ConocoPhillips Loses Big Pipeline Tax Refund

(CN) - An Oklahoma federal judge threw out a $2.21 million tax refund that ConocoPhillips received after buying interest in the 800-mile Trans-Alaska Pipeline.

ConocoPhillips acquired BP and ARCO's Alaska business, including subsidiary ATAI, which owned approximately 22 percent of the pipeline, in 2000.

In an amended tax return for that year, ConocoPhillips claimed an increase in its tax basis in ATAI's pipeline interest for costs known as dismantling, removal and restoration, or DD&R.

ConocoPhillips said its claimed deduction was justified under its July 1988 closing agreement, which provided $900 million in tax benefits to the pipeline owners according to a specific amortization schedule.

Though the Internal Revenue Service paid ConocoPhillips a $2.28 million refund in February 2009, it subsequently decided that most of the refund was unjustified.

Soon after ConocoPhillips filed an amended return with similar changes for 2001, the IRS filed suit to recover the erroneous refund.

U.S. District Judge James Payne sided with the government at summary judgment, finding that the pipeline owners' agreement actually barred the claimed deduction.

The language of the agreement for the purchase of ATAI unambiguously shows that ConocoPhillips agreed to be bound by the allocation of the basis of ATAI reflected on the originally filed Form 8023 regarding corporations making qualified stock purchases, according to Aug. 23 opinion.

There is no "strong proof" that ConocoPhillips and the sellers meant to include DR&R costs as part of the purchase price allocation for ATAI, Payne found.

"There is no proof at all to support that contention, and the court sees no justification for setting aside an arm's length agreement between sophisticated corporations," the 25-page opinion states. "Because Phillips agreed to be bound for all tax reporting purposes to the allocations in the original Form 8023, it must accept the consequences of that agreement and cannot unilaterally change that allocation after the fact."

"ConocoPhillips' unilateral change in the agreed allocation potentially whipsaws the IRS between the tax treatment BP (and Phillips) originally claimed under the Master purchase agreement and the tax position ConocoPhillips now claims based on its retroactive rewriting of that agreement," Payne added. "That is precisely the consequence that the 'strong proof' rule is meant to avoid."

The closing agreement also makes no reference to an increase in tax basis as an allowed, advance DR&R tax benefit.

"The word 'basis' itself only appears once in the closing agreement, in a recital stating that the closing agreement is made 'on the basis of concessions made by the Owners and by the Internal Revenue Service,'" Payne wrote. "This is clearly not a reference to an increase in tax basis."

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