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The answer to this seems to be straight-forward – a windfall tax is a tax. But the IRS, taxpayers, and the Courts do not always agree on this. Two recent Court cases illustrate this issue. In Entergy Corporation and Affiliated Subsidiaries v. Comm., 109 AFT 2d 2012- 2425 06/05/2012, a windfall tax assessed by the United Kingdom in 1997 and 1998 was determined to be a tax and thus creditable against U.S. income taxes. However, in PPL Corporation & Subs. v. Comm., 108 AFTR 2d 2011-7571 (665 F.3d 60), 12/22/2011, Code Sec (s) 901 the same UK windfall tax was determined not to be a tax and thus not creditable for U.S. income taxes.
Now we have a stand-off between the Tax Court (who ruled it was a tax), PPL, Entergy, and the Fifth Circuit versus the IRS and the Third Circuit. Numerous outcomes could occur but when a conflict exists between two circuits, the possibility of this issue ending up in the Supreme Court is very real. In addition with the current economic climate windfall taxes might become more and more common as governments around the world struggle to make ends meet.
Since two circuit courts have made different determinations on the creditability of the U.K. windfall tax, the next step is for the Supreme Court to make a determination. That court will announce its intentions as to whether is will grant certiorari by the end of October.