Opinion ID: 619605
Heading Depth: 2
Heading Rank: 1

Heading: The Applicable Test

Text: To determine whether the U.K. windfall tax is a creditable foreign tax, we start with I.R.C. § 901(b)(1). That subsection provides a tax credit for the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country. Congress first enacted these words in 1918, and it has not changed them since. See Phillips Petroleum Co. v. Comm'r, 104 T.C. 256, 284 (1995) (discussing legislative history). In the decades that followed, the word `income' in section 901(b)(1) [became] the subject of a long and tortuous history in case law that was permeated with vagaries, confusion, and seeming contradictions. Bank of Am. Nat'l Trust & Sav. Ass'n v. Comm'r, 61 T.C. 752, 759 (1974). The Treasury Department explained and clarified § 901(b)(1) in a 1983 regulation, Treasury Regulation 1.901-2, which the parties agree governs our case. We follow our sister Courts of Appeals in according it the force of law. See, e.g., Texasgulf, Inc. v. Comm'r, 172 F.3d 209 (2d Cir.1999); Amoco Corp. v. Comm'r, 138 F.3d 1139 (7th Cir.1998). The regulation's purpose is to define income, war profits, [or] excess profits tax within the meaning of I.R.C. § 901(b)(1). The regulation combines those statutory terms into the single concept of an income tax. Treas. Reg. § 1.901-2(a)(1). It provides that a foreign assessment is an income tax if it has the predominant character . . . of an income tax in the U.S. sense. Id. § 1.901-2(a)(1)(ii). (It also requires that the foreign tax be a tax, which is not at issue here.) The regulation then provides that a foreign assessment has a tax character if it is likely to reach net gain in the normal circumstances in which it applies. Id. § 1.901-2(a)(3)(i). And it is likely to reach net gain . . . if and only if the tax, judged on the basis of its predominant character, [1] satisfies each of three requirements: the realization requirement, the gross receipts requirement, and the net income requirement. Id. § 1.901-2(b)(1) (emphases added). The realization requirement is that the tax is imposed on or after the occurrence of events that would result in the realization of income under U.S. tax law. Id. § 1.901-2(b)(2). The gross receipts requirement is that the tax is imposed on gross receipts or an amount not greater than gross receipts. Id. § 1.901-2(b)(3). The net income requirement is that computing the tax demands deducting from gross receipts the costs and expenses incurred in earning those receipts. Id. § 1.901-2(b)(4). We determine whether each requirement is met judged on the basis of [the] predominant character of the tax. Id. § 1.901-2(b)(2), (b)(3), (b)(4). We do so mindful that [b]ecause § 901's exemption from taxation is `a privilege extended by legislative grace,' it is strictly construed. Texasgulf, 172 F.3d at 214 (quoting Inland Steel Co. v. United States, 677 F.2d 72, 79 (Ct.Cl.1982) ( per curiam )). The three requirements concern the timing and the base of the foreign tax. The realization requirement, one of timing, ensures that the taxpayer has received income before being obligated to pay taxes on it. See Helvering v. Horst, 311 U.S. 112, 115, 61 S.Ct. 144, 85 L.Ed. 75 (1940) (`[R]ealization' is not deemed to occur until the income is paid.). The main effect of this requirement is to exclude from income the appreciation in value of property that its owner has not yet sold. The gross receipts and net income requirements present questions about the tax base, the amount on which the tax is levied. The amount that a particular corporation owes is the product of its tax base multiplied by its tax rate.