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.

Liberty Global Confirms the Saying that, for Forum Choice, Taxpayers Should Avoid the Tax Court When Claims Lack Technical Merit (12/1/23; 3/9/24)

In Liberty Global Inc. v. Commissioner, 161 T.C. ___ No. 10 (11/8/23), GS here, the Court held against the taxpayer on its claims based the Overall Foreign Loss (“OFL”) provisions of the Code. Judge Toro does a nice job of explaining the provisions (with some easy (relatively) to understand examples, so I won’t attempt to here).

I post the case here because I have related cases which involved tax procedure issues. Given the amounts involved discussed in the Tax Court case, it is not surprising that Liberty Global left no stone unturned to avoid the result the Tax Court now delivered. The prior postings are (in reverse chronological order):

• Liberty Global Court Holds that Government May Proceed by Collection Suit without a Notice of Deficiency (Federal Tax Procedure Blog8/13/23), here.
• Further Commotion in Liberty Global Collection Suit Over Whether a Notice of Deficiency Is Required Before Collection Suit (Federal Tax Procedure Blog1/16/23; 1/19/23), here.
• Government Files Collection Suit in Liberty Global Raising Procedural Issues (Federal Tax Procedure Blog 10/8/22; 10/12/22), here.
• Court Invalidates Regulation for Invalidity of Good Cause Statement (Federal Tax Procedure Blog 4/6/22), here.

JAT Comments:

1. The taxpayer reported the transaction on 2010 return Schedule UTP (Form 1120), Uncertain Tax Position Statement as follows (Slip Op. 5):

[Liberty Global] entered into a transaction to sell its entire interest in its Japanese subsidiary, [J:COM], during the year. [Liberty Global] recognized a gain on the sale and due to recharacterization of the gain also recognized deemed section 902 credits as part of the overall transaction. The issues are the application of the rules under section 904 to the transaction and whether the amount of the foreign tax credit taken as a result of the transaction is appropriate.

I presume that the disclosure got the IRS’s attention. At least in this case UTP worked. 

Added 3/9/24 9:00 pm: The UTP disclosure apparently avoided the IRS assertion of a penalty. For a good discussion of this case, see Lee A. Sheppard, Foreign Tax Credit Recapture and Schedule UTP, 113 Tax Notes Int'l 421 (1/22/24).

TRAC Report on Fewer Civil Tax Cases in District Courts (1/23/20)

TRAC has this report:  Federal Civil Tax Suits Fall by Half Over Last Decade (TRAC 1/22/20), here.  Note that this report does not include Tax Court proceedings where most civil tax cases occur.  Nor does it include Court of Federal Claims filings where many tax refund suits are brought.

Excerpts;

The latest available data from the federal courts show that during the first quarter of FY 2020 (October 2019 - December 2019) the government reported 158 new civil filings of federal tax suits. According to the case-by-case information analyzed by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University, this number is down by 19 percent over the same period from FY 2019 when the number of civil filings of this type totaled 194. 

If filings continue at the same pace for the rest of this fiscal year, total civil tax filings will be 632, down from 736 during the past fiscal year. Ten years ago during FY 2010 there were a total of 1,205 such suits. 

Federal civil tax suits cover a range of issues. Out of the 158 suits filed during the first quarter of FY 2020, a total of 65 (41%) were suits filed against the United States. See Figure 2. Over half of the suits filed by taxpayers were suits for refunds of taxes or penalties. Taxpayers also sued the Internal Revenue Service IRS to quash summons or to move litigation from the court in which the suit was filed. The remaining 93 (59%) of suits filed during this period were filed by the U.S. Frequently these were specific actions to enforce an IRS summons or a tax lien, but others involved various miscellaneous collection and regulatory matters. 

JAT Comments: