PPL, an American energy company, bought one of many state-owned British utilities privatized in the 1980s. In 1997, PPL became subject to the United Kingdom’s new “windfall tax,” which was based in part on “profit-making value”—the utility’s average annual profit multiplied by an imputed price-to-earnings ratio. Various American energy companies subject to this tax filed claims with the Internal Revenue Service for a “foreign income tax” credit, which the IRS denied in 2007, asserting that the British tax was not creditable under the “foreign income tax” provision of the Internal Revenue Code (Section 901).

The IRS claimed that the windfall tax didn’t satisfy the “predominant character” standard (was not predominantly an income tax) because the British statute used the term “profit-making value” instead of “net income” and “gross receipts,” and the tax rate was defined “as a percentage of an imputed value … rather than directly as a percentage of net income.” After the federal tax court held that PPL was entitled to the foreign tax credit, the U.S. Court of Appeals for the Third Circuit reversed. Explaining that a tax exemption is a privilege extended by legislative grace, the appellate court held the tax not to be creditable because it reached beyond realized profit and didn’t tax actual gross revenue.

In a different case last year, however, the U.S. Court of Appeals for the Fifth Circuit held that the British windfall tax was indeed creditable because (1) it reached realized income and (2) gross revenue was an inherent part of the calculation. The Fifth Circuit explained that the form and label of the foreign tax are not determinative and that the predominant character standard requires the IRS to analyze the history and intent of a tax to assess whether it tries to reach some net gain.

Cato joined the Southeastern Legal Foundation and Goldwater Institute on an amicus brief urging the Supreme Court to take the case. The Court decided to do so.

Now on the merits, we three groups are joined by the U.S. Chamber of Commerce on a brief urging the Court to reverse the lower court and reject the IRS’s hyper-formalistic application of the foreign income tax credit rules.  We argue that taxpayers have the right to be free from double taxation and that here the IRS and Third Circuit improperly disregarded the substance of the windfall tax.

Ultimately, a foreign tax’s form or label can’t mask its substantive character and intent for legal purposes. American businesses operating overseas should be able to rely on a stable, substantive application of U.S. tax law instead of arbitrary interpretations and constructions manipulated to generate payments to the IRS.

The Supreme Court will hear argument in PPL v. Commissioner of Internal Revenue on February 20.

When Congress passed legislation this month establishing permanent normal trade relations with Russia, it included travel and financial sanctions against Russians accused of gross human rights violations, particularly those involved in the suspicious death of anti-corruption whistleblower Sergei Magnitsky. At the time, I counseled against “poking Russian officials in the eye with sanctions.” The Russian legislature is currently contemplating its response to that poke, and it doesn’t look good.

Having made clear its intention to retaliate in some way for the Magnitsky bill, which it deemed a national insult and intrusion into domestic affairs, Russia has decided to target America’s own human rights abusers—adoptive parents of Russian orphans. Russian media have been fueling a controversy over abuse by American parents of adopted Russian children, and the Magnitsky bill gave the legislature in Moscow an opportunity to kill two birds with one stone. At first, Russian leaders called for a travel ban on specific people accused of abuse in an obvious parallel to the U.S. sanctions. The current proposal under consideration is to ban all adoptions by American citizens.

Russia has an impressive surplus of orphans and is one the most common countries of origin for international adoptions in the United States. Thousands of children will be denied access to loving families. Not all the blame lies with Congress and its attempt to be a global human rights cop, but the end surely condemns the means.

This is from a Washington Post article on a recent survey of federal workers:

The Office of the U.S. Trade Representative ranks as the worst small agency, [with 32.7 percent of employees saying they are satisfied]. Former employees said its sense of mission was eroded by an ambivalent attitude toward free trade early in the Obama administration and during the economic crisis. Views of the agency’s leaders plummeted 18.9 percentage points over 2011.

Here’s hoping that the Obama administration will push harder for free trade in the second term, for the good of the country and to cheer up the folks at the U.S. Trade Representative’s office!