## Facts

- Exxon Corporation and affiliated companies conducted oil and gas exploration and production activities in the United Kingdom sector of the North Sea through government-issued licenses.
- For tax years 1983–1988, Exxon paid United Kingdom Petroleum Revenue Tax (PRT) on a field-by-field basis in connection with North Sea petroleum operations.
- PRT was enacted after Exxon’s relevant licensing arrangements were already in place and did not grant Exxon additional rights or special privileges upon payment.
- PRT was calculated on profits after allowing deductions for significant costs, including capital and operating expenditures associated with petroleum extraction.
- Exxon claimed U.S. foreign tax credits for PRT under I.R.C. § 901 (and alternatively under § 903).
- The Commissioner disallowed the credits, asserting PRT was a noncreditable payment made in exchange for specific economic benefits (effectively a license/royalty-type charge rather than an income tax).

## Issues

1. Whether U.K. Petroleum Revenue Tax constitutes a creditable foreign “income, war profits, or excess profits tax” under I.R.C. § 901 and Treas. Reg. § 1.901-2.
2. Whether PRT is noncreditable because it was paid in exchange for “specific economic benefits” within the meaning of Treas. Reg. § 1.901-2.
3. If PRT is not creditable under § 901, whether it is creditable as a tax “in lieu of” an income tax under I.R.C. § 903.

## Decision

- The Tax Court held for Exxon.
- The court determined that PRT was not paid in exchange for specific economic benefits.
- The court concluded that PRT constitutes a creditable foreign tax under I.R.C. § 901.
- Because PRT was creditable under § 901, the court did not rely on § 903.

## Legal Principles

- A foreign levy is creditable under I.R.C. § 901 if its predominant character is that of an income tax (or excess profits tax) in the U.S. sense, meaning it is likely to reach net gain.
- Under Treas. Reg. § 1.901-2, a levy is not creditable to the extent it is a payment for specific economic benefits (a quid pro quo for special privileges or rights) rather than a tax imposed for revenue-raising purposes.
- A profits-based resource-sector levy enacted generally by statute, computed by allowing recovery of significant costs and expenses, can qualify as an income/excess profits tax for foreign tax credit purposes.
- The existence of a licensing regime for access to natural resources does not, by itself, convert a generally applicable statutory tax into a noncreditable payment for specific economic benefits.

## Conclusion

The Tax Court held that the U.K. petroleum revenue tax imposed on Exxon’s North Sea operations for 1983–1988 was a profits-based levy reaching net gain and was not a quid pro quo for special licensing benefits, making it a creditable foreign income/excess profits tax under I.R.C. § 901.


Exxon Corp. v. Comm’r, 113 T.C. 338 (1999)