Corporation Urges Reversal of Third Circuit, Argues U.K. Windfall Tax Is Creditable

In 1997, one of Entergy's subsidiaries was London Electricity plc, a U.K. electric company subject to the U.K. Windfall Tax ("Windfall Tax" or "Tax"). Entergy prevailed in the U.S. Court of Appeals for the Fifth Circuit² on the issue presently before this Court: whether the Windfall Tax is a creditable foreign tax under 26 U.S.C. 901. The Solicitor General petitioned for certiorari to review the Fifth Circuit's decision in Entergy Corp. v. Commissioner.³ That petition is being held pending the outcome of this case.

Before this Court, however, the Commissioner maintains that creditability should be judged only by the label and form of the Windfall Tax. That contention is insupportable: the outcome here must be governed by the operation and practical effect of the Tax -- which demonstrate that the Tax falls on a specified portion of taxpayer income. In its brief, petitioner PPL establishes that point persuasively and shows that the Windfall Tax accordingly is creditable as an excess profits tax within the meaning of Section 901.

Amicus Entergy fully endorses the arguments offered by PPL. Rather than repeat those arguments in this brief, Entergy focuses on additional materials that support PPL's conclusion: evidence offered by Entergy at the trial of its companion case; the analysis of the Fifth Circuit in Entergy's appeal, which points up the flaws in the Third Circuit decision now under review; and the history and past judicial treatment of excess profits taxes. These materials leave no doubt that Congress (when it enacted Section 901) and the Treasury Department (when it promulgated the Section 901 regulations) regarded levies like the Windfall Tax to be creditable -- and that the Third Circuit's contrary conclusion rests on the misguided approach that the labels and form of a foreign statute govern creditability.

At the time, excess profits and war profits taxes were thought of as distinct, although both were imposed on a specified portion of taxpayer profits.⁴ Eventually the distinction blurred, and war profits taxes were subsumed within excess profits taxes.⁵ The authoritative commentator Kenneth James Curran wrote in 1943, "The customary practice today . . . is to use the term 'excess profits tax' to describe any levy that is confined to a segment of a taxpayer's income that is considered excessive, no matter by what standard of measurement it is determined." EXCESS PROFITS TAXATION (American Council on Public Affairs 1943) (App., infra, 13a-23a) at 15a-16a.⁶

As the term itself suggests, excess profits taxes measure "normal" profits by a "standard," or floor amount above which profits are considered excessive. The most common standards are the "invested capital" and the "profits" standards. App. 13a. The invested capital standard operates on the assumption that normal profits are measured by a return on the capital invested in the business, expressed as a percentage of invested capital. The excess profits tax is then levied on profits in excess of that percentage. The profits standard measures normal profits by the average profits earned during an earlier "base period." App. 14a.

The first U.S. excess profits taxes, enacted in 1917, shed light on the meaning of "excess profits" as used the next year in Section 901's predecessor. Those taxes used an invested capital standard to measure normal profits. Act of March 3, 1917, ch. 159, §§ 200-207; Act of October 3, 1917, ch. 63, §§ 200-214. The following year, Congress enacted an excess profits tax (using an invested capital standard) and a war profits tax (using an average profits standard with adjustments for changes in invested capital). Revenue Act of 1918, ch. 18, §§ 300-337, 40 Stat. 1057 (1919). Taxpayers were liable for the greater of the excess profits tax or the war profits tax. Id.

Excess profits taxes enacted for World War II and the Korean War allowed taxpayers to choose between an invested capital or average profits standard to measure normal profits. Second Revenue Act of 1940, Pub. L. No. 801-76, ch. 757, §§ 710-752; Excess Profits Tax Act of 1950, Pub. L. No. 909-81, ch. 1199, §§ 430-472.

After flotation, the privatized companies that would eventually be subject to the Windfall Tax (the "Windfall Companies") were considerably more efficient and profitable than expected. Substantial profits led to unexpectedly high dividends, executive compensation, and share price increases, which fueled public outcry that shareholders and executives of the privatized companies had profited unduly to the detriment of the U.K. fisc and consumers. Pet. App. 29-30. According to Geoffrey Robinson, a senior Treasury Minister who drafted the Windfall Tax, "People felt that too many bureaucrats, some of whom had never taken a risk in their lives and had not shown much managerial talent, had become overnight millionaires thanks to a botched government privatization process." Entergy Corp. v. Comm'r, T.C. Memo 2010-197 (2010) Ex. ("Ex.") 27-R at 68.

Beginning in the early 1990's, the Labour Party stated publicly that, in order to finance social programs, it would impose a windfall tax on the excess profits of the privatized companies. "[B]y 1993, . . . the shadow Chancellor [ ] put forward a program whereby we would tax those excess profits and use the funds to finance public works in the name of a youth employment program." JA 499-500. By 1994, the idea of an excess profits tax had become a principal feature of the Labour Party's speeches and programs leading up to the 1997 Parliamentary election. Pet. App. 31.

Drafting the Windfall Tax posed a complex task. Ex. 27-R at 66-67. There were over 150 privatized companies which could have been judged to have earned excess profits. Ex. 27-R at 70. Moreover, the companies were in different industries, had been privatized at different times, and had different accounting methods. Ex. 27-R at 67.

To get the Windfall Tax enacted by Parliament, it was imperative that it define a specific class of companies and tax each on the same basis. Otherwise, it would be classified as a "hybrid bill." Ex. 27-R at 79; Ex. 67-P (App., infra, 1a-8a) at 1a. Because hybrid bills disproportionately burden similarly situated interests, they are subject to a longer parliamentary process and are more vulnerable to parliamentary challenge. App. 1a-2a.

Additionally, a number of Windfall Companies threatened to challenge the legality of the Windfall Tax. Ex. 27-R at 75. While the outcome of the lawsuits was uncertain, a tax that discriminated among the Windfall Companies was certain to be stuck in protracted litigation. The Labour Party was also concerned that if the tax were hastily drafted, it would be subject to an endless stream of opposition amendments, and the Labour Party would have to make significant concessions to get the bill passed. Ex. 27-R at 67. Before the tax was even drafted, newspapers were predicting that the Windfall Tax would be subject to "a legal quagmire and huge parliamentary delays." Ex. 27-R at 80.

To expedite enactment of the Windfall Tax, the Labour Party retained Arthur Andersen in 1996. Pet. App. 31-32. Gordon Brown, then the Labour Party's Shadow Chancellor of the Exchequer, instructed Arthur Andersen to draft proposals for the imposition of a tax on the privatized companies' excess profits that would meet Parliamentary requirements, would be sustainable by the companies, and would not conflict with U.K. or European Union law. JA 502.

Arthur Andersen proposed six options. Three of the proposals were a tax on turnover (gross revenue), on assets, and on profits. All three were rejected. JA 505-506.

The fourth proposal was a traditional excess profits tax, which used pre-privatization profits as the standard above which the excess would be calculated. JA 512. However, it was not workable because British Gas, the utility that ultimately paid the single largest amount under the Windfall Tax, had a decrease in profits after privatization. Entergy, 683 F.3d 233, C.A. R.E. ("R.E.") Tab H, Scheds. 4A-4B; JA 512. Thus, an excess profits tax that used a traditional "historic profits" standard would have discriminated among the Windfall Companies. The Labour Party was forced to reject this option because it would have been vulnerable to legal challenge and would have been classified as a hybrid bill, subject to lengthy Parliamentary review and delays. JA 509-510; App. 1a-2a.

A fifth proposal was a tax on excess shareholder returns. JA 507. However, it faced the same problems as an excess profits tax using an "historic profits" standard. In this case, British Telecommunications showed decreased post-privatization shareholder returns and would have been excluded. JA 509. Also, a tax on shareholder returns would have violated the Labour Party's promise not to raise personal tax rates, would not have taxed shareholders who profited from the flotation but had already sold their stock, and would not have reached overseas shareholders. Therefore, this proposal was also rejected. JA 507.

As a solution to these problems, Arthur Andersen devised an excess profits tax (the Windfall Tax) using a percentage of flotation value⁷ as the standard rather than prior period profits. It was adopted because it could be applied to all of the Windfall Companies in the same way and at the same rate. Thus, the Windfall Tax avoided the vulnerabilities to legal challenge and Parliamentary delay posed by the other options. The Tax could also be borne without economically damaging the companies and would reliably yield the amount of revenue necessary to fund Labour's social programs. JA 509-510.

The Windfall Tax was enacted by the U.K. Finance (No.2) Act of 1997 (the "Windfall Tax Act" or "Act"). Ex. 18-J. Gordon Brown, by then Chancellor of the Exchequer, described the Tax as a "one-off windfall tax on the excess profits of the privatized utilities." Ex. 15-P, ¶ 188. The United Kingdom's Board of Inland Revenue described it as a tax on excess profits. Ex. 17-P, ¶ 41. There is no mystery why this language was used to describe the Windfall Tax: as PPL shows in its brief and as we demonstrate below, the amount of tax paid is measured by the size of a specified portion of taxpayer profits.

Entergy's U.K. accounting expert, Michael Taub, testified that the aggregate tax imposed on the 31 Windfall Companies equaled 20.27 percent of the aggregate Initial Period Profits.⁹ R.E. Tab H, Scheds. 4A-4B. No Windfall Company had a Windfall Tax liability in excess of Initial Period Profits. Pet. App. 43.

Entergy's U.S. accounting expert, Raymond Ball, testified that "[t]he effect of this tax is that, for a utility paying the tax, every £1 increase or decrease in profit, in any one of the four years [of the windfall period], would increase or decrease the tax payable . . . by £0.5175." Report of Raymond Ball, Ex. 69-P ¶ 15. The use of flotation value in the Windfall Tax equation merely set the threshold amount above which profits were taxed. "The choice of this particular threshold presumably reflects the political circumstances that triggered the enactment of this tax, but does not alter the conclusion that it is a tax imposed on the company's net income." Ex. 69-P ¶ 26.

Additionally, profit as calculated in the United Kingdom is of the same nature as net income as calculated in the United States. Ex. 69-P ¶ 28. "Under the U.K. Windfall Tax, the profit on which the tax is based is realized gross receipts net of associated expenses. . . ." Ex. 69-P ¶ 32. Thus, Ball testified that "[i]t is net income alone that is necessary for [the Windfall Tax] to be payable." Ex. 69-P ¶ 50.

PPL's accounting experts echoed the testimony of Entergy's accounting experts. Mark Ballamy, PPL's U.K. accounting expert, testified that "the windfall tax fell on the excess profits of the Windfall Tax Companies during their initial periods and that all of these profits represented realized profits." Edward Maydew, PPL's U.S. accounting expert, testified that in substance, the Windfall Tax was a tax on profits similar to prior U.S. and U.K. excess profits taxes. Pet. App. 59.

At trial, Entergy's counsel elicited statements from the government's U.K. tax expert, Philip Baker, demonstrating that the Windfall Tax operated as an excess profits tax as opposed to a tax on excess value. According to the government's expert, the Windfall Tax taxed profits in excess of a floor amount; it did not tax corporate value. Specifically, the government's expert testified to the operation of the Windfall Tax in four hypotheticals:

Writing for the Fifth Circuit panel, Chief Judge Jones began by finding that "[t]he case law from which 26 C.F.R. 1.901-2 is derived refutes the Commissioner's assertion that we should rely exclusively, or even chiefly, on the text of the Windfall Tax in determining the tax's 'predominant character."' Entergy Pet. App. 6a. Viewing the Tax "in practical terms," the Fifth Circuit went on to hold that it "clearly satisfies the realization and net income requirements" of 26 C.F.R. 1.901-2. Entergy Pet. App. 7a. Regarding the first of these requirements, the court found that the Tax "is based on revenues from the ordinary operation of the utilities that accrued long before the design and implementation of the tax"; "indeed, the Labour Party accurately estimated the amount the Windfall Tax would raise, as the earnings of each of the utilities were publicly available when the Labour Party drafted the tax." Entergy Pet. App. 7a. As to the net income requirement, "the tax only reached -- and only could reach -- utilities that realized a profit in the relevant period." Entergy Pet. App. 7a.

The Fifth Circuit then turned to the regulatory gross receipts requirement. As to this, the court explained:

Having reached this conclusion, the Fifth Circuit specifically rejected the Third Circuit's contrary analysis in this case as "exemplif[ying] the form-over-substance methodology that the governing regulation and case law eschew." Entergy Pet. App. 9a. In particular, the Fifth Circuit noted that the Third Circuit's analysis was premised on a misunderstanding of the regulatory gross receipts requirement and accompanying illustrations. As the Fifth Circuit explained, "[t]he gross receipts requirement . . . serves as one mechanism to prevent foreign nations from 'soaking up' American tax revenue by levying an income tax on an imputed amount deliberately calculated to reach some amount greater than the business's actual gross receipts." Entergy Pet. App. 9a. But the Windfall Tax does not rest on an "imputed amount" of gross receipts, "nor indeed on any imputation." Entergy Pet. App. 11a. "Instead, the Windfall Tax begins by taking 23% of the daily average of profit based on actual gross receipts, multiplied by a statutory constant of nine (deemed a 'price-to-earnings ratio'), less each company's flotation value. . . . There was no need to calculate imputed gross receipts; gross receipts were actually known." Entergy Pet. App. 11a.

Moreover, the Fifth Circuit added, "the Third Circuit opinion seems to overlook that a tax based on actual financial profits in the U.K. sense necessarily begins with gross receipts." Entergy Pet. App. 11a. Thus, "London Electricity's profit for [the] purpose of the Windfall Tax was calculated by computing gross receipts less operating expenses. The Windfall Tax was designed to reach a subset of this left-over amount by beginning with an amount predicated on actual gross receipts minus flotation value." Entergy Pet. App 11a-12a. The Third Circuit's refusal to take account of this reality, the Fifth Circuit concluded, is the "sort of formalism" that cannot be squared with the regulation's "predominant character standard." Entergy Pet. App 12a.

In rejecting this common-sense conclusion, the Commissioner argues and the Third Circuit held that the labels used by a foreign tax statute must trump the statute's real-world operation. The Windfall Tax therefore is not creditable, they say, because the formula used to set the tax rate does not, in so many words, use the terminology of "excess profits." But this myopic focus on labels, which would work a radical departure from the settled understanding of Section 901, is wrong. As the Fifth Circuit demonstrated in Entergy's case, the reality is that the amount produced as the tax base by the Windfall tax formula is, in every case, a "subset" of "gross receipts less operating expenses." Entergy Pet. App. 11a-12a. A tax imposed on that subset must be an "excess profits tax." Indeed, in this respect the Windfall Tax is functionally indistinguishable from historic excess profits taxes, imposed both by the United States and by foreign nations, which predated and shaped the understanding of the term "excess profits tax" as it is used in Section 901 and the implementing regulation.

No other court has ever adopted the Third Circuit's approach to Section 901, which disregards the real operation of the tax at issue. It departs from the intent of Congress and the manifest meaning of the governing regulation. The Third Circuit's decision accordingly should be set aside.

Despite this wealth of authority, the Commissioner argues that creditability of a foreign tax is determined exclusively by the literal text of the foreign tax statute, and that consideration of other evidence is legal error. Not a single case supports the Commissioner's position, and while the Third Circuit in PPL correctly stated the applicable principle, it failed to apply it.

Since the relevant Section 901 regulation was promulgated in 1983, every decision testing creditability has examined the operation and effect of the foreign tax to determine its predominant character. As the Fifth Circuit acknowledged, no decision has determined creditability exclusively, or even chiefly, by the text of the foreign statute.¹² That reality demonstrates a judicial consensus on the proper application of Section 901 -- a consensus wholly inconsistent with the Commissioner's approach. Adopting the Commissioner's proposed rule would work a disruptive and dramatic departure from the uniform current understanding of the statute.

In Phillips Petroleum Co. v. Commissioner, 104 T.C. 256 (1995), the Tax Court evaluated a Norwegian petroleum tax under the temporary Section 901 regulation preceding the current regulation. The court received evidence of Norway's purpose in designing the tax and how it actually operated. Id. at 291-292, 301-302. Indeed, the Commissioner offered evidence about the design of the tax¹³ and expert testimony that the tax base did not approximate gross receipts.¹⁴ Although the text of the petroleum tax statute did not satisfy the gross receipts test, the court analyzed quantitative data and found that the base of the tax, in effect, approximated gross receipts. Id. at 312. Therefore, the court found the petroleum tax creditable as an excess profits tax under Section 901. Id. at 316.

In Texasgulf Inc. v. Commissioner, 172 F.3d 209 (2d Cir. 1999), the Second Circuit judged the creditability of the Ontario Mining Tax ("OMT"). The OMT statute excluded deductions for investment interest, cost depletion, and royalties paid and instead allowed a deduction for a fixed "processing allowance." Id. at 212. The court reviewed empirical evidence to determine how the OMT operated with respect to the entire industry. Id. at 215. Because the processing allowance exceeded nonrecoverable expenses for nearly 85 percent of taxpayers, the court found that the processing allowance effectively compensated for nonrecoverable expenses and accordingly held that the OMT reached net gain and was creditable under Section 901. Id. at 215-217.

In Exxon Corp. v. Commissioner, 113 T.C. 338 (1999), acq. in result, I.R.B. 2001-31, the Tax Court evaluated the creditability of taxes imposed pursuant to the U.K. Petroleum Revenue Act ("PRT"). The PRT did not allow a deduction for interest expenses. Id. at 346. Both the Commissioner and Exxon offered testimony from U.K. government officials regarding the purpose of the PRT, expert testimony as to how the PRT operated, and data showing how the PRT affected taxpayers. Id. at 342, 348, 354, 357.¹⁵ After evaluating the evidence, the court found that the PRT provided several allowances that effectively compensated for the disallowed interest expenses. Id. at 357. Thus, the court held the PRT to be a creditable excess profits tax under Section 901. Id. at 359-60.

In the Tax Court, Entergy and PPL offered extensive evidence of the operation and effect of the Windfall Tax. Both taxpayers presented witnesses and documents demonstrating that the unquestioned purpose and effect of the Windfall Tax were to tax the excess profits of the privatized companies. See, e.g., Pet. App. 58-59. They showed that the algebraic restatement of the Windfall Tax formula proved that the Windfall Tax was a tax on profits above a floor. See, e.g., Pet. App. 62-63. They submitted quantitative data confirming that the Windfall Tax operated as an excess profits tax with respect to each taxpayer individually and all of the taxpayers combined. See, e.g., Pet. App. 59, 82-83.

The Commissioner's own witness testified that the Windfall Tax operated as an excess profits tax, not as a tax on company value. He testified that: (i) Windfall Tax liability could arise only if there were sufficient profits during the initial period to cause the value in profit-making terms to exceed flotation value; (ii) once the flotation value threshold was exceeded, Windfall Tax liability increased in the same proportion as profits increased; (iii) a company with no Initial Period Profits incurred no Windfall Tax liability regardless of how much its stock value increased; and (iv) a company with sufficient profits would incur Windfall Tax liability regardless of how much its stock value deteriorated. App. 9a-12a.

The Fifth Circuit reviewed the Tax Court's findings and was "persuaded by the Tax Court's astute observations as to the Windfall Tax's predominant character: the tax's history and practical operation were to 'claw back' a substantial portion of privatized utilities' 'excess profits' in light of their sale value." Entergy Pet. App. 7a-8a. The algebraic reformulation of the Windfall Tax, the Fifth Circuit continued, demonstrated conclusively that "[t]he tax rose in direct proportion to additional profits above a fixed (and carefully calculated) floor." Entergy Pet. App. 8a.

There can be no question that under 26 U.S.C. 901, an excess profits tax is creditable. Several decisions and revenue rulings, which predate promulgation of the Section 901 regulations and therefore shed light on their intended operation, either assumed or concluded that foreign excess profits taxes were creditable See H.H. Robertson Co. v. Comm'r, 176 F.2d 704, 707 (3d Cir. 1949) (conceding that the U.K. World War II Excess Profits Tax was creditable); Ethyl Corp. v. United States, 75 F. Supp. 461, 465 (Ct. Cl. 1948) (assuming that the U.K. World War II Excess Profits Tax was creditable); Columbian Carbon Co. v. Comm'r, 25 BTA 456, 474 (1932) (conceding that the U.K. World War I Excess Profits Tax was creditable), acq., 1932-1 C.B. 2; Rev. Rul. 68-318, 1968-1 C.B. 342 (finding creditable an Italian tax on profits in excess of a percentage of capital); Rev. Rul. 56-51, 1956-1 C.B. 320 (finding creditable a Cuban tax on profits in excess of a percentage of capital); Rev. Rul. 74-435, 1974-2 C.B. 204 (finding creditable a Swiss Cantonal tax imposed at variable rates on multi-year profits).

The Windfall Tax bore the hallmarks of previous excess profits taxes enacted in both the United States and United Kingdom. A percentage return on flotation value served the function of an invested capital standard. Once that standard was exceeded, every additional £1 in profit resulted in an additional £0.5175 of tax. Ex. 69-P ¶ 15. Very notably, the Commissioner has not offered any principled ground on which the Windfall Tax can be distinguished from traditional, and unquestioned, excess profits taxes using an invested capital standard. Therefore, the Tax Court and the Fifth Circuit correctly held that the Windfall Tax was a creditable excess profits tax under 26 U.S.C. 901.

Moreover, the Third Circuit erroneously and illogically believed that an entirely inapposite example in the regulation foreclosed the use of simple algebra to factor out the 9/4ths multiple in the Windfall Tax. Alone in its reasoning, the Third Circuit could not tolerate a tax base that had the appearance of taxing more than 100 percent of profits. Through simple algebra, the mirage dissolved and exposed the substance of the Windfall Tax as a traditional excess profits tax. This Court would have to ignore the entire body of foreign tax credit jurisprudence to find that a restatement of the Windfall Tax into a 51.71 percent tax on profits in excess of a fraction of flotation value must be blocked from view. The Fifth Circuit would not go there, and neither should this Court.

Had the Third Circuit examined the reformulation, it would have seen that Initial Period Profits exceeded the restated tax base for every company. Furthermore, the Third Circuit ignored evidence demonstrating that the Windfall Tax reached net gain. It failed to even acknowledge that the aggregate tax burden of the 31 companies equaled 20.27 percent of the aggregate Initial Period Profits,¹⁶ or that no Windfall Company had a Windfall Tax liability in excess of its Initial Period Profits.¹⁷

The Third Circuit also made no serious effort to explain why the Windfall Tax is not, in reality, a tax on excess profits. To the contrary, one implication of the court's reasoning is that an excess profits tax can never be creditable, a position that Congress did not adopt in Section 901 and the government has never advanced.

Such logic suggests that a tax's predominant character can be revealed only by the tax base as set forth in the foreign taxing statute.¹⁸ According to the Third Circuit, if the Windfall Tax had the predominant character of a tax on profits, profits would be the only variable in the tax base.¹⁹ Such reasoning would deny creditability if the tax base includes variables besides profits. However, that approach reads the concept of "excess" profits out of the statute altogether.

The court is simply wrong. Its reasoning implies a lack of understanding of how an excess profits tax functions. Excess profits taxes require a variable in the tax base besides profits to serve as a floor over which "excess" profits are derived. The Windfall Tax used a rate of return on flotation value as that floor.

There is absolutely no doubt that 26 C.F.R. 1.901-2 did not, and could not, deny creditability of excess profits taxes simply because the base of the tax is profits above a floor, as opposed to total profits. A regulation to that effect would flatly contravene the language of 26 U.S.C. 901. With all due respect to the Third Circuit, that it could contemplate such an astonishing possibility reveals how confused it was by the government's insistence on rigid textualism.

The Third Circuit's refusal to consider the evidence led to a result that cannot be squared with 26 C.F.R. 1.901-2. The predominant character standard demands more. Under 26 C.F.R. 1.901-2, the Third Circuit was required to consider the design, operation, and effect of the Windfall Tax. Because the totality of the evidence demonstrates that the Windfall Tax is the equivalent of a U.S. excess profits tax satisfying each of the three tests in 26 CFR 1.901-2, this Court should find that it is creditable.

December 20, 2012

² 683 F.3d 233 (2012).

³ Supreme Court No. 12-277.

⁴See Statement of W.G. McAdoo, Treasury Secretary, INCOME, EXCESS PROFITS, AND ESTATE TAXES: HEARINGS BEFORE THE HOUSE COMM. ON WAYS AND MEANS 15 (1918) ("By a war-profits tax we mean a tax upon profits in excess of those realized before the war. By an excess-profits tax we mean a tax upon profits in excess of a given return on capital.").

⁵See Holmes, supra, at 644 ("The law, however, does not adhere to a clear distinction between war-profits and excess-profits. . . .").

⁶ This brief cites to four appendices. "App." refers to the appendix attached hereto. "Entergy Pet. App." refers to the appendix attached to the Solicitor General's Petition for Certiorari in case No. 12-277. "JA" refers to the Joint Appendix accompanying PPL's brief in this case. "Pet. App." refers to the appendix attached to PPL's Petition for Certiorari in this case.

⁷ Flotation value equaled the product of the per-share flotation price and the number of ordinary shares issued in the flotation. Pet. App. 139-140.

⁸ The Tax Court described the Tax as a 51.71% tax on profits in excess of 44.47% of flotation value. Pet. App. 63. That equation reflects the inclusion of the extra leap year day, which makes the ratio used to determine average annual profits slightly more than 4/9. Omitting the extra day for the leap year results in the 51.75 percent tax rate.

⁹ The Windfall Tax Act defined "Initial Period Profits" as a company's after-tax profits earned during its four financial years immediately following flotation. Pet. App. 36-37.

¹⁰ "Value in profit-making terms" was defined as nine times average annual profit earned during a company's four financial years immediately following flotation. Pet. App. 139.

¹¹ A foreign tax, judged on the basis of its predominant character, is creditable if (i) it is imposed subsequent to the occurrence of events that would result in the realization of income under the Internal Revenue Code (the "realization test"), (ii) it is imposed on the basis of gross receipts or gross receipts computed under a method that does not exceed fair market value (the "gross receipts test"), and (iii) the base of the tax is computed to permit recovery of significant costs and expenses attributable to such gross receipts (the "net income test"). 26 C.F.R. 1.901-2(b)(2)-(4).

¹²See Entergy Pet. App. 6a ("The case law from which 26 C.F.R. § 1.901-2 is derived refutes the Commissioner's assertion that we should rely exclusively, or even chiefly, on the text of the Windfall Tax in determining the tax's 'predominant character."').

¹³See Phillips Petroleum, 104 T.C. at 292 ("Respondent's allegations that Norway sought a desired or prescribed level of compensation through enactment of the PTA was drawn from comments made by a group in committee recommendations before the [Norwegian Legislature]. . . .").

¹⁴See id. at 302 ("In the case at bar, we received testimony and expert reports from three expert witnesses: petitioners put forth two experts . . . respondent one expert, Peter R. Odell.").

¹⁵ Additionally, in Exxon, the Commissioner argued that it was appropriate to use quantitative data to analyze the creditability of the PRT. 113 T.C. at 359. Although it has no precedential value, the Commissioner's Action on Decision in the Exxon case is flatly inconsistent with his current argument. In the AOD, the Commissioner stated, "While we generally believe that quantitative data should not be used exclusively to establish whether the net income requirement is satisfied, we agree that the exclusive use of such data may be appropriate in situations involving specialized taxes that apply to a limited number of taxpayers, such as the PRT." AOD CC-2001-04 (Jul. 30, 2001). The Windfall Tax, in the instant case, was a specialized tax that applied to a limited number of taxpayers -- and here, quantitative data (that is, data demonstrating the actual relation of the tax to taxpayer profits) show that the Windfall Tax is a tax on excess profits.

¹⁶ R.E. Tab H, Scheds. 4A-4B.

¹⁷ Pet. App. 82-83.

¹⁸See Pet. App. 9 ("In our view, PPL's formulation of the substance of the U.K. windfall tax is a bridge too far. No matter how many of PPL's proposed simplifications we may accept, we return to a fundamental problem: the tax base cannot be initial-period profit alone unless we rewrite the tax rate.").

¹⁹See Pet. App. 9 ("Were this a tax on initial-period profit, as PPL contends that it is in substance, the tax base would simply be P [for profit] so that we could express the tax thus: Tax = 23% x P.").