Tax Analysts and Advocates v. Simon

• Decision Date: 05 February 1975
• Docket Number: Civ. A. No. 74-917.
• Citation: 390 F. Supp. 927
• Parties: TAX ANALYSTS AND ADVOCATES, and Thomas F. Field, Plaintiffs, v. William E. SIMON, Secretary of the Treasury of the United States, and Donald C. Alexander, Commissioner of Internal Revenue, Defendants.
• Court: U.S. District Court — District of Columbia

390 F. Supp. 927

TAX ANALYSTS AND ADVOCATES, and Thomas F. Field, Plaintiffs, v. William E. SIMON, Secretary of the Treasury of the United States, and Donald C. Alexander, Commissioner of Internal Revenue, Defendants.

Civ. A. No. 74-917.

United States District Court, District of Columbia.

February 5, 1975.

Ira L. Tannenbaum, Thomas F. Field, Samuel H. Black, Washington, D. C., for plaintiffs.

John J. McCarthy, Donald J. Gavin, John M. Cunningham, Tax Div., Dept. of Justice, Washington, D.C., for defendants.

OPINION

HART, Chief Judge.

This case comes before the Court on Defendants' Motion to Dismiss the Complaint and Opposition thereto. Plaintiffs filed their original complaint on June 17, 1974 and their amended complaint on August 13, 1974. The amendment was generated by one plaintiff's acquisition of the entire working interest in a domestic oil well. Both complaints seek a declaratory judgment that published and private rulings of the Internal Revenue Service allowing tax credits for payments made to foreign countries in connection with oil extraction and production and which are calculated on a fixed per barrel basis are unlawful since they are contrary to the Internal Revenue Code, 26 U.S.C. §§ 901(b), 903. Plaintiffs also seek in both complaints a permanent injunction requiring the Internal Revenue Service to withdraw these Rulings; restraining the IRS from permitting income tax credits for payments made to foreign countries in connection with oil extraction and production which are calculated on a fixed per barrel basis and requiring Defendants to assess and collect taxes from oil companies for all periods not barred by the statute of limitations in those cases where foreign tax credits were taken pursuant to these Rulings. Jurisdiction is alleged under 28 U.S.C. §§ 1340, 2201, 2202 and 5 U.S.C. §§ 702, 703.

FACTS

Plaintiff Tax Analysts and Advocates (TAA) is a non-profit corporation organized under the laws of the District of Columbia in 1970 for the purpose of promoting tax reform through educating the public in federal tax matters and conducting a public interest legal practice concerned with federal tax matters. TAA represents over one hundred seventy-five individual supporters, each of whom has contributed financially to TAA so that they could obtain legal representation to ensure that the Internal Revenue Service properly applies the Internal Revenue Code and does not grant special interest groups favorable treatment beyond that which the IRS can lawfully provide. The complaint alleges that each of these individuals, as a United States taxpayer, has a personal pecuniary interest in requiring that the IRS assess and collect taxes owed by other taxpayers to the fullest possible extent under the Internal Revenue Code.

Plaintiff Thomas F. Field is the Executive Director of TAA. In the original complaint, Field asserts that he is an American citizen and federal taxpayer who has a personal pecuniary interest in requiring that the IRS assess and collect taxes owed by other taxpayers to the fullest possible extent under the provisions of the IRC. In the interim between the filing of the original complaint and the filing of the amended complaint, Plaintiff Field purchased the entire working interest in a currently producing oil well in Pennsylvania. Thus the amended complaint asserts an additional basis for this suit, namely that Plaintiff Field has a personal pecuniary interest in seeing that other persons also producing oil do not receive unjustifiably preferential tax treatment with respect to their oil production income which would permit them to sell their oil at a lower price than would be possible without the preferential treatment, thus adversely affecting Field's income from his oil production.

Field's oil well currently produces three barrels of crude oil per month and future production is anticipated at that level. The most recent price of that oil is $10.28 per barrel and future prices are expected to remain at this level. Projected operating costs for the oil well are $120 per year. Gross receipts from the sale of the well's production are estimated to be $370.08 per year for the next five years. Pursuant to the purchase agreement of August 13, 1974, the owners of the land on which the well is located (Hickman Lumber Company) and the operator of the well (David H. Melot) together will receive a royalty of one-eighth of the proceeds of all oil produced from the well. These royalty payments are expected to amount to $46.32 per year for the next five years. Field's anticipated net profits before taxes are approximately $203.76 per year for the next five years. The term "entire working interest" in the oil well means that Mr. Field will own all the rights to operate the well and that he will receive the entire amount of the proceeds derived from the sale of the well's production reduced only by the royalty he must pay to the owners of the land (Hickman Lumber Company) and the operator of the well (David H. Melot). During the period commencing with his purchase of the working interest in the well on August 13, 1974 and terminating on October 31, 1974, Field earned $42.47, which constitutes the total proceeds from the sale of all oil produced between August 13 and October 31, 1974, reduced by the one-eighth royalty and the operating costs.

Defendant William E. Simon is Secretary of the Treasury of the United States. Defendant Donald C. Alexander is Commissioner of Internal Revenue. Under 26 U.S.C. §§ 7801, 7802, the Internal Revenue Code charges these Defendants with the responsibility to administer and enforce the Code, including the provisions concerning the foreign tax credit, 26 U.S.C. §§ 901(b), 903.

The relevant provisions of the Internal Revenue Code are sections 901(b) and 903, 26 U.S.C. §§ 901(b), 903 (1954). Section 901(b) allows qualified citizens of the United States and domestic corporations to claim a tax credit for "the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country . . .." Section 903 states that "the term `income, war profits, and excess profits taxes' shall include a tax paid in lieu of a tax on income, war profits, or excess profits otherwise generally imposed by any foreign country . . .."

The published Revenue Rulings at issue here were published in 1955 and 1968. Rev.Rul. 55-296, 1955-1 Cum. Bull. 386, allowed a foreign tax credit for income taxes paid to Saudi Arabia by virtue of Saudi Arabian Royal Decrees of November 4 and December 27, 1950. Rev.Rule 68-552, 1968-2 Cum. Bull. 306, allowed a foreign tax credit for income taxes imposed by Article 14 (1) (a) of Libyan Petroleum Law No. 25 of 1955, as amended through November 20, 1965. The private unpublished rulings at issue were promulgated by the Internal Revenue Service to allow foreign tax credits under section 901(b) for income taxes imposed by Iran, Kuwait and Venezuela in connection with oil production in those countries.

PLAINTIFFS' ARGUMENTS

Plaintiffs' position is that neither section 901(b) nor section 903 nor any other section of the Internal Revenue Code permits foreign income tax credits for the payments of excise taxes, severance taxes, mineral royalties, or similar payments made by American companies to foreign countries in which they extract and produce oil. Specifically, Plaintiffs allege that the Treasury Department, in the late 1940's and early 1950's, decided that certain payments denominated as income taxes and collected by foreign countries from companies owned and controlled by United States citizens in connection with the production of oil in those foreign countries would qualify for the foreign tax credit under section 901(b). Plaintiffs assert further that, as a result of these Treasury Department decisions, a pattern developed among the principal oil exporting nations (Saudi Arabia, Kuwait, Libya, Iran and Venezuela), whereby these nations promulgated laws which purported to impose income taxes on American companies extracting and producing oil in their countries. Plaintiffs argue that these income taxes are one of the components of a fixed per barrel "government take" collected by these nations from the companies extracting and producing oil within their boundaries. The "government take" is allegedly calculated on a fixed per barrel basis and is totally independent of the actual gross or net income which the companies derive from their oil extraction and production. Although denominated as income taxes, in Plaintiffs' view these payments are, in substance, either royalties paid for the right to extract oil from land owned by these five nations or excise, severance or similar taxes which are not creditable under section 901(b) of the Code; nor do Plaintiffs see any basis for finding that these payments constitute taxes "in lieu of" foreign income taxes creditable against United States taxes under section 903 of the Code. Plaintiffs complain that, as a result of these published and private Rulings of the Internal Revenue Service, American oil companies operating abroad pay no tax to the United States Treasury on income derived from the extraction and production of oil, resulting in a revenue loss to the United States Treasury in 1974 of $3 billion.

Plaintiff Field asserts, furthermore, that, as an oil producer extracting and producing oil from a domestic well, he must pay to the owner of the land on which his well is located, a one-eighth interest in the well's production and must treat that royalty payment as an expense which he deducts from his gross income rather than crediting it against his tax due, while the American oil companies operating abroad may credit the purported income taxes which they pay to the sovereign owners of the land from which they extract and produce oil. Plaintiff Field sees these payments as substantially similar operating rights. Plaintiff's injury is allegedly incurred...