ExxonMobil Corp. is asking a federal court in Dallas to order the Internal Revenue Service to refund what the energy giant says is about $1.9 billion in overpaid taxes, penalties and interest in 2010 and 2011 stemming from a lucrative natural-gas production venture with Qatar.
A bench trial of ExxonMobil’s claims began Monday before Chief Judge David C. Godbey of the Northern District of Texas. The trial is expected to take about a week.
At issue is the nature, for tax purposes, of ExxonMobil’s deal with Qatar to form an entity called Al Khaleed Gas (AKG) to explore for, mine and sell natural gas from offshore reservoirs in the Persian Gulf between Qatar and Iran. Roughly two-thirds of the massive gas deposit is in territorial waters of Qatar, where it’s known as the North Field; the remainder, called the South Pars, is in territorial waters of Iran. According to the International Energy Agency, the field holds an estimated 1,800 trillion cubic feet of natural gas and some 50 billion barrels of natural gas condensates.
Since its formation in 2000, “AKG has produced, marketed, and sold hundreds of millions of cubic feet of natural gas per day, with annual revenues in the billions of dollars,” according to an amended lawsuit filed by ExxonMobil against the U.S. government last July.
The suit contended that AKG “is a partnership under applicable federal tax law,” and, as such, “production payments” to Qatar should be treated as if they were a mortgage loan on which ExxonMobil’s is entitled to deduct from its 2010 and 2011 taxes the interest on those payments. By rejecting that claim, ExxonMobil’s suit said, the IRS “erroneously collected taxes and assessed penalties that were not owed.”
“The [IRS] commissioner’s refusal to refund the tax, penalties and interest paid by ExxonMobil following the IRS’s assessments is contrary to federal law and should be remedied,” the lawsuit said.
The suit doesn’t specify an amount the energy company is seeking as a refund, but it delineates roughly $1.9 billion as the difference between what it believes it overpaid and what the IRS previously refunded.
The government, in response, contended that the agreement to form AKG was a lease under which the payments to Qatar were royalties, not loan payments for which ExxonMobil could deduct “interest” paid.
In one court filing, lawyers from the tax division of the U.S. Department of Justice described ExxonMobil’s position as “alchemy” and a “manipulation … on paper, for tax purposes only.”
In his opening statement to Godbey on Monday, Ryan D. Galisewski, a DOJ tax lawyer from Washington, D.C., claimed ExxonMobil was “playing games with labeling” to mask the royalty payments as production payments within a partnership, for which interest is tax-deductible.
ExxonMobil, he said, was “doing all the work” to develop the natural gas reservoirs and “paid all the bills. … There was no co-ownership.”
In addition to Galisewski, the United States is represented in the case by Cory A. Johnson from the DOJ’s tax division in Washington, D.C., and Christian A. Orozco and Jonathan L. Blacker, tax division lawyers in Dallas.
ExxonMobil is represented by, among others, Emily A. Parker, Mary A. McNulty and Meghan McCaig of Holland & Knight in Dallas; and James P. Rouhandeh and Lara Samet Buchwald of Davis Polk & Wardell in New York City.
ExxonMobil on Monday called two witnesses, Harry Longwell and Maureen Cochrane, both retired senior executives of the company who played instrumental roles in the North Field venture with Qatar. Both described the business arrangement as a partnership in which risks and rewards were jointly shared by ExxonMobil and Qatar, through its state-run petroleum company.
“Every step of the way,” Longwell said, the arrangement “was a business partnership. … There was complete integration.”
Ms. Cochran, who served on the management committee of AKG, used “jointly” or “joint” more than a dozen times to describe how the committee, comprising equal numbers of ExxonMobil executives and high-ranking Qatari officials, operated.
“It was very much a joint process,” she said.
The case number in the Northern District of Texas is 3:22-cv-00515-N.