Exxon Argues Court Erred in Mineral Lease, Fuel Credit Decisions

EXXON MOBIL CORPORATION,
PLAINTIFF-APPELLANT/CROSS-APPELLEE
v.
UNITED STATES OF AMERICA,
DEFENDANT-APPELLEE/CROSS-APPELLANT

In the United States Court of Appeals
for the Fifth Circuit

ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS (CIV. NO. 16-2921)
(THE HONORABLE DAVID C. GODBEY, J.)

BRIEF OF APPELLANT/CROSS-APPELLEE
EXXON MOBIL CORPORATION

EMILY A. PARKER
MARY A. MCNULTY
LEONORA S. MEYERCORD
J. MEGHAN MCCAIG
THOMPSON & KNIGHT LLP
1722 Routh Street, Suite 1500
Dallas, TX 75201

KEVIN L. KENWORTHY
GEORGE A. HANI
ANDREW L. HOWLETT
MILLER & CHEVALIER, CHARTERED
900 16th Street, N.W.
Washington, DC 20006

KANNON K. SHANMUGAM
BRIAN M. LIPSHUTZ
MATTEO GODI
PAUL, WEISS, RIFKIND,
WHARTON & GARRISON LLP
2001 K Street, N.W.
Washington, DC 20006
(202) 223-7300

ADAM P. SAVITT
PAUL, WEISS, RIFKIND,
WHARTON & GARRISON LLP
1285 Avenue of the Americas
New York, NY 10019

CERTIFICATE OF INTERESTED PERSONS

The undersigned counsel of record certifies that the following listed per-sons and entities, as described in the fourth sentence of Rule 28.2.1, have an interest in the outcome of this case. These representations are made in order that the judges of this Court may evaluate possible disqualification or recusal:

KANNON K. SHANMUGAM

Attorney of Record
for Appellant/Cross-Appellee
Exxon Mobil Corporation

JULY 21, 2021

STATEMENT REGARDING ORAL ARGUMENT

Appellant/cross-appellee Exxon Mobil Corporation respectfully submits that oral argument would be useful to the disposition of this appeal because the appeal presents complex and exceptionally important issues regarding the interpretation and application of the Tax Code.

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TABLE OF CONTENTS

Statement of jurisdiction

Statement of the issues

Statutes involved

Introduction

Statement of the case

Summary of argument

Standard of review

Argument

Conclusion

Certificate of service

Certificate of compliance

Statutory addendum

TABLE OF AUTHORITIES

CASES

Adams v. All Coast, L.L.C., 988 F.3d 203 (5th Cir. 2021)

Adkins v. Silverman, 899 F.3d 395 (5th Cir. 2018)

Affiliated Foods, Inc. v. Commissioner, 128 T.C. 62 (2007)

Anderson v. Commissioner, Nos. 86,968, 86,969, 86,970, 1938 WL 8347 (B.T.A. Aug. 16, 1938)

Anderson v. Helvering, 310 U.S. 404 (1940)

Bailey v. Commissioner, 103 F.2d 448 (5th Cir. 1939)

Burnet v. Harmel, 287 U.S. 103 (1932)

Christie v. United States, 436 F.2d 1216 (5th Cir. 1971)

Commissioner v. Estate of Donnell, 417 F.2d 106 (5th Cir. 1969)

Commissioner v. Southwest Exploration Co., 350 U.S. 308 (1956)

Day v. Heckler, 735 F.2d 779 (4th Cir. 1984)

Eisner v. Macomber, 252 U.S. 189 (1920)

Estate of Weinert v. Commissioner, 294 F.2d 750 (5th Cir. 1961)

Flood v. United States, 33 F.3d 1174 (9th Cir. 1994)

Gray v. Commissioner, 183 F.2d 329 (5th Cir. 1950)

Helvering v. Bruun, 309 U.S. 461 (1940)

Herbel v. Commissioner, 129 F.3d 788 (5th Cir. 1997)

Jefferson Memorial Gardens, Inc. v. Commissioner, 390 F.2d 161 (5th Cir. 1968)

Kirby Petroleum Co. v. Commissioner, 326 U.S. 599 (1946)

Laudenslager v. Commissioner, 305 F.2d 686 (3d Cir. 1962)

Maines v. Commissioner, 144 T.C. 123 (2015)

Palmer v. Bender, 287 U.S. 551 (1933)

Rivera v. Kirby Offshore Marine, L.L.C., 983 F.3d 811 (5th Cir. 2020)

Rutledge v. United States, 428 F.2d 347 (5th Cir. 1970)

Shamrock Oil & Gas Corp. v. Commissioner: 35 T.C. 979 (1961)

346 F.2d 377 (5th Cir.), cert. denied, 382 U.S. 892 (1965)

Sunoco, Inc. v. United States: 129 Fed. Cl. 322 (2016)

908 F.3d 710 (Fed. Cir. 2018), cert. denied, 140 S. Ct. 46 (2019)

Vest v. Commissioner, 481 F.2d 238 (5th Cir.), cert. denied, 414 U.S. 1092 (1973)

United States v. Marshall, 798 F.3d 296 (5th Cir. 2015)

United States v. Witte, 306 F.2d 81 (5th Cir. 1962), cert. denied, 371 U.S. 949 (1963)

Whitehead v. United States, 555 F.2d 1290 (5th Cir. 1977)

Wood v. United States, 377 F.2d 300 (5th Cir.), cert. denied, 389 U.S. 977 (1967)

STATUTES AND REGULATIONS

American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418

26 U.S.C. § 25D(a)

26 U.S.C. § 30B(h)(5)

26 U.S.C. § 31(a)(1)

26 U.S.C. § 34(a)

26 U.S.C. § 34(b)

26 U.S.C. § 40(a)

26 U.S.C. § 40A(a)

26 U.S.C. § 44(d)(7)

26 U.S.C. § 45E(e)(2)

26 U.S.C. § 45H

26 U.S.C. § 45H(a)

26 U.S.C. § 61(a)

26 U.S.C. § 61(a)(2)

26 U.S.C. § 87

26 U.S.C. § 163(g)

26 U.S.C. § 275(a)(4)

26 U.S.C. § 280C

26 U.S.C. § 280C(d)

26 U.S.C. § 483

26 U.S.C. § 611

26 U.S.C. § 861

26 U.S.C. § 904

26 U.S.C. § 1001

26 U.S.C. § 4081

26 U.S.C. § 4081(a)(1)(A)

26 U.S.C. § 4083(a)(1)(A)

26 U.S.C. § 6401(b)(1)

26 U.S.C. § 6426

26 U.S.C. § 6426(a)

26 U.S.C. § 6426(a)(1)

26 U.S.C. § 6426(b)(1)

26 U.S.C. § 6427

26 U.S.C. § 6427(e)(1)

26 U.S.C. § 6427(e)(3)

26 U.S.C. § 6427(j)(1)

26 U.S.C. § 6676

26 U.S.C. § 6676(a)

26 U.S.C. § 9503

26 U.S.C. § 9503(b)(1)

26 U.S.C. § 9503(b)(1)(D)

28 U.S.C. § 1291

28 U.S.C. § 1346(a)(1)

26 C.F.R. § 1.61-3(a

26 C.F.R. § 1.611-1(b)(1)

OTHER AUTHORITIES

Black's Law Dictionary (10th ed. 2014)

H.R. Rep. No. 108-548 (2004)

IRS Notice 2005-62 (Aug. 1, 2005)

James Edward Maule, 506-3rd T.M., Tax Credits: Concepts and Calculation (BNA 2018)

Mertens Law of Federal Income Taxation (2021)

Priv. Ltr. Rul. 9728010, 1997 WL 381980 (July 11, 1997)

Priv. Ltr. Rul. 9728038, 1997 WL 382008 (July 11, 1997)

S. Rep. No. 67-275 (1921)

Antonin Scalia & Bryan A. Garner, Reading Law (2012)

Tech. Adv. Mem. 199918002, 1999 WL 283075 (May 7, 1999)

Tech. Adv. Mem. 199923046, 1999 WL 379195 (Jan. 29, 1999)

U.S. Department of Transportation, Federal Highway Administration, Status of the Federal Highway Trust Fund for the End of Fiscal Year 2004 (Oct. 2005) <tinyurl.com/Trust-Fund-2004>

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STATEMENT OF JURISDICTION

The district court had jurisdiction under 28 U.S.C. § 1346(a)(1). The district court entered final judgment on February 19, 2021. ROA.5776-5777. Exxon Mobil Corporation (ExxonMobil) filed a timely notice of appeal on April 9, 2021. ROA.5814-5815. The government filed a timely notice of cross-appeal on April 19, 2021. ROA.5816-5817. The jurisdiction of this Court rests on 28 U.S.C. § 1291.

STATEMENT OF THE ISSUES

1. Whether ExxonMobil's transactions with the State of Qatar and the Malaysian state oil company should be treated as sales, rather than mineral leases, for purposes of federal income taxation.

2. Whether the “credit against” the fuel excise tax for blending alcohol with gasoline satisfies the blender's excise-tax liability, rather than altering the amount of liability imposed, with the result that the credit does not reduce the amount of the blender's deduction for the cost of goods sold.

STATUTES INVOLVED

The relevant statutory provisions are set forth in an addendum to this brief.

INTRODUCTION

This is one of the most significant tax appeals currently pending in the country, presenting two important legal issues concerning ExxonMobil's returns for tax years 2006 to 2009. In the underlying action, ExxonMobil seeks a refund of approximately $1.3 billion based on two unrelated overpayments: approximately $1 billion involving transactions in Qatar and Malaysia, and approximately $300 million involving a credit against the fuel excise tax. Based on misinterpretations of the Tax Code, the district court ruled against ExxonMobil on both issues. This Court should now reverse.

As to the first issue, the district court erred by using an unprecedented test to conclude that ExxonMobil's transactions in Qatar and Malaysia should be treated as mineral leases, not sales, for tax purposes. A mineral lease is not the same as an office or apartment lease. It is a special arrangement by which the transferor and transferee share the minerals in the ground and the transferor typically receives cash or inkind payments for extracted minerals. The Tax Code generally treats transfers of property — including transfers of minerals in place, like oil and gas — as sales.

The distinction between a sale and a mineral lease has enormous tax consequences. In a sale, the transferor realizes gain or loss on the disposition of the minerals in the ground; all income later derived from extraction is the transferee's; and the transferee is entitled to deductions as compensation for depletion of the minerals. In a mineral lease, by contrast, payments from the transferee to the transferor are the transferor's — not the transferee's — income, and the transferor and transferee are each entitled to depletion deductions for their share of the minerals in the ground.

The district court failed to apply the correct test when it concluded that the transactions should be treated as mineral leases, rather than sales, for tax purposes. A transaction is a mineral lease only if the transferor retains an economic interest in the minerals in place: that is, if it has “secured by legal relationship income derived from the extraction of the oil [or gas], to which he must look for a return of his capital.” Commissioner v. Southwest Exploration Co., 350 U.S. 308, 314 (1956) (internal quotation marks and citation omitted). That requirement “mean[s] that the [transferor] must look solely to the extraction of oil or gas for a return of his capital.” Christie v. United States, 436 F.2d 1216, 1218 (5th Cir. 1971) (internal quotation marks and citation omitted). If a transferor has a right to non-extraction income, it is no longer considered to bear the “risk of nonproduction” and thus lacks an economic interest. Id. at 1221. That bright-line rule allows courts, the Internal Revenue Service, and private parties to predictably categorize mineral transfers for tax purposes.

The transactions here should be treated as sales, because the transferors — the State of Qatar and Petronas (the Malaysian state oil company) — derive income from sources other than extraction. First, ExxonMobil must build and maintain infrastructure for not just extraction, but also post-extraction activities. At the end of each agreement's fixed term, Qatar or Petronas receive that infrastructure. Qatar and Petronas are also entitled to payments based on post-extraction activities undertaken by ExxonMobil at those facilities. Second, Qatar and Petronas are entitled to damages in the event of breach, even if production never occurs. Third, in some of the agreements, Petronas is entitled to annual “abandonment cess” payments even if no oil or gas is produced. Qatar and Petronas thus do not derive income solely from extraction and have not retained an economic interest.

Instead of applying the well-established economic-interest test with its bright-line rule, as both parties advocated, the district court applied a “pre-dominant or primary purpose” test. That malleable test has no support in the Supreme Court's or this Court's precedent. But even if it did, the predominant purpose of the transactions was the development of new markets, not mere extraction. The agreements transferred extensive rights beyond the right to extract oil and gas. In return, Qatar and Petronas expected ExxonMobil to make significant infrastructure investments and to undertake significant post-extraction activities to develop new markets.

As to the second issue, the district court erroneously concluded that the alcohol fuel mixture credit in the American Jobs Creation Act of 2004 (AJCA) alters the amount of a fuel blender's liability for fuel excise tax. Section 4081 of the Tax Code imposes a fuel excise tax on gasoline removed from a refinery. The fuel excise tax is deductible from income as part of the cost of goods sold. The AJCA in turn created a refundable “credit . . . against” the fuel excise tax based on the amount of alcohol blended into gasoline. 26 U.S.C. § 6426(a)(1). The alcohol credit satisfies a fuel blender's excise-tax liability; it does not alter the amount of liability imposed. As a result, the blender is not required to reduce its deduction by the amount of the credit.

The district court's contrary interpretation is inconsistent with usage of the phrase “credit against” elsewhere in the Tax Code and indeed elsewhere in the AJCA. The interpretation also disregards the equivalence between the credit and an alternative cash payment, which is so complete that the AJCA gives fuel blenders a choice between the credit or cash. And the interpretation is at odds with the design of the AJCA; Fifth Circuit case law; and even the IRS form that is used to report fuel-excise-tax liability.

The district court adopted wholesale an opinion of the Court of Federal Claims, which relied on legislative history, cases from other contexts, and policy considerations. But none of those considerations can overcome the plain meaning of the statutory language. Accordingly, ExxonMobil is entitled to deduct the full amount of excise tax imposed as part of its cost of goods sold, without a reduction for the credit.

Because the district court erred as a matter of law in its treatment of the Qatar and Malaysia transactions and the alcohol credit, its judgment should be reversed on both issues.

STATEMENT OF THE CASE

A. Background

1. ExxonMobil's Qatar Operations

In recent decades, Qatar has sought to develop the ability to export the enormous volume of gas known to exist in the North Field, which is the largest non-associated gas field in the world. Qatar entered into a series of development and fiscal agreements during the 1990s and 2000s that granted several joint stock companies formed by the Qatari national oil company and ExxonMobil the right to extract, liquefy, and export a set amount of gas for a set number of years. ROA.5165, 37224-37392, 37901-38128, 38828-38896, 38949-39054, 39721-39790, 39994-40217, 40313-40489, 40704-40787, 63332-63333. In exchange, the joint stock companies — referred to here for simplicity as “ExxonMobil” — agreed to finance and undertake extraction, transportation, processing, liquefaction, storage, marketing, and sale of the gas. ROA.5165-5166, 6426-6430, 6445-6446. ExxonMobil also agreed to transfer all infrastructure to Qatar at the end of each contract and to make payments based on the value of the gas in foreign markets. ROA.5165-5166. Qatar thus obtained both the capability to export gas and gas products and the right to income from sources other than extraction.

The North Field is located offshore in the Persian Gulf. ROA.5165. After the gas is extracted, therefore, it must be transported approximately 60 miles to shore through a pipeline network that ExxonMobil built. ROA.6470, 63342. The gas is then processed to separate valuable condensates (which are sold) from contaminants and water (which are discarded). ROA.6470.

Because of geopolitical instability, North Field gas must be transported by ship, instead of pipeline, to reach foreign markets. ROA.6419. But to be moved by ship, the gas must first be converted into a liquid. ROA.5166, 6980. Liquefaction is an expensive, complicated process performed in facilities that are hundreds of yards long. It requires applying heat and pressure to separate liquid petroleum gas from the gas before further processing occurs. ROA.6490-6491, 6495, 6994, 7114. The gas is liquefied by cooling it to temperatures approaching -260°F and then stored. ROA.6471, 6474, 6476, 6977. The facilities were built by ExxonMobil, as required by the agreements. ROA.5165, 37928, 38964, 39745, 40149, 40718.

ExxonMobil is obligated to market the liquefied natural gas for sale in foreign countries. ROA.5165, 6445. When it is ready to be transported, ExxonMobil loads it onto technologically advanced ships, some of which ExxonMobil owns. ROA.6419-6420, 6476-6482. ExxonMobil has built regasification terminals in foreign countries to receive, store, and convert the liquefied gas back into gas. ROA.6420, 6476-6482.

At the end of each contract's term, all infrastructure constructed by ExxonMobil becomes the property of Qatar. ROA.5166. Significant gas will remain in the North Field when that happens, and Qatar can use the infrastructure to extract, process, transport, and sell liquefied natural gas, liquefied petroleum gas, and condensates. ROA.5166, 6442-6443, 6501-6503, 6626-6627, 40176, 40747. Overall, as expected by the parties, ExxonMobil has invested $20 billion in infrastructure in Qatar. ROA.6613-6614.

ExxonMobil is obligated to build that infrastructure even if it never produces any gas. ROA.6436, 37928, 38964, 39745, 40149, 40718. And if ExxonMobil fails to build the infrastructure, it is liable for damages. ROA.37950-37951, 38976-38977, 39760-39761, 40170-40171, 40741-40742. Thus, even if there is no production, Qatar will receive the infrastructure or damages equal to its cost.

ExxonMobil is also required to make payments to Qatar based on the value of liquefied natural gas and other products after ExxonMobil's manufacturing and marketing activities. ROA.6438-6442, 6610-6611, 6647-6648. Specifically, ExxonMobil agreed to pay Qatar based on the market value of liquefied natural gas, liquefied petroleum gas, and condensates, not the value of gas at the wellhead. ROA.5165-5166. By one estimate, ExxonMobil's liquefaction and subsequent post-extraction activities increase the value of the gas approximately twenty-fold. ROA.6640-6641, 44319. And at least $15 billion of ExxonMobil's infrastructure spending was on post-extraction infrastructure. ROA.6612-6613.

2. ExxonMobil's Malaysia Operations

Over the past half-century, Petronas has sought to develop a sustainable domestic market for offshore gas in Malaysia. ROA.6519-6520, 6655-6658. Beginning in the 1980s, it entered into a series of production-sharing contracts with ExxonMobil's Malaysian affiliate to develop offshore oil and gas deposits. ROA.41961-42213, 42386-42537, 42700-42889, 43137-43328, 43494-43639, 43750-43995, 44035-44225, 44232-44247. Petronas gave ExxonMobil the rights to explore, develop, extract, transport, process, and store oil and gas in quantities to be set by the Malaysian government over a term of years. ROA.5166, 41965, 42083, 42407, 42724, 43160, 43504, 43774, 44054. ExxonMobil must construct the necessary extraction, transportation, processing, and storage infrastructure. The infrastructure belongs to Malaysia at the end of each agreement, and ExxonMobil is obligated to make payments based in part on the value added by post-extraction activities. See, e.g., ROA.43809, 44074. Like Qatar, Petronas thus secured development of a market and income from sources other than extraction.

ExxonMobil has undertaken substantial efforts to transport, process, and store gas and condensates in Malaysia. ExxonMobil built part of a pipeline network to transport the gas over 100 miles to shore. ROA.44226-44231. It also built onshore facilities used to separate the gas from water and condensates; prepare the gas and condensates for sale; and treat and discard the water. ROA.4965, 6523-6525, 47533-47535.

In addition, ExxonMobil has undertaken substantial efforts to transport and process oil. ExxonMobil built part of a system for pumping and transporing the oil over 100 miles to shore. ROA.6521-6524, 44226-44231, 47503-47506, 47509-47512, 47531-47532. It also built an onshore terminal to process the oil for sale by separating out water, condensates, and other elements. ROA.4964, 6515-6516, 47515-47516. And ExxonMobil stored the oil until it was ready to be sold. ROA.6513-6515, 47512-47516. Consistent with the expectations of the Malaysian government, ExxonMobil agreed to build facilities in an economically developing area of the country. ROA.6513-6515, 6656-6658.

When the contracts end, Petronas owns all of the facilities built by ExxonMobil. ROA.6626. And rather than making payments based on the value of raw oil and gas at the wellhead, ExxonMobil is obligated to make payments that include the value added to oil and gas by transportation, processing, and storage. ROA.6533-6542, 6659-6660, 44322. Moreover, if ExxonMobil breaches its contractual obligations, it is liable for damages, regardless of whether oil or gas is produced. ROA.59630-59634. Finally, several of the contracts provide for annual “abandonment cess” payments. ROA.5166-5167. Those payments notionally cover the cost of plugging the wells at the end of their useful lives, but Petronas is free to spend the money as it sees fit and ExxonMobil is required to make the payments even if it extracts no minerals. ROA.6538-6539.

3. ExxonMobil's Fuel-Blending Operations

In addition to the correct treatment for tax purposes of the Qatar and Malaysia transactions, this appeal involves a discrete issue concerning the income-tax consequences of the fuel excise tax and a credit against that tax. Section 4081 of the Tax Code imposes an excise tax on non-aviation gasoline removed from any refinery. The tax is used to fund the Highway Trust Fund. See 26 U.S.C. § 9503(b)(1)(D). ExxonMobil Oil Corporation, a wholly owned subsidiary of ExxonMobil, is subject to the fuel excise tax. The excise tax is paid quarterly, but it also gives rise to an annual income-tax deduction. Specifically, the amount of the excise tax is included in the cost of ExxonMobil Oil Corporation's goods sold, which is in turn deducted from the total amount of its sales on ExxonMobil's consolidated income-tax returns. See 26 U.S.C. § 61(a)(2); 26 C.F.R. § 1.61-3(a).

Congress has long adjusted the excise tax to protect the environment and promote energy independence. For many years, Congress reduced the excise-tax rate for alcohol fuel mixtures (such as ethanol), but that policy resulted in an undesirable reduction in the size of the Highway Trust Fund. See 26 U.S.C. § 9503; H.R. Rep. No. 108-548, pt. 1, at 141-142 (2004); U.S. Department of Transportation, Federal Highway Administration, Status of the Federal Highway Trust Fund for the End of Fiscal Year 2004 (Oct. 2005) <tinyurl.com/Trust-Fund-2004>.

In 2004, Congress enacted the AJCA to preserve the incentive to pro-duce alcohol fuel mixtures while ensuring full funding of the Highway Trust Fund. Congress achieved that goal by doing three things. First, it eliminated the lower rate of excise tax for alcohol fuel mixtures. See Pub. L. No. 108-357, § 301, 118 Stat. 1418, 1461 (2004). Second, it created a new incentive for blending alcohol with gasoline. That incentive can be claimed as a “credit . . . against” the fuel excise tax, 26 U.S.C. § 6426(a); a tax-free payment from the Treasury, see 26 U.S.C. § 6427(e)(1); or a refundable income-tax credit, see 26 U.S.C. § 34(a). Third, Congress required all excise taxes imposed under Section 4081 to be appropriated to the Highway Trust Fund “without reduction for credits under section 6426.” 26 U.S.C. § 9503(b)(1).

ExxonMobil Oil Corporation blends alcohol with gasoline. For tax years 2008 and 2009, it claimed the credit against excise-tax liability in Section 6426(a)(1).

4. ExxonMobil's Tax Returns

a. On its returns for tax years 2006 to 2009, ExxonMobil originally treated the Qatar and Malaysia transactions as mineral leases and excluded payments to Qatar and Petronas from its income. ROA.7289, 11729, 22262, 30916. After determining that the transactions should instead be treated as sales for tax purposes, ExxonMobil filed amended returns to correct the tax treatment and request a refund. ROA.36841, 36882, 36919, 36955, 36996-37221.

The foreign-source component of ExxonMobil's taxable income in-creased because it now included all income from the sale of extracted minerals. ROA.36841, 36882, 36919, 36955. That increase caused the amount of foreign-tax credits that ExxonMobil used to increase as well. See 26 U.S.C. § 904. Foreign-tax credits alleviate the burden of double taxation on the foreign-source income. See S. Rep. No. 67-275, at 9 (1921). For the years at issue, ExxonMobil paid billions of dollars in foreign taxes, including to Qatar and Malaysia at rates as high or higher than the United States rate. See, e.g., ROA.36847.

Section 483 required ExxonMobil to treat payments to Qatar and Petronas as purchase payments and interest payments. ROA.6812. As required by regulations implementing Section 861, ExxonMobil deducted some of those interest payments from United States income, which reduced its tax liability and resulted in the refund requested. ROA.36841, 36882, 36919, 36955.

b. ExxonMobil also amended its treatment of the alcohol credit in tax years 2008 and 2009. On its original returns, ExxonMobil reduced its deduction for the cost of goods sold by the amount of the alcohol credit, as though the credit altered the amount of the excise tax it paid. ROA.1249-1250. On its amended returns, ExxonMobil treated the alcohol credit as satisfying the excise tax, rather than altering the amount of the tax. Id. As a result, ExxonMobil included the full amount of its excise-tax liability in the deducted cost of goods sold, rather than reducing that deduction by the amount of the credit. Id.

c. IRS disallowed ExxonMobil's refund claims. ROA.4823. It later imposed more than $200 million in penalties on the grounds that ExxonMobil lacked a reasonable basis for its treatment of the Qatar and Malaysia transactions as purchases and for its position that the treatment is not a change in its accounting method. ROA.5777; see also 26 U.S.C. § 6676.

B. Procedural History

On October 18, 2016, after paying the disputed amounts, ExxonMobil filed this refund action in the United States District Court for the Northern District of Texas. It sought a refund of its overpayments related to the Qatar and Malaysia transactions for tax years 2006 to 2009; a refund of its overpayments related to the alcohol credit for tax years 2008 and 2009; a refund of the penalties; and statutory interest. ROA.55-56, 62-64, 701-705, 708.

1. The District Court's Order On The Alcohol-Credit Issue

The parties cross-moved for summary judgment on the issue whether the alcohol credit satisfies a blender's excise-tax liability or alters the amount of liability imposed, and the district court agreed with the government that it was the latter. In a brief order, the district court “adopt[ed] [the] reasoning in full” of the Court of Federal Claims in Sunoco, Inc. v. United States, 129 Fed. Cl. 322 (2016) (a decision that was later affirmed by the Federal Circuit, see 908 F.3d 710 (2018), cert. denied, 140 S. Ct. 46 (2019)). ROA.1250. That decision relied on legislative history and “policy considerations,” particularly the asserted principle that Congress must “expressly state” that a tax credit is a payment in satisfaction of a tax for it to be treated in that manner. 129 Fed. Cl. at 327-329, 331-332.

2. The District Court's Order On The Sale Issue

The issue whether the Qatar and Malaysia transactions should be treated as sales or mineral leases proceeded to a bench trial. In its post-trial opinion, the district court declined to apply the economic-interest test and instead applied a “predominant or primary purpose” test. ROA.5178. The district court rejected ExxonMobil's argument that Anderson v. Helvering, 310 U.S. 404 (1940), and other decisions required it to use the economic-interest test. The court purported to distinguish Anderson on the ground that the transferor there might have had income either entirely from extraction or entirely from non-extraction sources, rather than from both, as Qatar and Petronas do. ROA.5175. The district court concluded that three of this Court's decisions created a “predominance” test that should be applied in lieu of the economic-interest test. ROA.5176-5177. The district court further expressed disagreement with the logic of the Supreme Court's requirement that income be derived “solely” from extraction. ROA.5176. And the district court concluded that the fact that payments “may be based in part on the price of the processed product does not matter,” because “what [Qatar and Petronas] provide is minerals in place.” ROA.5177-5178.

Applying its novel “predominant or primary purpose” test, the district court then determined that the transactions should be treated as mineral leases. With respect to Qatar, the court relied on three factors: that ExxonMobil is purportedly entitled to “produce an undefined amount of gas over a fixed term”; that the agreements are “structured as leases”; and that, “if there is no extraction, Qatar receives no compensation.” ROA.5183. The court discounted the “substantial amount of processing” conducted by ExxonMobil, on the ground that processing is economically necessary. ROA.5183.

With respect to Malaysia, the district court found that “Petronas would set annual budgets and annual production”; that ExxonMobil is “obligated to help construct [transportation] infrastructure”; and that the abandonment cess payments are an “annual flat fee” and are “not dependent on production.” ROA.5185. The court nevertheless concluded that the “salient features” of the transactions are that they “entitle Exxon Mobil to produce an unspecified amount of oil and gas for a fixed term, in exchange for which Exxon Mobil compensates Petronas based on a percentage of production.” ROA.5186. The district court subsequently denied ExxonMobil's motion for additional factual findings. ROA.5769.

3. The District Court's Order Denying Penalties

Finally, the district court granted summary judgment for ExxonMobil on its claim that the government unlawfully assessed approximately $200 million in penalties, concluding that ExxonMobil had a “reasonable basis” for its refund claims. ROA.5769; see 26 U.S.C. § 6676(a). The government has cross-appealed on that issue.

SUMMARY OF ARGUMENT

ExxonMobil is entitled to a refund for both overpayments. The Qatar and Malaysia transactions should be treated as sales rather than mineral leases, and the full amount of excise tax imposed should be deducted without any reduction for the alcohol credit.

I. The Tax Code normally treats a transfer of property as a sale for tax purposes. One exception is a mineral lease, in which the transferor and transferee jointly invest in extraction. The Supreme Court and this Court have maintained a bright-line rule for determining whether the exception for mineral leases applies. If a transferor is entitled solely to income from extraction, it has retained the risk of non-production and thus retains an economic interest in the minerals in place. A transaction of that kind is a mineral lease for tax purposes. But if a transferor has a right to income from any other sources, whether in full or in part, the transferee bears the risk of non-production and the transferor does not retain an economic interest. Such a transaction is a sale for tax purposes. That bright-line rule is easy to apply and provides predictability in a complex and constantly changing industry.

The district court was required to apply the economic-interest test, as the Supreme Court has done in Anderson v. Helvering, 310 U.S. 404 (1940), and other cases. The district court attempted to distinguish Anderson, but it did so based on a misreading of Anderson and a misunderstanding of the undisputed facts of this case. Moreover, the district court failed to come to grips with the other Supreme Court and Fifth Circuit cases that require application of the economic-interest test and its bright-line rule. See, e.g., Christie v. United States, 436 F.2d 1216, 1218 (5th Cir. 1971).

The district court gleaned a “predominant purpose” test from three of this Court's decisions, but none of those opinions provides a basis for rejecting the economic-interest test. Two of the cases applied the economic-interest test; the third is readily distinguishable from this case, because this case involves the distinction between a sale and a mineral lease and ExxonMobil undertakes extensive post-extraction transformation of the oil and gas.

Under the economic-interest test, the Qatar and Malaysia transactions should be treated as sales for several reasons. First, ExxonMobil must build and maintain extensive extraction and post-extraction infrastructure. At the end of each agreement's term, Qatar and Petronas receive all of that infra-structure, regardless of whether oil or gas is extracted. Qatar and Petronas are also entitled to payments based on the value added to the raw minerals by post-extraction activities at those facilities, including transportation, processing, and storage. Second, unlike in a typical mineral lease where the transferee is not obligated to explore and develop the minerals, Qatar and Petronas are entitled to damages in the event of a breach. Third, under four of the Malaysia agreements, ExxonMobil owes an “abandonment cess” payment regardless of whether any oil or gas is extracted. Qatar and Petronas are thus entitled to income that is not derived solely from extraction.

Finally on this point, even if the district court applied the correct test, the predominant purpose of the transactions is not the extraction of minerals. Instead, as the agreements and ExxonMobil's enormous investments show, it is the development of a new export market (in Qatar) or a domestic market (in Malaysia). Qatar and Petronas bargained for more than mere extraction.

II. The district court also erred by concluding that the alcohol credit alters the amount of a blender's excise-tax liability and, by extension, that ExxonMobil is not entitled to deduct the full amount of that liability. Like any other refundable tax credit, the alcohol credit simply satisfies part of ExxonMobil's tax liability; it does not alter it.

That interpretation is compelled both by the statutory text and by the broader context of the AJCA and the Tax Code. First, the phrase “credit against” refers most naturally to the satisfaction of a tax, and the Tax Code elsewhere uses it in this sense. Second, the AJCA expressly states that an-other credit alters the amount of an otherwise allowable deduction, but does not do so for the alcohol credit. Third, the AJCA provides the option of an equivalent cash payment; the district court's interpretation would have the absurd consequence that a blender who takes the credit against the excise tax is effectively taxed on it, but a blender who takes the equivalent payment is not. Fourth, Congress's expressed intention to give fuel blenders an incentive without reducing the taxes collected for the Highway Trust Fund reflects its understanding that the credits do not alter excise-tax liability. Fifth, the Fifth Circuit treats analogous simultaneous transactions as separate events for tax purposes, not as a single net transaction. Sixth, IRS's own Form 720 calculates “total tax” and the alcohol credit separately.

The district court's reasons for accepting the government's interpretation are unavailing. The legislative history is irrelevant because the statute is unambiguous. Cases about cash rebates and state tax credits are not on point. And even if there were ambiguity to resolve, the district court incorrectly construed the purported ambiguity in favor of the government. Under the plain meaning of the statute, the alcohol credit does not reduce a blender's excise-tax liability, and ExxonMobil was thus entitled to deduct the full amount of that liability. The district court's reasoning on both issues was erroneous, and its judgment should be reversed insofar as it denied ExxonMobil's claims for overpayment.

STANDARD OF REVIEW

This Court reviews a district court's decision to grant a motion for summary judgment de novo. See, e.g., Adams v. All Coast, L.L.C., 988 F.3d 203, 206 (5th Cir. 2021). This Court also reviews legal conclusions after a bench trial de novo; it reviews factual findings for clear error. See, e.g., Rivera v. Kirby Offshore Marine, L.L.C., 983 F.3d 811, 816 (5th Cir. 2020).

ARGUMENT

I. THE QATAR AND MALAYSIA TRANSACTIONS SHOULD BE TREATED AS SALES, NOT MINERAL LEASES

A. The District Court Erred By Failing To Apply The Economic-Interest Test

1. In general, the Tax Code treats transfers of property — including minerals in the ground, like oil and gas — as sales. The transferee is taxed when the minerals are extracted and sold, and it is entitled to deductions as compensation for the depletion of the minerals. See 26 U.S.C. §§ 61(a), 611; 26 C.F.R. §§ 1.61-3(a), 1.611-1(b)(1). The transferor realizes income regardless of whether extraction occurs and is subject to taxation on any gain from the transfer. See 26 U.S.C. § 1001. A sale shifts the risk of non-production because the transferor looks to the purchaser, rather than the mineral, for its return. That treatment reflects the rule that the exchange of property for something of value alters the “business risks” of an investment and is generally a “realization” event subject to taxation. Eisner v. Macomber, 252 U.S. 189, 211 (1920); see also Helvering v. Bruun, 309 U.S. 461, 469 (1940).

A mineral lease is an exception to the general treatment of property transfers as sales. In a mineral lease, the transferor provides minerals in place and the transferee has the right to explore and extract the minerals. See Burnet v. Harmel, 287 U.S. 103, 107 (1932). The transferor realizes income from the minerals only when the minerals are extracted and sold, and it is entitled to deductions for depletion of its share of the minerals. See Palmer v. Bender, 287 U.S. 551, 557 (1933); 26 C.F.R. § 1.611-1(b)(1). That special treatment reflects that the transferor does not realize income if no minerals are extracted and thus continues to bear the risk of non-production. See, e.g., Shamrock Oil & Gas Corp. v. Commissioner, 35 T.C. 979, 1040 (1961), aff'd, 346 F.2d 377 (5th Cir.), cert. denied, 382 U.S. 892 (1965). Because Qatar and Petronas transferred the risk of non-production to ExxonMobil, the transactions at issue are sales for tax purposes, not mineral leases.

2. The Supreme Court has long prescribed a bright-line test to determine whether a transferor retains the risk of non-production and therefore whether a transfer should be treated as a sale or a mineral lease. A transaction is treated as a mineral lease only when the transferor retains an “economic interest” in the minerals in place. Whitehead v. United States, 555 F.2d 1290, 1292 (5th Cir. 1977). To retain an economic interest, a transferor must have “(1) 'acquired, by investment, any interest in the oil [or gas] in place,' and (2) secured by legal relationship 'income derived from the extraction of the oil [or gas], to which he must look for a return of his capital.'” Commissioner v. Southwest Exploration Co., 350 U.S. 308, 314 (1956) (quoting Palmer, 287 U.S. at 557). The second factor “has been interpreted to mean that the taxpayer must look solely to the extraction of oil or gas for a return of his capital.” Christie v. United States, 436 F.2d 1216, 1218 (5th Cir. 1971) (internal quotation marks and citation omitted). As this Court has explained, “not all financing arrangements that call[ ] for payments to be made out of mineral production [are] economic interests.” Herbel v. Commissioner, 129 F.3d 788, 791 (5th Cir. 1997). The word “solely” ensures that mineral-lease treatment is available only when the transferor bears the “risk of nonproduction,” Christie, 436 F.2d at 1221, and allows parties, courts, and IRS to predictably categorize mineral transactions, see Anderson v. Helvering, 310 U.S. 404, 413 (1940).

The Supreme Court's decision in Anderson is instructive. There, the Court held that a transferor lacks an economic interest if it has a right to receive non-extraction income, even if it also has income that is derived from extraction. The transferor in Anderson was entitled to a fixed sum payable from any “proceeds . . . which might be derived from oil and gas produced from the properties and from the sale of fee title to any or all of the land conveyed.” 310 U.S. at 405-406 (emphasis added). A reservation of “an interest in the fee, in addition to the interest in the oil production,” meant that the transferor was no longer “dependent entirely upon the production of oil for the deferred payments.” Id. at 412. After all, the transferor could have income even if “no oil [was] severed from the ground.” Id. The Court explained that, “[i]n the interests of a workable rule,” a transferor does not retain an economic interest “beyond the situation in which, as a matter of substance, without regard to formalities of conveyancing, the reserved payments are to be derived solely from the production of oil and gas.” Id. at 413 (emphasis added).

In subsequent cases, the Supreme Court has repeated the bright-line rule that income must be derived “solely” from extraction for the transferor to retain an economic interest. In Kirby Petroleum Co. v. Commissioner, 326 U.S. 599 (1946), the Court explained that an “[e]conomic interest does not mean title to the oil in place but the possibility of profit from that economic interest dependent solely upon the extraction and sale of the oil.” Id. at 604 (emphasis added). And in Southwest, the Court reiterated that, for a transferor to retain an economic interest, the transferor “must look solely to the extraction of oil or gas for a return of his capital.” 350 U.S. at 314 (emphasis added). The Court observed that it had found no economic interest “where the payments were not dependent on production, or where payments might have been made from a sale of any part of the fee interest as well as from production.” Id. (citations omitted).

This Court has adhered to the same bright-line rule when applying the economic-interest test. In one case, this Court held that “[t]he requirements of Anderson . . . were scrupulously observed” where “the [t]axpayer had to look solely to the minerals or their proceeds.” United States v. Witte, 306 F.2d 81, 88 (5th Cir. 1962) (emphasis added), cert. denied, 371 U.S. 949 (1963). In another, this Court reasoned that minimum royalty payments were akin to an advance and did not destroy the transferor's economic interest because his income was still “based solely upon production as required by the economic interest test.” Wood v. United States, 377 F.2d 300, 307 (5th Cir.), cert. denied, 389 U.S. 977 (1967).

This Court has further made clear that “production” refers to “extraction,” as distinguished from “processing” or “manufacturing.” In Christie, the Court stated that “the taxpayer must look solely to the extraction of oil or gas for a return of his capital.” 436 F.2d at 1218 (quoting Southwest, 350 U.S. at 314). And in Rutledge v. United States, 428 F.2d 347 (5th Cir. 1970), this Court explained that, if a taxpayer “looks solely to extraction for his return,” it could not conclude that “he has divested himself of his economic interest in the minerals in place.” Id. at 351; see also 26 C.F.R. § 1.611-1(b)(1) (referring to “income derived from the extraction of the mineral”).

IRS has enforced the foregoing rule in more than fifty administrative rulings, explaining that a transferor retains an economic interest only if it looks “solely” to income derived from extraction. See, e.g., Tech. Adv. Mem. 199918002, 1999 WL 283075 (May 7, 1999); Priv. Ltr. Rul. 9728010, 1997 WL 381980 (July 11, 1997); Priv. Ltr. Rul. 9728038, 1997 WL 382008 (July 11, 1997). Although those rulings are not binding, they confirm what the cases say: namely, that any source of income not derived from extraction precludes the retention of an economic interest.

The sheer number of rulings and cases illustrates the need for an administrable rule that provides predictability for IRS, the courts, and private parties. Under the bright-line rule prescribed by the Supreme Court and this Court, a transferor's right to any non-extraction source of income means that a transfer is a sale, not a mineral lease.

3. Despite the enormous body of law establishing that a transferor retains an economic interest only if its compensation is derived “solely” from extraction, the district court focused on Anderson, denigrating the Supreme Court's “extreme view” there of the economic-interest test. ROA.5169. But this Court has never read Anderson in that fashion. And even if distinguishing Anderson could somehow suffice to address all of the cases discussed above, the district court's reasons for its distinction were unpersuasive.

First, the district court speculated that the compensation alternatives in Anderson would be “nearly all or nothing” — either payment from the proceeds of production or payment from the proceeds of sale of the land if there were no production. ROA.5176. The district court cited no facts in the record to substantiate that claim, and the Board of Tax Appeals in Anderson found that the record did not contain a breakdown of the actual income. See Anderson v. Commissioner, Nos. 86,968, 86,969, 86,970, 1938 WL 8347 (B.T.A. Aug. 16, 1938). In any event, the economic-interest test is not limited to “all or nothing” situations. The Supreme Court described the transferor in Anderson as having a right to “any or all of the land conveyed,” meaning the transferor could receive a mix of income if only some of the land were sold. 310 U.S. at 405-406 (emphasis added). And the agreement in Christie provided that payments would be made from the proceeds of production and the salvage value of “any or all” equipment — patently not an all-or-nothing situation, but enough to preclude an economic interest nonetheless. 436 F.2d at 1218 (emphasis added).

Second, the district court incorrectly called ExxonMobil's quotation of the word “solely” a mere “gloss” on Anderson. ROA.5177. But “derived solely from the production of oil and gas” is the key phrase from Anderson. 310 U.S. at 413. Both the Supreme Court and this Court have repeatedly stated the “solely” requirement. See pp. 24-26, supra. A district court may not disregard that requirement as formalistic, see ROA.5177, especially because the Supreme Court justified the “solely” requirement as a “workable,” bright-line method of assessing the “substance” of mineral transactions. See Anderson, 310 U.S. at 413. As discussed above, see pp. 22-24, supra, the requirement that income be derived “solely” from extraction ensures that “the party assuming the risk is the one who holds the economic interest, thereby sharing both the benefits of depletion and the burden of taxation.” Christie, 436 F.2d at 1221.

Third, the district court mischaracterized the operation of the economic-interest test. It began with a hypothetical in which a farmer (Qatar and Petronas) sells apples (oil and gas in place) to a baker (ExxonMobil) based on the market price of apple pies (manufactured petroleum products). See ROA.5177. The district court concluded that, like the farmer, Qatar and Petronas “are not being compensated for post-extraction processing,” because they only provide minerals in place. ROA.5177-5178. But the inquiry under the economic-interest test is not what Qatar and Petronas are being compen-sated for providing; the test is how their income is derived. See, e.g., Anderson, 310 U.S. at 413. Qatar and Petronas provided minerals in place and other property, but their right to income is not limited solely to extraction. See pp. 36-41, infra.

Fourth, this Court's decision in Wood actually contradicts the district court's cramped reading of Anderson. Wood recognized the bright-line rule that income must be “based solely upon production.” 377 F.2d at 307. The Court remarked that “the critical consideration is whether payment is dependent upon extraction, not the method by which that payment is calculated.” Id. at 306. But the Court was rejecting the taxpayer's argument that a fixed royalty payment based on the volume of sand and gravel removed, rather than the commercial value of the sand and gravel, was inconsistent with an economic interest. Id. at 306-307. Unlike here, the transaction in Wood did not involve a payment based on post-extraction activities. And more fundamentally, the Court clarified that “dependent upon production” means dependent upon “removal of the mineral from the leased premises” and “should be read as connoting nothing more than extraction for commercial use.” Id. at 306 n.16. Wood is thus one of the many cases applying the requirement that the holder of an economic interest derive its income solely from extraction, unlike here, where post-extraction activities add value.

4. The district court invoked three Fifth Circuit cases — Gray v. Commissioner, 183 F.2d 329 (1950); Estate of Weinert v. Commissioner, 294 F.2d 750 (1961); and Vest v. Commissioner, 481 F.2d 238, cert. denied, 414 U.S. 1092 (1973) — as support for its “predominance” test. But those cases do not support the district court's approach.

a. In Vest, the Court applied the economic-interest test. Shell Oil Company acquired the Vests' water rights and a right-of-way “for the purpose of developing the acquired water rights and the construction, operation and maintenance of a trunk pipeline to be used to transport and distribute the water.” Vest, 481 F.2d at 240. Shell was obligated to pay the Vests based on the sale of water extracted from the land, water extracted from nearby properties, and water transported through a pipeline on the right-of-way. See id. at 241. The Court explained that, under the economic-interest test, a mineral lease exists only if the transferor “look[s] solely to the extraction of the mineral for the return of his capital.” Id. at 242 (citing Southwest, 350 U.S. at 314). Because the Court concluded that the Vests' “right to receive payments was linked inextricably to Shell's withdrawal of water or use of the pipeline” and nothing else, it held that the transaction should be treated as a lease. Id. at 244-245. While the Court did not explain why payments based on the extraction of water from other properties did not destroy the Vests' economic interest, it was unquestionably applying the economic-interest test. See id. at 242.

The Court did use the words “primary purpose” in Vest, but only in addressing a different issue — the scope of the transaction. See 481 F.2d at 245 n.15. In addition to arguing that the entire transaction was a sale, the Vests argued in the alternative that the transfer of the right-of-way should be treated separately from the transfer of the water rights. See id. The Court rejected that argument on the ground that “the grant of the right of way was a necessary part of this transaction, the primary purpose of which was to secure the water rights.” Id. Critically for present purposes, however, the Court did not classify the transaction as a sale or mineral lease based on its assessment of the transaction's primary purpose. It simply used that language to conclude that there was “no basis for treating [the right-of-way] as a separate grant for income tax purposes.” Id. The only test the Court applied for distinguishing a sale from a mineral lease was whether the transferor “look[s] solely to the extraction of the mineral for the return of his capital.” Id. at 242.

b. In Gray, the Court again applied the economic-interest test. The opinion contains only four sentences of analysis. The first stated the conclusion that the transfers “must be construed as sub-leases and not sales.” 183 F.2d at 331. For that point, the Court cited multiple cases stating the rule that income must be derived solely from extraction. See id. The second sentence stated that the “acid test” was whether the transferor “reserved an 'economic interest' in the mineral estate.” Id. The third sentence called it “patent” that an overriding royalty, a net-profits interest, and “a contingent interest in any processing plant constructed[ ] manifestly resulted in the reservation of an 'economic interest' in the oil and gas in place.” Id. The Court cited two cases about net-profits interests, both of which recite the bright-line rule that income must be derived solely from extraction. See id. The fourth sentence observed without explanation that several other cases, including Anderson, were “readily distinguishable under their own facts.” Id.

It is thus incontrovertible that this Court applied the economic-interest test in Gray. The district court nevertheless inferred that the Court had applied a “predominant purpose” test because the transferor obtained “a contingent interest in any processing plant constructed,” 183 F.2d at 331, which the district court thought was not income derived from production. But it is implausible to conclude based on the four sentences above that this Court departed from Supreme Court precedents. No other court has cited Gray for the conclusion that the bright-line rule in Anderson and other cases no longer applies. The most that can be inferred from Gray is that, under the economic-interest test, a contingent interest in a processing plant does not destroy a transferor's economic interest. Because this case does not involve a contingent interest in a processing plant, Gray is relevant here only insofar as it reaffirms the economic-interest test.

c. In Weinert, the Court did refer to the concept of predominance, noting at one point that “[t]he arrangement here was predominantly concerned with mineral production.” 294 F.2d at 765. By that, the Court appears to have meant that, when part of the income in question comes from activities at a cycling plant that are “indispensable” to extraction, the economic interest is not destroyed. Id. But Weinert explicitly did not extend its predominance analysis to cases involving the classification of a transaction as a sale or mineral lease, and the Court limited its approach to activities that are physically necessary to extraction. Weinert is inapposite here for both of those reasons.

First, the Court expressly stated that there was “no question of a lease or sale” in Weinert. 294 F.2d at 763. Instead, two companies agreed to pay “loans and advances” for Weinert's portion of the costs of developing oil and gas reserves and building a processing plant. Id. at 751. Those costs were to be repaid from Weinert's share of the net profits; until the “loans and advances” were repaid, Weinert's interest in the property was held in trust. Id. at 751-752. The Court expressed discomfort with the structure of the transaction, which did not fit within the sale/lease dichotomy. See, e.g., id. at 757, 761. And it explicitly justified its relaxation of the economic-interest test on the ground that it should not be given a “rigid and literal interpretation” where the mineral property is placed in a trust, the proceeds of which were used to repay the advanced expenses. Id. at 765. This case, unlike Weinert, is undisputedly about whether the transactions at issue should be classified as sales or mineral leases, so Weinert's predominance analysis does not apply.

Second, even if Weinert applied to the classification of a transaction as a sale or mineral lease, it does not create an exception to the requirement that income be derived “solely” from extraction for anything other than activities that are physically necessary to extraction. The Court considered part of the cycling plant's work to be an “indispensable part of the severance and sale of the gas and liquid hydro-carbons,” because it was “nothing more than the ex-traction of the liquid hydrocarbons from the gas produced from the unitized leases and the return of such dry gas as was not sold into the geological formation from which it was produced.” 294 F.2d at 764. But “to be consistent with” the principles underlying the economic-interest test, only income from those essential activities was “apportion[ed]” to the “net profits from production.” Id. at 765. Income from other activities, such as fractionation, would be “distinguished” and taxable to Weinert, not the companies making the “loans and advances.” Id. at 757, 765.

This Court has since reiterated the distinction between post-extraction activities that are physically necessary to extraction and other activities, including those that “may have been essential from a marketing viewpoint.” Shamrock Oil and Gas Corp. v. Commissioner, 346 F.2d 377, 380 (5th Cir.), cert. denied, 382 U.S. 892 (1965); see also Christie, 436 F.2d at 1220. Here, the government did not contend, and the district court did not find, that the various post-extraction activities were all physically indispensable to extraction. Weinert thus provides no basis either for disregarding the economic-interest test or for applying it in the government's favor.

B. Under The Economic-Interest Test, The Transactions Should Be Treated As Sales, Not Mineral Leases

Under the economic-interest test, this is an easy case, because Qatar and Petronas do not look solely to income derived from extraction for a return of their capital. First, Qatar and Petronas are entitled to post-extraction facilities that will be in excellent condition at the end of each agreement. They are also entitled to payments based on the value added to the oil and gas by ExxonMobil's post-extraction activities at those facilities during the term of the agreements. Second, Qatar and Petronas are entitled to damages for breach of ExxonMobil's obligations. Third, under several of the contracts, Petronas is entitled to an “abandonment cess” payment regardless of whether any ex-traction occurs. Any of those features requires treating the transactions as sales, not mineral leases.

1. Qatar And Petronas Are Entitled To Income From Post-Extraction Infrastructure And Activities

Under the economic-interest test, the right to income derived from sources besides extraction destroys a transferor's economic interest because the transferor has mitigated the risk of nonproduction. See pp. 22-24, supra. The Supreme Court, this Court, and even IRS regulations have distinguished between income derived from extraction and other sources of income. See pp. 24-27, supra. Here, Qatar and Petronas are entitled to ownership of facilities built and maintained by ExxonMobil, as well as income derived from post-ex-traction activities at those facilities, which destroys their economic interests.

a. This Court should reverse for the straightforward reason that, at the end of the agreements, Qatar and Petronas are entitled to post-extraction infrastructure that ExxonMobil built. ROA.6442-6443, 6501-6503, 6626, 40176, 40747. The infrastructure includes transportation, processing, and storage facilities that ExxonMobil was expected or required to build regardless of production. ROA.6436, 6442-6443, 6501-6502, 6626, 37928, 38964, 39745, 40176, 40747, 44235-44237. All of the infrastructure is expected to be maintained in excellent working condition and to have significant economic value at the end of the agreements. See ROA.5166, 6442-6443, 6501-6502, 6626. Notably, the infrastructure in Qatar cost $20 billion, at least $15 billion of which was spent on post-extraction infrastructure. ROA.6611-6614.

This Court has held that even the salvage value of equipment destroys an economic interest. In Christie, it concluded that while “the equipment furnished in the instant case [was] used in the production of minerals,” the entitlement to the salvage value of the equipment nonetheless constituted an “alternative source of income.” 436 F.2d at 1220. If the salvage value of equipment transfers “the risk of nonproduction” and precludes an economic interest, id. at 1221, then the value of well-maintained and highly valuable post-extraction infrastructure necessarily suffices as well.

b. Besides gaining possession of those facilities at the end of each agreement, Qatar and Petronas also have the right to income from post-extraction activities undertaken at the facilities during the life of the agreements. In Qatar, ExxonMobil is obligated to make payments tied to the value of three manufactured petroleum products — not the value of raw, unprocessed gas. ROA.5165-5166.

From the offshore gas field in Qatar, gas must be transported approximately 60 miles to shore through pipelines that ExxonMobil built. ROA.6470, 63342. The gas must then be processed at facilities built by ExxonMobil to remove liquid petroleum gas, condensates, and water. ROA.6470. The gas is then liquefied and stored at -260°F at facilities built by ExxonMobil until it can be loaded onto sophisticated tankers, some of which ExxonMobil owns. ROA.6419-6420, 6471, 6474, 6476-6482, 6977. ExxonMobil is also responsible for marketing the liquefied natural gas to foreign countries. ROA.5165. And it has built regasification terminals at foreign destinations to convert the liquefied natural gas back into gas. ROA.6420, 6475-6482, 6490-6499.

The same is true under the Petronas agreements. Although the district court referred to the payments as being “based on extraction of minerals,” ROA.5166, they clearly are not. Several payments under the contracts are calculated at the point of export (for crude oil) or the point of sale (for gas). ROA.6533-6542, 6659-6660, 41977-41980, 42107-42115, 42431-42439, 42755-42778, 43183-43196, 43518-43528, 43845-43871, 44078-44086, 44232-44247. It is undisputed that significant post-extraction work is required between the well-head and the point of export or sale. See ROA.5052, 6382.

Gas must be transported to shore through pipelines that ExxonMobil built in part. ROA.6521-6525. ExxonMobil must next process the gas at on-shore facilities that it built to separate the gas from water and condensates, and treat the gas for sale. ROA.6513-6515, 6523-6525, 47512-47516, 47533-47535.

In Malaysia, oil must be transported to shore using a pumping station and 124 miles of pipelines, built in part by ExxonMobil. ROA.6521-6524, 44226-44231, 47503-47506, 47509-47512, 47531-47532. It must next be processed for sale at a terminal built by ExxonMobil. ROA.6513-6515, 47512-47516. That process involves separating the oil from water, condensates, and other elements. ROA.6513-6516, 47512-47516. The oil must then be stored until it is ready to be sold. ROA.6513-6516, 47515-47516. As in Qatar, there-fore, the Malaysian oil and gas are sold for a value based on significant post-extraction transportation, processing, and storage.

Neither the district court nor the government cited a case in which a transfer was treated as a mineral lease even though the transferor was entitled to income derived from activities as far removed from extraction as the ones here. In Vest, post-extraction transformation of the water was not at issue. See 481 F.2d at 242-243. In Gray, the transferor had only a contingent interest in a processing plant. See 183 F.2d at 331. And in Weinert — which did not involve a sale or mineral lease — the Court carefully distinguished between income derived from post-extraction activities that were physically indispensable to extraction, and income derived from other post-extraction activities. See 294 F.2d at 764. Here, by contrast, Qatar and Petronas reap the benefit of post-extraction activities in the form of income based on the value of products far removed from the wellhead.

The fact that Qatar and Petronas will receive valuable facilities at the end of each agreement is sufficient to require sale treatment. So is the fact that Qatar and Petronas are compensated according to the value added by ex-tensive post-extraction transformation. For either of those reasons, Qatar and Petronas lack an economic interest and the transactions should be treated as sales.

2. Qatar And Petronas Are Entitled To Damages

The transactions should be treated as sales for an additional, independent reason: Qatar and Petronas are clearly entitled to damages in the event of breach, even if no oil or gas is produced. In a typical mineral lease, the transferee is not liable for damages for failure to explore or develop the minerals because it has the option — not the obligation — to do so. The Qatar agreements expressly provide for damages in the event of breach, ROA.37950-37951, 38976-38977, 39760-39761, 40170-40171, 40741-40742, as does Malaysian law, ROA.59630-59634. ExxonMobil's obligations to explore, develop, and extract oil and gas thus cannot be avoided by forfeiting its interest under the agreements.

Under the economic-interest test, if expected income is insulated from the risk of non-production, it follows that income is not derived solely from production. See, e.g., Commissioner v. Estate of Donnell, 417 F.2d 106, 115 (5th Cir. 1969). For example, where “the transferee personally guarantees that an oil payment will equal the specified sum,” the transferor of the property burdened by the oil payment does not retain an economic interest. Laudenslager v. Commissioner, 305 F.2d 686, 691 (3d Cir. 1962), cert. denied, 371 U.S. 947 (1963); see also Tech. Adv. Mem. 199923046, 1999 WL 379195 (Jan. 29, 1999) (guaranteed payments in the event of force majeure). Here, the entitlement to damages effectively guarantees a certain amount of income even if no production occurs.

3. Petronas Is Entitled To 'Abandonment Cess' Payments

Under four of the Malaysia contracts, Petronas is entitled to “abandonment cess” payments. Those payments are required annually, regardless of whether any mineral is extracted. ROA.5166-5167; ROA.43247 (1995 Production Sharing Contract); ROA.43717, 43738 (Amended Natural Gas Project and Sales Agreement); ROA.43901-43917 (1998 Contract); ROA.44124-44135 (2008 Production Sharing Contract). Although the district court found that the payments were contributed to “a fund to cover the costs of plugging the wells at the end of their useful lives,” ROA.5167, Petronas was not contractually obligated to use the payments for that purpose. As in Anderson, where the transferor was entitled to payments that were not based on the extraction of minerals, see 310 U.S. at 412, the payments are thus an alternative source of income to Petronas. Any of the alternative sources of income in this case require the transactions to be treated as sales.

C. Even Under The District Court's Test, The Transactions Should Be Treated As Sales

Even if the Court were to apply a “predominant or primary purpose” test, it should still reverse. It is difficult to know exactly how this vague and malleable test is supposed to be applied. But under any conceivable meaning, the predominant purpose of the transactions is the development of an export natural-gas market (in Qatar) or a domestic natural-gas market (in Malaysia).

1. The predominant purpose of the transactions is plainly not the extraction of minerals; instead, the transactions seek to develop new markets on behalf of the sovereign entities that are the counterparties. ExxonMobil secured broad rights that went far beyond extraction, and Qatar and Petronas expected ExxonMobil to exercise those rights to build significant post-extraction infrastructure and undertake significant post-extraction activities. See pp. 36-40, supra. Those rights, which were necessary to processing and marketing the oil and gas, were crucial to the economic success of the transactions. The agreements also tied significant payments to the delivery of processed products far downstream of the wellhead. See pp. 37-40, supra. It would make little sense to tie compensation to the value of those products if the primary purpose were simply the extraction of raw oil and gas.

The district court acknowledged that development of new markets was one of the purposes of the transactions. See ROA.5166-5167. But the scope of the rights and obligations, the extent of ExxonMobil's investments, and the nature of the payments make clear that the development of new markets was not simply one purpose among many; it was the transactions' predominant purpose.

2. The remaining factors that the district court considered have little or nothing to do with the transactions' predominant purpose.

First, the district court read Vest to hold that a transfer should be treated as a sale only if it is for “all or a specific, predetermined quantity of minerals in place” within a prescribed time “in exchange for fixed consideration.” ROA.5174 (quoting Vest, 481 F.2d at 243 (emphasis omitted)). But in Vest, the Court did not suggest that anything short of such a transfer should automatically be treated as a mineral lease. See pp. 30-31, supra. In any event, ExxonMobil clearly acquired a specified quantity of minerals: Qatar “placed a ceiling on extraction,” ROA.62347, and Petronas “set annual budgets and annual production” to encourage sustainable development under Malaysia's national depletion policy, ROA.5185; see also ROA.4767, 4943.

Second, the district court treated the supposed form of the transactions as leases as one of the three most important factors. See ROA.5183. In analyzing the existence of an economic interest, however, “the substance of a contract's terms and provisions will prevail over its form.” Vest, 481 F.2d at 243.

Third, the district court relied on the purported fact that extraction was a necessary condition for compensation. See ROA.5183. But if that were enough to convert a sale into a mineral lease, the entire “predominance” test would be an empty exercise, because it would be irrelevant how much post-extraction work was required, how much value the transferor derived from that work, or what alternative sources of income were available, as long as compensation was in some way contingent on extraction.

Fourth, the district court misunderstood the significance of the fact that it was necessary for ExxonMobil to create infrastructure for processing and transportation. It concluded that processing and transportation infrastructure were economically necessary for extraction, but not independently valuable activities. See ROA.5183-5184. As discussed above, the creation of infrastructure that would ultimately be owned in excellent working condition by Qatar and Petronas was not an afterthought; it was one of the primary components of the transactions. See pp. 42-43, supra. Even if there were no production, ExxonMobil was required to build this infrastructure or pay damages. And because the predominant purpose of the transactions was that physical infrastructure and the development of new markets, the transactions should be treated as sales even under the district court's novel “predominance” test.

II. THE ALCOHOL CREDIT SATISFIES THE FUEL EXCISE TAX WITHOUT ALTERING THE AMOUNT OF THE TAX 

The district court also erred by granting summary judgment to the government on the alcohol-credit issue. The “credit against” the excise tax in Section 6426 satisfies a blender's excise-tax liability; it does not alter the amount of the tax. As a result, ExxonMobil is entitled to deduct the full amount of excise tax imposed, without a reduction in the deduction for the amount of the alcohol credit.

The foregoing meaning of “credit against” is consistent with other uses of the phrase in the Tax Code, and it respects Congress's decision in the AJCA to expressly make a different credit alter the amount of an allowable deduction. The district court's contrary interpretation results in differential tax treatment of the alcohol credit and the interchangeable cash payment available under Section 6427. The district court's conclusion is also at odds with the AJCA's statutory design, this Court's case law, and even IRS's own form for reporting excise tax. The district court incorporated by reference the reasoning of an opinion of the Court of Federal Claims, but that court's reliance on legislative history, inapposite case law, and policy arguments cannot overcome the statutory text and context. And as discussed below, the strained textual analysis in the decision of the Federal Circuit on appeal is no more persuasive. Because the alcohol credit unambiguously does not alter the amount of excise tax imposed, ExxonMobil deducted the full amount of its excise-tax liability on its amended returns, and it is entitled to a refund for its overpayment.

A. Section 6426(a), Read In Context, Does Not Reduce A Fuel Blender's Excise-Tax Liability

1. The phrase “credit against” in Section 6426(a) refers to a refund-able credit that satisfies a tax liability. The Tax Code imposes an excise tax on the removal from a refinery of a “taxable fuel,” which includes gasoline. See 26 U.S.C. §§ 4081(a)(1)(A), 4083(a)(1)(A). Section 6426(a), in turn, provides that “[t]here shall be allowed as a credit . . . against the tax imposed by section 4081 an amount equal to the sum of the credits described in subsection[ ](b).” 26 U.S.C. § 6426(a)(1). To incentivize the production of renewable fuels, subsection (b) creates a credit for alcohol fuel mixtures, which is calculated by multiplying a set rate by the amount of alcohol blended with gasoline. 26 U.S.C. § 6426(b)(1). In other words, there are two separate quantities — a “tax imposed by section 4081” based on the volume of gasoline, and a “credit” under Section 6426 based on the volume of blended alcohol. When a refiner engages in blending, it may use the credit “against” the tax; the credit thus satisfies a fuel blender's excise-tax liability.

Other parts of the Tax Code use the phrase “credit against” in a similar fashion. For example, Section 31(a)(1) uses “credit against” to describe the effect that tax withheld from an employee's paycheck has on the employee's income-tax liability. Under that section, the “amount withheld as tax under chapter 24 shall be allowed to the recipient of the income as a credit against the tax imposed by this subtitle.” 26 U.S.C. § 31(a)(1). It is common sense that withholding satisfies, but does not reduce, the amount of an employee's income tax liability; otherwise, the millions of people who satisfy their tax liability through the withholding of wages would have paid no tax at all.

Of course, the phrase “credit against” can sometimes refer instead to an alteration in the amount of a tax. But when Congress intends that meaning, it conveys it explicitly. Thus, under certain subparts of the Tax Code, “the [in-come] tax imposed” on a taxpayer is “reduced by the credits allowable”: for instance, the “credit against” the income tax for energy-efficient improvements to residential property. 26 U.S.C. § 6401(b)(1); see 26 U.S.C. § 25D(a). Congress used no such language, however, with respect to the alcohol credit.

In reaching a contrary result in Sunoco, Inc. v. United States, 908 F.3d 710 (2018), the Federal Circuit relied on generic definitions of “credit” that are too ambiguous to help. It is hard to say whether “any amount that is allowable as a subtraction from tax liability for the purpose of computing the tax due or refund due” refers to the satisfaction or alteration of tax liability. See id. at 716 (quoting James Edward Maule, 506-3rd T.M., Tax Credits: Concepts and Calculation 43 (BNA 2018)), cert. denied, 140 S. Ct. 46 (2019). Nor does the definition of a “tax credit” as “[a]n amount subtracted directly from one's total tax liability” clearly answer the question. See id. (quoting Black's Law Dictionary 1689 (10th ed. 2014)). It is only in context that the meaning of “credit against” becomes clear.

2. Contextual evidence from the AJCA and the rest of the Tax Code strongly supports the foregoing interpretation. The Tax Code often alters the amount of various deductions where federal tax credits are allowed or allowable under other sections of the Tax Code. See, e.g., 26 U.S.C. §§ 163(g), 30B(h)(5), 44(d)(7), 45E(e)(2), 275(a)(4). In particular, Section 280C alters the amount of deductions on account of expenses that generated certain tax credits. See 26 U.S.C. § 280C. The AJCA added a provision to Section 280C stating that “[t]he deductions otherwise allowed under this chapter” for expenses incurred in producing low-sulfur diesel fuel “shall be reduced by the amount of the credit” in Section 45H for the production of that fuel. 26 U.S.C. § 280C(d). Because Congress did not use similar language regarding the alcohol credit, the natural inference is that it did not intend to reduce the deduction for the cost of goods sold by the amount of the alcohol credit.

The Federal Circuit purported to distinguish Section 280C in Sunoco, but its reasoning is unpersuasive. That court declined to compare the Section 45H(a) credit to the alcohol credit because the former credit is calculated according to a blender's expenses, whereas the latter is calculated according to the amount of alcohol blended. See 908 F.3d at 717. But how a credit is calculated is irrelevant to whether it affects a deduction. Both provisions create a credit, and Congress altered the amount of a deduction in the case of one but not the other. Congress thus indicated that the alcohol credit does not reduce the amount of the deduction for the cost of goods sold.

3. The refundable nature of the alcohol credit further illustrates that it satisfies a tax liability. Far from “distinguish[ing]” the alcohol credit from a cash payment, see Sunoco, 908 F.3d at 716, the statute equates the two.

The equivalence is so complete that the statute permits a fuel blender to choose to receive the incentive as a credit against its fuel excise tax, a cash payment, or a refundable income tax credit. See 26 U.S.C. §§ 34(b), 6426, 6427(e)(3). Section 6427(e)(3) limits the amount of the cash payment only to the extent an “amount is allowed as a credit under section 6426.” In the tax context, the word “allowed” refers to an amount that has been “actually taken on a return and will result in a reduction of the taxpayer's income tax.” Flood v. United States, 33 F.3d 1174, 1178 n.5 (9th Cir. 1994) (internal quotation marks and citation omitted). Under the plain language of the statute, a fuel blender is thus entitled to the full amount in cash as long as it does not take any of the amount as an excise-tax credit.

IRS has adopted the contrary position without explanation in non-binding guidance, but its interpretation is inconsistent with the statutory text. IRS would permit a fuel blender to receive a cash payment only if it has first satisfied its entire excise-tax liability with the credit. See, e.g., IRS Notice 2005-62, § 5 (Aug. 1, 2005). But if Congress had intended that meaning, it would have used the word “allowable” instead. “Allowable” refers to a credit that is “permitted and not otherwise forbidden or limited,” regardless of whether it is “actually used.” Flood, 33 F.3d at 1177 (citation omitted); see also Day v. Heckler, 735 F.2d 779, 784 (4th Cir. 1984). But even if IRS were correct, the credit is still treated as equivalent to the tax-free cash payment, dollar for dollar.

Relatedly, the district court's interpretation produces an absurd result that should be rejected. A blender that takes a cash payment or a refundable income-tax credit receives the full amount, because both options are untaxed. See 26 U.S.C. § 6427(j)(1). But under the district court's interpretation, a blender that takes an excise-tax credit would increase its income-tax liability by decreasing its deduction for the cost of goods sold. Thus, a blender who took a $100 credit under Section 6426 in 2008 or 2009 would receive an economic value of $65 after paying 35% of the $100 in increased income taxes. Congress could not have intended that disparate treatment of blenders when it created three equivalent methods of claiming the same favorable tax treatment.

In Sunoco, the Federal Circuit perceived a “windfall” for a blender if the credit was treated as satisfying, rather than altering, the amount of the blender's excise-tax liability. See 908 F.3d at 719. But the credit never increases the amount of a blender's deduction beyond what it would be if the taxpayer received the cash payment and used it to pay the entire excise tax. Under the correct interpretation of the statute, a blender simply includes the full amount of its excise-tax liability in the deduction, regardless of whether the liability is satisfied with credits or cash.

Treating the fuel-excise-tax credit as if it reduced the amount of the deduction has the same effect as including the credit in gross income. And when Congress wishes to include a federal tax credit in taxable income, it knows how to do so explicitly. Section 87 expressly states that “[g]ross income includes” the amounts of the nonrefundable income-tax credits for alcohol fuel mixtures under Section 40(a), which is separate from the alcohol credit in this case, and the biodiesel fuel credit under Section 40A(a). 26 U.S.C. § 87. If Congress had intended to include the alcohol credit in taxable income, it would have made that intention clear in the same way it did in those other provisions.

4. The design of the AJCA provides additional evidence that the alcohol credit does not alter the excise-tax liability imposed. Section 6426 was part of an effort to encourage the use of renewable fuels without depleting the Highway Trust Fund. The Tax Code appropriates to the Highway Trust Fund an “amount[ ] equivalent to the taxes received . . . under . . . section 4081.” 26 U.S.C. § 9503(b)(1). As amended by the AJCA, the Tax Code further directs that, “[f]or purposes of this [appropriation], taxes received under section[ ] . . . 4081 shall be determined without reduction for credits under section 6426.” Id.

That direction makes perfect sense if the credit does not alter the amount of excise-tax liability. But if Congress had intended the contrary meaning, it would have directed that the amount of “taxes received” should be increased to account for “credits under section 6426.” Otherwise, the perverse result would be to lower the amount of money appropriated, because taxes paid with credits would not count as “taxes received.” By providing that the amounts received should be calculated without reduction for the credits, Congress manifested its understanding that the alcohol credit is a payment in satisfaction of the excise tax.

5. The district court's interpretation is inconsistent with this Court's treatment of analogous paired payments in another tax context. In Bailey v. Commissioner, 103 F.2d 448 (5th Cir. 1939), a taxpayer both held overdue notes from a company he controlled and owed money to the company on account. See id. at 449. He charged the notes “into a running account” against himself, in partial satisfaction of his debt to the company. Id. The Court concluded that the “set off” of the notes and the loan “operate[d] as though [the taxpayer] had paid his company . . . on account [of the loan] and [the company] had paid him back the money on the notes.” Id. In other words, Bailey treated the two payments as distinct — a payment from the company to the taxpayer and a corresponding satisfaction by the taxpayer of a separate, fixed liability — not as one net payment.

The alcohol credit and the fuel excise tax are analogous to the obligations at issue in Bailey. The credit and the tax here are distinct, not a single net payment. They arise from distinct statutory provisions, and not all gasoline producers are entitled to the credit. Even the mathematical inputs are different — gallons of gasoline for the tax, and gallons of alcohol for the credit. Consistent with Bailey, this Court should treat the government's payment to ExxonMobil (the credit) and ExxonMobil's payment to the government (the tax) as separate transactions in which the credit operates to satisfy the fixed tax liability, not as a single net payment.

6. The district court's interpretation is also inconsistent with IRS's own understanding of the alcohol credit, as reflected in Form 720 — the form used for reporting excise taxes, including the fuel excise tax, and claiming credits against those taxes. On Line 3 of Part III, IRS identifies the “[t]otal tax” as a fixed amount that includes the fuel excise tax. The alcohol credit is separately reported on Line 4 of Part III. The credits from Line 4 are added to estimated payments and carried-forward overpayments from previous periods on Line 9, and Line 9 is then subtracted from the “total tax” on Line 3. If Line 9 exceeds Line 3, the taxpayer is entitled to a refund. The alcohol credit is thus treated as satisfying the “[t]otal tax,” just like a payment of estimated tax, rather than altering the amount of that tax. As the AJCA's text and structure, Fifth Circuit case law, and Form 720 all make clear, the alcohol credit does not alter the excise tax imposed.

B. The District Court Erred By Relying On Legislative History, Inapposite Cases, And Policy Considerations

The district court adopted wholesale the reasoning of the Court of Federal Claims in Sunoco, supra. That court relied on legislative history, cases from other contexts, and policy considerations, but nothing in its opinion undermines the clear text of Section 6426.

First, reliance on legislative history is inappropriate here because the statutory text is clear. See, e.g., Adkins v. Silverman, 899 F.3d 395, 403 (5th Cir. 2018).

Second, the cases discussed by the Court of Federal Claims were taken out of context. See Sunoco, 129 Fed. Cl. at 330-331. The issue in Affiliated Foods, Inc. v. Commissioner, 128 T.C. 62 (2007), was the treatment of a cash rebate. See id. at 76. But a rebate exists only as a reduction of the original price; by contrast, the alcohol credit is created, earned, and calculated independently of the fuel excise tax. See p. 53, supra. And unlike a rebate, the alcohol credit could exceed the amount of the fuel excise tax. The Court of Federal Claims also cited Maines v. Commissioner, 144 T.C. 123 (2015), a case about the federal tax treatment of a state tax credit. But state credits, unlike federal credits, are not excluded from gross income by default. See 26 U.S.C. §87; 1 Mertens Law of Federal Income Taxation § 5:21 (2021).

Third, the Court of Federal Claims relied on a “policy consideration[ ]” that exemptions from taxation should be construed against the taxpayer — a rule it derived from the supposed canon that doubts over the applicability of credits must be resolved against the taxpayer. See Sunoco, 129 Fed. Cl. at 331. As an initial matter, there is no ambiguity to be resolved here and no dispute whether ExxonMobil is entitled to a credit. But even if there were, the canon relied on by the Court of Federal Claims is a “false notion” that rests on an overgeneralization of a principle from a different context. Antonin Scalia & Bryan A. Garner, Reading Law 359-362 (2012). If the Court finds ambiguity as to how the credit should be treated, it should instead apply the “longstanding” canon of construction that, “if the words of a tax statute are doubtful, the doubt must be resolved against the government and in favor of the taxpayer.” United States v. Marshall, 798 F.3d 296, 318 (5th Cir. 2015) (internal quotation marks and citation omitted). It should also resolve any ambiguity in favor of ExxonMobil to avoid the question whether the federal income tax would become an unconstitutional “tax on gross receipts” if ExxonMobil could not take the full deduction for its cost of goods sold. Jefferson Memorial Gardens, Inc. v. Commissioner, 390 F.2d 161, 165 (5th Cir. 1968).

When read in the context of the AJCA and the Tax Code, the statutory phrase “credit against” unambiguously refers to an amount that satisfies a blender's excise-tax liability.The district court's contrary interpretation would produce an absurd result and is inconsistent with the relevant case law and IRS's own Form 720. Because the alcohol credit did not alter ExxonMobil's excise-tax liability, ExxonMobil is entitled to deduct that full amount, without any reduction, as part of its cost of goods sold.

CONCLUSION

The judgment of the district court should be reversed to the extent it denied ExxonMobil's claims for overpayment.

Respectfully submitted,

KANNON K. SHANMUGAM
BRIAN M. LIPSHUTZ
MATTEO GODI
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
2001 K Street, N.W.
Washington, DC 20006
(202) 223-7300

ADAM P. SAVITT
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
1285 Avenue of the Americas
New York, NY 10019

EMILY A. PARKER
MARY A. MCNULTY
LEONORA S. MEYERCORD
J. MEGHAN MCCAIG
THOMPSON & KNIGHT LLP
1722 Routh Street, Suite 1500
Dallas, TX 75201

KEVIN L. KENWORTHY
GEORGE A. HANI
ANDREW L. HOWLETT
MILLER & CHEVALIER, CHARTERED
900 16th Street, N.W.
Washington, D.C. 20006

JULY 21, 2021