Exxon Mobil Wins A Substantial Refund Case on Interest on Production Payments (11/5/24)

I write on Exxon Mobil Corp. v. United States (N.D. TX No. 3:22-CV-0515-N Findings of Fact and Conclusions of Law 10/31/24), CL here & GS here [to come]. For those interested, the CL docket entries are here.  Exxon Mobil (sometimes referred to as ExxonMobil in the opinion) prevails in this tax refund suit. The Court held that certain payments by an Exxon Mobil affiliate on its arrangement with an entity of the State of Qatar were interest payments by treating a production payment as a debt under § 636(a). For details of the parties’ arguments, see the Pretrial Order on CL, here. (Note that per CL docket entries, the briefs were generally sealed for some reason (I did not bother to check on the reason).)

I won’t get into the merits of the interest issue decided. On those merits, 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).)

Procedural issues are:

1. Expert Witnesses. The Court says in the second paragraph (Slip op. 1-2):

          As a general matter the Court found ExxonMobil’s witnesses – both lay and expert – to be credible and helpful. The Court found Defendant United States of America’s (“United States”) expert to be credible but not helpful. That is to say, the Court believes Dr. Wright truthfully testified as to her opinions and that she is well-qualified to offer those opinions. The problem is the subject matter of her opinions – she was asked to offer opinions regarding oil and gas accounting from a business perspective, rather than opining [*2] on the correct tax treatment or the economic reality of the transaction. For that reason, the Court discounts her testimony.

Tax Case Illustrating the First Rule of Persuasion--Avoid Irritating the Person You Seek to Persuade (12/3/23)

In Fitzgerald Truck Parts, Inc. v. United States, 2023 WL 8100540, 2023 U.S. Dist. LEXIS 208420 (M.D. Tenn. 11/21/23), CL here and GS here, “After a trial held in Cookeville, Tennessee between July 10 and July 14, 2023, a jury found that Fitzgerald Truck Parts and Sales, LLC (“Fitzgerald”) was not liable for excise tax on some  12,830 glider semi trucks sold between 2012 and 2017.” The Government moved for Judgment as a Matter of Law or New Trial. The Court denied the motion.

I am not sure there is any federal tax procedure issue involved in the opinion, except that tax procedure necessarily involves trial procedures. For that reason, this decision is a doozy, primarily because the judge appears (my inference) to be irritated with the Government claims on the motion.

The essential facts are recounted in the opinion (pp. 1-3 bold face supplied by JAT):

          For more than 30 years, and up until Environmental Protection Agency (“EPA”) regulations essentially abolished the market, Fitzgerald manufactured glider semi-trucks. It did so by placing rebuilt engines and transmissions from wrecked highway tractors into glider kits produced by original equipment manufacturers. The kits from those manufacturers generally included such things as the cab, frame, sheet metal, mounting brackets and steering gear, to which the rebuilt powertrains were then added. Through this method, the goal was to offer for sale essentially a new truck – albeit with a rebuilt engine and transmission – at a lower price than a comparable truck from the factory.

          Not only did the customer receive a reduction in price, the customer was also not on the hook for  excise taxes, at least if the governing regulations were followed. Herein lies the core of the parties’ dispute.

          Under the Internal Revenue Code, a 12% federal excise tax is imposed “on the first retail sale” of “tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer.” 26 U.S.C. § 4051(a)(1). The code also contains a safe harbor provision that states:

(f) Certain repairs and modifications not treated as manufacture (1) In general An article described in section 4051(a)(1) shall not be treated as manufactured or produced solely by reason of repairs or modifications to the article (including any modification which changes the transportation function of the article or restores a wrecked article to a functional condition) if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article.

26 U.S.C. § 4052(f)(1).

          It has been Fitzgerald’s position throughout that the trucks it produced met the safe harbor [*3] provision. The Internal Revenue Service (“IRS”) disagrees. In accordance with IRS regulations, Fitzgerald paid the excise tax on one truck for each quarter of the tax years at issue, meaning excise taxes were not paid on some 12,800-plus gliders. The stakes are enormous, especially for a company that is no longer producing trucks, and never collected the excise tax from the purchaser in the first place. Those taxes are more than ten million dollars. Penalties and interest place that figure in the neighborhood of $300 million.

Tax Court Rejects Unusual Path to Admission of Expert Testimony (11/20/13)

In Estate of Tanenblatt v. Commissioner, T.C. Memo. 2013-263, here, the Tax Court excluded an expert witness report that the petitioner attempted to introduce as the expert's testimony by attaching the report to his petition, by a failed motion to admit the report, and an IRS stipulation that the petition was the petition but not for purposes of admission.  The Court said that "Petitioner's path for attempting to introduce the Tindall appraisal into evidence as expert testimony is, to say the least, unusual."

The Court immediately described the usual way:

Generally, a party obtains the testimony of an expert witness by calling that witness to testify. See Rule 143(g)(1). Pursuant to that Rule, the expert witness must prepare a written report, which is marked as an exhibit and, after having been identified by the witness and adopted by him, received into evidence as his direct testimony unless the Court determines that the witness is not qualified as an expert. The Rule further provides that, not less than 30 days before the call of the trial calendar on which a case appears, a party calling an expert witness shall serve on each other party and submit to the Court a copy of the expert's report. Finally, the Rule also provides that, generally, we will exclude an expert witness' testimony altogether for failure to comply with the Rule. Those requirements are echoed in our standing pretrial order, which was served on petitioner.

The Court inferred that the petitioner chose the unusual method because of a fee dispute with the appraiser.

The Court then rejected the attempt to back door the expert report into evidence, concluding:

Petitioner did not call Dr. Tindall as a witness but asks us to rely on her report (which, under our Rules, would serve as her direct testimony) as her expert opinion. Petitioner has neither qualified Dr. Tindall as an expert entitled pursuant to rule 702 of the Federal Rules of Evidence to give her opinion on technical matters nor has he satisfied our procedural rules for expert testimony, found in Rule 143(g) and in our standing pretrial order. In other words, petitioner has failed to satisfy the preconditions for our receiving Dr. Tindall's opinion into evidence. Because her report (i.e., the Tindall appraisal) is not in evidence, we may not consider her opinion.

The Court then accepted the IRS's valuation of $2,303,000.