Occidental Petroleum Corp. v. Comm'r of Internal Revenue, Docket No. 21969–80.
| Decision Date | 24 May 1984 |
| Docket Number | Docket No. 21969–80. |
| Citation | 82 T.C. 819,82 T.C. No. 63 |
| Parties | OCCIDENTAL PETROLEUM CORPORATION and Subsidiaries, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ts' 1977 consolidated taxable income was computed by combining income from foreign sources and a loss from domestic sources. The domestic loss was a composite of a loss from domestic operations and three items of “tax preference” as defined in section 57(a), I.R.C. 1954. In respect of the income from foreign sources, Ts paid or were deemed to have paid foreign income taxes. Ts elected to credit these taxes against their 1977 Federal income tax liability pursuant to section 901(a), thus eliminating such liability completely. In addition, Ts' foreign tax credits exceeded the amount of Federal income tax which would have been payable even if Ts' foreign source income had not been reduced by the tax preference items. Accordingly, the effect of Ts' claiming such preferences was to increase the amount of foreign tax credit carrybacks and carryovers under section 904(c). However, these carrybacks and carryovers expired unused. Held, because Ts received no tax benefit from their 1977 “tax preferences” either in 1977 or any other year, section 58(h) relieves them of liability for the minimum tax on tax preferences imposed by section 56. Robert J. Casey, for the petitioners.
Martin D. Cohen and David P. Fuller, for the respondent.
The Commissioner determined deficiencies and additions to tax against petitioners as follows:
+-------------------------------------------------------+
¦ ¦ ¦Additions to tax, I.R.C. 1954 ¦
+------+------------+-----------------------------------¦
¦Year ¦Deficiency ¦Sec. 6653(a) ¦Sec. 6652(t) [sic] ¦
+------+------------+--------------+--------------------¦
¦ ¦ ¦ ¦ ¦
+------+------------+--------------+--------------------¦
¦1976 ¦$14,340,296 ¦$717,015 ¦ ¦
+------+------------+--------------+--------------------¦
¦1977 ¦20,356,133 ¦1,017,807 ¦$5,000 ¦
+-------------------------------------------------------+
The deficiencies are based upon numerous adjustments, and the petitioners have raised some 91 separately enumerated allegations of error in the original petition. However, the parties have resolved all issues raised by those allegations of error, leaving for decision only the single issue raised in petitioners' “First Amendment to Petition”: whether petitioners are liable for the minimum tax on items of “tax preference” under section 56, I.R.C. 1954, for their taxable year ended December 31, 1977. The parties have agreed that if petitioners are so liable, the correct amount of the liability is $7,010,015. The case is before us on the basis of a stipulation of facts and oral arguments made at the hearing when the case was submitted.
Occidental Petroleum Corporation (“Occidental”) is organized under the laws of California, with its principal office in Los Angeles, California. Pursuant to an extension of time, duly granted, petitioners (Occidental and its subsidiaries) filed on September 15, 1978, a consolidated Federal income tax return for the taxable year ended December 31, 1977, with the Fresno, California, Service Center, utilizing the accrual method of accounting.
Petitioners' 1977 consolidated taxable income as adjusted by the Commissioner and agreed to by the parties was $730,297,281. This amount was computed by combining income from foreign sources and a loss from domestic sources, as follows:
+----------------------------------------+
¦Income from foreign sources¦$777,205,730¦
+---------------------------+------------¦
¦Loss from domestic sources ¦(46,908,449)¦
+---------------------------+------------¦
¦Taxable income ¦730,297,281 ¦
+----------------------------------------+
The loss from domestic sources was a composite of four separate items, a loss from domestic operations and three items of “tax preference”, as defined in section 57(a), I.R.C. 1954:
+-----------------------------------------------------------------------------+
¦Loss from domestic operations ¦$165,015 ¦
+------------------------------------------------------------------+----------¦
¦Excess of accelerated depreciation on domestic real property over ¦250,408 ¦
¦straight-line depreciation (sec. 57(a)(2)) ¦ ¦
+------------------------------------------------------------------+----------¦
¦Excess of percentage depletion deductions, in respect of domestic ¦ ¦
¦mineral properties, over the adjusted basis of such properties as ¦43,073,815¦
¦of the end of 1977 (sec. 57(a)(8)) ¦ ¦
+------------------------------------------------------------------+----------¦
¦Corporate capital gains tax preference (sec. 57(a)(9)(B)) ¦1 3,419, ¦
¦ ¦211 ¦
+------------------------------------------------------------------+----------¦
¦Loss from domestic sources ¦46,908,449¦
+-----------------------------------------------------------------------------+
In respect of the 1977 income from foreign sources, various members of the consolidated group paid or were deemed to have paid foreign income taxes of $514,049,133. Petitioners elected, pursuant to section 901, to claim credit for these taxes for 1977. As a consequence of the availability of these “foreign tax credits”, petitioners' Federal income tax liability for 1977, aside from any minimum tax on tax preference items, was zero. In addition, petitioners' foreign tax credits exceeded the amount of Federal income tax which would have been due even if petitioners' income were not reduced by the tax preference items.
Petitioners' excess foreign tax credits, i.e., those credits which exceeded petitioners' 1977 Federal income tax liability (as properly computed giving effect to the tax preference items), were available to be carried back to the two prior taxable years and carried over to the five subsequent taxable years, pursuant to section 904(c). However, it is stipulated that these credits expired unused.
The Commissioner determined, by way of statutory notice and amended answer, that petitioners were liable for minimum tax (on tax preference items) of $7,010,015 for 1977. As noted above, no issue is presented here as to the correctness of the amount determined. Instead, the parties disagree only as to whether, because petitioners had sufficient foreign tax credits available in 1977 to eliminate any Federal income tax liability even if the consolidated income were not reduced by the tax preference items, petitioners may properly be required to pay the minimum tax for 1977.
The matter at issue here may be set forth quite directly. In 1977, petitioners' income from foreign sources, less its loss from domestic operations, was $777,040,715. This amount was further reduced by the tax preference items, leaving taxable income of $730,297,281.2 Petitioners' foreign tax credits, which in fact eliminated its Federal income tax liability on the $730,297,281 of taxable income, were sufficient to eliminate the Federal income tax liability even if the $777,040,715 of taxable income had not been reduced by the preference items. According to petitioners, they did not benefit from the preference items and therefore should not be liable for the minimum tax on those preference items. Petitioners recognize that the preference items freed a certain portion of the foreign tax credits to be carried back or carried over to other years, but point out that no benefit resulted in this respect either since it is stipulated that these excess credits expired unused.
Except for two matters, Occidental and its subsidiaries litigated the same basic issue in a refund suit in the Court of Claims involving the years 1970 and 1971. Occidental Petroleum Corp. v. United States, 685 F.2d 1346 (Ct. Cl. 1982), There, as here, available foreign tax credits were more than sufficient to eliminate completely all Federal income tax for each of the years 1970 and 1971, regardless of whether the preference items were taken into account in computing that tax. The Court of Claims in an exhaustive opinion concluded that the statutory provisions imposing the minimum tax for tax preferences3 were literally applicable in that case and that there were no countervailing considerations, derived either from the legislative history or any other source, that called for reaching a different result. In its original presentation of the instant case to this Court, both at the oral argument and on brief, the Government took the position that the decision of the Court of Claims (sometimes hereinafter referred to as Occidental I) operated as collateral estoppel against petitioners in respect of what it described as the identical issue for 1977. Indeed, the Government characterized collateral estoppel as the “primary” issue now before us, and contended that petitioners are precluded from relitigating the point as to the later year.
However, there are two important differences between Occidental I and the present case. In the first place, section 301(d) of the Tax Reform Act of 1976, 90 Stat. 1520, 1553, added section 58(h) to the Internal Revenue Code of 1954, which provides:
SEC. 58. RULES FOR APPLICATION OF THIS PART * * *
(h) Regulations To Include Tax Benefit Rule.—The Secretary shall prescribe regulations under which items of tax preference shall be properly adjusted where the tax treatment giving rise to such items will not result in the reduction of the taxpayer's tax under this subtitle for any taxable years.
And section 301(g) of the 1976 Act made these provisions effective for tax years beginning after December 31, 1975.4 In the second place, the...
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