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IRS Disputes $1.3 Billion ExxonMobil Tax Refund Claim

Nov. 15, 2021, 9:19 PM

A district court was correct in denying a $1.3 billion tax refund ExxonMobil is seeking on overseas oil and gas ventures, because the company neither paid nor incurred taxes to deduct, the IRS said.

The agency is disputing the oil and gas giant’s refund claim on tax overpayments on transactions in Qatar and Malaysia, stating that the company’s reading of a tax credit for production of alternative fuels doesn’t satisfy it’s tax liabilities.

Of the $1.3 billion, about $1 billion is based on ExxonMobil’s amended position that certain oil and gas exploration contracts in those countries should be recharacterized as sales of minerals in place instead of mineral leases.

ExxonMobil can claim mixture credits against its excise-tax liability and then deduct whatever remains of that liability as a cost of goods sold, or choose not to use the credit and deduct the excise taxes as cost of goods sold, the agency said in a Friday brief to the U.S. Court of Appeals for the Fifth Circuit.

“Exxon wants to enjoy both the excise-tax benefits of claiming mixture credits and the income-tax benefits of forgoing mixture credits,” the agency said in its brief.

The agency added that the U.S. District Court for the Northern District of Texas was correct in ruling that Exxon’s overseas transactions were leases and not sales for tax purposes because the countries retained economic interests in the oil and gas. The court found that the company misconstrued economic interest tests to argue that the transactions were sales.

“Neither the Supreme Court nor this Court has ever denied lease treatment to a mineral transaction—or otherwise held that the transferor failed to retain an “economic interest” in the minerals in place—merely because the transferor had a right to a non-extraction source of income,” the agency said.

The brief is the latest development in ExxonMobil’s longstanding tax dispute with the IRS. Last July the company claimed that the district court erred in its January ruling siding with the IRS, finding that it employed an “unprecedented test” to conclude that the Qatar and Malaysia operations were mineral leases. The company argued that the fact it built and maintained oil and gas extraction infrastructure in these countries and must pay damages that occur from breaches prove that they are sales.

The company also won a refund of over $200 million in penalties, after the district court concluded that it had a reasonable basis for the oil and gas transactions.

The case is Exxon Mobil Corp v. United States, 5th Cir., No. 21-10373, 11/12/21.

To contact the reporter on this story: Jeffery Leon in Washington at jleon@bloombergindustry.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com