A federal appeals court reversed a US district court’s decision granting Texaco Inc. a more than $100 million tax refund, the US Department of Justice said on June 17.
It said that the US Department of Energy originally cited Texaco for selling petroleum products at a price higher than government-mandated ceilings during 1973-81. The company settled the allegation and agreed to pay $1.25 billion plus interest. It deducted the settlement amount as ordinary and necessary business expenses and sought an additional $100 million refund under US Internal Revenue Code Section 1341, DOJ said.
Section 1341 is designed to provide a taxpayer relief from having paid taxes on income that the taxpayer is later required to restore to a third party. It does not apply to “any deduction allowable with respect to an item which was included in gross income by reason of the sale,” according to DOJ.
In its appeal of a finding by the federal district court for California’s Northern District, DOJ’s tax division asked whether this exception to the relief provision applies to all deductions attributable to the sale of inventory or only to sales returns, allowances, or similar items. Texaco had argued that the second condition applied and the federal district court in Northern California had agreed.
The Ninth Circuit Court of Appeals sided with DOJ. It held that the exception’s plain meaning precluded Texaco’s refund claim, noting that the federal circuit court of appeals recently reached the same conclusion in Pennzoil-Quaker State Co. vs. United States.
The Ninth Circuit Court also determined that, even if there was some ambiguity in the statutory exception (as Texaco argued), the court “would be hard pressed not to defer to the agency’s interpretation of the statute” because the Internal Revenue Service’s interpretation was reasonable.
Finally, said DOJ, the court noted that although its interpretation of Section 1341 denied relief to certain taxpayers, it was up to Congress, not the courts, to revise the statute to “promote a more equitable consequence.”
“The court’s decision is important because it reaffirms the judiciary’s respect for the language enacted by Congress, and the deference owed to the agency entrusted with enforcing that statutory scheme,” said Nathan J. Hochman, assistant US attorney general in charge of DOJ’s tax division who argued the case in the Ninth Circuit.
It was not immediately clear if Chevron Corp., which acquired Texaco in 2000, plans to appeal the latest decision.
