Exxon Strikes Out on Its Tax Refund Claims But Dodges the § 6676(a) Penalty Bullet (8/4/22; 8/8/24)

In Exxon Mobil Corp. v. United States, 43 F.4th 424 (5th Cir. 8/3/22), CA5 here and GS here, Exxon Mobil (“Exxon”) filed a mammoth claim for refund claiming that it had misreported two separate tax matters on its original income tax return.  The first item it misreported (paying more tax than it claims was due) was worth “worth a billion dollars” related to the proper tax treatment of payments arising from an oil and gas transaction.  Related to this first claim, the IRS imposed a § 6676(a) 20% penalty worth about $200 million.  The second item, called by the Court a “purported blunder” (not a good sign to use the purported adjective) “this one worth $300 million,” about how to treat the renewable fuel tax credit.

I have two gut level comments.  

First, Exxon has and has had for a number of years one of the best tax departments ever and certainly the funding to buy the best outside legal talent available.  (General Electric used to claim that it tax department was the best law firm ever, but as those who have been watching, General Electric’s supposed inside best tax firm got them into bullshit tax shelters, so much for the best claim.)  So, why would these supposed legal giants overreport Exxon’s tax liability?  The answer as this new case determines, Exxon did not overreport the tax liability.  

Second, so what is this, shall I call it bullshit, about an amended return claiming that their legal geniuses overreported Exxon’s tax liability by $1.3 billion.  (I am sure those legal geniuses had a sigh of relief over this outcome.) And while many might claim that $1.3 billion for Exxon is pocket change, still that is the stuff that tax department promotions and pay is based on (and for outside counsel litigating aggressive positions, contingency fees).

So, I make some brief comments on the big claim ($1 billion) and the resulting IRS claim for a penalty for making that big claim.  I will not address the smaller claim ($300 million) because (i) I just don’t want to spend the energy trying to figure out why Exxon would have made that claim and (ii) the Court handily disposed of it anyway.

The Big Claim (worth $1 billion)

             This claim had to do with whether Exxon retained an economic interest in the oil and gas property involved. In oil and gas transactions, the economic interest concept is critical, although not always apparent even to keen observers.  (The oil and gas economic interest is a subset of oil and gas taxation which is Alice-in-Wonderland stuff, a universe unto itself; I am reminded of Justice Frankfurter’s complaint about Supreme Court review of the Tax Court’s oil and gas cases that those cases make distinctions “which hardly can be held in the mind longer than it takes to state them." Burton-Sutton Oil Co. v. Commissioner, 328 US 25, 38 (1946) (dissenting).)

             At any rate in my former life as an Appellate Attorney with DOJ Tax, I had the good fortune, such as it is, to handle Standard Oil Co. (Indiana) v. Commissioner, 465 F.2d 246 (7th Cir. 1972), GS here, an opinion written by then Judge Stevens (later Justice Stevens).  Basically, Standard Oil in a planned transaction was trying to play games with the economic interest concept, but failed.  (I will tell some war stories about the appeal trajectory in Standard Oil in my comments below, but they are not relevant to the Exxon case on which this blog entry is based.)  Suffice it to say that, what I learned then and mostly remember now about the economic interest concept flowing from the seminal decision in Anderson v. Helvering, 310 U.S. 404 (1940) GS here which is the fulcrum for the Exxon decision is consistent with the Exxon decision (and with Standard Oil for that matter).  Basically, I don’t think Exxon had a prayer for prevailing (kudos for  Exxon’s tax department for recognizing that on the original return).

            Without a prayer, so what is the Exxon case about on claim for refund?  Not much, other than some hope that the IRS would miss the key point and grant the refund.  The IRS did not grant the refund, so Exxon had to make a decision whether to sue upon the denial (or deemed denial) of the refund claim.  It decided to do that.  The IRS denied the claim, and as noted the denial was sustained by both the district court and the Fifth Circuit.

The  § 6676(a) Penalty Worth $200 Million

Not only did the IRS deny the claim, the IRS also asserted a penalty under § 6676(a), here, titled “Erroneous claim for refund or credit.”  The section provides a 20% penalty for refunds in an excessive amount unless due the position has a “reasonable basis.”  (Note that the statute was changed in 2018 to require that, to avoid the penalty, the position must have reasonable cause, a higher standard than “reasonable basis;” so Exxon’s claim was tested for penalty purposes under the lower reasonable basis standard.)  Reasonable basis is a pretty damn low standard (although, to use the expression, it is not nothing).  At any rate, the Fifth Circuit panel sustained the district court.  I won’t go further into that issue, but just express my opinion that Exxon is very lucky to avoid that penalty (with the same comment that $200 million is pocket change to Exxon).

The Little Claim ($300 Million)

    This claim involves credits.  I really don't know much about the credits, but, as presented by the panel decision, this claim had little merit as well.  But this claim did not draw the § 6676(a) penalty.  I therefore forego discussion.

JAT Comments (mostly war stories on Standard Oil):

1. First a relevant comment (before the war stories).  Errata for my 2022 FTP Book (Practitioner Edition) p 366 n. 1569, I say the change from reasonable basis to reasonable cause occurred in 2015.  Actually, the change was 2018, but I did correctly cite the P.L. for the change.  The correction will be made in future publications (the next being August 2023).

2. In preparing the draft answering brief in Standard Oil, I knew that Grant Wiprud would be the reviewer, so I put his name on the draft brief.  I knew that he would be the reviewer because he was the Appellate Section’s “oil and gas” expert.  This was perhaps my first encounter with Grant as a reviewer.  At that time, Grant had a reputation for making substantial even major revisions to any draft brief he reviewed.  So, after starting “review” of my brief, Grant called me into his office to ask about a point of law that he wanted to develop.  My response was that I had covered that point in my brief and cited the page.  He said that he was “writing” (not reviewing) the brief and had not read my draft, so needed to make sure the point was addressed.  Either on this round (or perhaps in another case), I told Grant that, in the future, I will just submit an outline of points and authorities and just let him write the brief unencumbered with my draft which he didn’t bother to read.  (I said it nicer than that but I did say something to that effect; after that, the powers that be had a session with Grant to suggest / direct that he not rewrite briefs without considering the drafts and revising as appropriate.)  At any rate, for those interested in the briefs both my draft and as rewritten by Grant (but subject to some revisions by me), I can certainly provide upon request (I can’t imagine why anyone would request).  In any event, I learned a lot about the concept of “economic interest” and its ambiguities in Standard Oil.

Added 8/8/24 12:00pm: In paragraph 2 above, I shared the anecdote of a DOJ Tax Appellate reviewer writing anew a brief without even looking at my draft. I was reminded of this anecdote in reading this blog post (Josh Blackman, Some Highlights From Justice Gorsuch's WSJ Interview (The Volokh Conspiracy 8/3/24), here:

What is his [Gorsuch’s] drafting process? "I like to have a law clerk do something," Justice Gorsuch says, even if he ultimately follows the practice of his old boss, Justice Byron White: "He'd say, write me something. And he'd read it. And then he'd throw it away. And then he'd write his own thing." This isn't to say the clerks are wasting time: "It's informative to see how another mind might approach the problem."

3. I recount the unusual trajectory of Standard Oil oral argument and post oral argument in another blog.  “Deference” to Judicial Opinions (with War Story) (Federal Tax Procedure Blog 9/1/21), here.