Testimony concluded Friday in ExxonMobil Corp.’s federal lawsuit seeking a refund of about $1.9 billion in taxes, penalties and interest stemming from a lucrative natural gas production venture with Qatar.
The presentation of evidence in the bench trial before Chief Judge David C. Godbey of the Northern District of Texas ended after a week. In lieu of closing arguments, the oil giant and the U.S. government agreed to submit post-trial briefs, the first of which, from ExxonMobil, the plaintiff in the civil case, is due in 45 days.
At issue in the civil suit is the nature, for tax purposes, of ExxonMobil’s deal with Qatar to form and operate 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 ExxonMobil’s amended complaint filed 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 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, Lara Samet Buchwald, and Antonio J. Perez-Marques of Davis Polk & Wardell in New York City.
The case number in the Northern District of Texas is 3:22-cv-00515-N