66 T.C.M. (CCH) 1707
EXXON CORPORATION and Affiliated Companies, et al., Petitioners,
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Nos. 18618-89, 24855-89 and 18432-90.
United States Tax Court
December 22, 1993
Robert L. Moore, II, Jay L. Carlson, John B. Magee, Gerald Goldman, Thomas D. Johnston, Joseph O. Luby, Bradford J. Anwyll, Kevin L. Kenworthy, Brian P. Thomas, and Craig D. Miller, for petitioners in docket Nos. 18618-89 and 18432-90.
Buford P. Berry, Emily Ann Parker, Dennis J. Grindinger, George V. Larsen, Joseph M. Incorvaia, David R. Wheat, Mary A. McNulty, and Bradley D. Spevak, for petitioners in docket No. 24855-89.
Raymond L. Collins, Ana G. Cummings, Bernard B. Nelson, Avery B. Cousins, III, John F. Eiman, Allan E. Lang, Alan Summers, William B. Lowrance, David A. Alvarez, James H.W. Insley, Roger Osburn, Emron M. Pratt, David J. Mungo, David P. Monson, Carol Bingham McClure, David E. Whitcomb, Mark Barnes, and Joyce E. Britt, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent, in a statutory notice of deficiency dated June 29, 1989, determined a deficiency in the 1979 Federal income taxes of Exxon Corp. and Affiliated Companies (docket No. 18618-89) in the amount of $268,721,294. In another notice of deficiency dated July 16, 1990, issued to Exxon Corp. and Affiliated Companies (docket No. 18432-90) for the years 1980, 1981 and 1982, respondent determined deficiencies in Federal income taxes in the following amounts:
In a notice of deficiency dated July 21, 1989, issued to Texaco, Inc., and Subsidiaries (docket No. 24855-89) for the years 1979, 1980, 1981, and 1982, respondent determined deficiencies in Federal income taxes in the following amounts:
Only the deficiencies for 1979 through 1981 are at issue herein. This Court's Order, dated January 7, 1991, indicated that the issues presently before the Court involved the purchase by petitioners' offtakers 
of crude oil from Saudi Arabia at a below-market purchase price, commonly referred to as the " Aramco Advantage" . Specifically, we ordered that the issues involved herein were limited to the following questions:
(1) Whether the transfer price of Saudi Arabian crude oil paid by petitioners' offtakers was below the prices charged for non-Saudi crude oil of similar grade or quality;
(2) if the answer to question (1) is in the affirmative, whether the transfer price charged by the offtakers to the other subsidiaries of each petitioner or to unrelated third parties was below the price charged for non-Saudi crude oil of similar grade or quality;
(3) if the answers to questions (1) and (2) are in the affirmative, whether the reduced price was caused by the restriction(s) imposed by Saudi Arabia which petitioners, their offtakers, and other subsidiaries were required to observe in order to have continued access to Saudi Arabian oil;
(4) whether the consuming country governments monitored the offtakers' sales of Saudi crude oil into their countries to assure that such sales were not in excess of the prices established by Saudi Arabia, increased only by costs incurred in transporting the crude oil;
(5) whether the Saudi Arabian pricing restriction(s) required petitioners and their offtakers to reflect the pricing restriction(s) in the transfer price of sales of Saudi crude oil from petitioners' offtakers to unrelated entities which purchased the Saudi crude oil for refining;
(6) whether in fact the crude oil pricing restriction(s) imposed by Saudi Arabia was/were observed by petitioners and their offtakers;
(7) if a crude oil pricing restriction(s) existed and petitioners and their offtakers observed the restriction(s), whether or not the pricing restriction(s) precludes or preclude a section 482[] or section 61 adjustment to petitioners' income.
The parties have stipulated that the answer to the first question is in the affirmative. The ultimate question to be addressed in question (7) arises under the rule of law presented in Commissioner v. First Security Bank, 405 U.S. 394 (1972), and its progeny. Essentially the issues are: (1) Whether the Saudi Arabian Government (SAG) imposed a price restriction prohibiting the sale of Saudi crude oil for an amount in excess of the Saudi official selling price; (2) if so, whether petitioners complied with this restriction; and (3) if so, whether the restriction and petitioners' compliance with it preclude respondent's proposed allocation of profits from petitioners' refining subsidiaries to petitioners' offtakers pursuant to either section 61 or section 482. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulations and attached exhibits are incorporated herein by this reference. We also incorporate by reference the facts contained in our earlier opinion in these cases on evidentiary matters, Exxon Corp. v. Commissioner, T.C.Memo. 1992-92, although some of the facts contained therein will be repeated here for convenience. Petitioner Exxon Corp. (Exxon) had its principal place of business in New York when the petitions in its cases were filed. Exxon is the common parent corporation of an affiliated group of corporations that includes all of petitioners in docket Nos. 18618-89 and 18432-90 (which collectively will be referred to as the Exxon petitioners). At all relevant times the Exxon petitioners were engaged in the business of producing, refining, and marketing crude oil and petroleum products in the United States and numerous other countries around the world. Petitioner Texaco, Inc. (Texaco), had its principal place of business in Texas when the petition in its case was filed. Texaco is the common parent corporation of an affiliated group of corporations that includes all of the petitioners in docket No. 24855-89 (which collectively will be referred to as the Texaco petitioners). The Texaco petitioners at all relevant times were engaged in the production, refining, transportation, and marketing of crude oil and refined products in the United States and foreign countries. Formation of Aramco and the Offtakers After centuries of upheaval, in September 1932, King Abd al-Aziz ibn Abd al-Rahman Al Saud (King Abd al-Aziz) proclaimed the formation of a new state, the Kingdom of Saudi Arabia. From its very inception, the law of Islam was the paramount law of the Saudi State, and the role of the King was paramount in temporal matters, although he too was subject to the higher authority of Islamic law. In May 1933, the SAG signed a concession agreement (the Concession Agreement) with Standard Oil of California (Socal, now Chevron Corp. (Chevron)). Subsequently, the concession was assigned to the California-Arabian Standard Oil Co. (CASOC), which in 1944 changed its name to Aramco. Under the terms of the Concession Agreement (as subsequently modified), Socal was permitted to extract petroleum from Saudi Arabia, subject to the payment of taxes and royalties to the SAG. By the end of November 1948, and continuing through the years at issue, all of the capital stock of Aramco was held directly or indirectly by four U.S. corporations: Exxon, Texaco, Chevron, and Mobil Oil Corp. (Mobil) or their predecessor corporations. Through January 1979 the Mediterranean Standard Oil Co., Inc. (MEDSTAN), a wholly owned subsidiary of Exxon incorporated in the United States, acquired crude oil from Saudi Arabia via Aramco. Thereafter, the Exxon International Trading Co., Inc. (EITCO), another wholly owned subsidiary of Exxon incorporated in the United States, performed this function. In January 1981 Exxon International Saudi Arabia, Inc. (EISAI), another wholly owned subsidiary of Exxon incorporated in the United States, began to purchase Saudi crude oil from the Saudi Arabian national oil company. These purchases occurred pursuant to an oil incentive contract executed in December 1980 under which Exxon became entitled to buy additional Saudi crude oil as a result of its investment in a chemical facility in Saudi Arabia. MEDSTAN, EITCO, and EISAI are referred to hereafter as the Exxon offtakers. Saudi crude oil was Exxon's largest crude oil source throughout the period 1977 through 1981. It constituted approximately 50 percent of Exxon's international crude supply. During the period 1979 through 1981 (the period at issue ), the Exxon offtakers acquired 2,273 million barrels of Saudi crude oil, of which 2,207 million barrels (or over 97 percent) were acquired via Aramco by MEDSTAN in January 1979 and by EITCO from February 1979 through December 1981. The dispositions of Saudi crude by the Exxon offtakers during the years 1979 through 1981 are summarized as follows:
|| Total Dispositions
| marketing affiliates
| Sales to unrelated parties
| " War Relief" sales to unrelated parties
| Crude oil exchanges with unrelated parties
| Crude oil losses and inventory changes
| Total Saudi crude oil dispositions (1979-81)
Exxon had refining affiliates located in Denmark, the Federal Republic of Germany, Australia, Belgium, Italy, Ivory Coast, Kenya, Malaysia, the Netherlands, Greece, the United Kingdom, Japan, Singapore, Argentina, France, Ireland, Thailand, Canada, Norway, and the United States, which purchased Saudi crude from at least one of the Exxon offtakers during the years 1979-81. In pricing crude...