July 22, 2019

Tenth Circuit: ConocoPhillips Entitled to Neither “Basis-Increase” Nor “Going-Forward Deductions

The Tenth Circuit Court of Appeals published its opinion in United States v. ConocoPhillips Company on Wednesday, March 11, 2014.

In the 1970s and 1980s, the Internal Revenue Service was embroiled in a tax dispute with multiple companies (including Phillips Petroleum Company and Arco Transportation Alaska, Inc.) that had jointly developed a pipeline system known as the Trans-Alaska Pipeline System (“TAPS”). The parties agreed to settle the dispute through a Closing Agreement. After entering the agreement, Phillips Petroleum Company (now ConocoPhillips Company) acquired Arco Transportation. In 2000 and 2001, Conoco revisited the tax implications of its acquisition and claimed “going-forward” and “basis-increase” deductions on its amended consolidated tax returns. The IRS refunded Conoco’s 2000 going-forward deductions and did not challenge them here. But the IRS disputed the remaining deductions and the parties brought the dispute to federal district court, where the district court decided the issue on cross-motions for summary judgment. The court rejected Conoco’s position and granted summary judgment to the IRS. Conoco appealed.

Conoco claimed monthly “going-forward” deductions for the additional interests in TAPS that Arco Transportation acquired from 1977 to 2000 and the additional interest that it acquired in 2001. This contention was based on alternative theories that Arco Transportation was an “owner” or “successor in interest” under the Closing Agreement. However, the court held that Arco Transportation was considered an “owner” only with respect to its 21% ownership in TAPS as of July 1, 1977. For the subsequently-acquired interests, Arco Transportation was not considered an “owner.” Because Arco Transportation did not own the additional TAPS interests on July 1, 1977, it was not an “owner” with respect to these interests. Thus, Conoco was not entitled to “going-forward” deductions for these additional interests based on the theory that Arco Transportation was an “owner.”

The court then turned to the question whether Conoco was a “successor in interest.” Under the Closing Agreement, an entity became a “successor in interest” in two ways: (1) by succeeding the owner through statutory succession, or (2) by acquiring a TAPS interest from an affiliated entity when the transferor and transferee filed a consolidated tax return. Arco Transportation did not acquire its later-acquired interests by statutory succession or by transfer from a member of its consolidated group. Thus, Arco Transportation was not a successor in interest for the additional TAPS interests acquired from 1977 to 2001; and the parent company, Conoco, was not entitled to the tax benefit of Arco Transportation’s going-forward deductions on the 2001 consolidated tax return.

Conoco also claimed “basis-increase” deductions. But Conoco’s claim to these deductions was based on a misinterpretation of the scope of the Closing Agreement. Because the Closing Agreement did not fix a restoration cost/liability or exclude it from 26 U.S.C. § 461(h), Conoco was not permitted take the basis-increase deductions before economic performance.

In conclusion, the Tenth Circuit held that Conoco was not entitled to the asserted “going-forward” or “basis-increase” deductions. The court disallowed Conoco’s going-forward deductions because Arco Transportation was not an “owner” or a “successor in interest” with respect to the additional TAPS interests acquired from 1977 to 2001. The court also disallowed the basis-increase deductions because the Closing Agreement’s allowance of a $900 million aggregate deduction did not fix a liability or provide Conoco with a blanket exemption from § 461(h) for that amount.

Accordingly, the district court’s award of summary judgment to the government was AFFIRMED.

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