The U.S. Supreme Court will hear oral argument in PPL Corp. v. Commissioner, Docket No. 12-43, on February 20. The issue presented is:

Whether, in determining the creditability of a foreign tax, courts should employ a formalistic approach that looks solely at the form of the foreign tax statute and ignores how the tax actually operates, or should employ a substance-based approach that considers factors such as the practical operation and intended effect of the foreign tax. 

The Third Circuit's opinion is here. For a detailed discussion of the case, see Jacob Goldin (Ph.D. Candidate (Economics), Princeton University), Reconsidering Substance Over Form in PPL, 137 Tax Notes 1229 (Dec. 17, 2012).

Tax Profs Anne Alstott (Yale), Marvin Chirelstein (Columbia), Mihir Desai (Harvard), Michael Graetz (Columbia), Daniel Halperin (Harvard), Mitchell Kane (NYU), Lawrence Lokken (Florida), Robert Peroni (Texas), and Alvin Warren (Harvard) have filed an amicus brief in support of the IRS. Here is the summary of their argument:

In 1997 the newly elected Labour government of
the United Kingdom enacted a Windfall Tax
applicable to a relatively small group of privatized
regulated utilities that years earlier had been sold to
the public at a fixed price (£2.40 a share for the
regulated electric companies). For the initial four or
five years following privatization, the previous
Conservative government had also fixed the prices
that these monopolies could charge their customers. The Windfall Tax was designed to redress both
undervaluation at privatization (which for
petitioners occurred in 1990) and subsequent lax
regulation that permitted the utilities to charge
unduly high prices during the initial period after
privatization. The tax imposed is 23% of the
difference between a recomputed share value (based
on a fixed price-earnings multiple of earnings) and
the lower value at which the shares were actually
issued to the public at privatization (the “flotation
value”).

Based on a specific mathematical reformulation
of the tax, which more than doubles its rate and
ignores or obscures important variables, petitioner
claims that the UK levy is an “income or excess
profits tax” eligible for dollar-for-dollar
reimbursement by U.S. taxpayers under the foreign
tax credit of § 901 of the Internal Revenue Code.
But since the value of an income-producing asset
necessarily depends on its earnings, a tax on value
can be restated mathematically as if it were an
income tax. The idiosyncratic algebraic
reformulation on which petitioner rests its entire
case is only one of several equivalent mathematical
reformulations, a number of which lead to the
opposite conclusion that the UK tax at issue here is
not a creditable income tax. Petitioner would, in
effect, have this Court extend the foreign tax credit
well beyond its statutory scope of income and excess
profits taxes to a whole host of taxes on value and
perhaps even to consumption taxes, none of which
have ever been creditable.

Precisely because petitioner’s reformulation
would open the door to claims of foreign tax credits
for foreign levies based on value, not income, if this
Court accepts petitioner’s argument, it would
provide a road map to foreign governments,
encouraging them to shift the costs of privatization
to U.S. taxpayers by initially undervaluing public
assets and companies sold to private interests and
subsequently imposing a retroactive levy to
compensate for the previous undervaluation.

Under petitioner’s approach, U.S. taxpayers
would reimburse a U.S. parent company dollar-fordollar
for such retroactive payments made by its
foreign subsidiaries. The UK tax at issue here is not
an income or excess profits tax, and no foreign tax
credit should be allowed for it under § 901.