Shell Petroleum, Inc. v. U.S., CIV. A. 93-508-JJF.
| Decision Date | 16 October 1997 |
| Docket Number | No. CIV. A. 93-508-JJF.,CIV. A. 93-508-JJF. |
| Citation | 996 F.Supp. 361 |
| Parties | SHELL PETROLEUM, INC. and Subsidiary Corporations, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — District of Delaware |
William O. LaMotte, III, Elaine C. Reilly, Morris, Nichols, Arsht, & Tunnell, Wilmington, DE. Of Counsel: B. John Williams, Jr., Mary E. Baluss, Morgan, Lewis & Bockius, LLP, Washington, DC; Charles R. Herpich, Jr., Sara D. Trapani, Shell Petroleum, Inc., Houston, TX; Charles W. Hall, Fulbright & Jaworski, LLP, Houston, TX, for Plaintiff.
Gregory M. Sleet, U.S. Atty., Wilmington, DE. Dennis M. Donohue, Special Litigation Counsel, Jonathan Jackel, Trial Attorney, Tax Division, U.S. Dept. of Justice, Washington, DC. Victoria J. Ely, Special Assistant to the Tax Division, District Counsel, I.R.S., Houston, TX, for Defendant.
This is an action brought by Plaintiff, Shell Petroleum Inc. ("Shell"), pursuant to 26 U.S.C. § 7422 for the refund of claimed overpaid federal income taxes and interest due thereon under 26 U.S.C. § 6611. Shell is incorporated under the laws of the State of Delaware and maintains a principal office in Delaware at 1105 Market Street, Wilmington, Delaware, 19899. (D.I. 296 at ¶ 2(a)). Shell is the common parent of an affiliated group of corporations (the "Shell Affiliated Group"). The Shell Affiliated Group files consolidated federal income tax returns, and their taxable year is the calendar year. (D.I. 342 at 1, ¶ 4).
On May 15, 1991, Shell timely filed claims for a refund of the Shell Affiliated Group's 1983 and 1984 consolidated federal income taxes with the Internal Revenue Service ("the IRS"). (D.I. 296 at ¶ 2(c)). On its 1983 and 1984 Amended Returns, Shell claimed credits against 1983 and 1984 federal income taxes for oil recovered from its Midway Sunset Oil Field in Kern County, California, pursuant to 26 U.S.C. § 29. (D.I. 296 at ¶ 2(c)); (D.I. 296 at 5, ¶ 9). Shell claimed tax credits of $1,690,902 for 1983 and $3,660,248 for 1984. (D.I. 296 at 24). The IRS denied Shell's refund claims, and thereafter Shell timely filed a complaint in this Court on October 29, 1993, asserting counts consistent with the refund claims. (D.I. 296 at ¶ 2(c)).
Jurisdiction is conferred upon the Court by 26 U.S.C. § 7422 and 28 U.S.C. § 1346(a)(1). A bench trial was held on this matter, and this Memorandum Opinion shall constitute the Court's Findings of Fact and Conclusions of Law.
Pursuant to Title 26, Section 29 of the Internal Revenue Code, oil companies are eligible for an income tax credit of $3.00 for each barrel of "oil produced from ... tar sands." 26 U.S.C. § 29(c)(1)(A). Section 29, however, does not define the term "tar sands." The Government argues that the appropriate definition of "tar sands" is found in Federal Energy Administration Ruling 1976-4 ("the FEA Ruling"), which defines tar sands as:
The several rock types that contain an extremely viscous hydrocarbon which is not recoverable in its natural state by conventional oil well production methods including currently used enhanced recovery techniques.
41 Fed.Reg. 25886 (1976). Shell contends that the proper definition for "tar sands" as used in Section 29 results from a consensus developed in the petroleum industry that oil produced from tar sand is oil with a viscosity1 greater than 10,000 centipoise, measured gas-free, at original reservoir temperature ("the Viscosity Standard"). (D.I. 342 at 23-24). The parties agree that if the Court determines that the FEA Ruling definition of "tar sands" is to be applied when interpreting Section 29, judgment should be entered for the Government. (D.I. 255 at 16, n. 44). On the other hand, if the Court determines that the FEA Ruling definition does not apply to Section 29, the Court must then determine whether Shell's proposed 10,000 centipoise standard is a universally accepted industry definition of "tar sands." If the Court accepts the industry's definition, it must also decide when that standard became the accepted industry definition of "tar sands" and whether Shell has in fact proven that the oil samples taken from its fields in the Potter Sands have a viscosity greater than 10,000 centipoise.
In the early 1970's, the United States experienced a series of crises related to the country's oil supplies. These crises resulted from instability in international oil markets which in turn caused severe fluctuations in the price of imported oil. In an effort to alleviate these crises, the federal government enacted a series of extensive regulations.
The first energy crisis occurred in October, 1973, in the wake of the Arab-Israeli War, when the Organization of Petroleum Exporting Countries ("OPEC") imposed an oil embargo on western countries, including the United States. Gary D. Allison, Energy Sectionalism: Economic Origins and Legal Responses, 38 Sw. L.J. 703, 705 (1984). The embargo, followed by a cartel pricing strategy, caused world oil prices to quadruple in less than a year and plunged numerous western economies into a cycle of inflation and recession. Id.
On November 27, 1973, in response to the increased price of world oil, the United States Congress enacted the Emergency Petroleum Allocation Act ("EPAA"). See 15 U.S.C. §§ 751-760. The EPAA mandated that the President promulgate regulations providing for the mandatory allocation of crude oil, residual fuel oil, and each refined petroleum product, at specified prices and amounts. 15 U.S.C. § 753(a).
While the price control system became increasingly complex, its two main components were "price ceilings" and "entitlement" payments. First, the EPAA set various price ceilings for two classifications of domestically produced oil. Proposed Windfall Profit Tax and Creation of Energy Trust Fund: Hearings Before the Committee on Ways and Means, No. 96-34, at 15-16 (1979) (hereinafter "Hearing"). Second, to prevent disparity in prices for crude oil from upsetting the competitive balance among regions of the country and within the oil refining industry, the EPAA used an "entitlement" system to equalize the costs of crude oil to all refiners. Id. at 16. Under this system, refineries were required to make "entitlement" payments to each other to ensure that each refinery paid the same average price for a barrel of oil, regardless of whether the oil was imported or domestically produced. Id. As a result, refiners who purchased more expensive imported oil were compensated by refiners who purchased domestically produced oil, which was less expensive due to the aforementioned price ceilings. Id. In effect, refiners who purchased less expensive domestic oil were required to subsidize competitors who purchased more expensive imported oil.
While the purpose of the EPAA was to "deal with shortages of crude oil, residual fuel oil, and refined petroleum products" in such a way as to "minimize the adverse impacts of such shortages ... on the American people and the domestic economy," it had the opposite effect. Id.; 15 U.S.C. § 751(b). Because the price of domestic oil was controlled by the EPAA's price ceilings, the incentive to produce domestic oil was removed. Hearing, supra, at 16. Consequently, there was incentive for oil companies to import more expensive foreign oil. Therefore as a result of the price controls and entitlement payments, the EPAA regulations encouraged oil consumption and importation and discouraged domestic oil production and the development of new energy sources.
In 1976, the Federal Energy Administration ("FEA") received several inquiries with respect to whether the so-called "synthetic fuels," fuels processed from oil shale, tar sands, coal, and other natural deposits that must be mined before the crude oil substitute can be extracted, were subject to the price controls of the EPAA. FEA Ruling 1976-4, 41 Fed.Reg. 25886 (1976). In response to these inquiries, the FEA issued Ruling 1976-4, which announced the definition of tar sands that the Government relies upon in the instant action. FEA Ruling 1976-4 defines tar sands as
the several rock types that contain an extremely viscous hydrocarbon which is not recoverable in its natural state by conventional oil well production methods including currently used enhanced recovery techniques.
In rendering its decision, the FEA determined that Congress intended the EPAA price controls to apply only to fuel resources that were threatened to be in short supply. Id. The FEA reasoned that Congress could not have intended to extend price controls to crude oil substitutes because crude oil substitutes were not being commercially produced when the EPAA was enacted. Id.
As a result of the Iranian Revolution which halted Iranian oil exports for three months, the United States faced its second energy crisis in 1979. Allison, supra, at 706. Due to the reduction in Iranian oil production, world oil prices doubled, creating an economic shock even more severe than that experienced in 1973. Id. This price increase for imported oil further enlarged the gap between the cost of world oil and the cost of price-controlled domestic oil.
In April 1979, the Carter Administration announced its intention to exercise its discretionary authority and phase out the domestic oil price controls between June 1, 1979 and September 30, 1981, the date the EPAA regulations were to expire. H.R.Rep. No. 96-304, at 4 (1979), reprinted in 1980 U.S.C.C.A.N. 587, 591. In May 1979, shortly before the start of the phased decontrol, lower tier domestic oil was controlled at an average price of $5.91 per barrel and upper tier domestic oil at an average price of $13.02 per barrel. Id. At the same time, the average price of uncontrolled world oil,...
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