Hunt v. Comm'r of Internal Revenue
| Citation | 90 T.C. 1289,90 T.C. No. 84 |
| Decision Date | 28 June 1988 |
| Docket Number | 30548-81,30549-81,1386-82,Docket Nos. 30547-81,538-83.,1385-82,465-83,1387-82,498-83 |
| Parties | LAMAR and NORMA K. HUNT, ET AL.1, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
HELD: Income from sales of crude oil sourced under ‘title passage‘ rule of sec. 1.861-7, Income Tax Regs., for purposes of determining petitioners' per-country limitation on foreign tax credit. Donald P. Lan, Jr., Drew R. Heard, Ivan Irwin, Jr., Clive D. Bode, and Joyce R. Scruggs, for the petitioners.
Raymond L. Collins and Gary A. Benford, for the respondent.
Respondent determined deficiencies in petitioners' income taxes as follows:
+----------------------------------------------------------+
¦Petitioner ¦Docket No.¦Tax year¦Deficiency ¦
+-------------------------+----------+--------+------------¦
¦Lamar and Norma K. Hunt ¦30547-81 ¦1972 ¦$35,105.32 ¦
+-------------------------+----------+--------+------------¦
¦ ¦ ¦1974 ¦41,340.35 ¦
+-------------------------+----------+--------+------------¦
¦ ¦ ¦1975 ¦11,741.64 ¦
+-------------------------+----------+--------+------------¦
¦ ¦1385-82 ¦1976 ¦8,495.69 ¦
+-------------------------+----------+--------+------------¦
¦ ¦ ¦1977 ¦1,033,259.02¦
+-------------------------+----------+--------+------------¦
¦ ¦465-83 ¦1978 ¦928,429.93 ¦
+-------------------------+----------+--------+------------¦
¦N.B. and Caroline L. Hunt¦30548-81 ¦1974 ¦4,048,294.48¦
+-------------------------+----------+--------+------------¦
¦ ¦ ¦1975 ¦16,096.39 ¦
+-------------------------+----------+--------+------------¦
¦ ¦1386-82 ¦1976 ¦97,914.61 ¦
+-------------------------+----------+--------+------------¦
¦ ¦ ¦1977 ¦14,796.91 ¦
+-------------------------+----------+--------+------------¦
¦ ¦498-83 ¦1978 ¦2,877,515.44¦
+-------------------------+----------+--------+------------¦
¦W.H. and Nancy B. Hunt ¦30549-81 ¦1974 ¦646,736.68 ¦
+-------------------------+----------+--------+------------¦
¦ ¦ ¦1975 ¦25,613.13 ¦
+-------------------------+----------+--------+------------¦
¦ ¦1387-82 ¦1976 ¦25,628.76 ¦
+-------------------------+----------+--------+------------¦
¦ ¦ ¦1977 ¦540,111.72 ¦
+-------------------------+----------+--------+------------¦
¦ ¦538-83 ¦1978 ¦814,531.97 ¦
+----------------------------------------------------------+
After concessions, the sole issue to be decided is whether income in 1974 attributable to certain crude oil should be sourced in Libya for purposes of calculating petitioners' foreign tax credit under section 901.2
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by reference.
All petitioners were residents of Dallas, Texas, at the time their petitions were filed. petitioners in each case filed joint Federal income tax returns with the Internal Revenue Service Center at Austin, Texas.3
Lamar Hunt, N. B. Hunt and W. H. Hunt (hereinafter sometimes referred to as petitioners) were partners in Hunt International petroleum Company, Libyan Project Lease (‘HIPCO‘) during the years at issue. Their respective interests i the partnership were 12.5%, 75%, and 12.5%. HIPCO was a Texas general partnership and at all relevant times used the accrual basis of accounting and a calendar year for filing its Federal partnership returns.
In 1957, N. B. Hunt acquired, pursuant to the Libyan Petroleum Law of 1955, an oil concession (Concession No. 65) under which he was entitled to extract any oil found within certain defined geographic boundaries within Libya and to process, export or otherwise dispose of such oil. In exchange for these rights, N. B. Hunt was required to make annual payments to Libya for fees, surface rents, royalties, income taxes and other imposts. N. B. Hunt subsequently assigned his interest in the concession to HIPCO. However, all operations by HIPCO under the Concession were conducted in the name of N. B. Hunt.4
HIPCO's business was the production and sale of crude oil. During all relevant periods, HIPCO was not an integrated company since it had no refining facilities, no tankers, and no storage facilities. During such periods it had offices in London, New York, and Texas. At no time did HIPCO maintain any office, or have any employees in any of the Persian Gulf nations.
In 1960, HIPCO assigned an undivided one-half interest in Concession No. 65 to BP Exploration Company (Libya) Limited (‘BP‘). In the assignment, BP agreed to have its employees conduct all field operations required with respect to the concession.5 However, HIPCO was individually responsible for its share of the imposts due to Libya and for all sales of oil extracted from the concession.
Subsequently, the Sarir Oil Field was discovered in Concession No. 65. By 1970, this field was not only producing approximately 400,000 barrels of crude oil per day or about 146 million barrels per year but Sarir crude oil also had a low sulfur content, a high gasoline yield, and required less refining than the heavier crudes found in the Persian Gulf nations. For these reasons, and because of Libya's proximity to Mediterranean markets, Sarir crude oil was more valuable than Persian Gulf crude oil.
However, in 1970, production from the Sarir Field began to be seriously jeopardized by threats of production cutbacks, prohibitions on lifting crude oil, and even possible nationalization by the new Libyan regime headed by Colonel Mu'ammer al-Qadhadhafi (‘Qaddafi‘). The threats were made in the form of demands by Qaddafi to increase the ‘posted price‘ of Libyan crude oil, which was the base used in computing the taxes, royalties and other imposts due Libya under existing oil concessions. When the demands were not satisfied, Qaddafi adopted the strategy of singling out vulnerable companies (independent companies6 which engaged in production solely in Libya) to force capitulation by threats of, and in some cases actual, production cutbacks.
The success of Libya's tactics led Persian Gulf nations to begin to make similar demands on the major oil companies. For instance, in December 1970, the Organization of Petroleum Exporting Countries (‘OPEC‘)7 passed a resolution which mandated joint negotiations between its members and all major oil companies. One of the purposes of the resolution was to increase the ‘government take‘8 by the Persian Gulf nations from the major companies to the level that had been obtained by Libya from the independent companies operating within its boundaries.
Shortly thereafter, Libya summoned the local representatives of the oil companies operating in Libya and outlined to such representatives a plan for implementing the OPEC resolutions. The plan contained ‘non-negotiable‘ demands for further increases in taxes and other imposts. On January 9, 1971, the Libyan government singled out HIPCO and one other oil company operating in Libya to ‘accept‘ the non-negotiable demands no later than January 16, 1971, or face further production cutbacks, prohibitions on lifting crude oil (known as ‘shut-ins‘) or nationalization.
Libya's escalating demands and the effect they were having on oil production in Libya and the Persian Gulf nations led the executives of major and independent oil companies to consider a unified means of resisting Libya and OPEC. As a result, discussions of the problem commenced in several areas of the oil industry, and a group of chief executives of the seven major oil companies (‘the McCloy Group‘) arranged a series of meetings which commenced on January 11, 1971. The stated purpose of the meetings was to attempt to negotiate a formal and unified response to the Persian Gulf nations and Libya, i.e., OPEC. Representatives of all of the major oil companies and most of the independent oil companies, including HIPCO, attended the meetings which were held in New York and Washington. The Departments of Justice and State of the United States were also represented.9 HIPCO was represented by N. B. Hunt, Henry M. Schuler, and Ed Guinn.
During the series of meetings, two plans for handling the OPEC and Libyan demands were developed. Basically, the first was to negotiate a unified response to OPEC and the additional demands of Libya, and the second, was to negotiate a sharing arrangement to help the oil companies operating in Libya resist the escalating Libyan demands. The crux of the sharing arrangement was to assure the independent oil companies operating in Libya that the burden of any further cutbacks imposed by the Qaddafi government would be borne by both the major and independent oil companies.
After extensive negotiations, a message to OPEC was executed by all oil companies which had representatives in attendance at the meetings. The message called upon OPEC to conduct an ‘all-embracing negotiation‘ with a team of representatives from the oil companies. In addition to the message to OPEC, a sharing arrangement was negotiated to deal with the specific problem of Libya.
Before its final adoption, the sharing arrangement underwent several revisions with drafts and amendments being offered by various companies. However, throughout the negotiations, one theme was consistently articulated which was that in order to solidify a unified negotiating front, no company operating in Libya was to accept any increase by Libya in ‘government take‘ without the prior approval of the other companies....
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