Tax Analysts and Advocates v. Blumenthal

• Decision Date: 15 June 1977
• Citation: 184 U.S.App.D.C. 238,566 F.2d 130
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 130

566 F.2d 130

184 U.S.App.D.C. 238, 77-2 USTC P 9478

TAX ANALYSTS AND ADVOCATES and Thomas F. Field, Appellants v Michael BLUMENTHAL, Secretary of Treasury of the United States, et al.

No. 75-1304.

United States Court of Appeals,

District of Columbia Circuit.

Argued 8 Jan. 1976.

Decided 15 June 1977.

As Amended 27 June 1977.

Joseph Onek, Washington, D.C., with whom Eldon V. C. Greenberg and Richard A. Frank, Washington, D.C., were on the brief, for appellants.

Leonard J. Henzke, Jr., Atty., Tax Div., Dept. of Justice, Washington, D.C., with whom Scott P. Crampton, Asst. Atty. Gen., Earl J. Silbert, U. S. Atty., and Richard Farber, Atty., Tax Div., Dept. of Justice, Washington, D.C., were on the brief, for appellees.

Before BAZELON, Chief Judge, and TAMM and WILKEY, ^* Circuit Judges.

Opinion for the Court filed by WILKEY, Circuit Judge.

BAZELON, Chief Judge, dissents and indicates that, for the following reasons, he will file a statement of his views at a later date:

In my view, the issues raised by this case are substantially similar to those raised by another case now pending before this court, American Society of Travel Agents v. Blumenthal, No. 75-1782, --- U.S.App.D.C. ---, 566 F.2d 145, in which I am also participating. I wish to have the opportunity to consider the opinion in that latter case before responding to the majority opinion in this case.

WILKEY, Circuit Judge:

The appellants in this case are Tax Analysts and Advocates (TAA), a non-profit On a motion by the defendants, ⁷ the District Court (Hart, J.) dismissed the complaint ⁸ on the grounds that appellants lacked standing to bring the action. ⁹ We agree with the District Judge and conclude that both appellants lack standing as federal taxpayers because they have suffered no judicially cognizable injury in this capacity, and thus affirm the District Court on the rationale stated in its opinion. ¹⁰ In addition, we conclude that Appellant Field, while suffering injury in fact as a competitor dealing in oil extraction and production,

                corporation organized under the laws of the District of Columbia for the purpose of promoting tax reform, and Thomas F. Field, Executive Director of TAA.  Appellants filed suit in the District Court 1 seeking a declaratory judgment that certain published and private rulings of the Internal Revenue Service (IRS) allowing tax credits for payments made to foreign nations in connection with oil extraction and production are contrary to the Internal Revenue Code (Code) and therefore unlawful.  2  In addition, appellants sought an injunction requiring the IRS to withdraw the rulings and to 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 the rulings.  3  Both appellants claim to have standing to sue as federal taxpayers; TAA makes this claim as the representative of its members, who are federal taxpayers, 4 while appellant Field relies on his status as an individual taxpayer.  5  In addition, appellant Field contends that he has standing as a competitor in his capacity as the owner of the entire working interest in a currently producing domestic oil well.  6
                does not assert an interest that falls within the "zone of interests" protected by the relevant provisions of the Code and therefore does not have standing in this context.  Accordingly, we affirm the order of the District Court
                

I. THE NATURE OF APPELLANTS' CHALLENGE

A. The Challenged Agency Action

Section 901(b) of the Code 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 . . . ." ¹¹ This credit can be taken only for foreign income taxes paid; ¹² no credit is allowed for the payment of excise taxes, severance taxes, mineral royalties, or similar payments to foreign governments. Excise taxes, severance taxes, and royalty payments are treated, when appropriate, as ordinary business expenses and therefore result in deductions from gross income rather than in tax credits which can offset tax liability on a dollar-for-dollar basis.

Beginning in the 1950's, the principal oil producing nations in the Middle East, North Africa and South America promulgated a series of formal income tax statutes which imposed net income taxes on United States companies producing oil in those nations. ¹³ In 1955, the IRS published Revenue Ruling 55-296 which allowed a foreign tax credit for income taxes paid to Saudi Arabia. ¹⁴ In 1968 the Service promulgated Revenue Ruling 68-552 allowing a foreign tax credit for income taxes imposed by Libya. ¹⁵ In addition, the IRS has issued several private rulings allowing foreign tax credits for income taxes levied by Iran, Kuwait, and Venezuela in connection with oil production in those countries. ¹⁶

Appellants contend that the income taxes paid by United States companies to the foreign nations listed above are not creditable taxes within the meaning of Section 901(b) of the Code. Rather, appellants assert that these taxes are in substance either royalties paid for the right to extract oil from land owned by the foreign nations, or excise, severance, or similar taxes which are not creditable under Section 910(b). ¹⁷ Appellant Field, as the owner of a domestic oil well, pays the owner of the land on which his well is located a regular royalty payment for the right to extract oil from the land; ¹⁸ under the Code, appellant can deduct these payments from gross income but cannot credit them against his tax liability. In effect, appellants allege that the IRS has exalted form over substance in allowing the tax credits at issue; all of the injuries which appellants put forth to support their standing flow from this decision to treat the foreign income taxes as creditable taxes, rather than as deductible expenses, for their taxpaying competitors.

Having outlined the substantive merits of appellants' claims, it remains to relate this aspect of the case to the issue of standing. Under the relevant Supreme Court directive, we "must accept as true all material allegations of the complaint, and must construe the complaint in favor of the

                complaining party."  19  This standard of review dictates that we assume that the IRS has improperly allowed a tax credit for the payments to foreign nations in connection with oil extraction and production.  This assumption as to illegality does not in and of itself confer standing on anyone to challenge the illegality.  20  Rather, as this court has stated, "the proper inquiry is whether the illegality does injury to an interest of the complaining party."  21  We now turn to an examination of the interests and injuries put forth by appellant Field to support his standing as a competitor in this case.  22
                

B. Competitor Standing

As an independent domestic oil producer, appellant Field competes in the domestic market with those companies which are granted tax credits for the income taxes paid to foreign nations. As a competitor, appellant Field claims that the Internal Revenue Code grants him a protected interest in competitive fairness and equity in matters of federal taxation which has been injured by the published and private rulings made pursuant to Section 901(b). Appellant believes that this asserted interest confers on him the right to "challenge ( ) as inequitable and illegal the favorable treatment received by others as a result of Internal Revenue Service action." ²³

Appellant alleges two injuries in his capacity as a competitor. As the first injury appellant Field alleges that the IRS rulings "result in his obtaining lower prices for his oil production than he would receive if the international companies could only deduct and not credit their oil production related payments." ²⁴ The rulings at issue in this case enable the international companies to pay far less income tax to the United States than if these payments were merely deductible. A substantial portion of the oil produced in Saudi Arabia, Libya, Kuwait, Iran and Venezuela by United States companies is exported to the United States. The prices charged by the international companies largely determine the market price for uncontrolled crude oil received by independent producers such as appellant Field. According to appellants, the lower taxes paid by the international companies allow these companies to sell their foreign oil in the United States at lower prices than would prevail if the companies could only deduct and not credit their foreign income tax payments. ²⁵ Thus, as a consequence, appellant Field contends that the IRS rulings result in competitive injury due to the loss of potential income in the sale of his domestically produced oil.

The second injury of a competitive nature alleged by appellant Field concerns the impact of the challenged rulings on the value of his operating interest in his domestic oil well. According to appellant Field, the challenged IRS rulings increase the net income from foreign oil production over what it would be if the foreign payments could only be deducted from gross income for federal tax purposes. ²⁶ Thus, as a result of The asserted competitive interest and alleged injuries presented by appellant Field will now be tested against the standards developed by the Supreme Court in the area of standing. ²⁸

                the rulings, foreign oil production yields higher investment returns and investors are more willing to invest in foreign oil production than they would be if the rulings had not been promulgated.  27  The value of foreign oil well investments is therefore increased relative to similar domestic investments, to the alleged competitive detriment of appellant Field.
                

II. ANALYSIS OF STANDING CLAIMS

A. Preliminary Considerations

The standing doctrine has two sources: the "case or controversy" requirement of Article III of...