Exxon Mobil Corp. v. Comm'r of Internal Revenue
| Decision Date | 03 May 2000 |
| Docket Number | Nos. 18618–89,18432–90.,s. 18618–89 |
| Citation | 114 T.C. 293,114 T.C. No. 20 |
| Parties | EXXON MOBIL CORPORATION and Affiliated Companies, f.k.a. Exxon Corporation and Affiliated Companies, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Affiliated group of oil and gas producers petitioned for redetermination of IRS' denial of deductions taken on claims for refunds for estimated dismantlement, removal, and restoration (DRR) costs related to oil production equipment and facilities. The Tax Court, Swift, J., held that: (1) DRR costs relating to fieldwide equipment and facilities was not sufficiently fixed and definite to be accruable; (2) DRR costs relating specifically to oil wells and to well drilling sites was sufficiently fixed, definite, and reasonably determinable to satisfy the all-events accrual test; but (3) accruing such costs as capital cost would constitute change in taxpayers' method of accounting, not granted by IRS; and (4) accruing such costs as current business expense would distort taxpayers' reporting of income.
Decision for IRS in part, and for taxpayer in part.
See also, 102 T.C. 721, 1999 WL 545754. Robert L. Moore II, Jay L. Carlson, Thomas D. Johnston, Kevin L. Kenworthy, Emmett B. Lewis III, James P. Tuite, David B. Blair, Laura G. Ferguson, Troy J. Babin, Jeffrey S. Lynn, Paul F. Kirgis, and Matthew J. Borger, for petitioners.
Richard L. Hunn, Robert M. Morrison, William G. Bissell, Carl D. Inskeep, Sondra K. Reid, Richard T. Cummings, and Richard D. Fultz, for respondent.
Held: For the years before the Court, $204 million (reflecting petitioners' 22–percent share of a total $928 million) in estimated dismantlement, removal, and restoration (DRR) costs relating to fieldwide oil production equipment and facilities located in the Prudhoe Bay oil field on the North Slope of Alaska is not sufficiently fixed and definite to be accruable under the all-events test of sec. 1.461–1(a)(2), Income Tax Regs.
Held, further, for the years before the Court, $24 million (reflecting petitioners' 22–percent share of a total $111 million) in estimated DRR costs relating specifically to oil wells and to well drilling sites located in the Prudhoe Bay oil field: (1) Is sufficiently fixed, definite, and reasonably determinable to satisfy the all-events accrual test of the accrual method of accounting; (2) is not accruable as a capital cost because such accrual would constitute a change in petitioners' method of accounting for such costs for which change respondent has not granted permission; and (3) is not accruable as a current ordinary and necessary business expense because such accrual would cause a distortion in petitioners' reporting of income.
In these consolidated cases, respondent determined deficiencies in petitioners' Federal income taxes for the years 1979 through 1982 as follows:
+-------------------+
¦Year¦Deficiency ¦
+----+--------------¦
¦1979¦$ 268,721,294 ¦
+----+--------------¦
¦1980¦2,898,174,073 ¦
+----+--------------¦
¦1981¦2,037,809,876 ¦
+----+--------------¦
¦1982¦1,599,495,218 ¦
+-------------------+
After settlement of many issues and court decisions on three issues,1 the primary issue remaining for decision is whether petitioners' attempted accrual, for 1979 through 1982, of its $204 million share of $928 million in total estimated dismantlement, removal, and restoration (DRR) costs relating to oil wells and to oil production equipment and facilities in the Prudhoe Bay oil field on the North Slope of Alaska (North Slope) would satisfy the all-events test of the accrual method of accounting. If, for the years in issue, the accrual of any of the estimated DRR costs would satisfy the all-events test of the accrual method of accounting, further issues are to be addressed relating to the amount and method of petitioners' claimed accrual thereof.2
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The parties have stipulated numerous facts and the authenticity and admissibility of numerous exhibits. The stipulated facts are so found.
During the years in issue, petitioners constituted an affiliated group of more than 175 U.S. and 500 foreign subsidiary corporations. At the time the petitions were filed, petitioner Exxon Corp. was the common parent of the affiliated group, incorporated in New Jersey, with its principal places of business located in New York, New York, or Houston, Texas. Hereinafter, petitioners will be referred to simply as Exxon.3
The businesses in which Exxon was engaged primarily involved exploration for and production, refining, transportation, and sale of crude oil, natural gas, and other petroleum products. During the years in issue, Exxon owned a 22–percent interest in the Prudhoe Bay Unit, a partnership of international oil and gas companies that owned and operated oil and gas leases in the Prudhoe Bay oil field on the North Slope of Alaska.
The Prudhoe Bay oil field is located in an extremely remote area 250 miles above the Arctic Circle on the North Slope of Alaska. It is bounded by the Beaufort Sea on the north, the Arctic National Wildlife Refuge on the east, the Brooks Mountain Range on the south, and the Bering Sea on the west.
The surface of the Prudhoe Bay oil field consists of a flat, treeless, desert plain of approximately 69,000 square miles covered by a thin mat of vegetation and organic material called tundra. Beneath the tundra is a layer of permafrost that extends to a depth of 1,800 to 2,000 feet.
From mid-May through mid-September, the sun does not set on the North Slope. Summer temperatures may reach 80 degrees Fahrenheit. From June through September, when the tundra thaws to a depth of 12 to 18 inches, vehicular traffic on the tundra is prohibited unless authorized by permit and may be conducted only in specially designed vehicles called Rolligons.
During summer, the permafrost traps water on the tundra surface, and the North Slope becomes a wetlands with thousands of shallow lakes and abundant wildlife, including numerous migratory birds and animals.
In winter, North Slope temperatures fall to –70 degrees Fahrenheit, the tundra freezes, blizzards and whiteouts are common, and darkness prevails for much of the day. In late November, the sun dips below the horizon and does not reappear until mid-January.
In spite of harsh winter conditions, some work on the North Slope is better performed during winter because frozen tundra provides a better foundation for vehicular traffic than tundra that, during the summer, may not be passable.
In 1979, the U.S. Army Corps of Engineers designated the entire North Slope of Alaska as a protected wetlands. Ninety-nine percent of the tundra on the North Slope is treated as wetlands for regulatory purposes.
Even with the extensive oil wells and oil recovery equipment and facilities that were constructed in the Prudhoe Bay oil field and that will be described further below, the North Slope of Alaska accurately may be described and regarded as essentially undeveloped, as a habitat for fish, wildlife, and birds, with occasional subsistence use of the land by isolated Eskimo communities.
Physical access to the North Slope is limited. The Dalton Highway, a two-lane gravel road that traverses the Brooks Mountain Range, provides the only land access. The only all-water route to the North Slope follows the west coast of Alaska north through the Bering Sea, around Point Barrow, and east to Prudhoe Bay. Except during an ice thaw that lasts, on average, 6 weeks in late summer when the Arctic ice cap sufficiently recedes from the shoreline, marine vessels and barges cannot access Prudhoe Bay.
The North Slope has no significant local infrastructure. Fairbanks, located approximately 400 miles to the south and beyond the Brooks Mountain Range, is the nearest city to Prudhoe Bay. Anchorage is located 700 miles to the south. Other than the facilities and personnel associated with the Prudhoe Bay oil field and a few other producing oil fields, there are scattered throughout the North Slope just a few isolated Eskimo communities.
Because of its isolation and remoteness, labor, materials, equipment, and support services for major construction projects on the North Slope—in particular, for construction and installation of the Prudhoe Bay oil field equipment and facilities—must be imported, which significantly increases the costs of construction and of performing work on the North Slope. The oil companies' total $11 billion capital cost, in the 1970's and early 1980's, of installing and constructing the Prudhoe Bay oil field equipment and facilities was more than four times what the total cost would have been to install and construct a comparable oil field in the lower 48 States.
In 1959, by the Alaska Statehood Law of 1958, Pub.L. 85–508, 72 Stat. 339, the Federal Government authorized the new State of Alaska to select 103,350,000 acres of Federal lands within the boundaries of Alaska to become State lands. Alaska selected approximately 1.6 million acres on the North Slope between the Colville and Canning Rivers.
In 1964, the State of Alaska began to offer to oil and gas companies oil and gas exploration and development leases on its lands on the North Slope using the standard Alaska Competitive Oil and Gas Lease Form No. DL–1 (DL–1 Leases).
In 1964, 1965, 1967, and 1969, using the DL–1 Leases, with Exxon, Atlantic Richfield Co. (ARCO), British Petroleum (BP), and other oil and gas companies, Alaska entered into the particular oil and gas leases covering the portions of the Prudhoe Bay oil field that are involved in these cases. The terms of the DL–1 Leases extended for 10 years subject to being...
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