WASHINGTON - The Ninth Circuit Court of Appeals reversed an adverse district court judgment granting Texaco Inc. a tax refund exceeding $100 million, the Justice Department announced today.
Texaco sold petroleum products at prices that exceeded government-mandated price ceilings between 1973 and 1981 and included the overcharges in its gross income. As part of a consent decree with the Department of Energy, Texaco was later required to pay $1.25 billion plus interest. Texaco deducted the settlement amount as ordinary and necessary business expenses and then sought an additional $100 million refund under Section 1341 of the Internal Revenue Code.
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. This relief provision, however, does not apply to "any deduction allowable with respect to an item which was included in gross income by reason of the sale" of inventory. The question presented on appeal was whether this exception to the relief provision applies to all deductions attributable to the sale of inventory (as the United States argued) or whether the exception applies only to sales returns, allowances or similar items (as Texaco argued and the District Court for the Northern District of California held).
The Ninth Circuit agreed with the United States. The court held that the plain meaning of the exception precluded Texaco’s refund claim, noting that the Federal Circuit Court of Appeals recently reached the same conclusion in Pennzoil-Quaker State Co. v. United States. The court further determined that, even if (as Texaco argued) there was some ambiguity in the statutory exception, 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, 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 so as to "promote a more equitable consequence."
Nathan J. Hochman, Assistant Attorney General of the Justice Department’s Tax Division, argued the case for the United States in the Ninth Circuit, and said that 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."
Assistant Attorney General Hochman thanked Tax Division attorneys Judith Hagley and Richard Farber, who briefed the case on appeal for the United States.