Amoco Corporation v. Commissioner of Internal of Revenue, 032896 FEDTAX, 20471-92

Docket Nº:20471-92
Opinion Judge:TANNENWALD, Judge
Party Name:AMOCO CORPORATION (Formerly STANDARD OIL COMPANY (INDIANA)) AND AFFILIATED CORPORATIONS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Robert L. Moore, II, Jay L. Carlson, Emmett B. Lewis, J. Bradford Anwyll, Kevin L. Kenworthy, Laura G. Ferguson, and James J. Lenahan, for petitioner. William G. Merkle, Cynthia J. Mattson, William B. Lowrance, Paul S. Manning, Michael J. Calabrese, Jan E. Lamartine, Bettie N. Ricca, and Joan M. ...
Case Date:March 28, 1996
Court:United States Tax Court
 
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T.C. Memo. 1996-159

AMOCO CORPORATION (Formerly STANDARD OIL COMPANY (INDIANA)) AND AFFILIATED CORPORATIONS, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 20471-92

United States Tax Court

March 28, 1996

S, a subsidiary of P, entered into a concession agreement with E, an entity owned and controlled by the Egyptian Government. Under the agreement, which had the force of law, E was responsible for the payment of S's Egyptian income tax liability. For the years in issue, E took a credit against its own tax liability for the amount of taxes paid on behalf of S. The Egyptian Tax Department determined that E was not entitled to a credit and was allowed only to deduct such payments from its taxable income. It assessed back taxes against E for a portion of the years in issue. Collection was foreclosed by the running of the Egyptian statutory period of limitations. Held, E was not authorized to credit Egyptian taxes paid on behalf of S against its income tax liability. Held, further, there was no refund of Egyptian taxes to or for the account of P. Held, further, E should be included in the term "foreign country" for purposes of sec. 901, I.R.C., and the regulations thereunder, including Example (3) of sec. 1.901-2(f)(2)(ii), Income Tax Regs. Held, further, there was no indirect subsidy to P with respect to E's credit practice. Held, further, the requirements of foreign tax creditability under secs. 901-908, I.R.C., have been satisfied with respect to Egyptian income taxes paid on behalf of S by E.

Robert L. Moore, II, Jay L. Carlson, Emmett B. Lewis, J. Bradford Anwyll, Kevin L. Kenworthy, Laura G. Ferguson, and James J. Lenahan, for petitioner.

William G. Merkle, Cynthia J. Mattson, William B. Lowrance, Paul S. Manning, Michael J. Calabrese, Jan E. Lamartine, Bettie N. Ricca, and Joan M. Thomsen, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

TANNENWALD, Judge:

Respondent determined deficiencies in petitioner's 1980, 1981, and 1982 Federal income taxes in the amounts of $109,618,203, $200,848,534, and $155,776,311, respectively. The issue for decision is whether petitioner is entitled, under section 901,1 to foreign tax credits for Egyptian income taxes purportedly paid or accrued for the years 1979-1982.2

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and the accompanying exhibits are incorporated herein by this reference. Amoco Corporation and Amoco Egypt

Petitioner Amoco Corporation (formerly Standard Oil Company (Indiana)) (hereinafter referred to as Amoco or petitioner) is an Indiana corporation with its principal place of business in Chicago, Illinois. Amoco and its affiliated corporations are engaged in the business of exploring for, producing, refining and marketing crude oil and petroleum products in the United States and other countries around the world. Amoco timely filed consolidated income tax returns on behalf of its affiliated group for the 1979, 1980, 1981, and 1982 tax years.

Amoco Egypt Oil Company (Amoco Egypt), is a Delaware corporation and a member of petitioner's affiliated group. It is engaged in the business of petroleum exploration and production within the Arab Republic of Egypt (ARE) (formerly the United Arab Republic). Amoco Egypt has explored for and produced crude oil and natural gas in ARE since the 1960's pursuant to concession agreements entered into with the ARE and the Egyptian General Petroleum Corporation.

Egyptian General Petroleum Corporation

The Egyptian General Petroleum Corporation is a legal entity first created by Egyptian Law No. 167 of 1958. Pursuant to Egyptian Law No. 20 of 1976, the powers, functions, and obligations of EGPC were assumed by a new legal entity also known as the Egyptian General Petroleum Corporation (both entities are hereinafter referred to as EGPC). EGPC is subject to Egyptian income tax. Further facts in respect of EGPC are set forth and discussed below, infra pp. 82-83.

Gulf of Suez Petroleum Company

The Gulf of Suez Petroleum Company (GUPCO) was formed by Amoco Egypt and EGPC pursuant to the 1964 Gulf of Suez Concession Agreement. GUPCO was later designated as the operating company for all operations pursuant to the merged concession agreement discussed below. GUPCO has a board of directors consisting of eight members, four of whom are designated by Amoco Egypt and the other four by EGPC. The chairman of the board is designated by EGPC.

Government Structure for Egyptian Tax Administration

The Egyptian Tax Department (ETD) is a department of the Finance Ministry responsible for the assessment and collection of taxes.3

Egyptian law requires that the ETD notify corporate taxpayers by certified mail of any adjustments to its tax declaration. The notice, a Form 18, must show the elements and amount of the proposed tax assessment and offer the taxpayer an opportunity to respond. The taxpayer may dispute the tax adjustments contained in the Form 18 within 30 days of its issuance. If an Egyptian corporate taxpayer agrees with the adjustments to its tax declaration, the tax is due and the subsequent assessment is final. Corporate Tax Form 19 is a notice of tax assessment and is issued if the corporation fails to respond to or disputes Form 18. The assessment pursuant to Form 19 may be appealed to the Internal Committee.

In the case of fraud on the part of the taxpayer, the ETD may make an additional assessment, using a Form 20. In all instances, the ETD may correct material or calculating errors.

If a dispute cannot be resolved by the Internal Committee, it is referred to the Refute Committee for appeal. EGPC is entitled to appeal a decision of the Refute Committee to the Egyptian State Council.

Amoco Egypt Tax Returns, Payments, Receipts

Amoco Egypt has filed annual income tax returns with the ETD from 1964 through 1992. For the period 1964 through June 30, 1975, Amoco Egypt paid its income taxes directly to the ETD.

For the period July 1, 1975, through December 31, 1992, EGPC paid Amoco Egypt's Egyptian income taxes in Egyptian pounds to the ETD. The ETD issued official receipts reflecting the income tax payments made by EGPC in the name of and on behalf of Amoco Egypt. The ETD typically delivered the receipts to EGPC, which in turn delivered them to Amoco Egypt. EGPC's payments of Amoco Egypt's income taxes were posted by ETD in its Amoco Egypt tax file (No. 440/4). None of EGPC's tax payments on behalf of Amoco Egypt for Amoco Egypt's 1979 to 1982 tax years were posted to EGPC's tax file (No. 440/6).

Amoco Egypt's annual tax returns were audited by the Petroleum Section of the Department of Tax on Joint Stock Companies within the ETD.

Amoco Egypt dealt directly with the ETD in connection with the department audits of its Egyptian income tax returns and disputes arising out of those audits.

EGPC's Tax Treatment of Amoco Egypt's Taxes

EGPC is required by law to file annual income tax returns. EGPC was a calendar year taxpayer for years ending before January 1, 1980. Thereafter, EGPC became a June 30 fiscal year taxpayer, with its first fiscal year for the short period ending June 30, 1980.

EGPC's tax payments of its own tax liability are posted to EGPC's tax file (No. 440/6) by the ETD. EGPC's tax returns are audited by the Petroleum Section of the Department of Tax on Joint Stock Companies within the ETD.

On EGPC's Egyptian income tax returns for years prior to its taxable year ended June 30, 1993, EGPC credited royalty payments and income taxes paid on behalf of its foreign partners against its own income tax liabilities.

For the 1975 to 1980 tax years, ETD did not challenge the credit taken by EGPC against its tax liability for taxes paid on behalf of foreign partners, including Amoco Egypt. See infra pp. 42-46 for subsequent action by the ETD.

Egyptian Petroleum Concession Agreements - General Principles

Under Egyptian law and the Egyptian constitution, the ARE owns all that country's natural resources. Rules and procedures for granting concessions relating to the exploitation of the ARE's natural resources are established by law. The Ministry of Petroleum and Mineral Resources (formerly known as the Ministry of Industry, Petroleum and Mineral Wealth) (both hereinafter referred to as the Petroleum Ministry) whose top executive is the Minister of Petroleum is part of the executive branch of the Egyptian Government with responsibility for management of the ARE's mineral resources.

The Egyptian Government authorizes petroleum exploration and development through concessions granted to EGPC or jointly to EGPC and a private oil company, such as Amoco Egypt. The procedure for entering into a concession agreement begins with a negotiation between EGPC and the private oil company as to the terms of the agreement. An agreement in English is initialed by the parties, indicating preliminary approval. The English text is then translated into an Arabic text, which is then initialed by the parties and the translators. Following approval by the EGPC board of directors and the Minister of Petroleum, the English text is signed by EGPC and the private oil company. Review and approval is then made by various government councils and committees. Among the government entities, the Egyptian State Council and the Council of Ministers conduct in-depth reviews and analyses of concession agreements where the terms of such agreements are presented to them for the first time. If an identical provision of another concession agreement is submitted, the committees rely upon the previous reviews. A law is then passed and signed by the president of the ARE authorizing the...

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