Exxon Mobil Corp. v. U.S.

• Decision Date: 10 March 2003
• Docket Number: No. CIV.A.3:00-CV-0815-M.,CIV.A.3:00-CV-0815-M.
• Citation: 253 F.Supp.2d 915
• Parties: EXXON MOBIL CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Texas

253 F.Supp.2d 915

EXXON MOBIL CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.

No. CIV.A.3:00-CV-0815-M.

United States District Court, N.D. Texas, Dallas Division.

March 10, 2003.

Grover Hartt, III, Cynthia E. Messersmith, Jonathan L. Blacker, U.S. Department of Justice, Dallas, TX, for U.S., Defendant.

George C. Chapman, Thompson & Knight, Dallas, TX, Robert L. Moore, II, Miller & Chevalier, Washington, DC, for Exxon Mobil Corp., Plaintiff.

David M. Waterson, Jr., Law Office of David M. Waterson, Houston, TX, for El Paso Field Services LP, Movant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

LYNN, District Judge.

This case was tried from July 8, 2002— July 16, 2002, and argued on July 25, 2002. Having heard and considered the evidence and the arguments of counsel, the Court makes these Proposed Findings of Fact and Conclusions of Law:

FINDINGS OF FACT

1. This is an action brought under Internal Revenue Code ("Code") sections 6532 and 7422 ¹ for the refund of federal income taxes (plus interest) that Exxon Corporation ("Exxon")² paid for the tax year ending December 31, 1976. The issue is the proper determination of Exxon's depletion deduction with respect to natural gas it produced from 442 properties in East Texas and along the Texas Gulf Coast, and sold after processing or transportation under twenty long-term contracts. This suit is one of many filed by Exxon in which it challenges the treatment by the Internal Revenue Service of its percentage depletion deduction. The first year litigated by Exxon was 1974. See Exxon Coloration v. United States, 33 Fed.Cl. 250 (1995), rev'd, 88 F.3d 968 (Fed. Cir.1996) ("Exxon I"). Exxon also litigated 1975 in the Court of Federal Claims. See Exxon Corporation v. United States, 45 Fed.Cl. 581 (1999), aff'd in part and rev'd in part, 244 F.3d 1341 (Fed.Cir.2001) ("Exxon IF). Exxon filed suit for its 1979 tax year in the United States Tax Court. See Exxon Corporation v. Commissioner, 102 T.C. 721, 1994 WL 243435 (1994). The 1980-90 tax years are docketed in the Tax Court. After this suit was tried, Exxon filed suit over 1977 and 1978 in this Court.

2. One of the principal issues in this case, as in Exxon I and Exxon II, is the determination of Exxon's "gross income from the property" under Code section 613 for each of the 442 properties. Gross income from the property is defined principally by regulation. Treas. Reg. § 1.613-3(a) provides that if "gas is not sold on the premises but is manufactured or converted into a refined product prior to sale, or is transported from the premises prior to sale, the gross income from the property shall be assumed to be equivalent to the representative market or field price [the "RMFP"] of the ... gas before conversion or transportation." Exxon sold the gas produced from the 442 properties after transporting it off the premises and, in most cases, after it was processed, thus requiring the calculation of an RMFP to compute Exxon's depletable gross income from the property.

3. In Exxon I, the Federal Circuit held "that the RMFP of gas is calculated as the weighted average price of wellhead sales of comparable gas in the taxpayer's market area." Exxon I, 88 F.3d at 976; see also Exxon II, 244 F.3d at 1344, quoting, with approval, the RMFP definition in Exxon I.

4. Code section 613A, effective for tax years beginning after December 31, 1974, limited Exxon's depletion deduction to natural gas "sold under a fixed contract." Plaintiffs claim must accordingly be limited to the gas from the 442 properties sold under "fixed contracts." The parties have stipulated that eighteen of the twenty contracts in issue were "fixed contracts." See JX11.³ Defendant contests whether the remaining two contracts, with Houston Lighting & Power Company ("HL & P") and Southwestern Electric Power Company ("SWEPCO"), qualify as "feed contracts" for purposes of Code section 613A. For whatever number of contracts this Court determines are fixed (eighteen, nineteen, or twenty), this Court must determine the RMFP.

5. Exxon is a New Jersey corporation now headquartered in Irving, Texas.

6. On September 15, 1977, Exxon timely filed with the Internal Revenue Service Center (Manhattan District) in New York, New York, a consolidated federal income tax return for the 1976 taxable year.

On its 1976 return, Exxon claimed percentage depletion deductions totaling $69,846,305 with respect to the 442 properties at issue. JX12 ¶ 8. Exxon calculated its "gross income from the property" for the gas sold from the properties using its 1976 "Exxon Field Price" of approximately $1.05/Mcf, which was based on average prices calculated from pipeline company purchases of both raw and processed gas, as reported to the State of Texas. PX72 at 30-32 and at Ex. 20. The 1976 Exxon Field Price lagged behind the market price because gas prices were rising rapidly and the purchaser data Exxon used to calculate the Field Price was not available from the State of Texas on a current basis. PX 72 at 31-32 and at Ex. 20.

The Commissioner of Internal Revenue ("Commissioner") audited Exxon's 1976 tax return and assessed deficiencies and interest, based in part on a $63,275,367 reduction in the $69,846,305 in percentage depletion deductions claimed for the 442 properties. The Commissioner disallowed all of Exxon's percentage depletion deductions for gas sold to certain of Exxon's industrial and utility customers. JX12 ¶ 10.

Exxon paid the $30,372,176 tax deficiency resulting from the Commissioner's disallowance of $63,275,367 of Exxon's percentage depletion deductions, plus interest, for 1976 and, on June 5, 1990, timely filed with the Internal Revenue Service Center at Holtsville, New York, a claim for refund of $121,426,851 in tax, plus interest. Of that sum, $41,855,880 was attributable to percentage depletion deductions for natural gas sold under fixed contracts. JX1 ¶ 1; JX12 ¶ 11.

On January 8, 1992, Exxon filed with the Internal Revenue Service Center at Holtsville, New York, an additional claim for refund of $523,935,903 in tax, plus interest, for its 1976 tax year. This refund claim included an additional $23,136,355 of tax attributable to additional percentage depletion deductions and $13,116,000 of tax attributable to a claim for deductions with respect to well-plugging, removal, and restoration costs associated with offshore oil and gas platforms. JX1 ¶ 2.

Both of Exxon's claims for refund satisfied the requirements of Code section 6511(c). The claims were neither allowed nor disallowed prior to April 8, 2000, when Exxon filed this action. JX1 ¶ 3.

With respect to the portion of Exxon's January 8, 1992 refund claim relating to costs associated with offshore oil and gas platforms, the parties have agreed that Exxon should be allowed a deduction of $123,039 for 1976, which results in an overpayment of tax of $59,056.⁴ JX2 ¶ 2.

In 1976, as today, Exxon's principal business was exploring for and producing crude oil and natural gas, as well as refining, transporting, buying, and selling oil and gas and the products that can be made from them. JX3 ¶ 2; Exxon II, 45 Fed.Cl. at 588; Exxon I, 33 Fed.Cl. at 251-52.

During 1976 and prior years, natural gas producers typically sold their gas production in the field to intrastate and interstate pipeline companies, which then transported the gas and sold it to endusers and local distribution companies. Because of the magnitude of its reserves in the 1930s, Exxon built its own gas pipeline system, which was known as the Exxon Gas System ("EGS"). JX3 ¶ 3; PX72 at 27; Exxon II, 45 Fed.Cl. at 589; Exxon I, 33 Fed.Cl. at 262.

Just as it was in 1974 and 1975, in 1976, EGS was a 1,500-mile intrastate pipeline system with two primary, interconnected lines—one running from a point near Corpus Christi in South Texas to a point near Tyler in Northeast Texas, and the other running from Houston to Port Arthur. JX3 at ¶ 4; Exxon II, 45 Fed.Cl. at 589. EGS brought gas production from Exxon's large natural gas reserves in East Texas and along the Texas Gulf Coast to customers in the increasingly industrialized markets of the Houston-Beaumont area.

To guarantee a market for its gas that would justify the large capital investment in EGS, in the 1950s and 1960s, Exxon entered into a number of long-term, fixed-price gas sales contracts with industrial and utility customers along the Texas Gulf Coast and in East Texas. Exxon called these contracts its Texas Industrial Commitment ("TIC") contracts. This case involves Exxon's entitlement to, and/or calculation of, percentage depletion for natural gas sold under sixteen of these TIC contracts, as well as four long-term contracts for sales of natural gas to pipeline companies at the tailgates of Exxon's gas processing plants. JX3 ¶ 6; PX72 at 1, 27, 29 and at Ex. 17.

In 1976, EGS and Exxon's TIC customers were supplied with gas from 442 properties in more than 75 oil and gas fields in the Texas Gulf Coast/East Texas area; approximately 85% of the total EGS gas came from three fields: King Ranch, Pledger, and Katy. JX3 ¶ 5; PX 72 at 29-30, 35. The reserves in these three fields were among the largest on the Texas Gulf Coast. Included within the 442 properties at issue are properties that produced gas which did not directly supply EGS.

During 1976, Exxon owned an economic interest, within the meaning of Treas. Reg. § 1.611-1(b), in each of the 442 properties at issue, and 99% of the gas Exxon sold under the twenty contracts was from Exxon's working interest share of the gas produced from the 442 properties. JX12 ¶ 2; PX72 at 29. The remaining 1% was gas that Exxon purchased from other working-interest owners in the 442 properties or in adjacent properties. PX72 at 29. Each of the properties at issue is a "property" within the meaning of I.R.C. § 614 and Treas. Reg. § 1.611-1(d)(1). JX12, ¶¶ 2-3.

Approximately 90% of the gas entering EGS in 1976 was transported to Exxon's TIC customers. PX72 at...