Brattle Economic Analysis Cited in Court’s Decision Regarding Multi-Billion-Dollar Natural Gas Deal
A Brattle team provided analyses and testimony in a tax dispute over a multi-billion-dollar natural gas deal. A federal judge, citing Brattle’s analyses, ruled in October 2024 that Exxon Mobil Corporation is entitled to tax refunds for interest expense deductions that were initially denied by the Internal Revenue Service.
In 2000, ExxonMobil and the State of Qatar entered into an agreement to develop Al Khaleej Gas (AKG), a project that would produce and sell natural gas and related petroleum products extracted from Qatar’s North Field. ExxonMobil took the position that the AKG project was a partnership for tax purposes. Following a 2006 restructuring, ExxonMobil also took the position that a “production payment” – a financing structure commonly employed in oil and gas projects – had been created and should be treated as debt of the partnership for tax purposes.
On audit, the IRS disagreed with ExxonMobil’s position, determining that AKG was a mineral lease rather than a partnership. The IRS also asserted that all amounts paid to Qatar – part of which ExxonMobil had characterized as production payments – were lease royalty payments. ExxonMobil paid the tax deficiency determined by the IRS for the years 2010 and 2011 and brought a suit for refund in the US District Court for the Northern District of Texas, arguing that the government had erred in its characterization of AKG and the production payment.
A Brattle team was retained by Davis Polk and Holland & Knight, counsel to ExxonMobil. Led by Principals David Plastino and Jake Zahniser-Word, the Brattle team evaluated whether AKG had the economic characteristics of a partnership, whether the production payments made to Qatar under the agreement’s terms had the economic characteristics of debt, and whether – absent the tax benefits – the transaction had a meaningful economic impact on the parties. In April 2024, Mr. Plastino testified at trial that ExxonMobil and Qatar shared in the economic upside and downside of the project and that AKG had other economic characteristics of a partnership. He also testified that the production payment had the economic characteristics of debt and analyzed the transaction’s non-tax business purposes.
Following a week-long trial, US District Judge David C. Godbey ruled in ExxonMobil’s favor, noting that “ExxonMobil’s tax treatment correctly reflects both the tax law and the economic substance of the transaction.” In his opinion, Judge Godbey found ExxonMobil’s fact and expert witnesses, which included Mr. Plastino, to be “credible and helpful” in reaching his conclusions that AKG was a partnership and that the production payment was debt. Judge Godbey’s decision adopted key points from Mr. Plastino’s testimony when finding that:
- AKG was a partnership, in part because “economic modeling established that there was a very high correlation between economic outcomes” for ExxonMobil’s and Qatar’s profits interests;
- The production payment was a “fundamentally different economic interest” than the profits interests shared by ExxonMobil and Qatar;
- The production payment “bears the objective indicia of debt… in addition to the economic characteristics of debt;” and
- The agreement “was indisputably a bona fide commercial transaction with genuine economic substance.”
ExxonMobil claimed damages to recover its overpayment of taxes, interest, and penalties for the 2010 and 2011 tax years at issue in this litigation. The exact computation of the tax refund and statutory interest is still pending.
