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Case Basics
Docket No. 
PPL Corporation
Commissioner of Internal Revenue
Decided By 
(for the petitioner)
(Assistant to the Solicitor General, Department of Justice, for the respondent)
Facts of the Case 

PPL Corporation held a 25 percent stake in South Western Electricity Board, a utility in England subject to a onetime windfall tax. After PPL paid the tax, it claimed a foreign tax credit under I.R.C. §901 on its U.S. tax return. §901 allows a credit for foreign taxes on "income, war, profits, [or] excess profits." The Internal Revenue Service (IRS) denied the tax credit and issued a notice of deficiency. PPL then filed a petition in Tax Court to challenge the IRS’s determination. The Tax Court agreed with PPL and the Commissioner of Internal Revenue (CIR) appealed to the U.S. Court of Appeals for the Third Circuit, arguing that §901 does not cover the windfall tax because it is a tax on the company’s value, not its profits. PPL argued that, looking beyond the face of the statute, the windfall tax was intended to act as a tax on excess profits. The Third Circuit ruled in favor of the CIR, holding that the windfall tax is not eligible for credit.


Should courts use a formalistic approach or a substance-based approach that takes into account how the tax actually operates when determining the creditability of a foreign tax?

Decision: 9 votes for PPL Corporation, 0 vote(s) against
Legal provision: Internal Revenue Code §901(b)(1)

Justice Clarence Thomas, writing for a unanimous Court, held that courts should apply a common-sense, substance-based approach when considering the effect of a foreign tax. Using this approach, the Court held that the U.K. tax is creditable under §901. The predominant character of the windfall tax was, for all intents and purposes, an income tax under U.S. definitions. The Court also held that the windfall tax should not fall under the same approach as a general tax on value. Value taxes, such as gift and estate taxes in the U.S., use past profits to estimate the tax value of future income. Conversely, the windfall tax is solely based on past, realized net income.

Justice Sonia Sotomayor concurred in the judgment, but noted that an argument could have been made that the windfall tax was a tax on values as opposed to an excess profits or income-based tax. However, because that argument was not raised in oral arguments, she declined to rule on that issue.

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PPL CORPORATION v. COMMISSIONER OF INTERNAL REVENUE. The Oyez Project at IIT Chicago-Kent College of Law. 28 August 2015. <http://www.oyez.org/cases/2010-2019/2012/2012_12_43>.
PPL CORPORATION v. COMMISSIONER OF INTERNAL REVENUE, The Oyez Project at IIT Chicago-Kent College of Law, http://www.oyez.org/cases/2010-2019/2012/2012_12_43 (last visited August 28, 2015).
"PPL CORPORATION v. COMMISSIONER OF INTERNAL REVENUE," The Oyez Project at IIT Chicago-Kent College of Law, accessed August 28, 2015, http://www.oyez.org/cases/2010-2019/2012/2012_12_43.