# Opposition — Commissioner v. Texaco Inc.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition
- **Published:** January 1, 1997
- **Citation:** 520 U.S. 1185

## Text

| tk fF { D
MAR 14 {997
No. 96-1107 99
SEER
IN THE

Supreme Cot of the United States ~~

OCTOBER TERM, 1996

COMMISSIONER OF INTERNAL REVENUE.
. Petitioner,
v.
TEXACO INC. AND SUBSIDIARIES,
Respondents.

On Petition for Writ of Certiorari te the
United States Court of Appeals
for the Fifth Circuit

RESPONDENTS’ PRIEF IN OPPOSITION

BUFORD P. BERRY
Counsel of Record

EMILY A. PARKER

DENNIS J. GRINDINGER

Mary A. MCNULTY

R. DAVID WHEAT

THOMPSON & KNIGHT

A Professional Corporation

1700 Pacific Avenue, Suite 3300

Dallas, Texas 75201

(214) 969-1700

JOSEPH M. INCORVAIA

TEXACO INC.

Attorneys for Respondents
Texaco Inc. and Subsidiaries

ACE UR. SEY ERIN

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTION PRESENTED

During the “second oil crisis” over the period 1979-
1981, the Saudi Arabian Government prohibited the re-
sale of Saudi crude at prices higher than those charged
purchasers by the Saudi Government. This restriction on
the resale price of Saudi crude was authorized by the King
of Saudi Arabia and was unilaterally imposed by the
Saudi Government, as part of its price moderation pol-
icy adopted at the urging of the U.S. Government and
other consuming country governments. Was the Saudi
Government restriction a legal restriction within the scope
of Commissioner v. First Security Bank, 405 U.S. 394
(1972), thus barring the Commissioner’s allocation of
additional income to Texaco on sales of Saudi crude under
26 U.S.C. § 482?

ii

LIST OF PARTIES, PARENT COMPANIES,
AND SUBSIDIARIES

The names of all parties appear in the case caption.
Respondent Texaco Inc. has no parent company or pub-
licly held subsidiaries.

a

'
4

TABLE OF CONTENTS

Page
QUESTION PRESENTED ................ i
LIST OF PARTIES, PARENT COMPANIES, AND
SAT a ii
TABLE OF AUTHORITIES .............00. iv
STATUTE AND REGULATION INVOLVED ____.. 1
STATEMENT OF THE CASE........0.0 2
I. COUNTER STATEMENT OF FACTS ...._. 2
II. THE PROCEEDINGS BELOW ............. 7
STE a 7
RESIS ae eT 11
REASONS FOR DENYING THE WRIT... 14
oo ot ESET ATT 27

(iii)

iv

TABLE OF AUTHORITIES

Cases Page
Building & Constr. Trades Council v. Associated

Builders & Contractors, 507 U.S. 218 (1998) ...... 22
Commissioner v. First Security Bank, 405 U.S. 394

TUITE ncsccicensiipenenthienateiaiiddeasdeiissiantiinaisenhinaialieiaieisl bende passim
Estate of Bailey v. Commissioner, 741 F.2d 801

(he | RR Sree ire er ene 16
L. E. Shunk Latex Products, Inc. v. Commissioner,

SEE Ee, Bae Fe pase dinccntediecinssiacanchcteaecteatanitotaitiancnn 24-25
Lehman v. Commissioner, 25 T.C. 629 (1955) ........ 24
Merrion v. Jicarilla Apache Tribe, 455 U.S. 130

CITT <sccniasistacsednnsieesidetinteiidaediphebaaiiadiataaatiieh scien dueacigaindaniai 15, 20
Poe v. Seaborn, 282 U.S. 101 (1930) ................2....... 19
Procter & Gamble Co. v. Commissioner, 961 F.2d

anne ae 8-9, 23, 25
Remington Rand Corp. v. Business Sys., Inc.,

S00. F.2n. Tee (6 CHE. IB8!) ewe, 16
Republic of Argentina v. Weltover, Inc., 504 U. S.

| RSS es ne 20-21
Saudi Arabia v. Nelson, 507 U.S. 349 (1998) .......... 21
South-Central Timber Dev., Inc. v. Wunnicke, 467

Ri Ae: ED ‘adesiencdianintncteceeeabenniandideciisasodiuaaiaal 21, 22
United States v. Basye, 410 U.S. 441 (1973) ...8, 12, 14, 17
United States v. Lulac, 793 F.2d 686 (5th Cir.

DI visa sivichdicdai lips hamish ddsaeeetlateattataindaceinanaimincces 16
United States v. Winstar Corp., 116 S. Ct. 2432

TIED itn sits ihc daceaala a ass Noiss nk ccansstiencdianaaaantalnaiaitcnstamatens 15, 20

Statutes, Regulations, and Other
es iar a eacnre eneebeaconmuaaaeantan 7-8, 11-12
26 U.S.C. § 482 (amended 1986) ................................. passim
Be ee iii cts asin Ninotastcscuecyeanioiacobiad 5
te PD giciacchaciaisanercticreniscenscataneciblintcenens 5
26 C.F.R. §§ 1.482-1(a), (b) (1994) -......-22002... 2
26 C.F.R. § 1.482-1(b) (1) (redesignated 1993) ...... 1
ae ee EO CED citeenccaneseeas 1-2, 13, 17
26 C.F.R. §§ 1.482-1(h) (2), (j) (1) (1994) -....0....... 23

26 C.F.R. §§ 1.482-1T (a), (b) (1993) (amended
EE sbiectiiaidicedinnieacenhbeaiiiciccanibiarsemaieieti baits 2

Vv

TABLE OF AUTHORITIES—Continued

Page

26 C.F.R. § 1.901-2(a) (2) (i) (1983) (amended
| oe seeintecialieamiladdeuiicatsiadlahaiaiitaciat ced es 20
Pe ae |) | Pe eee eee ene 20-21

IN THE
Supreme Court of the United States

OCTOBER TERM, 1996

No. 96-1107

COMMISSIONER OF INTERNAL REVENUE,

. Petitioner,

TEXACO INC. AND SUBSIDIARIES,
Respondents.

On Petition for Writ of Certiorari to the
United States Court of Appeals
for the Fifth Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

STATUTE AND REGULATION INVOLVED

The controlling law in this case is section 482 of the
Internal Revenue Code of 1954 and the Treasury regula-
tion issued under section 482, as in effect during the
years in issue (1979-1981). 26 U.S.C. § 482 (amended
1986); 26 C.F.R. § 1.482-1A(b)(1).22. The Commis-
sioner properly quotes the text of section 482 and the
Treasury regulation that defines the scope and purpose
of section 482, as in effect during the years in issue.”

126 C.F.R. § 1.482-1A(b) (1) was redesignated from 26 C.F.R.
§ 1.482-1(b) (1) in 1998. This regulation applies to taxable years
beginning on or before April 21, 1993. T.D. 8470, 58 Fed. Reg.
5263, 5271 (1993).

* The Commissioner properly quotes section 482 as in effect dur-
ing 1979-1981, except that the asterisks at the end of the Commis-
sioner’s quotation of section 482 are not appropriate. Petition for

2

The controlling law in this case is identical to the statute
and regulations considered by the Supreme Court in Com-
missioner v. First Security Bank, 405 U.S. 394 (1972)—
the controlling precedent in this case.* Unless otherwise
indicated, Respondents, Texaco Inc. and Subsidiaries
(“Texaco”), will refer hereafter only to the Internal Reve-
nue Code of 1954 and the Treasury regulations in effect
during 1979-1981.

STATEMENT OF THE CASE
I. COUNTER STATEMENT OF FACTS

Texaco disagrees with the Commissioner’s statement of
facts. Rather than point out each omission of fact and
resulting mischaracterization made by the Commissioner,
Texaco will properly state the facts found by the Tax
Court in this case.

The period 1979 through 1981 has been referred to as
the “second oil crisis.” * Pet. App. 41a. Over this period,
crude oil prices almost tripled 23 a result of supply uncer-

a Writ of Certiorari (‘‘Pet.”) 2. Another sentence was added
to section 482, but it did not become effective until after 1986.

3 The Commissioner also cites temporary regulations 26 C.F.R.
§§ 1.482-1T(a) and (b) (effective for taxable years beginning after
April 21, 1993), which were replaced with final regulations 26
C.F.R. §§ 1.482-1(a) and (b) (effective for taxable years beginning
after October 6, 1994). Pet. 2 n.1. These temporary and final regu-
lations are not applicable in this case. Furthermore, the Commis-
sioner’s statement that the 1993 temporary regulation “‘does not
alter the provisions of relevance to this case” is incorrect. Jd. The
second sentence in the applicable regulation (26 C.F.R. § 1.482-
1A(b)(1)) is deleted from the 1993 temporary regulation. The
Supreme Court relied, in part, on this sentence in First Security.
405 U.S. at 404-05. The Fifth Circuit and the Tax Court similarly
relied on this provision of the regulation. Appendix to the Petition
for a Writ of Certiorari (“Pet. App.”) 8a, 105a.

4The “first oil crisis’ occurred when world crude oil prices
increased fourfold over a three-month period following the out-
break of the Arab-Israeli war on October 7, 1973. Pet. App. 33a-35a.

3.

tainties caused by the Iranian Revolution, the takeover of
the U.S. Embassy in Iran, the U.S. trade embargo against
Iran, and the Iran-Iraq war. Pet. App. 40a-41a, 65a. In
an effort to relieve the crisis, the U.S. Government and
the governments of the other consuming countries re-
peatedly urged the Saudi Government to moderate crude
oil prices. Pet. App. 42a, 68a-75a, 113a n.35, 114a. In
response to these requests, the Saudi Government both
increased its production and set its official selling price
(“OSP”) of Saudi crude lower than the selling prices set
by other oil-producing countries for crude oils of similar
grade or quality. As part of this price moderation policy,
the Saudi Government, with the approval of the King,
mandated that purchasers of its crude not resell Saudi
crude for more than the OSP. Pet. App. 42a-45a, 120a-
122a. The Tax Court found that “[p]rominent U.S. offi-
cials believed that the [Saudi Government’s] price mod-
eration policies were designed to obtain the defense and
foreign policy support of the United States and to meet
the need for stability in the world economy.” Pet. App.
68a.

The Saudi Government sold its crude by way of the
Arabian American Oil Company (“Aramco”) to the
Aramco shareholders, including Texaco, and to Petromin,
the Saudi Arabian national oil company. The Aramco

© Since 1948 and through the years at issue, Texaco, Exxon Cor-
poration (“Exxon”), Chevron Corporation (“Chevron”), and Mobil
Oil Corporation (“Mobil”) (or their predecessor corporations)
owned all of the stock of Aramco. Pet. App. 19a. In 1933, Aramco
acquired the oil concession for Saudi Arabia from the Saudi Gov-
ernment. Pet. App. 18a. By 1977, however, the Saudi Government
had taken over 100 percent ownership of Aramco’s oil-producing
assets, and Aramco merely provided services to the Saudi Govern-
ment for a fee. Pet. App. 33a. The Saudi Government’s takeover
of Aramco was an exercise of its “sovereign power” and “was
forced upon the Aramco shareholders against their will.” Pet. App.
142a. The Saudi Government’s actions followed similar actions by
other oil-exporting countries, who terminated concessions and
nationalized or expropriated producing operations in their countries
during the 1970s. Pet. App. 29a-31la.

4

shareholders and Petromin then marketed Saudi crude to
customers who transported the crude to refineries located
throughout the world. Pet. App. 19a & n.4, 22a-23a, 25a,
32a-33a, 145a. The Saudi Government mandated that the
Aramco shareholders and purchasers from Petromin not
resell Saudi crude at prices higher than the OSP. Pet. App.
123a-124a. This restriction was initially communicated to
the Aramco shareholders by a letter, dated January 23,
1979, from the Petroleum Ministry of Saudi Arabia, signed
by Minister Ahmed Zaki Yamani (referred to as “Letter
103/Z”). Pet. App. 3a, 42a-44a. Letter 103/Z was
unilaterally issued, and the Aramco shareholders did not
negotiate, solicit, urge, or even influence the issuance of
Letter 103/Z. Pet. App. 114a, 148a-149a. The Saudi
Government restriction applied to all sales 0. Saudi crude
by the Aramco shareholders, whether to related or
unrelated customers. Pet. App. 133a. Texaco and the
other Aramco shareholders were required to comply with
the restriction by the Saudi Government and by the gov-
ernments of the consuming countries, including the U.S.
Government. Pet. App. 68a-75a, 124a-127a, 134a-155a.
The Tax Court found that, “[a]fter the [Saudi Govern-
ment] restriction was issued, official U.S. policy was
strongly in favor of enforcing the restriction and seeing
that the Saudi policy toward moderation was carried out.”
Pet. App. 68a. The Tax Court concluded that the Saudi
Government restriction was “the virtual equivalent of
law.” Pet. App. 158a; accord Pet. App. 6a.

The Saudi Government restriction applied to the sale
of Saudi crude and thus assured delivery of Saudi crude
into consuming countries at the OSP. The restriction did
not apply to the sale of products refined from Saudi crude,
and the Saudi Government recognized that it “could not
control product prices” in the consuming countries. Pet.
App. 16la. In public statements, however, Minister
Yamani stressed that the consuming country governments
were responsible for controlling refined product prices.
Pet. App. 45a-46a, 48a, 52a-53a, 94a-95a, 161a-162a.

anette

osasae

5

Many consuming countries had product price controls in
effect during 1979-1981, and certain countries directly
established the price of refined products by reference to
the import price of crude. Officials of consuming country
governments—including the United States, the United
Kingdom, Germany, France, Italy, the Netherlands, and
Japan—understood that the restriction was imposed to
ensure that Saudi crude reached the consuming countries
at the lower Saudi price. Pet. App. 68a-75a, 124a-127a.

Texaco had to comply with the Saudi Government re-
striction to have access to Saudi crude. Pet. App.
57a, 142a-143a. Continued access to Saudi crude was
critical to Tewaco, because Saudi crude made up more
than seventy-five percent of its international crude oil
supply during the years in issue. Pet. App. 4la. If Tex-
aco had violated the restriction, the Saudi Government
could have cut off Texaco’s access to Saudi crude, ex-
cluded Texaco from Saudi Arabia, or nationalized Tex-
aco’s assets in Saudi Arabia. Pet. App. 57a-60a, 142a-
144a & n.46. In addition, the consuming countries had
established an elaborate worldwide system for monitoring
the prices at which crude was bought and sold, and this
monitoring ensured compliance with the Saudi Govern-
ment restriction. Pet. App. 153a-154a.

Texaco International Trader Inc. (“Textrad”), a
domestic subsidiary of Texaco Inc., was the international
trading company for the Texaco group during the period
at issue. Pet. App. 23a. Textrad acquired Saudi crude

® Texaco Inc. is the parent corporation of a group of domestic
and foreign corporations engaged in the production, refining, trans-
portation, and marketing of crude oil and refined products in the
United States and foreign countries. Respondents are the members
of the Texaco group that joined in Texaco’s U.S. consolidated
income tax return. Pet. App. 18a. In general, foreign corporations
cannot join in a consolidated return (26 U.S.C. § 1504(b) (3)) and
are not directly subject to U.S. tax on their foreign income, but
the foreign income of controlled foreign corporations is indirectly
subject to U.S. tax under 26 U.S.C. §§ 951-964.

6

from Aramco at the OSP and, in compliance with the
Saudi Government restriction, resold Saudi crude to Tex-
aco’s affiliates and to unrelated customers at prices not
higher than the OSP. Texaco’s foreign and domestic affili-
ates refined Saudi crude and other crude into products
for sale in the countries where they operated. Pet. App.
2a, 23a-25a, 187a. Texaco’s affiliates reported profits
from the sale of products refined from Saudi crude in their
tax returns for the consuming countries in which they
operated, including the United States, the United King-
dom, Belgium, Germany, Italy, and Sweden.” Pet. App.
24a-25a, 72a-74a nn.14-18, 94a.

During the period at issue, Textrad sold approximately
thirty-four percent of its Saudi crude (780 million bar-
rels) to Texaco’s refining affiliates. Pet. App. 3a, 24a.
Of this amount, approximately 275 million barrels were
sold to Texaco’s domestic refining company and 505 mil-
lion barrels were sold to Texaco’s foreign refining affiliates.
Pet. App. 3a-4a. In addition, Textrad sold approximately
twenty-two percent (494 million barrels) of its Saudi
crude to Caltex Petroleum Corporation (“Caltex”).®
Textrad also sold almost twenty percent (444 million
barrels) of its Saudi crude to customers that were com-
pletely unrelated to Texaco.® Pet. App. 4a, 24a. The

7 One of Texaco’s foreign affiliates was Texas Overseas (Bermuda)
Limited (“TOBL’”), a Bermuda corporation that refined crude
at a refinery located in Bahrain. TOBL was not subject to tax in
Bermuda or in Bahrain. The Tax Court found that this arrange-
ment was unrelated to the Saudi Government restriction because
TOBL’s operations commenced in 1976. Pet. App. 179a-18la. The
Commissioner made an alternative adjustment allocating TOBL’s
income to Textrad, and the parties settled that adjustment.

8 Caltex is a domestic corporation owned fifty percent by Texaco
Inc. and fifty percent by Chevron. Pet. App. 23a.

® Textrad purchased and sold 367 million barrels of Saudi crude
to unrelated customers at the OSP. Textrad purchased and sold
77 million barrels of Saudi crude to unrelated customers expressly
designated by the Saudi Government to receive “war relief” crude.
Pet. App. 24a, 65a-66a.

7

volume and pattern of Textrad’s sales and other disposi-
tions of Saudi crude during 1979-1981 were consistent
with its sales and other dispositions in prior years.” Pet.
App. 4a, 64a, 85a-86a, 91a.

The Commissioner increased Textrad’s income for
1979-1981 on its sales of Saudi crude to Texaco’s foreign
affiliates under sections 61 and 482 of the Internal Reve-
nue Code.“ The Commissioner alleged that Textrad
shifted profits attributable to the lower cost of Saudi crude
out of Texaco’s U.S. taxable income by selling Saudi
crude at the OSP to Texaco’s foreign affiliates. Pet. App.
2a, 98a. The Commissioner made a similar adjustment
with respect to Exxon. Pet. App. 99a-100a. The Tax
Court consolidated Texaco’s and Exxon’s cases for trial
of this adjustment. Pet. App. 14a n.1.

Il. THE PROCEEDINGS BELOW

A. Tax Court. Following a five-week trial, the Tax
Court issued a detailed opinion numbering almost 200
pages. The Tax Court held that “[uJnder the rule of
Commissioner v. First Security Bank, 405 US. 394
(1972), its assignment of income predecessors, and its
progeny,” the Saudi Government restriction “precluded a
section 61 or section 482 adjustment to the income of

10 In addition to selling Saudi crude, consistent with its historical
business practices, Textrad also refined Saudi crude and exchanged
Saudi crude for non-Saudi crude in order to facilitate Texaco’s
refining operations. Pet. App. 88a-86a, 89a-91a. Textrad realized

Textrad could not have changed its operations in order to capture
additional profits from Saudi crude because “deviations from his-

11 The Commissioner also increased Textrad’s income on its sales
of Saudi crude to Caltex, but that adjustment was only a small
portion of the total adjustment at issue in this case.

8

[Textrad] in this case.” Pet. App. 187a. The Tax Court
noted that First Security and related cases “stand for the
proposition . . . that ‘in order to be taxed for income, a
taxpayer must have complete dominion over it.’” Pet.
App. 111a-112a, citing First Security, 405 U.S. at 403.
If, as in First Security, “the receipt of income is prohibited
by law, the Commissioner is prohibited from allocating
such income pursuant to section 482.” Pet. App. 106a.

Addressing the Commissioner’s adjustment under sec-
tion 61, the Tax Court recognized that United States v.
Basye, 410 U.S. 441, 449 (1973), and other assignment
of income cases hold that “ ‘income must be taxed to him
who earns it.”” Pet. App. 115a. It noted, however, that
in applying the assignment of income doctrine, this Court
“has consistently distinguished between taxpayers who
voluntarily relinquish the right to receive income and
taxpayers who are denied the right to receive income by
operation of law.” Jd. Relying on First Security, the Tax
Court concluded that “a taxpayer who is legally pro-
hibited from receiving income and who does not in fact
receive such income, cannot be said to have ‘earned’ the
income under a section 61 analysis.” Pet. App. 116a.
Therefore, under the assignment of income doctrine, “the
Commissioner cannot allocate income to a taxpayer who
is legally prohibited from receiving it.” Pet. App. 118a.

The Tax Court then determined whether the principle
of First Security applied under the facts in this case.”

12 The Tax Court initially addressed the Commissioner’s concern
that “[i]ndiscriminate deference to foreign law [in applying section
482] would open the door to wide-scale collusion between taxpayers
and foreign sovereigns engaged in commercial activity.” Pet. App.
114a. Because of the potential for collusion, the Tax Court applied
“a ‘heightened scrutiny’ of the evidence” of the Saudi Government
restriction and found “no evidence” of collusion. Pet. App. 113a-
114a & n.36. The Tax Court also rejected the Commissioner’s argu-
ment that the principle ~ /. st Security did not apply where
receipt of the income in je on was precluded by foreign as
opposed to domestic law. Fe: App. 1lla-114a, citing Procter &

ee

9

The Tax Court examined “whether the [Saudi Govern-
ment] restriction constituted a valid and binding pro-
hibition imposed by the [Saudi Government] against the
sale of Saudi crude oil for an amount in excess of Saudi
OSP.” Id. The Tax Court found that the Saudi Govern-
ment restriction was unilaterally imposed on Texaco and
other resellers of Saudi crude and “was authorized by the
King.” ** Pet. App. 119a-122a. The Tax Court also
found that Texaco was required to comply with the restric-
tion by both the Saudi Government and consuming country
governments. Pet. App. 153a-155a.

In response to the Commissioner’s argument that the
restriction was merely a contract term, the Tax Court
stated:

We agree with [the Commissioner] that, if the restric-
tion was a mere contract term, negotiated by [Texaco
and Exxon] in the context of a commercial relation-
ship, then the facts in First Security and Procter &
Gamble would be distinguishable from the facts in
this case. In such a circumstance, the restriction
would not have deprived [Texaco and Exxon] of the
power to control the location of income, and the rule
of First Security and subsequent cases would not
apply. If, on the other hand, the restriction required
[Texaco and Exxon] to price Saudi crude as they
did, then [the Commissioner’s] allocation cannot
stand.

Gamble Co. v. Commissioner, 961 F.2d 1255 (6th Cir. 1992). The
Commissioner did not make that argument on appeal to the Fifth
Circuit and does not make that argument in her petition. See
infra note 23.

18 The Tax Court found that the Saudi Government restriction
“applied to all sales of Saudi crude”; was “in effect during the
period at issue”; applied to “all four Aramco shareholders”; and
“was imposed upon other than the Aramco shareholders.” Pet.
App. 128a, 124a, 188a, 158a. The Tax Court found “no evidence
that certain purchasers were not required to resell Saudi crude
at Saudi OSP.” Pet. App. 124a.

10

Pet. App. 134a. The Tax Court found that “the restric-
tion was not a negotiated contract term that [Texaco and
Exxon] had the option of taking or leaving; the Saudis
issued the restriction without discussion or negotiation,”
in “language of a mandatory, nonnegotiable, admonish-
ing nature.” Pet. App. 145a, 146a. The Tax Court
found “no evidence that [Texaco and Exxon] urged the
[Saudi Government] to issue the resale price restriction
at issue here,” or that the restriction was even the result
of Texaco’s and Exxon’s “influence.” Pet. App. 149a.
The Saudi Government issued the restriction with “an
underlying warning that failure to comply with Saudi
requirements would have serious repercussions.” Pet.
App. 146a.

The Tax Court also rejected the Commissioner’s argu-
ment “that the restriction was merely a commercial term
consented to in the context of a commercial relationship.”
Pet. App. 137a. The Tax Court examined the “historical
relationship” and “the specific facts leading up to the
[Saudi Government] restriction.” Pet. App. 143a. While
the Tax Court recognized that “the relationship between
{Texaco and Exxon] and the [Saudi Government] was in
part commercial in nature in the sense that it involved the
purchase and sale of crude oil,” it found that the Saudi
Government restriction itself “was not commercial in
nature.” Pet. App. 143a-144a. Based on all the facts,
the Tax Court concluded that the Saudi Government
restriction was not “a ‘commercial’ contract pricing term
in which [Texaco and Exxon] made a negotiated, calcu-
lated concession.” Pet. App. 149a. In addition, the Tax
Court reasoned that “the Saudi power over the pricing of
its crude was sovereign in nature from the inception of
its relationship with [Texaco and Exxon]”; that “the sub-
sequent takeover of Aramco by the [Saudi Government]
was another exercise of the [Saudi Government’s] sover-
eign power”; that the setting of crude prices by member
countries of the Organization of Petroleum Exporting

11

Countries (“OPEC”) “was inherently sovereign in na-
ture”; and that the penalties for violating the restriction
(cut off of crude supplies, nationalization of assets, and
exclusion from Saudi Arabia) were not the type of pen-
alties “that would have existed in a normal contractual
relationship between private parties.” Pet. App. 142a,
143a, 144a n.46.

The Commissioner also argued that the Saudi Govern-
ment restriction was consensual because Texaco and
Exxon “were not compelled to purchase Saudi crude
on the terms and conditions sought by the Saudis.” Pet.
App. 147a. The Tax Court found that Texaco’s and
Exxon’s relationship with the Saudi Government “went to
the very heart of [Texaco’s and Exxon’s] livelihood as
international marketers of crude oil to third parties and
to their refining affiliates.” Id. Texaco and Exxon did
not have the “choice” whether to buy Saudi crude, be-
cause “to choose to cut off a significant percentage of
their crude supply was not a realistic option.” Pet. App.
148a.

Based on all the facts, the Tax Court concluded that
“the Saudi restriction was the virtual equivalent of law
and constituted a valid and binding prohibition against
the sale of Saudi crude for an amount in excess of Saudi
OSP.” Pet. App. 158a. The Tax Court then found that
“[Texaco and Exxon] complied with the restriction in
all material respects.” Pet. App. 187a. Therefore, the
Tax Court held that the Saudi Government restriction
“precluded a section 61 or section 482 adjustment” to
Textrad’s income. Id.

B. Fifth Circuit. The Commissioner appealed to
the Fifth Circuit, which unanimously affirmed the Tax
Court. The Fifth Circuit reviewed the Tax Court’s

14 The Tax Court has not entered a final decision in Exxon’s
case, due to other issues not yet resolved. Any appeal of Exxon’s
case likely would be to the Second Circuit.

12

factual findings and determined that they were “not
clearly erroneous.” Pet. App. 6a. The Fifth Circuit
concluded that “[t]he Tax Court’s findings of fact fully
support[ed]” its conclusions that the Saudi Government
restriction “had the effect of a legal restriction in Saudi
Arabia” and “should be given the effect of law for pur-
poses of §§ 482 and 61.” Id.

The Fifth Circuit “agree[d] with the Tax Court’s legal
conclusion that the teaching of Commissioner v. First
Security Bank, 405 U.S. 394 (1972), bars the Com-
missioner from allocating income to Textrad on its sales
of Saudi crude under § 482. Because the sales price of the
crude is governed by [the Saudi Government restriction],
Texaco did not have the power to control the sales price
of the oil.” Pet. App. 6a (parallel citations omitted). The
Fifth Circuit pointed out, as the Supreme Court did in First
Security, that “the Commissioner’s own regulations for
implementing § 482 contemplate that the controlling in-
terest ‘must have “complete power” to shift income among
its subsidiaries.’” Pet. App. 8a. The Fifth Circuit held:

It is precisely this ability to control the flow of its
income that Texaco lacked. The Tax Court found,
and we agree, that [the Saudi Government restric-
tion] had the force and effect of law, that Textrad
was obligated to comply with its requirements, and
that it did so comply. Because Textrad lacked the
power to sell Saudi crude above the OSP, reallocation
under § 482 is inappropriate.

Pet. App. 10a.

The Fifth Circuit rejected the Commissioner’s assign-
ment of income argument and reliance on the Supreme
Court’s decision in United States v. Basye, 410 US.
441 (1973). The Fifth Circuit concluded that “nothing
in Basye is contrary to the principles discussed above.”
Pet. App. lla. The Fifth Circuit examined the Court’s
reasoning in Basye and concluded that it “turned on the

13

consensual nature of the agreement and is entirely con-
sistent with the principles of control expressed in the
regulations adopted under § 482 and in First Security.”
Id. By contrast, “where, as here, the taxpayer lacks the
power to control the allocation of the profits, reallocation
under § 482 is inappropriate.” Pet. App. 12a.

The Fifth Circuit also stated that the Commissioner’s
proposed allocation would not “be consistent with § 482’s
goal of achieving tax parity between controlled and un-
controlled taxpayers.” Jd. The standard of tax parity
as reflected in the Commissioner’s regulations is “an un-
controlled taxpayer dealing at arm’s length with another
uncontrolled taxpayer.” J/d., citing 26 C.F.R. § 1.482-1A
(b)(1). The Fifth Circuit reviewed the record evidence
and concluded that it “fully supports the Tax Court’s
findings that Textrad sold significant amounts of Saudi
crude to unrelated customers at the same OSP it sold
to its affiliates, that the volume of Textrad’s sales of
Saudi crude to unrelated customers during this period
remained generally consistent with historic levels, and
that any changes in Textrad’s sales to its affiliates and
its unrelated customers during this period had no
nexus with the restrictions imposed by [the Saudi
Government].” Pet. App. 12a-13a. Therefore, the Fifth
Circuit concluded, “the Tax Court did not err in con-
cluding that the Commissioner failed to demonstrate any
disparity between Texaco’s treatment of its affiliates and
its unrelated customers as a result of the Saudi price
restrictions. Thus, under the regulation’s tax parity stand-
ard, the Commissioner’s allocation of Texaco’s income
under § 482 is improper.” Pet. App. 13a.

14

REASONS FOR DENYING THE WRIT

The issue in this case—whether the Saudi Government
restriction was a legal restriction or a consensual agree-
ment—is narrow, largely fact-based, of no general impor-
tance, and correctly decided by the courts below. The
courts below found that, during the period 1979-1981,
the Saudi Government required Texaco to charge below-
market prices on all sales of Saudi crude, whether to
related or unrelated customers. In compliance with that
mandate, Textrad actually sold 367 million barrels of
Saudi crude to unrelated customers at the Saudi-mandated
price. Applying the principles established in Commis-
sioner v. First Security Bank, 405 U.S. 394, 404 (1972),
the courts below found that the Saudi Government restric-
tion deprived Texaco of the “ ‘complete power’ to shift
income among its subsidiaries.” Pet. App. 8a, 10a, 106a,
158a. The courts below also found that recognition of
the restriction achieved “tax parity” since there was no
“disparity between Texaco’s treatment of its affiliates and
its unrelated customers as a result of the Saudi price
restrictions.” Pet. App. 13a; accord 186a-187a.

The Commissioner primarily urges review on the ground
that the Saudi Government restriction was a “consensual
commercial arrangement,” thereby allegedly making the
principles of United States v. Basye, 410 U.S. 441 (1973),
controlling. The courts below thoroughly considered the
Commissioner’s argument and found that there was “no
evidence” that the price restriction was a product of
“collusion” or “negotiations” between Texaco and the
Saudi Government, or that Texaco solicited or even
“influence[d]” issuance of the restriction. Pet. App. 114a,
148a, 149a; accord Pet. App. 5a. Rather, they deter-
mined that the restriction was “a valid and binding prohi-
bition” authorized by the King and unilaterally imposed on
Texaco and other resellers of Saudi crude oil to ensure de-
livery of Saudi crude to refiners at the Saudi OSP, as part

eS Oe —

15

of the Saudi Government’s price moderation policy adopted
at the urging of the U.S. Government and other consuming
country governments. Pet. App. 3a, 6a, 122a, 158a.
Under these facts, there is no support for the Commis-
sioner’s argument that the Saudi Government restriction
was a consensual agreement because Saudi Arabia was
also the supplier of Saudi crude oil. This Court, in other
contexts, has frequently made clear that governments
engaged in commerce retain their sovereign power to
regulate in the public interest. See, e.g., United States v.
Winstar Corp., 116 S. Ct. 2432, 2458, 2465-67 (1996);
Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 145-47
(1982). The Tax Court expressly found that the Saudi
Government restriction itself “was not commercial in
nature.” Pet. App. 144a. The Commissioner offers no
good reason for this Court to second-guess this determina-
tion under the facts in this case.

The Commissioner also fails to demonstrate that this
case is of any broad or continuing significance. The proper
characterization of the Saudi Government restriction is of
importance to only two taxpayers and, then, only for the
years 1979-1981. The Commissioner’s assertion that the
result in this case will encourage collusion between tax-
payers and foreign governments, at the expense of the
U.S. Treasury, is simply not justified. The Tax Court
properly addressed this concern and applied “heightened
scrutiny” of the Saudi Government restriction due to its
foreign origin and Texaco’s commercial relationship with
the Saudi Government. There is no reason for this Court
to disturb the Tax Court’s finding that there was no evi-
dence of collusion between Texaco and the Saudi Govern-
ment in this case. Pet. App. 113a-114a. Thus, the peti-
tion should be denied.

1. The decision below rests upon the established legal
principle that the Commissioner is not free “to allocate
income to a party prohibited by law from receiving it.”
Pet. App. 7a, citing First Security, 405 U.S. at 404. As

16

this Court observed more than two decades ago, “[iJn
cases dealing with the concept of income, it has been
assumed that the person to whom the income was attrib-
uted could have received it.” First Security, 405 U.S. at
403. In applying section 482, the central question is
whether the controlling taxpayer has “complete dominion”
over the income that the Commissioner seeks to allocate—
that is, it must have “ ‘complete power’ to shift income
among its subsidiaries.” Jd. at 403, 404. “It is only
where this power exists, and has been exercised in such a
way that the ‘true taxable income’ of a subsidiary has
been understated, that the Commissioner is authorized
to reallocate under § 482.” Jd. at 404-05. Applying
those standards, the Fifth Circuit agreed with the Tax
Court that, given the legal, mandatory nature of the
restriction imposed by the Saudi Government, “it [was]
precisely this ability to control the flow of its income
that Texaco lacked.” Pet. App. 10a; see First Security,
405 U.S. at 405 (power to control income “hardly in-
cludes the power to force a subsidiary to violate the
law”).

The Fifth Circuit also stated that, in this case, reallo-
cation would not “be consistent with § 482’s goal of
achieving tax parity between controlled and uncontrolled

15 According to the Commissioner, “[t]he court of appeals erred
in implying that whether the resale price restriction in Letter
103/Z was a Saudi ‘law’ was a question of fact to be reviewed
under the clearly erroneous standard.” Pet. 20 n.12. But this
is an obvious misreading of the Fifth Circuit’s opinion. That
court plainly stated: “Based on the Tax Court’s factual findings,
which are not clearly erroneous, we agree that Letter 103/z had
the effect of a legal restriction in Saudi Arabia.” Pet. App. 6a
(emphasis added). That analysis is entirely correct. The Fifth
Circuit reviewed the legal conclusions of the Tax Court for error
and the factual findings on which they were based for clear error.
See United States v. Lulac, 793 F.2d 636, 642 (5th Cir. 1986) ;
Estate of Bailey v. Commissioner, 741 F.2d 801, 803-04 (5th Cir.
1984); Remington Rand Corp. v. Business Sys., Inc., 830 F.2d
1260, 1268-65 (8d Cir. 1987).

|

17

taxpayers.” Pet. App. 12a, citing First Security, 405 U.S.
at 407. The governing regulation establishes that “[t]he
purpose of section 482 is to place a controlled taxpayer
On a tax parity with an uncontrolled taxpayer.” 26 C.F.R.
§ 1.482-1A(b)(1); see Pet. App. 12a. In compliance
with the Saudi Government restriction, Textrad sold 367
million barrels of Saudi crude “to unrelated customers
at the same OSP it sold to its affiliates.” Pet. App. 12a.
These transactions establish a benchmark of “arm’s length”
sales against which the sales of Saudi crude to affiliated
buyers can be measured. Thus, there is no basis to con-
clude that Texaco was improperly shifting income by
selling Saudi crude to its own subsidiaries at the OSP.2®

2.A. Relying on Basye, the Commissioner’s principal
argument is that the holding of First Security does not
apply to a “consensual agreement.” ” See Pet. 12, quoting
Basye, 410 U.S. at 453 n.13. Both courts below agreed
with this proposition but rejected-the Commissioner’s con-
tention that the Saudi Government restriction was a con-
sensual agreement. Pet. App. 10a-12a, 134a, 146a-149a.

The Commissioner continues to argue that the Saudi
Government restriction was consensual. Pet. 19 (“the
Saudi resale price restriction represents a consensual, com-

16 The Tax Court found that the volume of Textrad’s sales of
Saudi crude to unrelated customers during the years at issue re-
mained consistent with historic levels and that any changes in
Textrad’s pattern of sales were not related to the Saudi Government
restriction. Pet. App. 64a.

17In Basye the deflection of income did not result from a legal
restriction imposed by a government. Rather, Basye involved an
agreement between a partnership of doctors and a health mainte-
nance organization to provide medical services in return for a base
compensation plus the payment of retirement benefits to a trust.
This Court expressly distinguished First Security on the basis
that it “involved a deflection of income imposed by law, not an
assignment arrived at by the consensual agreement of two parties
acting at arm’s length as we have in the present case.” 410 U.S.
at 453 n.138.

18

mercial arrangement”); see also Pet. 17 (“consensual ar-
rangement”), 18 (“consensual commercial arrangement”).
But the contrary conclusion of the courts below is fully
supported, and compelled, by the record. Furthermore,
the characterization of one particular restriction, of nar-
row application at the time and long since defunct, does
not merit review by this Court. While the Commissioner
argues that her view “finds support not only in the facts
of this case but also in a long and consistent line of
decisions of this Court concerning governmental immu-
nity,” a review of the relevant facts and law leads to the
opposite conclusion. Pet. 19-20 (citation omitted).

The Tax Court concluded that “there is no evidence
that would support [the Commissioner’s] claim that the
price restriction was a product of voluntary negotiations
between [Texaco and Exxon] and the [Saudi Govern-
ment].” Pet. App. 148a. To the contrary, it found “that
the restriction was not a negotiated contract term that
[Texaco and Exxon] had the option of taking or leaving;
the Saudis issued the restriction without discussion or
negotiation.” Pet. App. 145a; see also id. at 146a (noting
that the language of Letter 103/Z was “of a mandatory,
non-negotiable, admonishing nature”). The Tax Court
also reviewed in detail the historical background of the
dealings between Texaco and Saudi Arabia. In particular,
it pointed out that Saudi Arabia, in a prior “exercise of
[its] sovereign power,” had taken over Aramco against
the will of its shareholders (including Texaco). Pet. App.
142a. Observing that Saudi Arabia “possessed the ulti-
mate weapon of nationalization,” the court found that
“[t]here was an aspect of control by the Saudis here that
went far beyond a private party’s contractual power to
negotiate and enforce a contract term.” Pet. App. 142a,
143a. That degree of control, likewise, supported the
conclusion that the Saudi Government restriction “was not
a ‘commercial’ contract pricing term in which [Texaco
and Exxon] made a negotiated, calculated concession.”
Pet. App. 149a.

19

Since there is no evidence that Texaco solicited, nego-
tiated, or influenced the restriction, the Commissioner
argues that Texaco consented to the restriction by “con-
senting to purchases of oil subject to the Saudi restric-
tion.” Pet. 18. The issue under section 482 is not
whether Texaco could have avoided the restriction by not
purchasing Saudi oil. The issue is whether Texaco could
have purchased the oil and resold it at a price higher
than the restricted price, thus earning on those sales the
profit that the Commissioner seeks to allocate. See First
Security, 405 U.S. at 404-05. The courts below found
that, as a result of the Saudi Government restriction,
Texaco did not have the choice to sell Saudi crude for
more than the restricted price. Pet. App. 6a, 12a, 158a.
Further, under the Commissioner’s argument, every deflec-
tion of income that results from a legal restriction would
be consensual. For example, the banks in First Security
chose to offer credit life insurance to their customers.
Likewise, the husband and wife in Poe vy. Seaborn, 282
U.S. 101, 117 (1930), chose to live in Washington state
and thus were subject to Washington law under which
the husband’s wages were the income of the mar’‘al com-
munity. But the choices that subjected the taxpayers to
legal restrictions in these cases did not make the resulting
deflection of income “consensual.” Likewise, Texaco’s
purchase of Saudi crude did not make any deflection of
income resulting from compliance with the Saudi Govern-
ment restriction consensual.

2.B. The Commissioner tries to salvage her position
that the Saudi Government restriction was consensual by
claiming that “when a government undertakes a commer-
cial activity, it acts in a commercial, not sovereign, Capac-
ity.” Pet. 20. If the Commissioner is arguing that some
actions of a sovereign engaged in commerce are treated
as private acis, the Commissioner is correct. The courts
below agreed that not all governmental actions are sover-
eign in nature, but found that this particular edict was a
sovereign act. To the extent that the Commissioner ar-

20

gues that the restriction must be deemed consensual sim-
ply because Saudi Arabia was the producer and supplier of
Saudi crude oil, the argument runs head-on into the well-
recognized principle that sovereigns engaged in commer-
cial activities nonetheless retain the sovereign power to
regulate in the public interest. See, e.g., United States v.
Winstar Corp., 116 S. Ct. 2432, 2458, 2465-67 (1996);
Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 145-47
(1982).

This Court has frequently made clear that “[c]on-
tractual arrangements,” including those to which a sover-
eign itself is a party, “remain subject to subsequent legis-
lation by the presiding sovereign.” Jicarilla, 455 U.S. at
147-48 & cases cited therein. Thus, a sovereign engaged
in commerce may operate both as a contractor and as a
sovereign.” See generally United States v. Winstar Corp.,
116 S. Ct. 2432 (1996). Given that dual capacity, it
follows that sovereign governments and U.S. taxpayers
might enter into purely contractual arrangements that,
upon a proper showing, the Commissioner would be en-
titled to disregard for purposes of section 482. But a
sovereign may also exercise its sovereign power wholly
without regard to the “consent” of its contractual partners.
Thus, “[w]hatever place consent may have in contractual
matters and in the creation of democratic governments, it
has little if any role in measuring the validity of an exer-
cise of legitimate sovereign authority.” Jicarilla, 455
USS. at 147.

18In her foreign tax credit regulations, the Commissioner has
recognized that a foreign government may simultaneously act both
as a sovereign and as a commercial party. See 26 C.F.R. § 1.901-
2(a) (2) (i) (1983) (amended 1991). These regulations provide
that, depending on the facts and circumstances, a foreign govern-
ment that has a commercial relationship with the taxpayer may
also, in its sovereign capacity, impose a tax on the taxpayer.

19 Although the Commissioner relies on the Foreign Sovereign
Immunities Act of 1976, 28 U.S.C. §§ 1602-1611, and the decision
in Republic of Argentina v. Weltover, Inc., 504 U.S. 607 (1992),
neither sheds much light on whether the Saudi Government restric-

21

The record evidence supports the decision below that
the Saudi Government was exercising its sovereign powers
in issuing the restriction. In addition to pointing out the
unilateral nature of the edict and its approval by the
King, the Tax Court found that the Saudi Government
had imposed the restriction as part of its price moderation
policy adopted at the urging of the U.S. Government and
the governments of other consuming countries.” That
policy began with the decision by Saudi Arabia to sell its
oil at a lower price than the price set by other oil-pro-
ducing countries, and the restriction on the resale price
of Saudi crude was intended to ensure that the crude

tion was a legal restriction that Texaco was required to obey.
Nothing in the Act is inconsistent with the basic principle that a
sovereign may engage in an activity both as a commercial entity
and as a sovereign, and this Court has recognized the intermingled
existence of both roles. See Saudi Arabia v. Nelson, 507 U.S. 349,
358 n.4 (1993) (declining to “address the case where a claim
consists of both commercial and sovereign elements”). And, in
Weltover, the Court held only that action by Argentina to change
the terms of its own transactions—that is, extending the period
for repayment of its debt—was sufficiently commercial in nature to
deny it immunity from suits to collect on that debt. Here, by
contrast, the restriction imposed by Saudi Arabia applies not to
its own transactions, but to subsequent transactions between resell-
ers of crude oil and their customers. See South-Central Timber
Dev., Inc. v. Wunnicke, 467 U.S. 82, 99 (1984) (plurality opinion)
(“downstream restrictions have a greater regulatory effect than do
limitations on the immediate transaction”’).

2° The Tax Court found that the price moderation policy was
designed to obtain the defense and foreign policy x ipport of the
United States, to stabilize the world economy, and to protect the
long-term interests of Saudi Arabia in its abundant oil reserves.
Pet. App. 68a, 114a, 124a-127a, 153a n.48. The Tax Court also
found that the consuming country governments, including the
United States, were very. much aware of the terms of the Saudi
Government restriction; that the Saudi Government made public
statements about the scope and nature of the restriction, which
were widely publicized during the period at issue; and that the
nature of the Saudi Government restriction was common knowl-
edge throughout the world. Pet. App. 45a-48a, 52a-53a, 68a-75a,
121a-122a.

22

reached the consuming countries at the lower Saudi price.
The Fifth Circuit concluded, based on the Tax Court’s
findings, that the Saudi Government imposed the restric-
tion to ensure that its price moderation policy “had its
intended effect.” Pet. App. 3a. Under these facts, the
Saudi Government was acting as a sovereign when it is-
sued the restriction.”

In an attempt to support her argument that the Saudi
Government restriction was nothing more than a com-
mercial arrangement, the Commissioner asserts that the
Saudi Government “planned” and “contemplated” that its
price moderation policy, including the restriction, would
put additional profits into the “pocket” of the Aramco
shareholders. Pet. 14, 24. The facts contradict those
assertions. While Minister Yamani stated publicly that
the Saudi Government would “follow the barrel of Saudi
crude until it lands at a certain refinery and we know
that it is sold at our price,” and that “I cannot do any-
thing after that,” he added that “Jt is the consumers’ re-
sponsibility.” Pet. App. 46a, 48a (emphasis added).
Many consuming countries had product price controls or
other measures in effect during 1979-1981 that limited the
product profits realized by the Aramco shareholders. Pet.
App. 68a-75a & nn.14-18. Further, the Tax Court found
that, in compliance with the restriction, Texaco and Exxon
sold Saudi crude to both affiliated and unaffiliated cus-
tomers at the OSP. Pet. App. 2la, 24a, 185a, 186a.

21 See Building & Constr. Trades Council v. Associated Builders
& Contractors, 507 U.S. 218, 229 (1993) (distinguishing situations
in which a state “acts as a regulator” from situations in which it
“acts as a market participant with no interest in setting policy’) ;
see also South-Central Timber Dev., Inc. v. Wunnicke, 467 U.S.
82, 96 (1984) (plurality opinion) (factors showing that state
acted as regulator included “foreign commerce, a natural resource,
and restrictions on resale’).

22 The Commissioner’s quotations of Minister Yamani conspicu-
ously omit his statements that controlling profits from refined
products is the consuming countries’ responsibility. Pet. 6 & n.3.

23

Thus, the Saudi Government restriction had its intended
effect: it prevented the Aramco shareholders and others
from reselling Saudi crude for more than the OSP and
it assured delivery of Saudi crude to refineries at the
Saudi-mandated price.

3. The Commissioner seeks to distinguish First Secu-
rity from this case on the grounds that the Saudi Govern-
ment did not prohibit Texaco from profiting from sales of
products refined from Saudi crude and did not prohibit
Texaco from engaging in the business of buying and sell-
ing crude.* Pet. 16-17. The Commissioner contends that
in First Security “the taxpayer could not lawfully engage
in the commerce that produced the income.” Pet. 16.
According to the Commissioner, the present case is differ-
ent because Texaco “was lawfully engaged in the business
of buying and selling crude oil” and could and did profit
from sales of refined products. Pet. 16-17. But the rele-
vant issue under section 482 is not whether the taxpayer
can lawfully engage in a particular business; the issue is
whether it can lawfully earn the income that the Com-
missioner seeks to allocate to it. Here, the Commissioner
Seeks to increase Textrad’s income on sales of Saudi crude
to Texaco’s affiliates. Textrad could not earn that income
because it could not lawfully sell Saudi crude oil at a
higher price than that established by the Saudi Govern-
ment. The Tax Court further found that all Texaco
affiliates were prohibited from selling Saudi crude for
more than the price mandated by the Saudi Government.

*3The Commissioner does not contend that the principle of
First Security does not apply to a foreign government restriction.
The Commissioner merely notes that she “disagrees” with the Sixth
Circuit’s conclusion in Procter & Gamble “that First Security Bank
applies where the law prohibiting the receipt-of income is that of
a foreign country.” Pet. 17 n.10. The Commissioner did not make
that argument before the Fifth Circuit, and she has accepted, in
her own regulation, the premise that a foreign legal restriction may
bar an allocation under section 482 in certain circumstances. See
Treas. Reg. §§ 1.482-1(h) (2), ¢j) (1) (1994), effective for taxable
years beginning after October 6, 1994.

24

Pet. App. 123a-124a, 158a. In First Security, this Court
barred allocation of a share of insurance premiums to
the banks even though members of the affiliated group
(other than the banks) were allowed to engage in the
insurance business and to receive insurance premiums.
405 USS. at 402.

The artificial nature of the Commissioner’s attempts to
distinguish First Security is readily apparent from the
Court’s reasoning in First Security. There, the Court
relied on the Tax Court’s prior decision in L. E. Shunk
Latex Products, Inc. v. Commissioner, 18 T.C. 940
(1952), which involved a “closely analogous situation.”
405 U.S. at 406. Like the present case, Shunk Latex in-
volved a corporation that could lawfully engage in the
commerce that produced the income but could not law-
fully earn the income at issue because of a governmentally
imposed price ceiling.* 18 T.C. at 959. Further, in
Shunk Latex the profit associated with the higher price
was received and retained by an affiliated person. Id. Yet
this Court quoted with approval the conclusion of the
Tax Court that the Commissioner had “no authority to
attribute to petitioners income which [by virtue of the
price ceiling] they could not have received.” 405 U.S. at
406, quoting 18 T.C. at 961; accord Lehman v. Commis-
sioner, 25 T.C. 629, 633-34 (1955). In this case, the
Commissioner seeks to increase Textrad’s income on sales
of Saudi crude even though all Texaco affiliates were pro-
hibited from selling Saudi crude for more than the re-

24 Although the Commissioner claims that the subsidiary to
which she reallocated the income (Textrad) earned it as a matter
of “economic reality,” that view is mistaken. Pet. 19. The Tax
Court found that Textrad was prohibited from engaging in the
activity—selling Saudi crude for more than the mandated price—
that would have produced the income that the Commissioner seeks
to allocate in this case. Pet. App. 158a. Furthermore, the Tax
Court found that Textrad could not have changed its operations in
order to capture additional profits from Saudi crude because “devia-
tions from historical behavior would have been objected to by the
Saudis.” Pet. App. 180a.

25

stricted price. Thus, as in First Security and Shunk Latex,
the Commissioner in this case is seeking to allocate to the
taxpayer income that it was prohibited from receiving,

4. The Commissioner appears to acknowledge that
the characterization of the Saudi Government restriction
as a legal restriction or a consensual agreement is of cur-
rent significance to only two taxpayers, Texaco and
Exxon. This narrow application is hardly surprising. The
issue arises out of an oil crisis occurring almost twenty
years ago and an extraordinary price moderation policy
adopted by the Saudi Government at the urging of the
U.S. Government.

To broaden the potential impact of the decision below,
therefore, the Commissioner raises the specter that tax-
payers may “encourage or endure the adoption of profit-
able foreign ‘legal restrictions’” at the expense of the
U.S. Treasury. Pet. 25. But this concern is not justified.
The Tax Court recognized the possibility that a foreign
legal restriction might be the result of collusion with a
private taxpayer, and it subjected the restriction to “height-
ened scrutiny” to assure that collusion was not present.
Pet. App. 113a, citing Procter & Gamble Co. v. Com-
missioner, 961 F.2d 1255, 1259 (6th Cir. 1992). It
found, however, that “despite [the Commissioner’s] ex-
pressed fears, there is no evidence of such collusion in
this case.” Pet. App. 114a; see also id. (noting “sufficient
evidence in the record of Saudi self-interest in issuing
the restriction—particularly in terms of its close relation-
ship with the U.S. Government, which encouraged price
moderation at the time”). Moreover, in order to bring
itself within the facts of this case, a taxpayer would
be required to orchestrate an extraordinary series of global
events and U.S. and foreign government actions and
policies.

26

Finally, the Commissioner points to the amount of taxes
in dispute.” But the amount in dispute, standing alone,
provides no proper ground for granting review. Section
482 does not authorize the Commissioner to reallocate
income simply because that action will result in more tax
revenue to the U.S. Treasury. Rather, it provides for
reallocation when a taxpayer, by virtue of its “complete
power” over the income, has shifted income between con-
trolled parties so that the “true taxable income” of the
taxpayer has not been clearly reflected. See First Security,
405 U.S. at 404-05. The courts below merely decided
that this particular taxpayer, as the result of a particular
legal restriction imposed by the Saudi Government, did
not have or exercise that power. That conclusion does not
warrant further review.

2% The Commissioner computes the tax due as more than $1 bil-
lion, whereas the actual asserted tax deficiency is approximately
$800 million. Pet. 12. In addition, the Commissioner has assumed
that the amount asserted as the deficiency for Texaco is correct.
But the Tax Court has not ruled on the amount of the adjustment,
only on the Commissioner’s power to make an adjustment at all.

27

CONCLUSION
The petition for a writ of certiorari should be denied.

Respectfully submitted,

BUFORD P. BERRY
Counsel of Record

EMILY A. PARKER
DENNIS J. GRINDINGER
Mary A. MCNULTY

R. DAVID WHEAT

THOMPSON & KNIGHT

A Professional Corporation
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201

(214) 969-1700

JOSEPH M. INCORVAIA

TEXACO INC.

Attorneys for Respondents
Texaco Inc. and Subsidiaries

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_0090%3A3. Public record. Not legal advice.