Tax Law

Use of Extrinsic Evidence and Quantitative Analysis in PPL Corp. v. Comm'r

Despite the quantity of ink spilled by the Tax Court in its lengthy review of the factors which govern a creditable foreign income tax, the key takeaway for corporate tax counsel and their advisors from PPL Corp. & Subsidiaries v. Comm'r, 2010 U.S. Tax Ct. LEXIS 31 (T.C. Sept. 9, 2010) is the extent to which the taxpayer was able to rely on extrinsic evidence and quantitative analysis in supporting their position and, ultimately, winning the case. In this Analysis, W. Lynn Loden, Elizabeth Sweigart and Alyssa Quiballo discuss the use of extrinsic evidence and quantitative analysis in PPL Corp. & Subsidiaries v. Comm'r. They write:

     While the majority of the written decision in PPL Corporation v. Comm'r, 135 T.C. No. 15 (Sept. 9, 2010), exhaustively reviews the exercise of determining and proving what constitutes a creditable foreign income tax, taxpayers should note the equal attention and emphasis placed by the Tax Court on identifying the predominant character of a tax without limitation to its strict form or labels used in determining its creditability for U.S. tax purposes. In PPL Corporation, the court supports the taxpayer's use of extrinsic evidence to determine the character of a tax (which supports its creditability), showing that the substance of the law is just as important as its form in determining applicability.

     . . . .

     Ultimate Issue. The parties in PPL Corporation primarily disagreed on two key issues: What may be considered in determining the creditability of a foreign tax, and what is the predominant character of the windfall tax? The court ruled in agreement with PPL that the windfall tax paid by its indirect subsidiary, SWEB, is a creditable tax under 26 USC 901.

     Use of Extrinsic Evidence. The IRS expressed the view that anything other than the plain text of a statute should not be considered in determining creditability of a tax. Hence, extrinsic evidence relating to the "purpose, design, or substance" of the tax was deemed inadmissible. Judge Halpern notes that the IRS's initial argument was that the 1983 Regulations ". . . neither require nor permit inquiry into the purpose underlying the enactment of a foreign tax or the history of a foreign taxing statute." However, the court found this plain-text view to be inconsistent with the "predominant character" standard set forth in the 1983 Regulations. As previously mentioned, the determining factor of a creditable tax is whether or not the tax "is likely to reach net gain in the normal circumstances in which it applies." The court explained that by including circumstances in application of the tax, the drafters of the regulations clearly intended for extrinsic factors to play a role in determining the tax's creditability.

     Extrinsic evidence has also been used to demonstrate the creditability of a foreign tax in several court cases following the inception of the 1983 Regulations. Thus, PPL's use of legislative history, expert testimony and analysis of the design and effect of the Windfall Tax was taken into account by the court.

(citations omitted)

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