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Exxon Seeks Rehearing in $1.5 Billion Refund Dispute

Sept. 20, 2022, 3:14 PM

ExxonMobil Corp. is asking an appeals court to rehear its claim to a $1.5 billion tax refund from the IRS for overseas oil and gas ventures because the court’s earlier ruling conflicts with established precedent.

The oil and gas giant filed a petition for rehearing en banc at the US Court of Appeals for the Fifth Circuit. The company is seeking a refund of over $1 billion in overpayment of taxes on oil and gas contracts in Qatar and Malaysia from 2006 to 2009, a claim the IRS disallowed in 2016 when it determined the company’s ventures were mineral leases that were subject to tax, instead of sales, which allows Exxon to claim depletion deductions.

The IRS found Exxon would retain its economic interests in the oil and gas extraction, and the Fifth Circuit sided with the agency in August.

In its petition, Exxon claims the Fifth Circuit’s ruling conflicts with established precedent from the Supreme Court and the Fifth Circuit, establishing a bright line requirement that mineral leases must show the transferring entity receives income solely from the extraction of oil and gas.

By ruling in favor of the IRS, Exxon argues the government can “impose the heaviest tax burden possible on the U.S. party to the transaction.”

The IRS “lacks jurisdiction to tax the foreign-sovereign and sovereign-controlled counterparties, giving it every incentive to maximize ExxonMobil’s tax burden by denying the interest deduction,” Exxon said. “And the government need not provide all of the benefits of mineral-lease treatment because Qatar and Petronas cannot claim depletion deductions.”

Kannon K. Shanmugam, of Paul, Weiss, Rifkind, Wharton & Garrison LLP, who chairs the firm’s Supreme Court and Appellate Practice Group, representing Exxon, and the IRS didn’t immediately respond to a request for comment.

The case is Exxon Mobil Corp. v. United States, 5th Cir., No. 21-10373, 9/19/22.

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

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergindustry.com; Butch Maier at bmaier@bloombergindustry.com