138 F.3d 1139 (7th Cir. 1998), 96-3632, Amoco Corp. v. C.I.R.

Docket Nº:96-3632.
Citation:138 F.3d 1139
Party Name:AMOCO CORPORATION (formerly Standard Oil Company (Indiana)) and Affiliated Corporations, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
Case Date:March 11, 1998
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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138 F.3d 1139 (7th Cir. 1998)

AMOCO CORPORATION (formerly Standard Oil Company (Indiana))

and Affiliated Corporations, Petitioner-Appellee,



No. 96-3632.

United States Court of Appeals, Seventh Circuit

March 11, 1998

Argued May 19, 1997.

James J. Lenahan, Chicago, IL, Jay L. Carlson, Alan I. Horowitz, Robert L. Moore, II (argued), Miller & Chevalier, Washington, DC, for Petitioner-Appellee.

Stuart L. Brown, Cynthia J. Mattson, Internal Revenue Service, Gary R. Allen, David E. Carmack, Charles Bricken (argued), Department of Justice, Tax Division, Appellate Section, Loretta C. Argrett, Department of

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Justice, Tax Division, Washington, DC, for Respondent-Appellant.

Before RIPPLE, KANNE, and DIANE P. WOOD, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

The Internal Revenue Code permits U.S. taxpayers who have paid the equivalent of income taxes to foreign governments to credit those amounts against their U.S. taxes, with certain limitations. See Internal Revenue Code of 1986 § 901 et seq., 26 U.S.C. § 901 et seq.; Internal Revenue Code of 1954 § 901 et seq., 26 U.S.C. § 901 et seq. (1982). 1 We must decide in this case whether Amoco was entitled to claim credits derived from some of its operations in the Arab Republic of Egypt ("ARE" or "Egypt"). This would be complex enough if all we had to do was ascertain what the law of Egypt was and whether Amoco's tax payments to the Egyptian authorities met the criteria of § 901, but those questions begin rather than end our inquiry. As the following account of the facts indicates, we must also consider the effect of Egypt's decision to use a wholly owned corporate entity for its critically important oil business, as well as the significance of certain mistakes that entity made in handling the Egyptian taxes on its transactions with Amoco.


Amoco Corporation, formerly Standard Oil Company (Indiana), through its affiliate the Amoco Egypt Oil Company (all of which we refer to as "Amoco"), has been active in crude oil and natural gas exploration and production in Egypt since the 1960s. Under the Egyptian Constitution and implementing Egyptian law, the ARE owns all the country's natural resources, including its oil and gas. Within the executive branch of the government, the Ministry of Petroleum and Mineral Resources is responsible for the management of Egypt's mineral resources. Affiliated with the Ministry is the Egyptian General Petroleum Corporation (EGPC), which was initially created in 1958 pursuant to Egyptian Law No. 167 of 1958, and later reconstituted under the same name by Egyptian Law No. 20 of 1976. According to the 1976 statute, EGPC is "a Public Authority endowed with an independent juristic personality, engaged in developing and properly utilizing the petroleum wealth and in supplying the country's requirements of the various petroleum products." EGPC is the entity through which the government organizes oil concession agreements with outside companies.

EGPC is wholly owned by the ARE and controlled by the Egyptian Government. Upon its dissolution, all of its assets must revert to the state. The chair of its board of directors is appointed by decree of the President of the Republic, and the remaining members are appointed by decree of the Prime Minister on the recommendation of the Minister of Petroleum and Mineral Resources. Resolutions of the Board must be forwarded to the Minister for ratification, amendment, or cancellation. Notwithstanding these close ties to the Government, EGPC has an independent budget prepared in the same manner as a commercial budget, and it is subject to Egyptian income tax. Its funds bear the oxymoronic label "privately owned State funds." Except for certain reserves, however, its after-tax surplus (if any) each year is turned over to the public treasury, and in the (as of yet hypothetical) event there were a deficit the treasury would be responsible for it.

When Amoco began its Egyptian oil operations in the early 1960s, it negotiated agreements with EGPC that set forth the terms under which it would do business. Over the course of its first decade in Egypt Amoco entered into three such concessions: the Western Desert Concession Agreement (October 1963), the Gulf of Suez Concession Agreement (February 1964), and the Western Desert and Nile Valley Concession Agreement (September 1969). Under these

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agreements, Amoco was generally required to pay for all preliminary exploration costs, up to a specified amount, after which Amoco and EGPC split both production costs and crude oil revenues on a 50-50 basis. Each entity paid its own Egyptian income taxes, and in addition each paid royalties and other miscellaneous charges imposed by the government. (These and all other concession agreements in Egypt are technically laws, and before becoming effective are ratified by the legislature and signed by the Egyptian President.) Amoco's exploration efforts were richly rewarded in February 1965, when it struck the El Morgan field in the Gulf of Suez. Production from that field, the largest oil find in Egypt to date, began in February 1967.

Eager to secure for itself a greater share of the benefits from its oil, the Government of Egypt in 1970 began entering into a different type of concession agreement with oil companies. The new agreements used a production-sharing format rather than the 50-50 income-sharing approach of Amoco's early agreements. Under these production-sharing agreements, EGPC holds the concession to explore for and produce petroleum while its foreign partners act as contractors, bearing the cost of all exploration, development, and production activities in return for a negotiated share of the production. Part of the contractor's share is earmarked for the recovery of costs.

Several oil companies entered into production-sharing agreements with EGPC between 1970 and 1974. In 1974, Amoco and EGPC entered into three production-sharing agreements, which related to oil fields not covered by Amoco's earlier income-sharing agreements. In early 1975, Amoco and EGPC began discussing converting the three existing 5050 income-sharing agreements into a single production-sharing agreement that came to be called the Merged Concession Agreement, or MCA. The Tax Court's opinion contains a detailed description of these negotiations. See Amoco Corp. v. Commissioner, 71 T.C.M. (CCH) 2613, 2618-20, 1996 WL 139214 (1996). Amoco and EGPC devoted considerable attention in those negotiations to the creditability of Amoco's Egyptian taxes for U.S. tax purposes. Amoco wanted to pay its own Egyptian taxes. EGPC, in contrast, preferred that the transaction be arranged so that Amoco would remain responsible for its own taxes, but EGPC would pay Amoco's taxes out of EGPC's share of the oil produced. (By thus structuring the agreement EGPC would itself sell the oil allocated to taxes, thus obtaining foreign currency.)

The MCA was initialed by the parties in November, 1975, was ratified by the Egyptian Government in February, 1976 (Law No. 15 of 1976), and was effective retroactive to July 1, 1975. In the final draft, Amoco and EGPC agreed that Amoco would be entitled to up to 20% of the crude oil produced as a reimbursement for the costs of exploration, production, and related operations. EGPC and Amoco would share the remaining 80% of production in varying percentages, between 85 and 87% for EGPC and 13 to 15% for Amoco. Out of its share of production, EGPC had to pay the Government of Egypt a royalty of 15% of the total quantity of petroleum produced and saved from the concession; Amoco had no direct royalty obligation to the Egyptian government. Article IV(f) of the MCA addressed the subject of taxes, and stated in pertinent part:

1. AMOCO shall be subject to Egyptian Income Tax Laws and shall comply with the requirements of the A.R.E. Law in particular with respect to filing returns, assessment of tax, and keeping and showing of books and records.

* * *

3. EGPC shall assume, pay and discharge, in the name and on behalf of AMOCO, AMOCO's Egyptian Income Tax out of EGPC's share of the Crude Oil produced and saved and not used in operations under Article VII. All taxes paid by EGPC in the name and on behalf of AMOCO shall be considered taxable income to AMOCO.

* * *

6. In calculating its A.R.E. income taxes, EGPC shall be entitled to deduct all royalties paid by EGPC to the GOVERNMENT and AMOCO's Egyptian Income Taxes paid by EGPC on AMOCO's behalf.

As often happens with international agreements, the English version of the text was

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not the only one, nor the only authentic one. In the Arabic version of Article IV(f), paragraph 6, which appears if anything to be slightly more authoritative, the Arabic word "minha," meaning "therefrom," appeared immediately after the Arabic words "an takhssim," meaning "to deduct." The term "minha" literally means "from it or her." The Arabic word for taxes is a feminine noun, "daraa'ib," while the Arabic word for income is a masculine noun, "al-dakhl." This brief excursion into Arabic helps to explain why, in later years, EGPC took the position that Article IV(f), para. 6, allowed it to credit against its Egyptian taxes the full amount of the taxes it was paying on Amoco's behalf, even though the English version of the text sounds as if Amoco's Egyptian taxes were to be taken as a deduction against EGPC's income. In any event, at the time no one appears to have noticed the linguistic ambiguity. (The Egyptian Government eventually concluded that the MCA authorized only deductions, the Tax Court so held, and the Commissioner does not challenge that interpretation on appeal.)

It was not long after the MCA took effect that Amoco got wind of the fact that EGPC...

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