The Supreme Court is expected to decide after its return from a recess Tuesday whether to review a decision involving a multibillion-dollar tax question: whether the levies other countries impose on oil producers are foreign "income" taxes or royalties under American tax law.
A producer can use foreign income taxes as a dollar-for-dollar offset against domestic income taxes. Their value to the producer is roughly twice as high as royalties, which are ordinary business expenses deducted from gross income.
In a speech in November, 1975, Charles M. Walker, Assistant Scretary of the Treasury for Tax Policy, said that the Organization of Petroleum Exporting Countries (OPEC) imposes "very high taxes which have many of the characteristics of royalties."
In the Supreme Court, however, the immediate issue is whether a lawsuit against the Treasury Department could be brought by Tax Analysts and Advocates, a Washington-based nonprofit group, and Thomas F. Field, executive director of TAA.
Field owns an oil well in Venago County, Pa. It produces about three barrels a month and yields a before-taxes profit of $204 a year.
Field contends that his profit, however small, would be higher but for "erroneous and illegal" Internal Revenue Service rulings. These, he says, give an advantage to the foreign operations of "competitors" such as Exxon, which import oil after paying royalties. The payments are treated as foreign income taxes under IRS rulings.
If the IRS dis not do this, the unporters would have to charge higher prices, and he would, too, Field says. Thus he has suffered a reduced profit amounting to a "competitive injury."
Consequently, he argues, he has a legal right, or standing, to sue Treasury.
The courts commonly scrutinize IRS rulings that increase someone's tax payments. "The peculiarity of this case," the TAA/Field brief says, "is that it involves so-called 'give away rulings'. Whether rulings that lose rather than raise (Treasury) revenue can be subjected to judicial scrutiny will be determined to a considerable degree by the outcome of this case."
IRS issued the first of the two rulings in dispute in 1955. Merely in the years 1974 through 1976, Treasury has estimated, its loss - offset by higher taxes exacted from other taxpayers, including TAA and Field - was $5.6 billion.
"In recent years the nature of the purported income taxes . . . has changed both in character and amount," the brief says.
Since at least 1973, the OPEC countries have calculated the levies "so as to produce a fixed per-barrell government take without regard to the profits or losses of the producing firms," the brief continues.
Thus, the brief says, the levies "have no relationship to the actual gross or net income of the oil companies" and "no longer constitute creditable income taxes - if they ever did."
Last month, however the IRS reversed its policy, holding that the sums paid to certain countries - particularly, Saudi Arabia and Libya, for the extraction of petroleum - are not income taxes. As a result, the payments can't be used to offset U.S. income taxes.
Field and TAA protest that the reversal leaves standing rulings for other major exporting countries, including Kuwait, Iran and Venezuela; doesn't formerly take effect until July 1,and, in Saudi Arabia and Libya, actually won't effect the "Seven Sisters" (Exxon, Mobile, Texaco, Standard of California, Gulf, British Petroleum and Shell) until 1979.
"Accordingly," Field and TAA say, "the injury to the public revenues - which already totals more than $5 billion since the suit was filed - will continue." They want Treasury to collect retroactive taxes to the extent permitted by the statute of limitations.
In a 2 to 1 ruling in June, U.S. Court of Appeals for the District of Columbia agreed with Field that he "has suffered injury in fact."
But, the majority held neither he nor TAA had standing to sue under a 1970 Supreme Court ruling requiring a complainant to have an interest "arguably within the zone of interests" regulated by the pertinent law or constitutional guarantee.
The majority conceded that the "zone test" is "ambiguous and imprecise," has been subject to "voluminous criticism," and has caused "confusion in the courts."
In July Kenneth Culp Davis, the leading expert on the issue of standing, said that in their last 18 opinions on standing, the Supreme Court majorities haven't mentioned the test. It "has become extinct, as it should," he said.
In the appeals court, Chief Judge David Bazelon, the dissenter, wrote that to permit tax liability to be challenged only by the taxpayer himself, in this case the oil companies, rather than by injured third-parties such as fields, "is in effect to permit the IRS virtually unfettered discretion in adjusting relationships among economic entities."
If allowed to survive, the majority decision will distort standing "to accommodate the purpose of shielding the IRS against a multiplicity of suits challenging the liabilities of third-parties," Bazelon wrote.
For the government, solicitor Wade H. McCree asked the Supreme Court to preserve the decision. He contended that the court, contrary to Davis, has "consistently reaffirmed" the zone test.
McCree termed "wholly speculative" Field's proposition that the disputed IRS rulings, by lowering the price of foreign oil, held down the unregulated price of his Pennsylvania crude.