In 1997, Britain imposed a one-time "windfall tax" on 32 British companies privatized between 1984 and 1996. PPL was part-owner of a privatized British company that was subject to the windfall tax.
PPL claimed a credit for its share of the bill in its 1997 U.S. federal income tax return, relying on the tax code language stating any "income, war profits, and excess profits taxes" paid overseas can be credited against U.S. income taxes.
The "predominant character of the windfall tax is that of an excess profits tax, a category of income tax in the U.S. sense," Justice Clarence Thomas wrote for the unanimous court.
The commissioner of the Internal Revenue Service rejected PPL's claim, but the Tax Court held that the British windfall tax could be credited for U.S. tax purposes under the code. The 3rd U.S. Circuit Court of Appeals reversed the Tax Court decision.
"Given the artificiality of the U.K.'s calculation method, this court follows substance over form and recognizes that the windfall tax is nothing more than a tax on actual profits above a threshold," Thomas wrote.
"The economic substance of the U.K. windfall tax is that of a U.S. income tax. The tax is based on net income ... ," he said. "Therefore, the tax is creditable" under U.S. tax law.
Justice Sonia Sotomayor wrote a concurring opinion.