, and the value placed on the company at the time of
                                      privatisation. The value of the company is calculated by multiplying the
                                      average annual profit after tax for, normally, the first four financial years




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                                      after flotation, by a price-to-earnings ratio of nine. That ratio approximates
                                      to the lowest average * * * sectoral price-to-earnings ratio of the compa-
                                      nies liable to the tax. * * *

                                        The Conservative Party Shadow Chancellor of the
                                      Exchequer, Peter Lilley, MP (Mr. Lilley), summarized his
                                      party’s opposition to the windfall tax, and, in particular,
                                      clause 1 imposing the tax, as follows:
                                      We have four major criticisms of the clause and the windfall tax that it
                                      initiates. First, the clause makes it clear that the tax will not be borne by
                                      the so-called fat cats and speculators, criticisms of whom justified its
                                      introduction. Secondly, it makes no meaningful attempt to define what is
                                      a windfall and should therefore bear the tax. Thirdly, it increases instead
                                      of reduces cost to customers; any improved profitability should be passed
                                      on to customers in the form of lower prices. Finally, it is retrospective,
                                      arbitrary and symptomatic of the Government’s belief in arbitrary govern-
                                      ment, rather than in government by known and predictable rules.

                                        Mr. Lilley’s comments during the debate illustrate his
                                      understanding of how the tax would affect the privatized
                                      utilities:
                                      They [the government] have taken average profits over four years after
                                      flotation. If those profits exceed one ninth of the flotation value, the com-
                                      pany will pay windfall tax on the excess. * * *

                                      And further:
                                      Essentially, the windfall tax boils down to a tax on success. Companies
                                      that failed to improve their profitability over the said period will pay much
                                      less or even no windfall tax. * * *

                                        Other members of the Conservative Party repeated the
                                      idea that the windfall tax was a tax on profits or on success.
                                        Several Labour Party members defended the tax as a
                                      legitimate method of recouping the difference between what
                                      should have been charged for the privatized utilities at the
                                      time of the various privatizations and the actual flotation
                                      prices. For example, one such member, Mr. Hancock,
                                      observed:
                                      The overwhelming majority of people have embraced the tax because most
                                      think that they were ripped off in the first place when the companies were
                                      sold. The companies were sold at hopelessly undervalued prices at a time
                                      when most people felt that the companies were better and safer in the
                                      hands of the public sector. The legitimacy of the tax among the general




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                                      public is that they feel that they are getting back what they should have
                                      had in the first place.

                                      Another, Mr. Stevenson, echoed Mr. Hancock’s remarks:
                                      I asked the Library to do some research on the difference between the pro-
                                      ceeds from privatization of the utilities, not including the railways, and
                                      their stock market share price the minute they were floated. I asked the
                                      Library to tot up the difference. It was almost £6 billion at the outset of
                                      privatisation and it has increased over the years. So the snapshot figure
                                      of £6 billion by which the Government undersold public assets, and there-
                                      fore robbed the public, is a conservative estimate.

                                      Overall Effect of the Windfall Tax on the Windfall Tax
                                      Companies
                                         Thirty-one of the thirty-two windfall tax companies had a
                                      windfall tax liability. None of the 31 companies that paid
                                      windfall tax had a windfall tax liability that exceeded its
                                      total profits over its initial period. Twenty-nine of those
                                      thirty-two companies had initial periods of 4 full financial
                                      years. Twenty-seven of those twenty-nine companies had ini-
                                      tial periods consisting of 1,461 days, i.e., three 365-day years
                                      and one 366-day (leap) year. The other 2 of those 29 compa-
                                      nies had initial periods of 1,456 days and 1,463 days, 10
                                      respectively. The remaining three companies had initial
                                      periods of less than 4 full financial years, consisting of 1,380
                                      days, 316 days, and (in the case of British Energy, which
                                      because of low initial profits, paid no windfall tax) 260 days,
                                      respectively.
                                      Effect of the Windfall Tax on SWEB
                                         Before the enactment of the windfall tax, SWEB met with
                                      members of the shadow treasury team (which included Mr.
                                      Robinson) and the Andersen team in an effort to influence
                                      the development of the windfall tax. SWEB’s then treasurer,
                                      Charl Oo¨sthuizen (Mr. Oo¨sthuizen), was the SWEB officer
                                      principally engaged in that effort. Upon the announcement of
                                      the windfall tax, SWEB realized that its liability for the tax
                                      would greatly exceed its prior estimates thereof, and it inves-
                                      tigated ways of reducing that liability. SWEB determined that
                                      it could reduce its windfall tax liability if it could reduce its
                                        10 The parties stipulated an initial period of 1,463 days, although that would seem to exceed

                                      4 years, even taking into account a leap year.




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                                      earnings for the 4-year initial period. To that end, SWEB
                                      identified a theretofore unidentified liability of £12 million
                                      for tree-trimming costs (trees interfered with its distribution
                                      network) that SWEB should have taken account of in deter-
                                      mining its earnings for its fiscal year ended March 31, 1995.
                                      SWEB’s outside auditor approved a restatement of its 1995
                                      earnings and, after an initial objection, Inland Revenue did
                                      as well.
                                         SWEB filed its windfall tax return with Inland Revenue on
                                      November 7, 1997, and paid its £90,419,265 windfall tax
                                      liability (which was based on 4 full financial years totaling
                                      1,461 days), as required, in two installments, on December 1,
                                      1997 and 1998. The first installment was paid 1 day after
                                      the close of SWEB’s tax year (for U.S. Federal income tax pur-
                                      poses) ending November 30, 1997.

                                                                                  OPINION

                                      I. The Windfall Tax Issue
                                           A. Principles of Creditability
                                         Pursuant to section 901(a) and (b)(1), a domestic corpora-
                                      tion may claim a foreign tax credit against its Federal
                                      income tax liability for ‘‘the amount of any income, war
                                      profits, and excess profits taxes paid or accrued during the
                                      taxable year to any foreign country’’. We must decide
                                      whether the windfall tax constitutes a creditable income or
                                      excess profits tax under section 901.
                                         In Phillips Petroleum Co. v. Commissioner, 104 T.C. 256,
                                      283–284 (1995), we described the background, purpose, and
                                      function of the foreign tax credit provisions of the Internal
                                      Revenue Code as follows:
                                         The foreign tax credit provisions were enacted primarily to mitigate the
                                      heavy burden of double taxation for U.S. corporations operating abroad
                                      who were subject to taxation in both the United States and foreign coun-
                                      tries. Burnet v. Chicago Portrait Co., 285 U.S. 1, 9 (1932); F.W. Woolworth
                                      Co. v. Commissioner, 54 T.C. 1233, 1257 (1970). These provisions were
                                      originally designed to produce uniformity of tax burdens among U.S. tax-
                                      payers, irrespective of whether they were engaged in business abroad or
                                      in the United States. H. Rept. 1337, 83d Cong., 2d Sess. 76 (1954). A sec-
                                      ondary objective of the foreign tax credit provisions was to encourage, or
                                      at least not to discourage, American foreign trade. H.R. Rept. 767, 65th




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                                      Cong., 2d Sess. (1918), 1939–1 C.B. (Part 2) 86, 93; Commissioner v. Amer-
                                      ican Metal Co., 221 F.2d 134, 136 (2d Cir. 1955), affg. 19 T.C. 879 (1953).
                                        Taxes imposed by the government of any foreign country were initially
                                      fully deductible in computing net taxable income, pursuant to our income
                                      tax law of 1913. Revenue Act of 1913, ch. 16, 38 Stat. 114. Specific foreign
                                      taxes became creditable pursuant to the Revenue Act of 1918. The foreign
                                      taxes that are presently creditable pursuant to section 901, specifically,
                                      income, war profits, and excess profits taxes, have remained unchanged
                                      and are the same taxes that were creditable in 1918. Revenue Act of 1918,
                                      ch. 18, sec. 222(a)(1), 40 Stat. 1073.
                                        The definition of income, war profits, and excess profits taxes has
                                      evolved case by case. The temporary and final regulations, adopted rel-
                                      atively recently, outline the guiding principles established by prior case
                                      law. * * *

                                        The Supreme Court in Biddle v. Commissioner, 302 U.S.
                                      573, 579 (1938), established the principle, uniformly followed
                                      in subsequent caselaw and enshrined in the regulations,
                                      that, in deciding whether a foreign tax is an ‘‘income tax’’ for
                                      purposes of section 901, the term ‘‘income tax’’ will be given
                                      meaning by referring to the U.S. income tax system and
                                      measuring the foreign tax against the essential features of
                                      that system:
                                      The phrase ‘‘income taxes paid,’’ as used in our own revenue laws, has for
                                      most practical purposes a well understood meaning * * *. It is that
                                      meaning which must be attributed to it * * *.

                                         The final regulations referred to in Phillips Petroleum are
                                      the regulations that were issued in 1983, were in effect in
                                      1997 (the year in issue), and remain in effect today (some-
                                      times, the 1983 regulations).
                                         Section 1.901–2, Income Tax Regs., is entitled ‘‘Income,
                                      war profits, or excess profits tax paid or accrued.’’ Paragraph
                                      (a) thereof is entitled ‘‘Definition of income, war profits, or
                                      excess profits tax’’, and, in pertinent part, it provides as fol-
                                      lows (adopting the term ‘‘income tax’’ to refer to an ‘‘income’’,
                                      ‘‘war’’, or ‘‘excess profits’’ tax):
                                        (1) In general. * * * A foreign levy is an income tax if and only if—
                                        (i) It is a tax; and
                                        (ii) The predominant character of that tax is that of an income tax in
                                      the U.S. sense.

                                      Paragraph (a) further provides that, with exceptions not rel-
                                      evant to this case, ‘‘a tax either is or is not an income tax,
                                      in its entirety, for all persons subject to the tax.’’




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                                        In pertinent part, section 1.901–2(a)(3), Income Tax Regs.,
                                      defines the term ‘‘predominant character’’ as follows: ‘‘The
                                      predominant character of a foreign tax is that of an income
                                      tax in the U.S. sense * * * [i]f, within the meaning of para-
                                      graph (b)(1) of this section, the foreign tax is likely to reach
                                      net gain in the normal circumstances in which it applies’’.
                                        In pertinent part, section 1.901–2(b)(1), Income Tax Regs.,
                                      provides:
                                      A foreign tax is likely to reach net gain in the normal circumstances in
                                      which it applies if and only if the tax, judged on the basis of its predomi-
                                      nant character, satisfies each of the realization, gross receipts, and net
                                      income requirements set forth in paragraphs (b)(2), (b)(3) and (b)(4),
                                      respectively, of this section.

                                        Pursuant to section 1.901–2(b)(2)(i), Income Tax Regs. (as
                                      pertinent to this case), a foreign tax satisfies the realization
                                      requirement:
                                      if, judged on the basis of its predominant character, it is imposed * * *
                                      [u]pon or subsequent to the occurrence of events (‘‘realization events’’) that
                                      would result in the realization of income under the income tax provisions
                                      of the Internal Revenue Code * * *

                                        Pursuant to section 1.901–2(b)(3)(i), Income Tax Regs. (as
                                      pertinent to this case), a foreign tax satisfies the gross
                                      receipts requirement ‘‘if, judged on the basis of its predomi-
                                      nant character, it is imposed on the basis of * * * [g]ross
                                      receipts’’.
                                        Pursuant to section 1.901–2(b)(4)(i), Income Tax Regs., a
                                      foreign tax satisfies the net income requirement:
                                      if, judged on the basis of its predominant character, the base of the tax
                                      is computed by reducing gross receipts * * * to permit—
                                         (A) Recovery of the significant costs and expenses * * * attributable
                                      * * * to such gross receipts; or
                                         (B) Recovery of such significant costs and expenses computed under a
                                      method that is likely to * * * [approximate or be greater than] recovery
                                      of such significant costs and expenses.

                                      Section 1.901–2(b)(4)(i), Income Tax Regs., further provides:
                                      A foreign tax law permits recovery of significant costs and expenses even
                                      if such costs and expenses are recovered at a different time than they
                                      would be if the Internal Revenue Code applied,[11] unless the time of

                                        11 E.g., items deductible under the Internal Revenue Code and capitalized and amortized

                                      under the foreign tax system.




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                                      recovery is such that under the circumstances there is effectively a denial
                                      of such recovery. * * * A foreign tax law that does not permit recovery of
                                      one or more significant costs or expenses, but that provides allowances
                                      that effectively compensate for nonrecovery of such significant costs or
                                      expenses, is considered to permit recovery of such costs or expenses. * * *
                                      A foreign tax whose base is gross receipts or gross income does not satisfy
                                      the net income requirement except in the rare situation where that tax is
                                      almost certain to reach some net gain in the normal circumstances in
                                      which it applies because costs and expenses will almost never be so high
                                      as to offset gross receipts or gross income, respectively, and the rate of the
                                      tax is such that after the tax is paid persons subject to the tax are almost
                                      certain to have net gain. * * *

                                        The Secretary first adopted the ‘‘predominant character’’
                                      standard in the 1983 regulations. In the preamble to those
                                      regulations (the preamble), the Secretary stated that the
                                      standard:
                                      adopts the criterion for creditability set forth in Inland Steel Company v.
                                      U.S., 677 F.2d 72 (Ct. Cl. 1982), Bank of America National Trust and
                                      Savings Association v. U.S., 459 F.2d 513 (Ct. Cl. 1972), and Bank of
                                      America National Trust and Savings Association v. Commissioner, 61 T.C.
                                      752 (1974). * * * [T.D. 7918, 1983–2 C.B. 113, 114.]

                                         In the cases the Secretary cited in the preamble and in
                                      other, more recent, cases, the issue or test regarding the
                                      status of a foreign tax as a creditable income tax appears to
                                      be whether the foreign tax in question is designed to and
                                      does in fact reach net gain in the normal circumstances in
                                      which it applies. Thus, in Bank of Am. Natl. Trust & Sav.
                                      Association v. United States, 198 Ct. Cl. 263, 274, 459 F.2d
                                      513, 519 (1972) (Bank of America I), which the Secretary
                                      cites in the preamble, the Court of Claims, in considering the
                                      creditability of a gross income tax that, on its face, was not
                                      a tax on net income or gain, concluded that such a tax could
                                      be creditable under certain circumstances:
                                        We do not, however, consider it all-decisive whether the foreign income
                                      tax is labeled a gross income or a net income tax, or whether it specifically
                                      allows the deduction or exclusion of the costs or expenses of realizing the
                                      profit. The important thing is whether the other country is attempting to
                                      reach some net gain, not the form in which it shapes the income tax or
                                      the name it gives. In certain situations a levy can in reality be directed
                                      at net gain even though it is imposed squarely on gross income. That
                                      would be the case if it were clear that the costs, expenses, or losses
                                      incurred in making the gain would, in all probability, always (or almost
                                      so) be the lesser part of the gross income. In that situation there would




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                                      always (or almost so) be some net gain remaining, and the assessment
                                      would fall ultimately upon that profit.[12]

                                         In Inland Steel Co. v. United States, 230 Ct. Cl. 314, 325,
                                      677 F.2d 72, 80 (1982), also cited in the preamble, the Court
                                      of Claims, relying on its earlier decision in Bank of America
                                      I, emphasized the purpose of the foreign country in designing
                                      the tax to reach net gain: 13
                                      To qualify as an income tax in the United States sense, the foreign country
                                      must have made an attempt always to reach some net gain in the normal
                                      circumstances in which the tax applies. * * * The label and form of the
                                      foreign tax is not determinative. * * *

                                         In Bank of Am. Natl. Trust & Sav. Association v. Commis-
                                      sioner, 61 T.C. 752, 760 (1974), affd. without published
                                      opinion 538 F.2d 334 (9th Cir. 1976), the third case the Sec-
                                      retary cites in the preamble, we described the analysis of the
                                      Court of Claims in Bank of America I as ‘‘[distilling]’’ the
                                      governing test to determine whether a foreign income tax
                                      qualifies as a creditable income tax within the meaning of
                                      section 901(b)(1); i.e., whether the tax was ‘‘designed to fall
                                      on some net gain or profit’’. That test, we added, ‘‘is the
                                      proper one to apply’’. Id.
                                         Moreover, courts have construed the 1983 regulations in a
                                      manner consistent with the analysis in Bank of America I.
                                      For example, the Court of Appeals for the Second Circuit, in
                                      Texasgulf, Inc. v. Commissioner, 172 F.3d 209 (2d Cir. 1999)
                                      (Texasgulf II), affg. 107 T.C. 51 (1996) (Texasgulf I), consid-
                                      ered the creditability of the Ontario Mining Tax (OMT), which
                                      imposed a graduated tax on Ontario mines to the extent that
                                      ‘‘profit’’, as defined for OMT purposes, exceeded a statutory
                                      exemption. In determining ‘‘profit’’ for OMT purposes, tax-
                                      payers were allowed to deduct ‘‘an allowance for profit in
                                      respect of processing’’ (processing allowance) in lieu of certain
                                      expenses that were attributable to OMT gross receipts but
                                        12 The test the Court of Claims adopted for the creditability of a foreign gross income tax (the

                                      virtual certainty of net gain) is specifically incorporated in the regulations. See sec. 1.901–
                                      2(b)(4)(i), Income Tax Regs., quoted supra.
                                        13 As the Court of Appeals for the Second Circuit stated in Texasgulf, Inc. v. Commissioner,

                                      172 F.3d 209, 216 (2d Cir. 1999) (Texasgulf II), affg. 107 T.C. 51 (1996) (Texasgulf I), the pre-
                                      amble to the 1983 regulations ‘‘reaffirms Inland Steel’s general focus upon the extent to which
                                      a tax reaches net gain’’. In Texasgulf II, the Court of Appeals found creditable under the pre-
                                      dominant character standard in the 1983 regulations a tax, the Ontario Mining Tax, that the
                                      Court of Claims, in Inland Steel Co. v. United States, 230 Ct. Cl. 314, 677 F.2d 72 (1982), had
                                      found noncreditable before the promulgation of those regulations. See discussion infra.




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                                      that were not recoverable under the tax (nonrecoverable
                                      expenses). The taxpayer had presented empirical evidence to
                                      show that, across the industry, the processing allowance was
                                      likely to exceed nonrecoverable expenses for the tax years at
                                      issue. In answer to the Commissioner’s objection that the
                                      taxpayer had not shown anything more than an accidental
                                      relationship between the processing allowance and the non-
                                      recoverable expenses, the Court of Appeals stated:
                                      At bottom, the Commissioner’s argument is that the type of quantitative,
                                      empirical evidence presented in this case is not relevant to the creditability
                                      inquiry. However, the language of § 1.901–2—specifically, ‘‘effectively com-
                                      pensate’’ and ‘‘approximates, or is greater than’’—suggests that quan-
                                      titative empirical evidence may be just as appropriate as qualitative ana-
                                      lytic evidence in determining whether a foreign tax meets the net income
                                      requirement. We therefore hold that empirical evidence of the type pre-
                                      sented in this case may be used to establish that an allowance effectively
                                      compensates for nonrecoverable expenses within the meaning of § 1.901–
                                      2(b)(4). [Id. at 216; fn. ref. omitted.]

                                      The Court of Appeals concluded:
                                      Given the large size and representative nature of the sample considered,
                                      these statistics suffice to show that the Tax Court did not clearly err in
                                      finding that the processing allowance was likely to exceed nonrecoverable
                                      expenses for the tax years at issue. Texasgulf has therefore met its burden
                                      of proving that the predominant character of the OMT * * * is such that
                                      the processing allowance effectively compensates for any nonrecoverable
                                      costs. [Id. at 215–216.]

                                         In reaching their decisions, both the Court of Appeals and
                                      this Court distinguished Inland Steel Co. v. United States,
                                      supra (which held the same OMT to be noncreditable). The
                                      former distinguished that case on the ground that it was
                                      decided before the promulgation of section 1.901–2, Income
                                      Tax Regs., and, in particular, before the adoption of the rule
                                      that a foreign tax law that ‘‘provides allowances that effec-
                                      tively compensate for non-recovery of * * * significant costs
                                      or expenses * * * is considered to permit recovery of such
                                      costs and expenses.’’ Texasgulf II, 172 F.3d at 216–217. We
                                      distinguished Inland Steel not only on that ground but also
                                      on the ground that the case was governed by the ‘‘predomi-
                                      nant character’’ test, which replaced the ‘‘substantial equiva-
                                      lence’’ test under which Inland Steel was decided. Texasgulf
                                      I, 107 T.C. at 69–70. In reaching that conclusion we stated
                                      that use of the ‘‘predominant character’’ and ‘‘effectively com-




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                                      pensates’’ tests represented ‘‘a change from the history and
                                      purpose approach used in cases decided before the 1983 regu-
                                      lations applied a factual, quantitative approach.’’ Id. at 70.
                                         In Exxon Corp. v. Commissioner, 113 T.C. 338 (1999), we
                                      considered the creditability of the U.K. petroleum revenue
                                      tax (PRT) under section 901 and the 1983 regulations. We
                                      found that a purpose of the PRT was ‘‘to tax extraordinary
                                      profits of oil and gas companies relating to the North Sea.’’
                                      Id. at 344. With limited exceptions, the tax base subject to
                                      PRT was gross income relating to oil and gas recovery activi-
                                      ties less ‘‘all significant costs and expenses, except interest
                                      expense’’. 14 Id. at 345. In lieu of an interest expense deduc-
                                      tion, the law provided a deduction for ‘‘uplift’’; i.e., ‘‘amounts
                                      equal to 35 percent of most capital expenditures relating to
                                      a North Sea field’’. Id. at 347.
                                         With respect to the predominant character of the tax, we
                                      found: ‘‘The purpose, administration, and structure of PRT
                                      indicate that PRT constitutes an income or excess profits tax
                                      in the U.S. sense.’’ Id. at 356. We stated that the evidence
                                      at trial showed ‘‘that special allowances and reliefs under PRT
                                      significantly exceed the amount of disallowed interest
                                      expense for Exxon and other oil companies’’, and we quoted
                                      the testimony of the U.K. Government official who first pre-
                                      sented PRT to the U.K. House of Lords for formal consider-
                                      ation that ‘‘ ‘of course, this tax [PRT] represents an excess
                                      profits tax.’ ’’ Id. at 357. We rejected as irrelevant the
                                      Commissioner’s contention that a company-by-company anal-
                                      ysis showed that most of the companies operating in the
                                      North Sea did not have uplift allowance greater than or
                                      equal to the disallowed interest expense, and we agreed with
                                      Exxon that the ‘‘PRT was designed to tax excess profits from
                                      North Sea oil and gas production[,] which generally were
                                      earned by major oil and gas companies[,] which owned the
                                      largest and most profitable fields in the North Sea.’’ Id. at
                                      359. We then noted that the vast majority of those companies
                                      ‘‘had uplift allowance in excess of nonallowed interest
                                      expense.’’ 15 Id. Finally, we concluded that ‘‘the predominant
                                        14 The denial of a deduction for interest was designed to prevent the use of intercompany debt

                                      to avoid or minimize liability for the tax. Exxon Corp. v. Commissioner, 113 T.C. 338, 345 (1999).
                                        15 Earlier in Exxon Corp. v. Commissioner, supra at 352, in discussing the predominant char-

                                      acter standard, we made the following observation regarding sec. 1.901–2, Income Tax Regs.:
                                           The regulations * * * provide that taxes either are or are not to be regarded as income taxes




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                                      character of PRT constitutes an excess profits or income tax
                                      in the U.S. sense’’ creditable under section 901. Id.
                                           B. Arguments of the Parties
                                           1. Petitioner’s Arguments
                                         Petitioner argues that, given the historical development,
                                      design, and actual operation of the windfall tax, it constitutes
                                      a creditable tax on excess profits.
                                         Petitioner rejects respondent’s view that, in determining
                                      the creditability of the windfall tax, we are constrained by
                                      the text of the statute. Rather, petitioner argues that we may
                                      consider extrinsic evidence of the purpose and effect of the
                                      tax as applied to the windfall tax companies. As petitioner
                                      states: ‘‘The determination of whether a foreign tax is
                                      designed to fall on some net gain or profit depends on the
                                      substance, and not the form or label, of the tax.’’ In support
                                      of its position, petitioner relies, in large part, on the decisions
                                      of this Court in Exxon Corp. v. Commissioner, supra, Texas-
                                      gulf I, and Phillips Petroleum Co. v. Commissioner, 104 T.C.
                                      256 (1995), in each of which we considered evidence of the
                                      purpose, design, and operation of the foreign tax in question
                                      in considering creditability.
                                         With respect to the development and design of the tax,
                                      petitioner offers the trial testimony of Professor Littlechild,
                                      two members of the Andersen team (Mr. Osborne and Dr.
                                      Wales), and an exhibit constituting Mr. Robinson’s trial testi-
                                      mony in Entergy Corp. v. Commissioner, T.C. Memo. 2010–
                                      198, filed today, which also involves the creditability of the
                                      windfall tax. Petitioner notes that Professor Littlechild’s
                                      testimony establishes that he designed the regulatory system
                                      (RPI – X) that allowed the privatized utilities to realize the
                                      higher-than-anticipated profits during the initial period after
                                      flotation. Petitioner also notes that both Mr. Osborne and Dr.
                                      Wales (members of the Andersen team who testified as
                                      experts regarding the regulatory and political concerns that
                                      led to enactment of the windfall tax) stated that (1) the
                                      in their entirety for all persons subject to the taxes. See sec. 1.901–2(a), Income Tax Regs. Re-
                                      spondent does not interpret this provision as requiring that, in order to qualify as an income
                                      tax, a tax in question must satisfy the predominant character test in its application to all tax-
                                      payers. Rather, respondent interprets this provision as requiring that in order to qualify as an
                                      income tax a tax must satisfy the predominant character test in its application to a substantial
                                      number of taxpayers.




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                                      rationale for the tax was the perceived excess profits the
                                      privatized utilities earned during the initial period and (2)
                                      the actual form of the tax was adopted for ‘‘presentational’’
                                      reasons. 16 Mr. Robinson’s testimony in Entergy is consistent
                                      with that of Mr. Osborne and Dr. Wales, and it reaches the
                                      same principal conclusion: The intent was to tax the excess
                                      profits of the privatized utilities.
                                        Petitioner also offers the testimony of Mark Ballamy (Mr.
                                      Ballamy) and Edward Maydew (Professor Maydew), both
                                      experts in accounting, the former the founder of a U.K.
                                      accounting firm, the latter a professor of accounting at the
                                      University of North Carolina. Petitioner claims that the sum
                                      and substance of Mr. Ballamy’s testimony (which dealt with
                                      U.K. financial accounting concepts under the windfall profits
                                      tax statute) ‘‘establishes that the windfall tax fell on the
                                      excess profits of the Windfall Tax Companies during their
                                      initial periods and that all of these profits represented
                                      realized profits’’. Professor Maydew testified regarding U.K.
                                      and U.S. financial accounting concepts and that the windfall
                                      tax was, in substance, a tax on income, similar in operation
                                      to prior U.S. and U.K. excess profits taxes. Petitioner claims
                                      that Professor Maydew’s testimony confirms that of Mr.
                                      Ballamy that the U.K. and U.S. concepts of realization are
                                      fundamentally the same, thereby satisfying the regulations’
                                      realization requirement.
                                        Petitioner’s final expert witness was Stewart C. Myers
                                      (Professor Myers), professor of finance at MIT’s Sloan School
                                      of Management. Professor Myers’ research and teaching
                                      focus is, in part, on the valuation of real and financial assets.
                                      Petitioner points to Professor Myers’ testimony that the dif-
                                      ferences in windfall tax payments by the privatized compa-
                                      nies cannot be explained by differences in flotation value or
                                      by changes in value after flotation and that the tax ‘‘operated
                                      as an excess-profits tax, not as a tax on value, change in
                                      value or undervaluation.’’ 17
                                         16 Dr. Wales testified that, during a Nov. 6, 1996, meeting with Gordon Brown, the Andersen

                                      team ‘‘demonstrated the presentational linkage that could be made between the mechanics of
                                      the tax, * * * the underlying rationale for the tax [i.e., a tax on the privatized utilities’ initial
                                      period excess profits] and the popular notion of undervalue at privatisation.’’
                                         17 As part of his testimony, Professor Myers employed a series of scatter plot diagrams to dem-

                                      onstrate that there was, at best, a very loose relationship between the windfall tax the
                                      privatized utilities paid and changes in their actual market values after privatization, but very
                                      tight and direct relationships between (1) the windfall tax payments and the cumulative initial
                                      period earnings of those companies and (2) the windfall tax payments and what Professor




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                                         Petitioner also offered the fact testimony of Mr.
                                      Oo¨sthuizen, SWEB’s treasurer during the period leading up to
                                      the enactment of the windfall tax in 1997 and, before that,
                                      SWEB’s tax manager. Mr. Oo     ¨ sthuizen recognized that, under
                                      the windfall tax formula, for every pound that profits were
                                      reduced in an initial period year, SWEB received 51 percent
                                      of that amount back as a reduction in its windfall tax
                                      liability. He also was involved in SWEB’s decision to act on
                                      that knowledge by obtaining permission from its auditors
                                      (and, after an initial objection, Inland Revenue) to restate its
                                      accounts for its 1994–95 fiscal year (the final year of SWEB’s
                                      initial period) by expensing (as a reserve) £12 million of pro-
                                      jected tree-trimming costs, which saved SWEB over £6 million
                                      of projected windfall tax. 18 Petitioner also notes Mr.
                                      Oo¨sthuizen’s recognition that the windfall tax operated as an
                                      excess profits tax. In that regard, Mr. Oo¨sthuizen testified as
                                      follows:
                                        In effect, the way the tax works is to say that the amount of profits
                                      you’re allowed in any year before you’re subject to tax is equal to one-ninth
                                      of the flotation price. After that, profits are deemed excess, and there is
                                      a tax. That’s how the tax works. It has a definition of what is allowable
                                      profit and what is excess profits, and it taxes the excess.

                                        Lastly, petitioner notes that it is possible to restate the
                                      windfall tax formula algebraically to make clear that it oper-
                                      ates as an excess profits tax imposed (on 27 of the 32 wind-
                                      fall tax companies) at an approximately 51.7-percent rate. 19
                                      In that regard, petitioner points to a series of stipulations in
                                      Myers determined to be the cumulative initial period excess profits of the RECs and the WASCs.
                                        Professor Myers also testified that the term ‘‘value in profit-making terms’’, as defined in the
                                      windfall tax statute, is not a standard economic term or concept and it has no meaning in any
                                      other context. Moreover, he believes that it does not represent a true economic value of any of
                                      the privatized utilities; rather, he believes that it constituted ‘‘a one-off device created to deter-
                                      mine tax liability.’’ He further testified:
                                      The privatized companies were valued daily on the London Stock Exchange. The designers of
                                      the Windfall Tax could have used stock-market values to identify (with hindsight) the ‘‘under-
                                      valuation’’ of the companies on or after their IPO dates. Instead they settled on a formula in
                                      which the chief moving part was not value but profits.
                                        Professor Myers rejects respondent’s argument (discussed infra) that value in profit-making
                                      terms, because it is calculated using a reasonable price-to-earnings multiple, is the product of
                                      an acceptable valuation technique. In Professor Myers’ view, ‘‘9 is not an accurate P/E multiple,
                                      and it is not applied to current or expected future earnings * * * [Therefore,] ‘value-in-profit-
                                      making terms’ cannot measure the economic value that companies could, would, or should have
                                      had.’’
                                        18 Mr. Oo ¨ sthuizen testified that a Government press release describing the windfall tax
                                      prompted SWEB to restate its accounts for its 1994–95 fiscal year.
                                        19 Mr. Oo¨ sthuizen and Professors Maydew and Myers make the same point.




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                                      which the parties agree that that is in fact the case. 20 In
                                      particular, petitioner points to the parties’ stipulation that
                                      the windfall tax formula (for companies with a full 1,461-day
                                      initial period) can be rewritten pursuant to the following
                                      steps (where P is the total initial period profits and FV is the
                                      flotation value).
                                           Statutory Windfall Tax Formula
                                           Tax = 23% × [{(365 × (P/1,461)) × 9} – FV]

                                           Windfall Tax Formula—Modification (1)
                                           Tax = 23% × [{(P/4 [21]) × 9} – FV)]

                                           Windfall Tax Formula—Modification (2)
                                           Tax = 51.71% × {P – (44.47% × FV)} [22]

                                        Petitioner also points out that, instead of a cumulative
                                      reformulation of the windfall tax for the entire initial period,
                                      the tax can be reformulated by showing its application with
                                      respect to each year of that period as follows (where P1, P2,
                                      etc. represent profits for year 1, year 2, etc.).
                                           Tax =   51.71%    ×   {P1   –   (11.11%   ×   FV)}
                                               +   51.71%    ×   {P2   –   (11.11%   ×   FV)}
                                               +   51.71%    ×   {P3   –   (11.11%   ×   FV)}
                                               +   51.71%    ×   {P4   –   (11.14%   ×   FV)} [23]

                                        Petitioner argues that the foregoing mathematical and
                                      algebraic reformulations of the windfall tax as enacted show
                                      that, in substance, it was a tax imposed at a 51.71-percent
                                      rate ‘‘on the profits for each Windfall Tax company’s initial
                                      period to the extent those profits exceeded an average annual
                                        20 Respondent objects to certain of those stipulations on the ground that the reformulations

                                      are neither (1) ‘‘the statutory equivalent of the equation set forth in the [Windfall Tax] Act’’ nor
                                      (2) ‘‘an appropriate application of the equation in the Act’’, and on the further ground that the
                                      stipulations are ‘‘irrelevant and immaterial.’’ Respondent does not object to the mathematical
                                      equivalence of the reformulations.
                                        21 For the sake of simplicity here and in modification (2), 1,461 days divided by 365 days is

                                      deemed to equal 4 rather than the more accurate 4.0027397.
                                        22 Again, for the sake of simplicity, 44.47 percent represents (1,461/365)/9 or approximately

                                      0.4447489 (which is approximately 4/9), and the 51.71 percent represents {9/(1,461/365)} × 23
                                      percent or approximately 0.5171458 (which is approximately 9/4 of the 23-percent windfall tax
                                      rate). As Professor Myers points out, to get from modification (1) to modification (2), one need
                                      only multiply all terms inside the brackets (in modification (1)) by 4/9 and the 23 percent tax
                                      rate by 9/4 with the windfall tax amount remaining unchanged, because (4/9) × (9/4) = 1.
                                        23 The 11.14 percent reflects the multiplier for the leap year of 366 days, assumed, for demon-

                                      strative purposes, to be year 4.




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                                      return of approximately 11.1 percent of [the company’s flota-
                                      tion value].’’
                                         Petitioner acknowledges, and the parties have stipulated
                                      (with respondent lodging the same objections regarding lack
                                      of statutory equivalency, appropriateness, relevancy, and
                                      materiality), that 5 of the 32 windfall tax companies had ini-
                                      tial periods longer or shorter than 1,461 days and that, for
                                      those companies, the reformulated rates are different. For
                                      two of those companies, because the number of days in the
                                      initial period was very close to 1,461 days, the rate of the
                                      reformulated windfall tax was very close to 51.71 percent,
                                      and the 4-year return on flotation value to be exceeded for
                                      there to be a tax was very close to 44.47 percent. For NIE,
                                      which had an initial period of 1,380 days, those two rates
                                      were 54.75 percent and 42.01 percent, respectively. As noted
                                      supra, British Energy had no windfall tax liability because of
                                      insufficient profits during the initial period. The fifth com-
                                      pany, Railtrack, had an initial period of only 316 days, with
                                      the result that the effective tax rate on its excess profits
                                      (determined pursuant to the stipulated reformulation of the
                                      tax) was 239.10 percent, and the cumulative 4-year return on
                                      flotation value to be exceeded for there to be a tax was only
                                      9.62 percent. Petitioner dismisses any concerns regarding the
                                      effect of the reformulated windfall tax on those 5 companies
                                      as compared to its uniform effect on the other 27 companies
                                      on several grounds: (1) For 2 of the companies, the dif-
                                      ferences are negligible; (2) any differences in effective rates
                                      ‘‘are not significant or material in evaluating the overall
                                      incidence of the Windfall Tax’’ because the 5 companies are
                                      outliers and, therefore, must be ignored for purposes of deter-
                                      mining creditability under the section 901 regulations as
                                      applied by the Court of Appeals for the Second Circuit in
                                      Texasgulf II and this Court in Texasgulf I; (3) as Mr.
                                      Osborne explained, the payment of relatively large amounts
                                      of windfall tax by companies with initial periods of substan-
                                      tially less than 1,461 days (i.e., NIE and Railtrack) was not
                                      a problem because profits earned over the balance of what
                                      would have been a full 1,461-day period (referred to by Mr.
                                      Osborne as ‘‘out performance’’) would not be subject to the
                                      tax; and (4) the tax did not exceed the realized, after-tax
                                      profits of any of the windfall tax companies.




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                                      330                 135 UNITED STATES TAX COURT REPORT                                       (304)


                                           2. Respondent’s Arguments
                                         Respondent argues that the 1983 regulations alone control
                                      the creditability of the windfall tax because those regulations
                                      subsume or supersede prior caselaw and ‘‘neither require nor
                                      permit inquiry into the purpose underlying the enactment of
                                      a foreign tax or the history of a foreign taxing statute.’’
                                      Applying those regulations to this case, respondent concludes
                                      that, according to the actual terms of the windfall tax
                                      statute, the windfall tax failed to satisfy any of the tests that
                                      a foreign tax must satisfy to be considered ‘‘likely to reach
                                      net gain in the normal circumstances in which it applies’’;
                                      i.e., the realization, gross receipts, and net income tests.
                                      Therefore, the windfall tax did not have the predominant
                                      character of an income tax in the U.S. sense. In essence,
                                      respondent’s position is that, pursuant to the terms of the
                                      statute, the windfall tax ‘‘was not imposed upon or after the
                                      occurrence of a realization event for U.S. tax purposes
                                      because the * * * tax was not a direct additional tax on pre-
                                      viously-realized earnings. Rather, the tax was imposed on
                                      the difference between two company values.’’ As a tax
                                      imposed on a base equal to the unrealized difference between
                                      two defined values, rather than directly on realized gross
                                      receipts reduced by deductible expenses, respondent argues
                                      that it necessarily fails to satisfy any of the three tests.
                                         Respondent flatly rejects petitioner’s claim that, under the
                                      1983 regulations, we may rely on extrinsic evidence ‘‘relating
                                      to * * * [the Windfall Tax’s] purported purpose, design, and
                                      ‘substance’ revealed through petitioner’s so-called ‘algebraic
                                      reformulation’ of the tax.’’ Respondent argues that Texasgulf
                                      II, Texasgulf I, and Exxon Corp. v. Commissioner, 113 T.C.
                                      338 (1999), which did admit extrinsic evidence to dem-
                                      onstrate the creditability of foreign taxes, should be limited
                                      to their facts; i.e., a finding that the alternative cost allow-
                                      ances under consideration in those cases ‘‘effectively com-
                                      pensated’’ for the nondeductibility of certain actual expenses
                                      pursuant to the requirements of section 1.901–2(b)(4)(i)(B),
                                      Income Tax Regs., and ‘‘do not support the use of extrinsic
                                      evidence to satisfy a requirement not found in the regula-
                                      tions.’’
                                         Respondent also argues that we should disregard peti-
                                      tioner’s algebraic reformulations of the windfall tax statute




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                                      as merely ‘‘a hypothetical rewrite’’ of the statute, which does
                                      not constitute ‘‘ ‘quantitative’ or ‘empirical’ evidence’’ that the
                                      tax actually touched net gain, ‘‘as contemplated by this Court
                                      in Texasgulf I or Exxon.’’ That argument, like his argument
                                      that we may not consider extrinsic evidence that the actual
                                      incidence of the tax was on net income or excess profits, fol-
                                      lows from what appears to be the crux of respondent’s posi-
                                      tion: The windfall tax is unambiguously imposed on the dif-
                                      ference between two values and, therefore, it cannot be a tax
                                      on income or profit. 24
                                          Because for respondent ‘‘the ‘substance’ of the tax is
                                      revealed on the face of the Windfall Tax statute itself ’’—i.e.,
                                      ‘‘[t]he words of the U.K. statute are the ‘substance’ of this
                                      tax’’—he believes that it is not necessary to look beyond
                                      those words to give them meaning. Nevertheless, he argues
                                      that, even assuming the intent of the Andersen team and
                                      members of Parliament might be relevant in characterizing
                                      the nature of the windfall tax, their intent is as consistent
                                      with the statute as written (i.e., a tax on value in excess of
                                      flotation proceeds) as it is with petitioner’s view that the
                                      windfall tax was intended as a tax on excess profits. In sup-
                                      port of that argument, respondent refers to Mr. Robinson’s
                                      2000 book describing his life as a member of the Labour
                                      Party, entitled ‘‘The Unconventional Minister’’, and quotes
                                      the following portion of chapter 6, which describes the
                                      development and enactment of the windfall tax:
                                      Then in October 1996 Chris Wales had a stroke of inspiration. Chris
                                      simply turned the whole argument on its head: the problem was not that
                                      the companies had made too much profit, nor that they had paid out too
                                      much to shareholders and fat-cat directors, nor that they had been treated
                                      with kid gloves by the regulators. That was all true of course: but the gen-
                                      esis of the problem was that they had been sold too cheaply in the first
                                      place. Why not then, argued Chris, tax the loss to the taxpayer which
                                      arose from the sale of these companies at what was a knock-down price.

                                        In further support of his position that the windfall tax was
                                      indeed a tax on the difference between two defined values,
                                      respondent offers the expert testimony of Peter K. Ashton
                                      (Mr. Ashton), a consultant who was qualified as an expert in
                                      economics and valuation methodologies, and Philip Baker QC
                                        24 Respondent makes the point on brief as follows: ‘‘The key evidence in this case—the Wind-

                                      fall Tax statute itself—explicitly provides that the Windfall Tax is imposed on a base of the dif-
                                      ference between two values, and such formulation fails to satisfy the section 901 regulations.’’




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                                      (Queens Counsel; Mr. Baker), a U.K. tax lawyer offered as an
                                      expert in U.K. tax legislation and the U.K. tax system.
                                        Mr. Ashton viewed the method of computing the statutory
                                      value in profit-making terms for each of the windfall tax
                                      companies as a generally accepted valuation methodology,
                                      which he referred to as the ‘‘market value multiples method
                                      for computing the equity value of a company.’’ Although Mr.
                                      Ashton agreed that, in general, ‘‘valuation is a forward-
                                      looking proposition’’, he reasoned that the windfall tax meth-
                                      odology of fixing value retroactively was acceptable because
                                      the draftsmen selected a valuation date with respect to
                                      which they had ‘‘perfect foresight of what the income is going
                                      to be for * * * [the windfall tax companies] that you can
                                      plug in to the valuation formula.’’
                                        The substance of Mr. Baker’s testimony was that, by its
                                      terms, the windfall tax was for each windfall tax company a
                                      tax on a tax base equal to the difference between two defined
                                      values, and that, as such, it was distinguishable from prior
                                      or existing U.K. taxes on excess profits or capital gains.
                                        Respondent echoes Mr. Baker’s view that the windfall tax
                                      was intentionally imposed on a tax base measured, in part,
                                      by a value (the ‘‘value in profit-making terms’’) derived
                                      (retrospectively) from known initial period earnings and, for
                                      that reason, criticizes Professor Myers’ reliance on ‘‘equity
                                      value or market capitalization value’’ as his standard for con-
                                      cluding that, in relying on ‘‘value in profit-making terms’’,
                                      the windfall tax was not a tax on value, as that term is
                                      conventionally understood. In respondent’s view, we ‘‘need
                                      not determine whether the Profit-Making Value formula
                                      resulted in a ‘realistic’ valuation of the Windfall Tax Compa-
                                      nies in order to determine whether the Windfall Tax is a
                                      creditable tax.’’ That is because, in respondent’s view, profit-
                                      making value ‘‘represented a reasonable approximation of
                                      how the Windfall Tax Companies might have been valued at
                                      the time of flotation if subsequent earnings could have been
                                      known at that time.’’ 25
                                         25 Relying on a point that the Andersen team made in a November 1996 presentation to Gor-

                                      don Brown, respondent also argues, presumably as an alternative ground for denying a foreign
                                      tax credit for the windfall tax, that the tax was, in substance, a reenactment of TCGA sec. 179
                                      (see the discussion of that provision in note 3 of this report); i.e., a retroactive tax on the unreal-
                                      ized appreciation of the windfall tax companies at the time of privatization. Respondent argues
                                      that, because the tax necessarily fails the realization test of the 1983 regulations, it is noncred-
                                      itable. We find respondent’s arguments unpersuasive for two reasons. First, respondent’s own




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                                      (304)                 PPL CORP. & SUBS. v. COMMISSIONER                                           333


                                           C. Analysis
                                           1. Introduction
                                         The parties fundamentally disagree as to what we may
                                      consider in determining whether the windfall tax is a cred-
                                      itable tax for purposes of section 901. Respondent’s view is
                                      that we need not (indeed, may not) consider anything other
                                      than the text of the windfall tax statute in determining
                                      whether that tax is an ‘‘income tax’’ within the meaning of
                                      section 1.901–2(a), Income Tax Regs. ‘‘[B]ased on * * * the
                                      simple formula employed to levy the tax’’, respondent argues,
                                      the windfall tax falls on the difference between two values—
                                      ‘‘Flotation Value’’ and ‘‘Profit-Making Value’’. It is,
                                      respondent continues, therefore a tax on value (and not on
                                      income). ‘‘Petitioner’’, respondent concludes, ‘‘cannot escape
                                      from the plain language of the [windfall tax] statute.’’ 26
                                         Petitioner, points out that, under the cited regulation, it is
                                      the ‘‘predominant character’’ of the foreign tax in question
                                      that counts. To determine the predominant character of the
                                      windfall tax, petitioner argues that we may consider evidence
                                      beyond the text of the statute; viz, evidence of the design of
                                      the tax and its actual economic and financial effect as it
                                      applies to the majority of the taxpayers subject to it. In sup-
                                      port of that argument, petitioner principally relies on three
                                      cases this Court has decided since the promulgation of the
                                      1983 regulations: Exxon Corp. v. Commissioner, 113 T.C. 338
                                      expert, Mr. Baker, specifically disavowed those arguments by flatly stating that the windfall tax
                                      ‘‘was not corporation tax. It was a separate tax and it was at the rate of 23 percent instead
                                      [of the 33 percent corporate tax rate].’’ Second, we agree with petitioner that, even if the wind-
                                      fall tax had been intended as (in substance) a reenactment of TCGA sec. 179, it would not be
                                      a tax on unrealized appreciation; rather it would be a tax on previously realized but unrecog-
                                      nized gain and, therefore, creditable. As petitioner points out: ‘‘the operation of section 171
                                      TCGA and section 179 TCGA is substantively similar to the gain deferral and recognition rules
                                      relating to intercompany transfers in our consolidated return regulations, section 1.1502–13, In-
                                      come Tax Regs.’’ Petitioner argues, however, that ‘‘[t]he Windfall Tax statute was not designed
                                      on the basis of Section 179 TCGA. Respondent’s argument on this basis is unfounded.’’ We ac-
                                      cept what is, in effect, petitioner’s concession that the windfall tax should not be considered an
                                      income tax because it resembled, or was a reinstatement of, TCGA sec. 179. Therefore, we do
                                      not decide the windfall tax issue on that ground.
                                         26 ‘‘In construing a statute’’, respondent argues, ‘‘the ‘preeminent canon of statutory interpreta-

                                      tion requires a court to ‘‘presume that [the] legislature says in a statute what it means and
                                      means in a statute what it says there.’’ ’ ’’ (quoting BedRoc Ltd., LLC v. United States, 541 U.S.
                                      176, 183 (2004) (quoting Conn. Natl. Bank v. Germain, 503 U.S. 249, 253–254 (1992))). Respond-
                                      ent insists that ‘‘ ‘when the statute’s language is plain, ‘‘the sole function of the courts’’—at least
                                      where the disposition required by the text is not absurd—‘‘is to enforce it according to its
                                      terms.’’ ’ ’’ (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6
                                      (2000) (quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989)).




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                                      334                 135 UNITED STATES TAX COURT REPORT                                       (304)


                                      (1999), Texasgulf I, and Phillips Petroleum Co. v. Commis-
                                      sioner, 104 T.C. 256 (1995).
                                        For the reasons that follow, we think that petitioner has
                                      the better argument, and we find that the windfall tax is a
                                      creditable income tax under section 901.
                                           2. Nature of the Predominant Character Standard
                                         Respondent’s text-bound approach to determining the cred-
                                      itability of the windfall tax is inconsistent with the 1983
                                      regulations’ description of the predominant character
                                      standard for creditability under which ‘‘the predominant
                                      character of a foreign tax is that of an income tax in the U.S.
                                      sense * * * [i]f * * * the foreign tax is likely to reach net
                                      gain in the normal circumstances in which it applies’’. Sec.
                                      1.901–2(a)(3)(i), Income Tax Regs. By implicating the cir-
                                      cumstances of application in the determination of the
                                      predominant character of a foreign tax, the drafters of the
                                      1983 regulations clearly signaled their intent that factors
                                      extrinsic to the text of the foreign tax statute play a role in
                                      the determination of the tax’s character. In determining the
                                      predominant character of a foreign tax, we may look to the
                                      actual effect of the foreign tax on taxpayers subject to it, the
                                      inquiry being whether the tax is designed to and does, in
                                      fact, reach net gain ‘‘in the normal circumstances in which
                                      it applies’’, regardless of the form of the foreign tax as
                                      reflected in the statute.
                                         That interpretation of the regulations’ predominant char-
                                      acter standard is consistent with caselaw preceding the
                                      issuance of the 1983 regulations and, in particular, two of
                                      the cases cited in the preamble to those regulations as pro-
                                      viding the ‘‘criterion for creditability’’ embodied in that
                                      standard: Inland Steel Co. v. United States, 230 Ct. Cl. 314,
                                      677 F.2d 72 (1982), and Bank of America I (see supra p. 321
                                      of this report). In the former case, the Court of Claims stated
                                      that a foreign tax will qualify as an income tax in the U.S.
                                      sense if the foreign country has ‘‘made an attempt always to
                                      reach some net gain in the normal circumstances in which
                                      the tax applies. * * * The label and form of the foreign tax
                                      is not determinative.’’ Inland Steel Co. v. United States,
                                      supra at 325, 677 F.2d at 80 (emphasis added). The court
                                      noted that the issue, as framed under its analysis in Bank




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                                      (304)                 PPL CORP. & SUBS. v. COMMISSIONER                                       335


                                      of America I, is ‘‘whether taxation of net gain is the ultimate
                                      objective or effect of * * * [the foreign] tax.’’ Id. at 326, 677
                                      F.2d at 80 (emphasis added). In Bank of America I, 198 Ct.
                                      Cl. at 274, 459 F.2d at 519 (emphasis added), the Court of
                                      Claims stated: ‘‘The important thing is whether the other
                                      country is attempting to reach some net gain, not the form
                                      in which it shapes the income tax or the name it gives.’’
                                         The facts and analysis of the Court of Claims in Bank of
                                      America I nicely illustrate the prevailing pre-1983 standard.
                                      The case involved in part the creditability of foreign taxes on
                                      the taxpayer’s gross income from the banking business its
                                      branch conducted in each of certain foreign countries.
                                      Clearly, a gross income tax is not, by its terms, a net income
                                      tax. Had the Court of Claims focused solely on the statutory
                                      language, which, in each case, levied a tax on the taxpayer’s
                                      ‘‘gross takings’’ or ‘‘gross receipts’’ before deduction of any
                                      expenses, it would have been compelled to hold, on that
                                      ground alone, that none of the taxes under consideration con-
                                      stituted a creditable net income tax. The focus of the court’s
                                      inquiry, however, was not on the text of the statute per se,
                                      but on the question of whether the tax was ‘‘attempting to
                                      reach some net gain’’. Id. The court specifically noted that ‘‘a
                                      levy can in reality be directed at net gain even though it is
                                      imposed squarely on gross income.’’ Id. Relying on prior
                                      judicial decisions, Internal Revenue Service rulings, and
                                      gross income tax levies under Federal law (e.g., sections 871
                                      and 1441), the court concluded that an income tax under sec-
                                      tion 901 ‘‘covers all foreign income taxes designed to fall on
                                      some net gain or profit, and includes a gross income tax if,
                                      but only if, that impost is almost sure, or very likely, to reach
                                      some net gain because costs or expenses will not be so high
                                      as to offset the net profit.’’ Id. at 281, 459 F.2d at 523. 27
                                      Because the gross income taxes in Bank of America I failed
                                      to meet that test, the court held that they were noncred-
                                      itable. Id. at 283, 459 F.2d at 524–525.
                                         Also, as noted supra, the cases that have applied the 1983
                                      regulations’ predominant character standard are consistent
                                      with the Court of Claims’ approach to creditability in Inland
                                      Steel and Bank of America I. Thus, in Texasgulf I, and in
                                         27 As noted supra note 12, the Court of Claims’ test for the creditability of a gross income tax

                                      is incorporated into the 1983 regulations. See sec. 1.901–2(b)(4)(i), Income Tax Regs.




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                                      336                 135 UNITED STATES TAX COURT REPORT                                       (304)


                                      Exxon Corp. v. Commissioner, supra, we relied on quan-
                                      titative, empirical evidence of the actual effect of the foreign
                                      tax on a majority of the taxpayers at whom it was directed
                                      and found that, in each case, the tax was designed to, and
                                      did, in fact, reach net gain and, therefore, constituted a cred-
                                      itable income or excess profits tax. In Texasgulf I, we distin-
                                      guished the result in Inland Steel Co. v. United States,
                                      supra, which had held the tax under consideration (the
                                      Ontario Mining Tax) to be noncreditable, stating: ‘‘The use of
                                      the ‘predominant character’ and ‘effectively compensates’
                                      tests in section 1.901–2(b)(4), Income Tax Regs., is a change
                                      from the history and purpose approach used in the cases
                                      decided before the 1983 regulations applied a factual, quan-
                                      titative approach.’’ Texasgulf I, 107 T.C. at 70 (emphasis
                                      added).
                                         We reject respondent’s argument that this Court, in Texas-
                                      gulf I and Exxon, and the Court of Appeals for the Second
                                      Circuit, in Texasgulf II, ‘‘strictly limit the use of empirical
                                      data to an analysis under the alternative cost recovery
                                      method of the net income requirement of * * * [section
                                      1.901–2(b)(4)(i)(B), Income Tax Regs.].’’ It is true that Texas-
                                      gulf I, Texasgulf II, and Exxon involved the creditability of
                                      foreign taxes that started with a statutory tax base con-
                                      sisting of gross income, and that all three relied on extrinsic
                                      evidence to show that the foreign law’s allowances in lieu of
                                      deductions for expenses actually incurred would ‘‘effectively
                                      compensate for nonrecovery of * * * significant costs or
                                      expenses’’, as required by section 1.901–2(b)(4)(i), Income Tax
                                      Regs. We disagree, however, with respondent’s conclusion
                                      that those cases ‘‘do not support the use of extrinsic evidence
                                      to satisfy a requirement not found in the regulations.’’
                                      Nothing in those cases would so limit a taxpayer’s right to
                                      rely on extrinsic evidence to demonstrate the creditability of
                                      a foreign tax and, specifically, that it satisfied the predomi-
                                      nant character standard. In Texasgulf I, Texasgulf II, and
                                      Exxon, the narrow issue was whether the statutory allow-
                                      ances in question did, in fact, ‘‘effectively compensate’’ for the
                                      nondeductibility of ‘‘significant costs or expenses’’ within the
                                      meaning of section 1.901–2(b)(4)(i), Income Tax Regs. But the
                                      overall issue for decision in those cases, as in this case, was
                                      whether the foreign tax was designed to and did, in fact,
                                      reach net gain. The only limitation on reliance on extrinsic




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                                      (304)                 PPL CORP. & SUBS. v. COMMISSIONER                                      337


                                      evidence in any of the three opinions in those cases is the fol-
                                      lowing observation by the Court of Appeals for the Second
                                      Circuit in Texasgulf II, 172 F.3d at 216 n.11:
                                      We note, however, that this case is exceptional, in that the relatively small
                                      number of taxpayers subject to the OMT made it practicable to compile
                                      and present broadly representative industry data spanning a lengthy
                                      period. We do not suggest that the reliance that we place on empirical evi-
                                      dence would be appropriate in cases where such comprehensive data is
                                      unavailable.

                                      Far fewer taxpayers were subject to the windfall tax than
                                      were subject to OMT in Texasgulf II, and the data (after-tax
                                      financial profits) 28 for the taxpayers subject to the windfall
                                      tax were readily available in the published financial reports
                                      of those taxpayers.
                                         Respondent’s argument that we should restrict our inquiry
                                      to the text of the windfall tax to determine its predominant
                                      character is unpersuasive.
                                           3. The Predominant Character Standard as Applied to the
                                              Windfall Tax
                                         The term ‘‘value’’ may mean, among other things, either
                                      ‘‘Monetary or material worth’’ or, in mathematics, ‘‘An
                                      assigned or calculated numerical quantity.’’ The American
                                      Heritage Dictionary of the English Language 1900 (4th ed.
                                      2000). The parties do not disagree that the amount of the
                                      windfall for purposes of determining the windfall tax is, in
                                      mathematical terms, the excess (if any) of one value (value
                                      in profit-making terms) over another (flotation value). Nor do
                                      they disagree that flotation value is real or actual value (a
                                      value in the first sense). They do disagree as to whether
                                      value in profit-making terms is a real or actual value.
                                      Relying on its experts’ testimony, petitioner argues that it is
                                         28 Although respondent states that ‘‘[t]he use of financial book earnings, rather than ‘taxable

                                      income,’ in determining the Windfall Tax Companies[’] Profit-Making Value further distin-
                                      guishes the Windfall Tax from a U.S. excess profits tax’’, he does not argue that a foreign tax
                                      on financial profits is noncreditable for that reason alone. That argument would appear to be
                                      invalid, in any event, in the light of our own corporate alternative minimum tax, which at one
                                      time was calculated, in part, using financial or book earnings. See sec. 56(f), repealed in 1990
                                      by the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101–508, sec. 11801(a)(3), 104 Stat.
                                      1388–520. Moreover, differences between book and taxable income are, with rare exception, at-
                                      tributable to timing differences, which are generally disregarded under the 1983 regulations.
                                      See sec. 1.901–2(b)(4)(i), Income Tax Regs.




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                                      338                 135 UNITED STATES TAX COURT REPORT                                       (304)


                                      not ‘‘a real economic value’’. 29 We need not settle that dis-
                                      pute because, even were we to agree with respondent that
                                      value in profit-making terms is a real or actual value,
                                      that would not necessarily be determinative since our inquiry
                                      as to the predominant character of the windfall tax is not
                                      text bound. Indeed, however we describe the form of the
                                      windfall tax base, our inquiry as to the design and incidence
                                      of the tax convinces us that its predominant character is that
                                      of a tax on excess profits. As an initial matter, we note that
                                      the parties have stipulated that none of the 31 companies
                                      that paid windfall tax had a windfall tax liability in excess
                                      of its total profits over its initial period.
                                         With respect to design, respondent reorders the usual
                                      notion (at least in architecture) that form follows function to
                                      argue, in essence, that form determines function; i.e., that
                                      the design of the tax base (the excess of one value over
                                      another) demonstrates Parliament’s decision to enact a tax
                                      based on value (i.e., ‘‘to tax undervaluation on flotation of the
                                      Windfall Tax Companies’’) ‘‘rather than a tax based on
                                      income or excess profits.’’ We disagree.
                                         Gordon Brown’s public statements in his July 2, 1997,
                                      Budget Speech, the Inland Revenue and U.K. Treasury
                                      announcements, and the debate in Parliament preceding
                                      enactment of the windfall tax make clear that the tax was
                                      justified for two essentially equivalent reasons: (1) It would
                                      recoup excessive profits earned by the privatized utilities
                                      during the initial period, and (2) it would correct for the
                                      undervaluation of those companies at flotation. The reasons
                                      are equivalent because each subsumes the other. That is the
                                      essence of the explanation of the windfall tax by Her Maj-
                                      esty’s Treasury in its 1997 publication entitled ‘‘Explanatory
                                      Notes: Summer Finance Bill 1997’’:
                                        The profits made by these companies in the years following privatisation
                                      were excessive when considered as a return on the value placed on the
                                      companies at the time of their privatisation by flotation. This is because
                                      the companies were sold too cheaply and regulation in the relevant periods
                                      was too lax.

                                        29 Mr. Osborne, one of petitioner’s expert witnesses and a member of the Andersen team in-

                                      volved in designing the windfall tax, testified that value in profit-making terms ‘‘is not a real
                                      value: it is rather a construct based on realised profits that would not have been known at the
                                      date of privatisation, and a mechanism by which additional taxes on profits could be levied.’’




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                                      (304)                    PPL CORP. & SUBS. v. COMMISSIONER                                     339


                                      Thus, profits were considered excessive in relation to the
                                      prices at which the windfall tax companies were sold to the
                                      public, which, in turn, were deemed to be too low. 30 One
                                      explanation implies the other. It follows, then, that both par-
                                      ties may be said to be correct in their assessment of the polit-
                                      ical motivation for the windfall tax.
                                         Of greater significance, in terms of the creditability of the
                                      windfall tax, is the fact that the members of Parliament
                                      understood that they were enacting a tax that, by its terms,
                                      represented one of two equivalent explanations. That under-
                                      standing is evidenced by the Conservative Party Shadow
                                      Chancellor of the Exchequer’s, Mr. Lilley’s, recognition that
                                      the Government had ‘‘taken average profits over four years
                                      after flotation’’ and ‘‘[i]f those profits exceed one ninth of the
                                      flotation value, the company will pay windfall tax on the
                                      excess.’’ Mr. Lilly’s understanding that the windfall tax could
                                      be characterized as a tax on excess profits is further
                                      indicated by his recognition that privatized utilities ‘‘that
                                      failed to improve their profitability over * * * [the initial
                                      period] will pay much less or even no windfall tax.’’
                                         Just as ‘‘a levy can in reality be directed at net gain even
                                      though it is imposed squarely on gross income’’, Bank of
                                      America I, 198 Ct. Cl. at 274, 459 F.2d at 519, so too can a
                                      foreign levy be directed at net gain or income even though
                                      it is, by its terms, imposed squarely on the difference
                                      between two values. 31 And that is what we conclude in the
                                           30 That   rather obvious point was also made by Mr. Osborne:
                                         The rationale for the tax was rooted in * * * [the] initial period during which excessive profits
                                      were made, as judged against the companies’ flotation values.
                                         The nature of the judgment means that there is a logical symmetry between the two available
                                      ways of describing the rationale for the tax—that profits were high in relation to the flotation
                                      value, or that the flotation value was low in relation to profits. * * *
                                         31 A classic definition of income from the economic literature is squarely so based: ‘‘Income

                                      is the money value of the net accretion to one’s economic power between two points of time.’’
                                      Haig, ‘‘The Concept of Income–Economic and Legal Aspects’’, The Federal Income Tax 7 (Colum-
                                      bia University Press 1921).
                                         Robert M. Haig’s definition was subsequently expressed by another economist, Henry C. Si-
                                      mons, in a way that explicitly included consumption: ‘‘Personal income may be defined as the
                                      algebraic sum of (1) the market value of rights exercised in consumption and (2) the change
                                      in value of the store of property rights between the beginning and end of the period in ques-
                                      tions.’’ Simons, Personal Income Taxation 50 (1938). The Simons refinement has come to be
                                      known as the Haig-Simons definition of income and is widely accepted by lawyers and econo-
                                      mists. Graetz & Schenk, Federal Income Taxation, Principles and Policies 97 (6th ed. 2009).
                                         A foreign tax imposed on a base conforming to the Haig-Simons definition of income, viz, (1)
                                      the value of savings at the end of the period plus consumption during the period minus (2) the
                                      value of savings at the beginning of the period, would seem to qualify as a tax on net gain under
                                                                                                      Continued




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                                      340                 135 UNITED STATES TAX COURT REPORT                                        (304)


                                      case of the windfall tax. The architects and drafters of the
                                      tax knew (1) exactly which companies the tax would target,
                                      (2) the publicly reported after-tax financial profits of those
                                      companies, which were a crucial component of the tax
                                      base, 32 and (3) the target amount of revenue the tax would
                                      raise. Therefore, it cannot have been an unintentional or
                                      fortuitous result that, (1) for 29 of the 31 windfall tax compa-
                                      nies that paid tax, the effective rate of tax on deemed annual
                                      excess profits was at or near 51.7 percent, 33 and (2) for none
                                      of the 31 companies did the tax exceed total initial period
                                      profits. What respondent refers to as ‘‘petitioner’s algebraic
                                      reformulations of the Windfall Tax statute’’ do not, as
                                      respondent argues, constitute an impermissible ‘‘hypothetical
                                      rewrite of the Windfall Tax statute’’. Rather they represent
                                      a legitimate means of demonstrating that Parliament did, in
                                      fact, enact a tax that operated as an excess profits tax for the
                                      vast majority of the windfall tax companies. 34 The design of
                                      the windfall tax formula made certain that the tax would, in
                                      fact, operate as an excess profits tax for the vast majority of
                                      the companies subject to it. 35
                                      the 1983 regulations. That the tax base includes unrealized appreciation in property is no bar
                                      to such qualification. See sec. 1.901–2(b)(2)(i)(C), (iv) Example (2), Income Tax Regs.
                                         32 SWEB’s ability to reduce retroactively its reported profits for one of its initial period years

                                      appears to have been a solitary aberration among the windfall tax companies and does not de-
                                      tract from the general conclusion that the initial period financial profits of the windfall tax com-
                                      panies were known before enactment.
                                         33 Because it had an initial period of only 316 days, Railtrack presents the sole exception to

                                      the overall conclusion that the windfall tax, viewed as a tax on excess profits, affected the tar-
                                      geted companies in a reasonable manner. As noted supra, the effective tax rate on Railtrack’s
                                      excess profits was 239.10 percent and the cumulative 4-year return on flotation value to be ex-
                                      ceeded for there to be a tax was only 9.62 percent. It is clear, however, that neither the regula-
                                      tions nor the cases interpreting them require that the foreign tax mimic the U.S. income tax
                                      for all taxpayers to achieve creditability under sec. 901, only that it satisfy that standard ‘‘in
                                      the normal circumstances in which it applies’’. See sec. 1.901–2(a)(3)(i), Income Tax Regs. See
                                      also Exxon Corp. v. Commissioner, 113 T.C. at 352, in which we noted the Commissioner’s ac-
                                      knowledgment that, ‘‘to qualify as an income tax a tax must satisfy the predominant character
                                      test in its application to a substantial number of taxpayers.’’ In that case we found that the
                                      U.K. Petroleum Revenue Tax (PRT) provided a sufficient allowance in lieu of a deduction for
                                      interest expense where, for the 34 companies responsible for 91 percent of the PRT payments,
                                      the allowance exceeded nonallowed interest expense.
                                         34 Respondent describes petitioner’s algebraic reformulation of the windfall tax as an attempt

                                      ‘‘to rewrite the value-based Windfall Tax to convert it into a profit-based tax.’’ Presumably, re-
                                      spondent would agree that, had the tax been enacted as a ‘‘profit-based tax’’ instead of as a tax
                                      on the difference between two values, it would have been creditable. Under that approach, the
                                      same tax is either creditable or noncreditable, depending on the form in which it is enacted,
                                      a result at odds with the predominant character standard set forth in the regulations and ap-
                                      plied in the caselaw.
                                         35 If, as respondent suggests, the real goal of the windfall tax was to recoup, on behalf of the

                                      public, the windfall to the initial investors that arose by virtue of flotation prices well below
                                      actual value (as perceived with hindsight), why did the Labour Party majority not try to recoup




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                                      (304)                 PPL CORP. & SUBS. v. COMMISSIONER                                          341


                                         Because both the design and effect of the windfall tax was
                                      to tax an amount that, under U.S. tax principles, may be
                                      considered excess profits realized by the vast majority of the
                                      windfall tax companies, we find that it did, in fact, ‘‘reach
                                      net gain in the normal circumstances in which it [applied]’’,
                                      and, therefore, that its ‘‘predominant character’’ was ‘‘that of
                                      an income tax in the U.S. sense.’’ See sec. 1.901–2(a)(1), (3),
                                      Income Tax Regs.
                                         We recognize that, in the cases that have either provided
                                      the foundation for the predominant character standard (e.g.,
                                      Inland Steel Co. v. United States, 230 Ct. Cl. 314, 677 F.2d
                                      72 (1982), and Bank of America I), or applied that standard
                                      (e.g., Texasgulf I, Texasgulf II, and Exxon Corp. v. Commis-
                                      sioner, 113 T.C. 338 (1999)), the tax base, pursuant to the
                                      statute, was a gross amount or a gross amount less expenses
                                      comprising, in part, allowances in lieu of actual costs or
                                      expenses, and the issue was whether the statutory tax base
                                      represented net gain for the majority of taxpayers subject to
                                      the foreign tax. Nevertheless, the analysis that led the courts
                                      in those cases (with the exception of Inland Steel) 36 to deter-
                                      mine creditability or noncreditability of the foreign tax in
                                      issue is equally applicable in determining the creditability of
                                      the windfall tax, the question being whether, according to an
                                      empirical or quantitative analysis, the tax was likely to reach
                                      net gain in the normal circumstances in which it applied.
                                      Because the facts of this case provide an affirmative answer
                                      to that question, we find the windfall tax to be creditable.



                                      the entire windfall or at least a substantial portion of it; i.e., why was the tax rate not 100 per-
                                      cent or something closer to it than the 23-percent rate actually imposed? Although there is no
                                      evidence in the record that would provide a direct answer to that question, we find the enact-
                                      ment of the relatively low 23-percent rate to be consistent with an awareness of the Labour
                                      Party that it was taxing the companies, not the investors who actually benefited from the alleg-
                                      edly low flotation prices, and a decision, on its part, that a tax on the companies, being, in effect,
                                      a second tax on their initial period profits, should be imposed at a reasonable, nonconfiscatory
                                      rate, which would be sufficient to raise the desired revenue. That view is, of course, consistent
                                      with petitioner’s argument that the form of the tax was adopted for ‘‘presentational’’ reasons.
                                         36 As we noted in Texasgulf I, 107 T.C. at 71, the Court of Claims in Inland Steel Co. v. United

                                      States, 230 Ct. Cl. 314, 677 F.2d 72 (1982) ‘‘did not have industry-wide data to consider, and
                                      the Secretary had not yet promulgated regulations using a quantitative approach’’, and it held
                                      the Ontario Mining Tax to be noncreditable because it was not the ‘‘substantial equivalent’’ of
                                      an income tax, a standard for creditability that was modified by the 1983 regulations’ adoption
                                      of the predominant character standard.




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                                      342                 135 UNITED STATES TAX COURT REPORT                                          (304)


                                           D. Conclusion
                                        The windfall tax paid by petitioner’s indirect U.K. sub-
                                      sidiary, SWEB, constituted an excess profits tax creditable
                                      under section 901.
                                      II. The Dividend Rescission Issue
                                         The parties submitted the dividend rescission issue fully
                                      stipulated. On brief, petitioner states that, if we resolve the
                                      windfall tax issue in its favor, then petitioner concedes the
                                      dividend rescission issue. Because we have done so, we need
                                      not address the dividend rescission issue. We accept peti-
                                      tioner’s concession. 37
                                      III. Conclusion
                                        Taking into account our prior Opinion in PPL Corp. &
                                      Subs. v. Commissioner, 135 T.C. 176 (2010),
                                                                          Decision will be entered under Rule 155.




                                         37 Petitioner argues that if we resolve the windfall tax issue in its favor, then SWEB Holdings

                                      would not have had sufficient earnings and profits to pay a taxable dividend. Any distribution
                                      by SWEB Holdings would thus constitute a nontaxable return of capital. On brief, petitioner
                                      states that the ‘‘tax consequences [of such a nontaxable return of capital] would not, in
                                      petitioner’s judgment, be material.’’ For that reason, ‘‘[i]n the interest of judicial economy’’, peti-
                                      tioner does not ask that we decide the dividend rescission issue in its favor if we decide the
                                      windfall tax issue in its favor.




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                                      (304)                 PPL CORP. & SUBS. v. COMMISSIONER                                      343




                                                                               f
                                                                                                                                         PO20115.eps




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