The Corpus Christi Court of Appeals has affirmed a trial court denial of an oil company’s petition for a refund for overpayment of state franchise taxes in a case arising from the Deepwater Horizon disaster.
Anadarko Petroleum v. Glenn Hegar, Comptroller of Public Accunts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas (No. 13-21-00335; filed October 19, 2023) involves the franchise tax treatment of Anadarko’s payments to BP of joint interest billing invoices for its share of expenses related to the disaster. Anadarko and BP eventually executed a settlement agreement in which Anadarko paid $4 billion in exchange for a release of all claims against Anadarko and indemnity against any future compensatory damages claims against the company. Anadarko took a deduction for the settlement payment on its 2011 federal tax return and but did not claim a cost of goods deduction on its 2012 franchise tax return. In 2015 Anadarko filed an amended 2012 return claiming the deduction and seeking an $8 million refund. The comptroller reclassified the settlement payment as an indirect cost, which limited the COGS deduction to 4%. Anadarko thus received a partial refund of about $350,000 plus interest.
Anadarko sought administrative relief from the comptroller in 2017. Prior to the administrative hearing, the comptroller changed its initial decision and declared 100% of the settlement payment non-deductible and demanded repayment of the partial refund. It also issued an amended decision assessing an additional $400,000 in franchise tax plus interest. Anadarko appealed to a Travis County district court, which issued a take-nothing judgment in favor of the state. Anadarko appealed.
In an opinion by Justice Silva, joined by Chief Justice Contreras and Justice Longoria, the court of appeals affirmed. Beginning with the proposition that whether an expense is deductible as COGS raises a mixed question of law and fact, the court observed that the trial court’s findings of fact are viewed under a sufficiency standard, while its conclusions of law are reviewed de novo. The trial court determined that the settlement payment “was ‘a cost of committing a tort’ rather than for expenses incurred under the JIBs” and thus not deductible as COGS. The court based its finding on evidence showing that the settlement agreement itself provided that the payment must be used “to pay the claims for Persons whose injuries and damages” arose from the incident, Anadarko’s insurance claim for reimbursement under its personal injury and property damage coverage, Anadarko’s statement to the IRS that it did not pay any post-spill JIBs, and testimony of Anadarko employees in the federal litigation and the administrative hearing. Based on this evidence, the court of appeals concluded that sufficient evidence existed to support the trial court’s ruling that the settlement payment went to tort damages.
Turning to the deductibility of the payment, the court observed that “[t]ort liability payments are not ‘direct costs of acquiring or producing’ goods, as required for COGS deduction under § 171.1012(c) [Tax Code].” They further are “not included in the additional deductible ‘costs in relation to the taxable entity’s goods’ under § 171.1012(d)…” Under the plain language of the statute, consequently, tort damages are not deductible. While Anadarko claimed that some of the settlement payment could have been used for potentially deductible purposes, the records it provided to court listed the amounts in broad categories not specific enough to make that determination. Finally, the court concluded that under the economic realities doctrine, which the comptroller argued supported its position, the fact that at the time of the settlement more than $8 billion in tort claims had already been asserted and that Anadarko received a pecuniary benefit from the settlement (release and indemnity), the facts supported the trial court’s finding that the entire payment was for tort damages.
