AMOCO CORP. v. COMMISSIONER

T.C. Memo. 1996-159

UNITED STATES TAX COURT

AMOCO CORPORATION (Formerly STANDARD OIL COMPANY (INDIANA))
AND AFFILIATED CORPORATIONS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20471-92. Filed March 28, 1996.

S, a subsidiary of P, entered into a concession
agreement with E, an entity owned and controlled by the
Egyptian Government. Under the agreement, which had
the force of law, E was responsible for the payment of
S's Egyptian income tax liability. For the years in
issue, E took a credit against its own tax liability
for the amount of taxes paid on behalf of S. The
Egyptian Tax Department determined that E was not
entitled to a credit and was allowed only to deduct
such payments from its taxable income. It assessed
back taxes against E for a portion of the years in
issue. Collection was foreclosed by the running of the
Egyptian statutory period of limitations. Held, E was
not authorized to credit Egyptian taxes paid on behalf
of S against its income tax liability. Held, further,
there was no refund of Egyptian taxes to or for the
account of P. Held, further, E should be included in
the term "foreign country" for purposes of sec. 901,
 - 2 -

I.R.C., and the regulations thereunder, including
Example (3) of sec. 1.901-2(f)(2)(ii), Income Tax Regs.
Held, further, there was no indirect subsidy to P with
respect to E's credit practice. Held, further, the
requirements of foreign tax creditability under secs.
901-908, I.R.C., have been satisfied with respect to
Egyptian income taxes paid on behalf of S by E.

Robert L. Moore, II, Jay L. Carlson, Emmett B. Lewis, J.

Bradford Anwyll, Kevin L. Kenworthy, Laura G. Ferguson, and James

J. Lenahan, for petitioner.

William G. Merkle, Cynthia J. Mattson, William B. Lowrance,

Paul S. Manning, Michael J. Calabrese, Jan E. Lamartine, Bettie

N. Ricca, and Joan M. Thomsen, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

TANNENWALD, Judge: Respondent determined deficiencies in

petitioner's 1980, 1981, and 1982 Federal income taxes in the

amounts of $109,618,203, $200,848,534, and $155,776,311,

respectively. The issue for decision is whether petitioner is

entitled, under section 901,1 to foreign tax credits for Egyptian

income taxes purportedly paid or accrued for the years 1979-

1982.2

1
All statutory references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
2
In the petition, petitioner affirmatively claimed additional
depletion deductions in the amounts of $738,084, $1,069,353, and
$1,273,498, for 1980, 1981, and 1982, respectively, as well as
reductions of petitioner's dividend income for 1980 and 1982 in
(continued...)
 - 3 -

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.

Amoco Corporation and Amoco Egypt

Petitioner Amoco Corporation (formerly Standard Oil Company

(Indiana)) (hereinafter referred to as Amoco or petitioner) is an

Indiana corporation with its principal place of business in

Chicago, Illinois. Amoco and its affiliated corporations are

engaged in the business of exploring for, producing, refining and

marketing crude oil and petroleum products in the United States

and other countries around the world. Amoco timely filed

consolidated income tax returns on behalf of its affiliated group

for the 1979, 1980, 1981, and 1982 tax years.

Amoco Egypt Oil Company (Amoco Egypt), is a Delaware

corporation and a member of petitioner's affiliated group. It is

engaged in the business of petroleum exploration and production

within the Arab Republic of Egypt (ARE) (formerly the United Arab

Republic). Amoco Egypt has explored for and produced crude oil

and natural gas in ARE since the 1960's pursuant to concession

agreements entered into with the ARE and the Egyptian General

Petroleum Corporation.

2
(...continued)
the amounts of $1,847,461, and $6,528,665, respectively. These
issues have not yet been scheduled for trial.
 - 4 -

Egyptian General Petroleum Corporation

The Egyptian General Petroleum Corporation is a legal entity

first created by Egyptian Law No. 167 of 1958. Pursuant to

Egyptian Law No. 20 of 1976, the powers, functions, and

obligations of EGPC were assumed by a new legal entity also known

as the Egyptian General Petroleum Corporation (both entities are

hereinafter referred to as EGPC). EGPC is subject to Egyptian

income tax. Further facts in respect of EGPC are set forth and

discussed below, infra pp. 82-83.

Gulf of Suez Petroleum Company

The Gulf of Suez Petroleum Company (GUPCO) was formed by

Amoco Egypt and EGPC pursuant to the 1964 Gulf of Suez Concession

Agreement. GUPCO was later designated as the operating company

for all operations pursuant to the merged concession agreement

discussed below. GUPCO has a board of directors consisting of

eight members, four of whom are designated by Amoco Egypt and the

other four by EGPC. The chairman of the board is designated by

EGPC.

Government Structure for Egyptian Tax Administration

The Egyptian Tax Department (ETD) is a department of the

Finance Ministry responsible for the assessment and collection of

taxes.3

3
Egyptian Law No. 14 of 1939 provides that an annual tax is
established, "on the profits from professions and commercial,
industrial, and artisan operations, including mining and other
(continued...)
 - 5 -

Egyptian law requires that the ETD notify corporate

taxpayers by certified mail of any adjustments to its tax

declaration. The notice, a Form 18, must show the elements and

amount of the proposed tax assessment and offer the taxpayer an

opportunity to respond. The taxpayer may dispute the tax

adjustments contained in the Form 18 within 30 days of its

issuance. If an Egyptian corporate taxpayer agrees with the

adjustments to its tax declaration, the tax is due and the

subsequent assessment is final. Corporate Tax Form 19 is a

notice of tax assessment and is issued if the corporation fails

to respond to or disputes Form 18. The assessment pursuant to

Form 19 may be appealed to the Internal Committee.

In the case of fraud on the part of the taxpayer, the ETD

may make an additional assessment, using a Form 20. In all

instances, the ETD may correct material or calculating errors.

If a dispute cannot be resolved by the Internal Committee,

it is referred to the Refute Committee for appeal. EGPC is

entitled to appeal a decision of the Refute Committee to the

Egyptian State Council.

3
(...continued)
concessions and undertakings, with no exceptions other than those
designated by law." The tax applies to economic units subsidiary
to the public establishments and public authorities.
 - 6 -

Amoco Egypt Tax Returns, Payments, Receipts

Amoco Egypt has filed annual income tax returns with the ETD

from 1964 through 1992. For the period 1964 through June 30,

1975, Amoco Egypt paid its income taxes directly to the ETD.

For the period July 1, 1975, through December 31, 1992, EGPC

paid Amoco Egypt's Egyptian income taxes in Egyptian pounds to

the ETD. The ETD issued official receipts reflecting the income

tax payments made by EGPC in the name of and on behalf of Amoco

Egypt. The ETD typically delivered the receipts to EGPC, which

in turn delivered them to Amoco Egypt. EGPC's payments of Amoco

Egypt's income taxes were posted by ETD in its Amoco Egypt tax

file (No. 440/4). None of EGPC's tax payments on behalf of Amoco

Egypt for Amoco Egypt's 1979 to 1982 tax years were posted to

EGPC's tax file (No. 440/6).

Amoco Egypt's annual tax returns were audited by the

Petroleum Section of the Department of Tax on Joint Stock

Companies within the ETD.

Amoco Egypt dealt directly with the ETD in connection with

the department audits of its Egyptian income tax returns and

disputes arising out of those audits.

EGPC's Tax Treatment of Amoco Egypt's Taxes

EGPC is required by law to file annual income tax returns.

EGPC was a calendar year taxpayer for years ending before

January 1, 1980. Thereafter, EGPC became a June 30 fiscal year
 - 7 -

taxpayer, with its first fiscal year for the short period ending

June 30, 1980.

EGPC's tax payments of its own tax liability are posted to

EGPC's tax file (No. 440/6) by the ETD. EGPC's tax returns are

audited by the Petroleum Section of the Department of Tax on

Joint Stock Companies within the ETD.

On EGPC's Egyptian income tax returns for years prior to its

taxable year ended June 30, 1993, EGPC credited royalty payments

and income taxes paid on behalf of its foreign partners against

its own income tax liabilities.

For the 1975 to 1980 tax years, ETD did not challenge the

credit taken by EGPC against its tax liability for taxes paid on

behalf of foreign partners, including Amoco Egypt. See infra pp.

42-46 for subsequent action by the ETD.

Egyptian Petroleum Concession Agreements - General Principles

Under Egyptian law and the Egyptian constitution, the ARE

owns all that country's natural resources. Rules and procedures

for granting concessions relating to the exploitation of the

ARE's natural resources are established by law. The Ministry of

Petroleum and Mineral Resources (formerly known as the Ministry

of Industry, Petroleum and Mineral Wealth) (both hereinafter

referred to as the Petroleum Ministry) whose top executive is the

Minister of Petroleum is part of the executive branch of the
 - 8 -

Egyptian Government with responsibility for management of the

ARE's mineral resources.

The Egyptian Government authorizes petroleum exploration and

development through concessions granted to EGPC or jointly to

EGPC and a private oil company, such as Amoco Egypt. The

procedure for entering into a concession agreement begins with a

negotiation between EGPC and the private oil company as to the

terms of the agreement. An agreement in English is initialed by

the parties, indicating preliminary approval. The English text

is then translated into an Arabic text, which is then initialed

by the parties and the translators. Following approval by the

EGPC board of directors and the Minister of Petroleum, the

English text is signed by EGPC and the private oil company.

Review and approval is then made by various government councils

and committees. Among the government entities, the Egyptian

State Council and the Council of Ministers conduct in-depth

reviews and analyses of concession agreements where the terms of

such agreements are presented to them for the first time. If an

identical provision of another concession agreement is submitted,

the committees rely upon the previous reviews. A law is then

passed and signed by the president of the ARE authorizing the

Minister of Petroleum to enter into the concession agreement on

behalf of the Egyptian Government. The Minister of Petroleum and
 - 9 -

the private oil company then sign the English and Arabic versions

of the agreement, marking the effective date.

Once the English text of the agreement has been signed by

EGPC and the private oil company, the oil company may request

permission from EGPC to commence operations, prior to the

effective date.

Amoco Egypt's 50/50 Income-Sharing Agreements

During the 1960's, the ARE, EGPC, and Amoco Egypt entered

into three concession agreements (the 50/50 agreements): The

Western Desert Concession Agreement in October 1963, the Gulf of

Suez Concession Agreement in February 1964, and the Western

Desert and Nile Valley Concession Agreement in September 1969.

Under the 50/50 agreements, Amoco Egypt and EGPC each had 50-

percent interests in concessions entitling them to explore for

and produce petroleum in specified areas. Amoco Egypt was

required to fund the exploration costs until a commercial

discovery was established or until a certain amount of money had

been expended on exploration efforts. Thereafter, Amoco Egypt

and EGPC shared equally the costs of exploration and production,

as well as sharing the crude oil produced in each concession

area. Under the 50/50 agreements, EGPC and Amoco Egypt each paid

royalties to the ARE on their respective shares of production.

EGPC and Amoco Egypt each paid Egyptian income taxes on their

respective income from each concession agreement.
 - 10 -

In addition to Egyptian income taxes, EGPC and Amoco Egypt

were each subject to an additional amount or "surtax" under the

50/50 agreements designed to assure that the ARE received 50

percent of each party's respective net profits. If the amount

otherwise paid to the ARE, in the form of royalties, income

taxes, and other payments, was less than 50 percent of net

profits, Amoco Egypt and EGPC were required to pay to the ARE

such difference by way of the surtax, to make the total of all

payments equal to 50 percent of total net profits. If the total

amount otherwise paid to the ARE exceeded 50 percent of net

profits, Amoco Egypt and EGPC were exonerated and relieved from

any obligation with respect to the excess, or could elect to

credit such excess against future obligations to the Government.

In February 1965, Amoco Egypt's exploration efforts in the

Gulf of Suez, pursuant to the Gulf of Suez concession agreement,

resulted in the discovery of the El Morgan field. Production

from the El Morgan field, the largest oil find in the ARE to

date, began in February 1967. In the years after the discovery

of the El Morgan field, Amoco Egypt made additional petroleum

discoveries under its 50/50 concession agreements.

Shift to Production-Sharing Format

In 1970, the ARE and EGPC entered into a concession

agreement with a Japanese corporation, the North Sumatra Oil
 - 11 -

Development Cooperation Co. (Nosodeco), following a production

sharing format. The Nosodeco agreement provided:

Income tax of NOSODECO in the [A.R.E.] to the
Government shall be borne and paid by EGPC. EGPC shall
present to NOSODECO the document evidencing such
payment of tax. Income taxation outside [A.R.E.] shall
not be borne by EGPC.

There was no provision dealing with the calculation of

EGPC's taxes.

Since 1970, all new Egyptian concession agreements,

including those to which Amoco Egypt is a party, have used the

production sharing format, rather than the 50/50 income-sharing

format.

Under a typical Egyptian production sharing agreement, EGPC

holds the concession to explore for and produce petroleum. A

foreign oil company, as contractor, bears the cost of all

exploration, development, and production activities in return for

a negotiated share of production. Some percentage of the oil

produced in any year is allotted to the contractor for the

recovery of costs. The remaining oil production is shared by

EGPC and the contractor in agreed percentages.

In contrast to the 50/50 agreements, under the production

sharing format, EGPC bears the entire royalty obligation and pays

the royalty out of its share of production. Under the production

sharing format, the foreign entity remains subject to Egyptian

income tax, but EGPC assumes the obligation to pay the tax.
 - 12 -

Esso and Mobil Production Sharing Agreements

In early 1973, Esso Middle East (Esso), a division of Exxon

Corporation, began negotiations with EGPC to obtain an Egyptian

concession agreement. Negotiations were conducted in English and

draft agreements were prepared in English.

In the Esso negotiations, EGPC was represented by EGPC

chairman (and later Minister of Petroleum) Ahmed Hilal, his

successor as EGPC chairman, Ramzy El Leithy, Agreements

Department Manager Ibrahim Radwan (I. Radwan), Accountant Ahmed

Radwan (A. Radwan), Legal Counsel Ahmed Mansour, and Tax Advisor

Gamal Eshmawi. Leithy served as EGPC chairman from April 1973

until 1980. Negotiations began before Leithy became chairman,

although Leithy was head of the negotiating team when Article

III(f)(6), see infra p. 14, was added to the agreement. Mansour

and A. Radwan represented EGPC at most negotiation meetings, but

went to Leithy with any problems. Mansour and A. Radwan were on

an EGPC "small committee" responsible for reviewing the Esso

agreement.

In the negotiations, Esso was represented by Frank H.

Mefferd, W. D. Kruger, C. Hedlund, A. T. Gibbon, B. G. Agnew,

C. B. Corley, and Alfons Sadek.

In February 1973, EGPC began the negotiations by using the

Nosodeco production sharing agreement as a proposed model for the

Esso agreement. It was intended that EGPC bear taxes and
 - 13 -

royalties on behalf of Esso. The proposed model provided that

Esso "shall be exempted from the Income tax in the A.R.E."

In March 1973, Esso submitted proposed modifications to the

agreement, including modifications to the tax provisions to make

clear that Esso was liable for Egyptian income taxes. Esso also

proposed language describing the calculation of Esso's taxable

income for Egyptian income tax purposes and stated that EGPC

would pay Esso's taxes out of EGPC's share of crude oil and

provide Esso with official receipts evidencing payment of Esso's

taxes. Neither the EGPC model agreement given to Esso nor the

revised draft agreement Esso presented to EGPC contained any

reference as to how EGPC's taxes would be computed.

In late March, a revised proposal was submitted by Esso,

including both English and Arabic versions. Neither version had

a provision pertaining to the computation of EGPC's taxes.

On April 3, 1973, EGPC responded to the revised proposal by

complaining that it would have nothing left after paying

royalties, Esso's taxes, and its own tax liability, and asked

Esso to accept a smaller share of production.

Esso determined that EGPC had not deducted taxes paid on

behalf of Esso in its sample calculations and on April 6, 1973,

informed EGPC that "this tax amount would be deductible in

calculating EGPC's taxable income." Further, "Thus with royalty

expensed, EGPC would have a net income * * * after paying
 - 14 -

Egyptian income tax." By this, Esso meant that EGPC should

deduct from EGPC's taxable income taxes paid on Esso's behalf and

royalties paid. It was also suggested to EGPC, although not

pursued, that its profits would increase if royalty expenses were

credited against tax.

In subsequent meetings with Esso negotiators, EGPC indicated

uncertainty about whether the ETD would permit EGPC, in computing

its taxable income, to deduct royalties and the taxes paid on

behalf of Esso pursuant to the proposed production sharing

agreement. The tax provisions were important to reaching a final

Esso agreement. Following a meeting among Mefferd, Kruger, and

Agnew for Esso, and I. Radwan, Mansour, and Eshmawi for EGPC, the

following Article III(f)(6) was added, at EGPC's request, to the

production sharing agreement:

In calculating its A.R.E. Income Taxes, EGPC shall be
entitled to deduct all royalties paid by EGPC to the
A.R.E. Government and the A.R.E. Taxes of ESSO paid by
EGPC on ESSO's behalf.

Esso and EGPC initialed an agreement in English on May 19,

1973. The agreement was not binding on either party until a law

authorizing the Minister of Petroleum to enter into the agreement

was issued and published in the Egyptian Official Gazette.

Between May and early August 1973, Esso's Mefferd and Nabih Doss,

a lawyer for an Esso marketing affiliate in Egypt, worked with

EGPC's Mansour and Mongui El Rakshy, general counsel of General
 - 15 -

Petroleum Corporation (GPC), on finalizing the Arabic version of

the Esso agreement for submission to the State Council. Mefferd

and Doss worked on the first draft of the Arabic version together

in Egypt, in which Article III(f)(6) of such draft the word

"minha" (meaning "therefrom"), see infra p. 23, does not appear.

Mefferd then returned to Houston, leaving Doss to review the

Arabic version with Rakshy representing EGPC. Doss communicated

changes to Mefferd by telex, but assured Mefferd that no

substantive changes had been made. Mefferd did not notice that

the word "minha" appeared after the word "deduct" in Article

III(f)(6) of the final Arabic version he reviewed.

The first step for obtaining approval of the Esso agreement

involved EGPC's submitting it to the State Council. Mansour was

the only EGPC lawyer presenting concession agreements to the

State Council on EGPC's behalf.

Also in 1973, the ARE and EGPC entered into a concession

agreement with Mobil Exploration Egypt, Inc. (Mobil).

Negotiations for a production sharing agreement occurred

simultaneously with the Esso negotiations. On May 10, 1973, an

agreement was initialed in English on behalf of Mobil and EGPC.

At EGPC's request, the Mobil agreement included Article III(g),

identical to Article III(f)(6) of the Esso agreement. Mobil

contemplated, by Article III(g), that EGPC would be entitled to

deduct royalties paid to the Egyptian Government, and Egyptian
 - 16 -

taxes paid by EGPC on behalf of Mobil, from its, EGPC's, taxable

income.

Egyptian Law No. 107 of 1973 and Law No. 108 of 1973,

authorizing the Minister of Petroleum to enter into the Mobil and

Esso agreements, respectively, were promulgated by presidential

decree. Both laws, and the respective agreements, in both

English and Arabic, were published in the Egyptian Official

Gazette on October 4, 1973. The Arabic versions of Article

III(g) of the Mobil agreement and Article III(f)(6) of the Esso

agreement both include the term "minha" after the word for

"deduct".

1974 Amoco Egypt Production Sharing Agreements

In 1974, Amoco Egypt entered into three Egyptian production

sharing agreements: the South Gharib, South Ghara Marine, and

South Belayim Marine Concession Agreements. The 1974 Amoco

agreements were patterned after prior Egyptian production sharing

agreements. The tax provisions of the agreements were not the

subject of any negotiation.

Article III(f)(6) of the 1973 Esso agreement served as a

model for the provisions in the 1974 Amoco agreements governing

EGPC's tax treatment of its tax payments on behalf of Amoco

Egypt.
 - 17 -

1976 MCA

At EGPC's request, in early 1975, EGPC and Amoco Egypt began

preliminary discussions regarding the conversion of the three

existing 50/50 agreements into a single production sharing

agreement that came to be known as the merged concession

agreement or MCA.4 With respect to EGPC and the ARE, the

compelling force for the new agreement was the rapid worldwide

increase in oil prices that had created unanticipated profits for

Amoco Egypt under the 50/50 agreements and thus a desire by EGPC

and the ARE to modify the profit split, as well as a desire to

adopt the production sharing format being used in the Arab

community.

By letter dated March 3, 1975, EGPC formally requested that

Amoco Egypt begin negotiating the terms of a production sharing

agreement that would replace the 50/50 agreements. EGPC required

that the new agreement follow the production sharing format;

Amoco Egypt did not have the option of remaining with the 50/50

or "participation" agreement format.

4
The 50/50 agreements are not to be confused with the 1974
production sharing agreements that were not replaced by the MCA.
These production agreements have not been dealt with separately
by the parties. To the extent that they may be involved in the
years before us (as to which the record is unclear), our
conclusions in respect of the issues arising out the MCA will be
applicable.
 - 18 -

Leithy, EGPC chairman, was the chief negotiator for EGPC for

the negotiation of the MCA, as well as representing the interests

of the Egyptian Government. Other members of the EGPC

negotiating team included Mansour, its legal counsel, I. Radwan,

and A. Radwan, its accountant.

Ross W. Craig, president of Amoco Egypt from 1971 to 1977,

was the lead negotiator for Amoco Egypt. Other members of Amoco

Egypt's negotiating team included attorneys Quentin Swiger and A.

T. Richey from the tax department, attorneys Thomas James, John

Rosshirt, and Egyptian attorney Ahmed Chiati from the law

department, and economist James Bock from the planning and

economics department.

The MCA negotiations generally consisted of one-on-one

negotiations between Craig and Leithy. The negotiations were

conducted in English, and drafts of the MCA were prepared in

English.

Initially, a draft of the MCA prepared for Amoco Egypt

proposed that EGPC be entitled to a tax credit for royalties paid

to the Egyptian Government. This idea was quickly rejected by

Craig and was never proposed to EGPC.

In working out the terms of the MCA, the parties used EGPC's

prior production sharing agreements as models.

In the course of negotiations, Amoco was concerned with the

creditability of Amoco Egypt's Egyptian income taxes for U.S. tax
 - 19 -

purposes. Amoco Egypt initially proposed that it pay its own

Egyptian income taxes out of its share of the oil. EGPC rejected

this proposal, primarily because, among other things, the

arrangements under the prior agreements offered EGPC the

opportunity to obtain the foreign exchange benefit of obtaining

dollars for oil and paying Amoco Egypt's taxes in local Egyptian

currency. At EGPC's insistence, the tax provisions of the 1973

Esso agreement were used as the model for the tax provisions of

the MCA.

In a letter dated April 22, 1975, Amoco Egypt responded to

EGPC's March 3, 1975, request for negotiations and outlined the

essential terms of an agreement, one of which was that "AMOCO's

income-tax liability, grossed up, would be paid out of EGPC's 80

per cent share of profit oil." Leithy reviewed the April 22,

1975, letter and initialed the English text concerning Amoco

Egypt's proposal regarding its taxes.

In an August 4, 1975, letter from Craig to Leithy, Craig

summarized Amoco Egypt's understanding of EGPC's position with

respect to certain matters, including that Amoco Egypt's income

would be computed on a gross-up basis. Craig stated such gross-

up would not adversely affect EGPC's interest "since EGPC is

entitled to deduct from EGPC's gross income the A.R.E. income

taxes of AMOCO paid by EGPC." Leithy placed his initials next to

the English version of the above declaration.
 - 20 -

A draft of the MCA prepared contemporaneously with the

August 4, 1975, letter provides in part:

In calculating its A.R.E. Income Taxes, EGPC shall be
entitled to deduct royalties paid by EGPC to the
GOVERNMENT and the A.R.E. Income Taxes of AMOCO [Egypt]
paid by EGPC on AMOCO [Egypt]'s behalf.

An internal telex, dated August 26, 1975, from Chiati,

states that "In article IV(f) with respect to taxes, EGPC insists

on our taking Esso's text as it is, i.e. without amendments".

Article IV(f)(6), specifically, was proposed by EGPC, and

had no significance to Amoco Egypt, given Amoco Egypt's

understanding that it entitled EGPC to deduct royalties and Amoco

Egypt's taxes from taxable income. Craig understood that Article

IV(f)(6) entitled EGPC to a deduction from income, and at some

point discussed such understanding with Leithy, but Craig never

discussed EGPC's taxes in general.

On November 16, 1975, Leithy and Craig initialed the MCA in

English on behalf of EGPC and Amoco Egypt, respectively.

Under Article VII of the MCA, Amoco Egypt is entitled to up

to 20 percent of the crude oil produced as a reimbursement for

the costs of exploration, production, and related operations.5

EGPC and Amoco Egypt share the remaining 80 percent of production

in varying percentages, between 85 and 87 percent for EGPC and 13

5
Such recovery limit is not related to the computation of Amoco
Egypt's Egyptian income taxes with respect to deductible costs.
 - 21 -

and 15 percent for Amoco Egypt. Out of its share of production,

EGPC is obligated under the MCA to pay the ARE a royalty of 15

percent of the total quantity of petroleum produced and saved

from the concession. Under Article IV(a) of the MCA, Amoco Egypt

is not required to pay any royalty to the ARE on its share of

production.

The English version of Article IV(f) of the MCA provides in

part:

1. AMOCO [Egypt] shall be subject to Egyptian Income
Tax Laws and shall comply with the requirements of
the A.R.E. Law in particular with respect to
filing returns, assessment of tax, and keeping and
showing of books and records.

* * * * * * *

3. EGPC shall assume, pay and discharge, in the
name and on behalf of AMOCO [Egypt], AMOCO
[Egypt]'s Egyptian Income Tax out of EGPC's
share of the Crude Oil produced and saved and
not used in operations under Article VII.
All taxes paid by EGPC in the name and on
behalf of AMOCO [Egypt] shall be considered
taxable income to AMOCO [Egypt].

4. EGPC shall furnish to AMOCO [Egypt] the proper
official receipts evidencing the payment of AMOCO
[Egypt]'s Egyptian Income Tax for each tax year
within two hundred and ten (210) days following
the commencement of the next ensuing tax year.
Such receipts shall be issued by the proper tax
Authorities and shall state the amount and other
particulars customary for such receipts.

5. As used herein Egyptian Income Tax shall be
inclusive of all income taxes payable in the
A.R.E. (including tax on tax) such as the tax on
income from movable capital and the tax on profits
from commerce and industry and inclusive of taxes
 - 22 -

based on income or profits including all dividend,
withholding with respect to shareholders and other
taxes imposed by the GOVERNMENT of A.R.E. on the
distribution of income or profits by AMOCO
[Egypt].

6. In calculating its A.R.E. income taxes, EGPC shall
be entitled to deduct all royalties paid by EGPC
to the GOVERNMENT and AMOCO [Egypt]'s Egyptian
Income Taxes paid by EGPC on AMOCO [Egypt]'s
behalf.

Article IV(f)(2) defines Amoco Egypt's annual income for

Egyptian income tax purposes, which includes the market value of

oil received by Amoco Egypt, plus an amount equal to Amoco's

Egyptian income tax liability computed in the manner shown in

Annex E to the MCA. Annex E, regarding accounting procedures and

tax implementing provisions, provides:

It is understood that any A.R.E. income taxes paid
by EGPC on AMOCO [Egypt]'s behalf constitute additional
income to AMOCO [Egypt], and this additional income is
also subject to A.R.E. income tax, that is "grossed-
up".

Article IV(f)(6) is identical to Article III(f)(6) of the

1973 Esso agreement and to the version initialed by EGPC and

Amoco Egypt on November 16, 1975. It is also identical in

substance to the August 4, 1975, draft of the MCA.

Article XXIII(a) of the MCA provides:

Any dispute arising between the GOVERNMENT and the
parties with respect to the interpretation, application
or execution of this Agreement, shall be referred to
the jurisdiction of the appropriate A.R.E. Courts.

Article XXVI of the MCA provides:
 - 23 -

The Arabic version of this Agreement shall, before
the Courts of A.R.E., be referred to in construing or
interpreting this Agreement; provided, however, that in
any arbitration pursuant to Article XXIII hereabove
between EGPC and AMOCO [Egypt] the English version
shall also be used to construe or interpret this
Agreement.

Article XXX of the MCA provides:

This Agreement shall not be binding upon any of
the parties hereto unless a law is issued by the
competent authorities of the Arab Republic of Egypt,
authorizing the Minister of Petroleum to sign said
Agreement and giving Articles IV * * * of this
Agreement full force and effect of law notwithstanding
any countervailing governmental enactment, and the
Agreement is signed by the GOVERNMENT, EGPC and AMOCO
[Egypt].

The Arabic version of the MCA was reviewed by I. Radwan and

Mansour for EGPC, and Chiati, Sadek and Aguizy for Amoco Egypt,

in December 1975. Article IV(f)(6) of the Arabic version

includes the Arabic word "minha", meaning "therefrom", following

the Arabic words for "to deduct", "an takhssim". The term

"minha" literally means from it or her. The Arabic word for

taxes, "daraa'ib", is a feminine noun. The Arabic word for

income, "al-dakhl", is a masculine pronoun.

Thereafter, both the English and Arabic versions of the MCA

were reviewed and approved by the Egyptian State Council, the

Council of Ministers, and the Industry and Motive Power Committee

of the People's Assembly, prior to consideration by the People's

Assembly.
 - 24 -

On February 9, 1976, the People's Assembly passed Law No. 15

of 1976. Article 1 authorizes the Minister of Petroleum to sign

the MCA. Article 2 gives several articles of the MCA, including

Article IV, the force of law prevailing over contrary

legislation.

President Sadat signed a decree promulgating Law No. 15 of

1976 on February 19, 1976. Law No. 15 of 1976 and the MCA were

published in the Egyptian Official Gazette on February 21, 1976,

in English and Arabic.

The minutes of the People's Assembly session in which

Egyptian Law No. 15 of 1976 was considered and approved reflect

no discussion of the tax aspects of the MCA. Nor does a report

prepared by the Industry and Motive Power Committee concerning

Law No. 15 of 1976 address such aspects. The report does note

that the Egyptian Government expects to receive an additional

$2.4 billion from the Amoco Egypt concessions over the next 20

years as a result of converting the 50/50 agreements to the

production sharing format.

The MCA in its English and Arabic versions was formally

executed by the EGPC, Amoco Egypt, and the Minister of Petroleum,

on behalf of the ARE, on February 24, 1976. The MCA became

effective as of July 1, 1975.
 - 25 -

1983 MCA Amendments

In 1976, respondent issued Rev. Rul. 76-215, 1976-1 C.B.

194, holding that taxes paid under an Indonesian production

sharing agreement were not creditable. On June 12, 1978,

respondent issued Rev. Rul. 78-222, 1978-1 C.B. 232, holding that

taxes paid under a revised Indonesian production sharing

agreement were creditable.

In August 1978, in response to the Indonesian rulings, Amoco

decided that the MCA needed to be restructured in certain

respects in order to ensure U.S. tax creditability, including

requiring Amoco Egypt: (1) To pay its Egyptian income taxes

directly, and (2) to compute such taxes on a consolidated basis

rather than separately in respect of each concession.

Amoco developed proposed MCA amendments to submit to the

U.S. Internal Revenue Service (IRS) for a favorable ruling. The

provision in the MCA providing for EGPC's payment of Amoco

Egypt's taxes represented a change from the generally applicable

Egyptian tax law pursuant to which Amoco Egypt had previously

paid its taxes directly and, because of the Indonesian rulings,

raised questions as to creditability under U.S. law. The basic

approach of the proposed amendments was to provide that Amoco

Egypt would be subject to and pay its own taxes under the general

tax laws rather than have them paid by EGPC as provided in the
 - 26 -

MCA. The MCA provisions relating to EGPC's payment of Amoco

Egypt's taxes, including Article IV(f)(6), would be deleted.

Chiati advised Amoco that it would not be an easy matter to

pass through the People's Assembly the various amendments to the

laws required by Amoco's approach.

Amoco wanted to apply its approach to all other contractors.

However, on the assumption that this perhaps would not be

feasible, Amoco considered the consequences of only Amoco Egypt's

renouncing the MCA provisions and subjecting itself to the

general tax laws.

In September 1978, Amoco representatives met with Leithy,

the EGPC chairman, and then with Hilal, the Minister of

Petroleum, to advise them of the Indonesian rulings and the need

to amend Amoco's production sharing agreements in the ARE. Leithy

and Hilal indicated a willingness to discuss the matter further

when Amoco had a specific proposal to make.

Amoco assembled a group to develop specific proposals for

restructuring the agreements and to draft the necessary

documents. This group included Rosshirt, Jim Flaherty, an Amoco

tax attorney, Charles K. Koepke, the Administrative and Economics

Manager for the Middle East region, Richard Rausch, head of

Amoco's Planning and Economics Group, and Chiati, an Egyptian

attorney and adviser on Egyptian law. Also, Amoco retained Carl

A. Nordberg, as outside tax counsel, to advise the company on the
 - 27 -

changes that needed to be made to the concession agreements to

ensure U.S. tax creditability. Nordberg specializes in

international tax matters and assisted in the restructuring of

the Indonesian production sharing agreement so that it resulted

in a creditable tax.

Amoco developed a proposal whereby the agreements would be

amended to provide that Amoco Egypt would pay its Egyptian income

taxes directly and by deleting all of the provisions relating to

EGPC's payment of Amoco's Egyptian taxes on Amoco's behalf,

including Article IV(f)(6) of the MCA. Amoco also proposed the

use of a Petroleum Production Incentive Allowance (PPIA), which

was a formula under which additional oil would be allocated to

Amoco Egypt in order to allow it to pay its Egyptian taxes

directly while keeping the net economic interests of Amoco Egypt

and the ARE substantially unchanged. Amoco developed the PPIA

because EGPC was not willing to alter the existing production

split, see supra p. 20, to reflect a gross-up for the taxes to be

paid directly by Amoco Egypt. EGPC found an increase in Amoco

Egypt's production allowance more appealing for political

purposes. Since under the PPIA approach, Article IV(f)(6) would

be deleted, its meaning was unimportant to Amoco at this time in

connection with the ruling request.

In the course of developing the proposed changes in the MCA,

it was understood by Amoco and its advisers that Article IV(f)(6)
 - 28 -

of the MCA provided EGPC with a deduction from gross income for

royalties and the Egyptian taxes that were paid on Amoco Egypt's

behalf. Such understanding was based variously and cumulatively

on the plain language of the English version of the MCA, the lack

of knowledge that the Arabic was possibly different than the

English, the internal symmetry of the MCA, and the August 4,

1975, letter of principles, supra p. 19.

On September 5, 1979, Amoco submitted a request to the IRS

for a ruling on the creditability of Amoco's Egyptian income

taxes based on certain proposed changes to the MCA as follows:

1. Amendment of the MCA to delete all provisions
relating to Amoco Egypt's income tax liability,
including the provision under which EGPC assumes
responsibility for paying Amoco Egypt's tax
liability, and to state simply that Amoco Egypt is
subject to Egyptian income tax laws and shall
comply with those laws.

2. Addition of the Petroleum Production Incentive
Allowance ("PPIA") to reflect the additional
economic burden assumed by Amoco Egypt for its own
tax liability.

3. Clarification that Amoco would become directly
liable for payment of its income taxes from
Amoco's funds.

4. Provision for the establishment of certain rules
to clarify how the Egyptian income tax laws apply
to the oil and gas business.

Due to Leithy's refusal, the ruling request did not assume

that EGPC would apply the modified tax provisions to non-U.S. oil

companies. This provided an element of doubt to Amoco regarding

U.S. creditability.
 - 29 -

On September 18, 1979, Amoco sent a copy of the September 5,

1979, ruling request to EGPC. In February 1980, Amoco requested

expeditious treatment of the ruling. Amoco's chairman wrote the

U.S. Secretary of Commerce and the U.S. Secretary of the

Treasury, with respect to the ruling request. On August 5, 1980,

Amoco's chairman met with the Secretary and Assistant Secretary

of the Treasury to discuss the request and was advised that a

favorable ruling would be issued shortly.

In July 1980, Amoco filed a supplementary request, asking

for a favorable ruling on the existing MCA, i.e., without the

proposed amendments as set forth in the September 5, 1979,

request; or, anticipating a negative ruling, for such negative

ruling to be applied prospectively for years beginning after the

issuance of a favorable ruling on the PPIA approach. The

supplemental request did not address the computation of EGPC's

taxes.

On August 7, 1980, the IRS issued a favorable ruling on

Amoco's September 5, 1979, request. A ruling on the supplemental

request was issued on August 11, 1981, which did not address the

indirect subsidy rules under section 4.901-2(f), Temporary Income

Tax Regs, 45 Fed. Reg. 75647, 75653 (Nov. 17, 1980), see infra p.

34.

Amoco was aware that the "lack of a creditable Egyptian

income tax could result in reduced corporate earnings on the
 - 30 -

order of several hundred million dollars annually in the near

future" and that the "ultimate result will be determined by

negotiation."

In late September 1980, Amoco sent a team to the ARE to

negotiate the changes to the MCA contemplated by the favorable

IRS ruling. In an internal meeting with Amoco Egypt, Glen Taylor

of Amoco Egypt expressed concern that the proposed amendments had

deleted the provision "which allowed EGPC to 'deduct' from its

own tax liability all royalties which it pays to the Government

and Amoco [Egypt]'s Egyptian income taxes paid by EGPC on Amoco

[Egypt]'s behalf." Amoco's U.S. representatives understood the

MCA to allow only a deduction from income.

At a meeting on September 28, 1980, Hilal, Minister of

Petroleum, informed Amoco that he would be announcing the

departure of Leithy as EGPC chairman. Hilal also confirmed

EGPC's willingness to amend the MCA, provided he could assure the

parliament that the ARE would never be any worse off under the

amended agreement. Leithy left EGPC because of political

differences with Hilal on how to run EGPC.

With regard to negotiating the amendment of the MCA, the

lead EGPC negotiator was Hamed Kaptan, an auditor. Mansour, the

EGPC staff attorney, was also involved. Rausch was the lead

negotiator for Amoco until August 1981, and Koepke was the lead

negotiator from August 1981 until the amendments were concluded
 - 31 -

in August 1983. Other Amoco representatives in the negotiations

included Flaherty, Chiati, and Dudley.

It was Amoco's understanding, going into the negotiations,

that it was necessary only to keep the ARE whole, based in part

on Hilal's statement at the September 28, 1980, meeting. At the

first negotiating session in late September 1980, however, Kaptan

asserted that both the ARE and EGPC should be kept no worse off.

Amoco countered that keeping EGPC whole should be taken care of

between EGPC and the ETD, and did not concern Amoco.

Because it wanted to be kept whole, EGPC objected to the

deletion of Article IV(f)(6), arguing that this provision

permitted them to take a credit for the taxes paid on Amoco

Egypt's behalf. EGPC asked what Amoco intended to do to

compensate EGPC if it lost what it viewed as its right to a

credit for Amoco Egypt's taxes. The Amoco negotiators disagreed

with EGPC's interpretation of Article IV(f)(6) and expressed the

view that the article provided for a deduction from income for

the taxes paid on Amoco's behalf. Amoco did not argue the point

because it anticipated that Article IV(f)(6) was going to be

taken out of the MCA. Amoco did not investigate EGPC's assertion

that it had been claiming credits for Amoco Egypt's taxes. At no

time during the restructuring negotiations did Amoco discuss with

EGPC the basis for EGPC's taking a tax credit.
 - 32 -

In the course of discussions, one idea that was raised, but

quickly dismissed, was to have a law passed entitling EGPC to a

credit for taxes paid directly by Amoco Egypt. Amoco left the

first negotiating session having agreed to look into the U.S. tax

consequences of allowing EGPC a tax credit for Egyptian taxes

paid directly by Amoco Egypt, by inserting language to such

effect into the MCA. Amoco also considered amending the language

of Article IV(f)(6).

Following the September 1980 meetings in the ARE, Amoco

officials met with Nordberg, who reiterated to Amoco that Article

IV(f)(6) should be deleted from the agreement and, moreover,

advised that a continuation of EGPC's credit practice could

jeopardize U.S. tax creditability. Nordberg advised that

allowing EGPC a tax credit would severely jeopardize a favorable

ruling from the IRS. The advice was based on Nordberg's analysis

of Rev. Rul. 78-258, 1978-1 C.B. 239, and the proposed

regulations under section 901, under which, he thought, allowing

EGPC a credit would constitute an indirect subsidy. Amoco

accepted Nordberg's advice. Nordberg advised that it would not

jeopardize U.S. creditability if EGPC got relief in a manner not

related to the amount of Amoco Egypt's tax payments, including if

EGPC were forgiven a fixed fraction of its taxes, or EGPC's

royalty obligation were eliminated.
 - 33 -

In early November 1980, a second round of negotiations took

place between Amoco and EGPC, where Amoco representatives

communicated Nordberg's advice to EGPC, that EGPC could not be

allowed to credit Amoco Egypt's taxes against its tax liability.

EGPC indicated that it understood Amoco's position. However,

EGPC continued to indicate the credit practice, and keeping EGPC

whole, was an open issue through meetings in December 1980. At a

December 18, 1980, negotiating session, EGPC indicated that it

would drop the credit issue. It was understood by Amoco that

EGPC would deal with the ETD as far as being kept whole, but that

EGPC would not arrange with the ETD to take credits for Amoco

Egypt's taxes.

In November 1980, temporary regulations under section 901

were released, indicating that it would be permissible for U.S.

tax creditability purposes for a foreign national oil company to

pay a contractor's taxes. See sec. 4.901-2, Temporary Income Tax

Regs., 45 Fed. Reg. 75647, 75648 (Nov. 17, 1980). In light of

the temporary regulations, Amoco reviewed the EGPC negotiations

and planned for a new IRS ruling request on the existing MCA.

Part of Amoco's strategy was to protect its U.S. tax credits

claimed for 1979 and 1980.

In a January 1981 negotiation meeting, EGPC indicated that

it was attempting to get a reduction in the royalty rate it paid
 - 34 -

the Egyptian Government, as compensation for no longer taking tax

credits for Amoco Egypt's taxes.

In January 1981, Amoco submitted another ruling request to

the IRS seeking a determination that taxes paid by EGPC on Amoco

Egypt's behalf under the existing agreements were creditable.

Amoco believed that the basic provision whereby Amoco Egypt's

taxes were paid by EGPC would pass muster under the temporary

regulations and, if so, that it would not be necessary to

continue the difficult negotiations on the PPIA approach. In

stating the reasons why the Egyptian tax system met the

requirements for a creditable tax under section 903, Amoco

stated: "No portion of Amoco's tax is refunded to it, nor is any

portion of such tax used directly or indirectly to provide a

subsidy to Amoco." The computation of EGPC's taxes was not

addressed, and Amoco did not indicate that EGPC had claimed a tax

credit for taxes paid on behalf of Amoco Egypt.

In February 1981, EGPC formed a new negotiating team that

included Mansour. Mansour was more amenable than the previous

lead negotiator, Kaptan, to handling the loss of EGPC's right to

the credit under Article IV(f)(6) through a reduction in the

royalty rate.

In March 1981, Amoco Egypt sent a letter to EGPC to resolve

an impasse over a "keep-whole" clause. The clause was requested

by EGPC as a means of recovering from Amoco Egypt the difference,
 - 35 -

if any, between the taxes it paid and any additional revenue it

received under the PPIA provisions. In an attachment to the

letter, Amoco Egypt described the status of the negotiations in

part as follows:

At one point EGPC questioned the deletion of the
following provision in the Concession Agreements
[Article IV(f)(6)] * * * The loss of such credit or
more precisely "deductions" said EGPC, is apt to
adversely affect its financial position. Clearly the
loss of this credit will have no impact whatsoever on
Egypt as a whole. As to EGPC, it is possible to offset
the loss of above credit by EGPC agreeing with the
Government to reduce the royalty paid [by EGPC] to the
Government. [Emphasis added.]

By letter dated March 20, 1981, Amoco submitted additional

information to the IRS regarding its January 1981 ruling request,

in response to specific questions posed by the IRS on two issues.

The letter did not address the issue of EGPC's payment of taxes

on behalf of Amoco Egypt.

By May 1981, Amoco Egypt was frustrated in failing to reach

an agreement with EGPC, with an economic hardship clause being

the major obstacle. It recognized, based on EGPC's inconsistent

negotiating methods, that further obstacles might include the

readdressing of previously discussed issues, including language

in the agreements allowing EGPC to credit against its own tax

liability tax payments discharging Amoco Egypt's tax liability.

In August 1981, Amoco received a favorable ruling from the

IRS on the January 1981 ruling request. With minor reservations,

the ruling stated that EGPC's payment of Egyptian income taxes on
 - 36 -

behalf of Amoco Egypt would not affect the latter's foreign tax

credit. As a consequence of this ruling, the PPIA proposal was

abandoned, and Amoco and its outside counsel began drafting

revised amending agreements to reflect the minor changes required

by the new ruling. Nordberg prepared an initial draft, which

left Article IV(f)(6) in the agreement, based on the premise that

EGPC would continue to pay Amoco Egypt's taxes and was entitled

to receive a deduction from income. Flaherty deleted Article

IV(f)(6) from Nordberg's draft based on EGPC's having orally

agreed to such deletion in the context of the PPIA negotiations

and a general concern regarding EGPC standing by its agreement to

discontinue taking a tax credit.

In a letter to EGPC, dated September 21, 1981, Amoco Egypt

advised EGPC that it had obtained "an Internal Revenue Service

Ruling on a revised approach to amending the Concession

Agreements which we believe will satisfy all of EGPC's concerns."

Amoco Egypt stated that, under the ruling, EGPC could continue to

discharge Amoco's Egyptian tax liability on Amoco Egypt's behalf.

On September 22, 1981, a meeting was held at Amoco's Chicago

offices where it was decided that Article IV(f)(6) could be

retained in the agreement.6 Nordberg advised that the most

6
Regarding this meeting, Chiati wrote in a memo to the file:
"EGPC's credit for payment of Amoco [Egypt]'s taxes to be left as
is." Despite the literal meaning of this sentence, it appears to
be merely a shorthand way of saying Article IV(f)(6) was going to
(continued...)
 - 37 -

important concern was to make the changes to the MCA simple, and

to get them done quickly. In this light, Nordberg advised that

it was not necessary to insist that EGPC change its practice of

taking a tax credit for Amoco Egypt's taxes.

Nordberg's advice was based in part on consultations with

other lawyers at his firm, including Kevin Dolan and Daniel

Horowitz, who had been involved in foreign tax credit issues as

employees of the Treasury Department and IRS National Office,

respectively. Based on those consultations and a memorandum

prepared by Dolan,7 Nordberg concluded that, because of EGPC's

status as a public authority, the subsidy rule under the Treasury

regulations would not be implicated regardless of EGPC's

treatment of the tax it paid on behalf of Amoco Egypt.

In a letter to EGPC, dated October 14, 1981, Amoco Egypt

presented a proposed amending agreement, wherein it stated:

The substance of the changes is to provide for the
computation of Amoco Egypt's Egyptian income tax
liability on the basis of the consolidated income from
all concession agreements. EGPC shall continue to
discharge Amoco's Egyptian tax liability on its behalf
and, contrary to my earlier advice, no change need be
made in the provision relating to EGPC's right to
deduct such taxes paid on Amoco's behalf in calculation
of EGPC's Egyptian income tax liability.

6
(...continued)
be left in the agreement as is. In his testimony, Chiati shows
an understanding that EGPC was entitled only to a deduction.
7
Dolan's memo concluded that the arrangement is properly
analyzed under the direct subsidy rules since EGPC is a
governmental entity.
 - 38 -

There was no change to Article IV(f)(6) in the proposed

amended MCA.

On August 2, 1982, two more ruling requests were submitted

to the IRS. Again, the computation of EGPC's taxes was not

mentioned.

Negotiations of the amending agreement continued for over a

year. During this period, there were no discussions of Article

IV(f)(6). In December 1982, Amoco Egypt and EGPC initialed a

"Memo of Understanding", which described the agreed changes to

the MCA and reflected that no change would be made to Article

IV(f)(6). Shortly thereafter, Amoco Egypt and EGPC initialed an

amended MCA that retained Article IV(f)(6) without change.

In August 1983, a law was enacted authorizing the Minister

of Petroleum to enter into the amended MCA. The promulgation law

provided that the provisions of the amended MCA had the force of

law and would be in effect by way of exception to the provisions

of any contradictory legislation. Article IV(f)(6) was not

changed in the final amended MCA signed by the parties in August

1983.

Petitioner's Knowledge as to EGPC's Credit Practice

In March 1980, Amoco Egypt wrote Amoco in the United States,

regarding the implementation of a two-tier pricing system,

stating in part: "Since taxes paid by EGPC on behalf of

contractors are creditable against EGPC's other tax liabilities

there also should be no difference in EGPC's total tax bill."
 - 39 -

Such letter was prepared by Amoco Egypt's finance manager,

Richard Dudley, although it was signed by the president of Amoco

Egypt, D. B. Wilkie. On September 16, 1980, Dudley wrote the ETD

about the change of EGPC's fiscal year and stated: "Since EGPC

pays our taxes and credits such payments against their own taxes,

we must furnish EGPC with data on our accrued taxes for the

period January 1 to June 30, 1980." Dudley consequently wrote a

telex to Amoco in the United States regarding the information

requirement, stating "Amoco taxes paid by EGPC are credited

against their payment." Dudley had considerable tax-related

experience with production sharing agreements, although he had no

knowledge of the negotiation of the MCA, and was not experienced

with the preparation of Amoco Egypt's tax returns. Dudley's

statements in the above correspondence reflected his impressions,

rather than his reasoned analysis of the MCA. Dudley had no

understanding of the impact of EGPC's treatment of taxes paid on

Amoco Egypt's behalf on Amoco's U.S. tax liability.

Respondent's Knowledge as to EGPC's Credit Practice

In early February 1988, respondent was furnished with a

statement from the ETD that taxes of contractors, such as Amoco

Egypt, were taken as a credit against EGPC's tax liability.

Concurrently, respondent obtained an English translation of the

Arabic text of a provision identical to Article IV(f)(6).

In April 1988, after respondent advised Nordberg that she

had been informed of the EGPC tax credit, Nordberg went to the
 - 40 -

ARE and reviewed EGPC's tax returns which reflected that EGPC was

claiming such credit, and reported this information to

respondent. This was the first instance in which Amoco informed

respondent that EGPC was taking the credit.

On May 11, 1988, EGPC sent a letter to Amoco Egypt

confirming that EGPC claimed a credit. EGPC explained that its

method of computing its tax was a combination of general Egyptian

income tax principles and special provisions found in the

production sharing agreement. On May 31, 1988, Amoco submitted a

memo to respondent, in which it explained EGPC's credit practice

as follows:

It now appears, however, that the Arabic version
of Article IV(f)(6) contains some additional words
which, according to some translators, provide that EGPC
is allowed to deduct from its income taxes the taxes it
pays on Amoco Egypt's behalf plus the royalties it pays
on its own behalf. That is, under this interpretation,
EGPC is allowed an intragovernmental tax credit for the
Amoco Egypt taxes (as well as for the EGPC royalty)
that reduces EGPC's tax liability.

The memo further stated an understanding that EGPC had

claimed a tax credit for 1979, the year then in issue.

Section 901(i)

In 1986, section 901(i) was added to the Code. Tax Reform

Act of 1986, Pub. L. 99-514, sec. 1204(a), 100 Stat. 2085, 2532.

Section 901(i) provides:

(i) Taxes Used to Provide Subsidies.--Any income,
war profits, or excess profits tax shall not be treated
as a tax for purposes of this title to the extent--
 - 41 -

(1) the amount of such tax is used (directly
or indirectly) by the country imposing such tax to
provide a subsidy by any means to the taxpayer, a
related person (within the meaning of section
482), or any party to the transaction or to a
related transaction, and

(2) such subsidy is determined (directly or
indirectly) by reference to the amount of such
tax, or the base used to compute the amount of
such tax.

From 1988 to 1990, Amoco engaged in repeated attempts to

obtain a technical correction of section 901(i).

Also from 1988 to 1990, Amoco, with help from EGPC, the

Petroleum Ministry, and the U.S. Ambassador to the ARE,

endeavored to persuade the U.S. Treasury Department and the

Congress regarding the status of EGPC as a part of the Egyptian

Government and the nonapplication of the indirect subsidy rules

to entities like EGPC.

Egyptian Resolution of Credit Issue

On March 20, 1991, Jim Lenahan, assistant general tax

counsel of Amoco, consulted Nordberg on whether Amoco should ask

the Egyptian Government "to remedy the Egyptian deal either

prospectively or retroactively."

On December 24, 1991, Miller & Chevalier, petitioner's

counsel in this case, outlined a "program" for obtaining

assistance from the Egyptian Government. The program proposed

meetings between senior Amoco personnel and senior Egyptian

officials, as well as lower-level meetings. The program

contemplated convincing EGPC and the Petroleum Ministry to change
 - 42 -

EGPC's tax credit prospectively. Petitioner believed it would

maximize its chances of obtaining such a change by demonstrating

to the Minister of Petroleum that the intent of the parties to

the MCA was for EGPC to get a tax deduction, instead of tax

credit.

In January 1992, lawyers for Amoco interviewed Craig, former

president of Amoco Egypt, and in February 1992, they interviewed

Leithy, former chairman of EGPC, with respect to their respective

understandings of the purpose and intent of Article IV(f)(6) as

written in 1975. They did not seek such information directly

from EGPC.

Between February 2 and February 6, 1992, Charles Pitman,

Amoco Egypt's incoming president, and Fuller, chairman of the

board of Amoco, discussed Amoco's foreign tax credit controversy

with Dr. Hamdi El Banbi, the Minister of Petroleum and the former

chairman of GUPCO. The purpose of Fuller's presence was, inter

alia, to "underscore the seriousness of the dispute" with the

IRS.

On February 6, 1992, David Work, the outgoing president of

Amoco Egypt, Pitman, Lenahan, and Chiati met with Banbi

concerning petitioner's dispute with the IRS. Lenahan told Banbi

that other U.S. oil companies were interested in the case and

that Amoco was taking the lead. Banbi agreed to help Amoco if he

could do so at no cost to the ARE and suggested that Amoco advise

EGPC's chairman Dr. Moustafa Shaarawy. Shortly after the
 - 43 -

February 6, 1992, meeting, Banbi told Work to let him know if

Amoco was not receiving full cooperation from EGPC. Amoco

contacted Shaarawy shortly after the February 6, 1992, meeting.

On February 10, 1992, Lenahan and Carlson met with EGPC's

A. Radwan. Lenahan and Carlson requested EGPC's help to show:

(1) That EGPC is part of the Egyptian Government, and (2) that

EGPC does not receive a subsidy from the Egyptian Government. On

February 11, 1992, Lenahan and Carlson met with A. Radwan again

and provided him with an extensive report on the two issues.

EGPC expressed that it would fully cooperate.

Amoco did not ask Minister Banbi to consider changing EGPC's

tax credit practice until May 13, 1992, after the determination

of the ETD, reflected in a letter dated May 2, 1992, that EGPC

was not entitled to claim credits for foreign partner taxes.

Until May 1992, EGPC had officially taken the position that it

was entitled to a tax credit.

In December 1989, Ahmed Ismail, a tax inspector in the

Petroleum Section of the Department of Tax on Joint Stock

Companies of the ETD, conducted his first audit of EGPC,

concerning its 1983-1984 return. He did not challenge EGPC's

claimed tax credits for royalties or foreign partner taxes. Such

action conformed with the failure to challenge such credits in

earlier years.

In an audit report signed November 29, 1990, concerning

EGPC's 1984-1985 tax year, Ismail reported that EGPC subtracted
 - 44 -

foreign partner taxes and royalty expenses from its income for

purposes of its profit/loss statement, but had restored foreign

partner taxes to its income on its income tax return. Ismail, in

his audit report, restored the royalty expense to EGPC's income,

as EGPC itself had done for foreign partner taxes. The audit

report did not address whether EGPC was entitled to a tax credit

for royalties or foreign partner taxes. An assessment form (Form

19), dated December 27, 1990, for the 1984-1985 tax year does not

indicate an allowance of a tax credit.8

For the 1985-1986 tax year, also audited by Ismail, a notice

of assessment (Form 18), dated December 5, 1991, shows an

adjustment in EGPC's income in the amount of foreign partner

taxes and royalties paid by EGPC. The notice does not provide

for a tax credit for royalties or foreign partner taxes.

For the 1986-1987 tax year, Ismail prepared an audit report

denying EGPC a deduction from income for either royalties or

taxes paid on behalf of foreign partners. Ismail cited Article

114 of Egyptian Law No. 157 of 1981 for the proposition that

corporate tax is not a deductible cost. The notice of assessment

for the 1986-1987 year (Form 18) does not provide for a tax

credit.

In October 1991, Ismail met for the first time with Ahmed

Momtaz, an employee of Amoco Egypt responsible for coordinating

8
Ismail testified that the credit was disallowed, which is
consistent with the absence of the credit on the assessment form.
 - 45 -

audit adjustments with EGPC. Ismail inquired as to Momtaz' view

of Article IV(f)(6) of the MCA. Momtaz translated the English

version into Arabic and expressed his view that Amoco Egypt's

taxes should be treated as a cost by EGPC.

As of January 1992, EGPC's tax years up to the June 30,

1980, short year were closed, following ETD audits, appeals to

the Internal Committee on challenged positions, and the

expiration of the Egyptian statutory period of limitations.

Regarding EGPC's payment of taxes on behalf of foreign partners

for those years, it was never at issue whether EGPC was entitled

to a deduction or a credit for taxes paid. In reports discussing

the 1975 and 1976 tax years, and the 1977 and 1978 tax years, the

Internal Committee states that, in calculating its income taxes,

EGPC is entitled to "deduct therefrom the Egyptian income tax it

paid on behalf of Amoco", and allowed EGPC to deduct such amounts

from its tax base. There is no discussion of foreign partner

taxes in Internal Committee reports concerning the 1979 tax year

and the short year ending June 30, 1980. The Internal

Committee's review was focused on whether EGPC had substantiated

the payment of foreign partner taxes.

Also as of January 1992, notices of assessment for the 1980-

1981 to 1982-1983 years had been issued, which had not disallowed

EGPC's practice of taking a credit. No final assessment had yet

been made for these years.
 - 46 -

In an Internal Committee report dated January 19, 1992,

concerning the 1980-1981 tax year, there is no discussion of

foreign partner taxes. The final assessment for the 1980-1981

year, Forms 3 and 4, dated February 3, 1992, did not allow a

credit for royalties or taxes paid on behalf of foreign partners.

In another Form 19 concerning the 1980-1981 year, dated April 14,

1992, the ETD served a notice of tax assessment based on the

disallowance of a credit to EGPC. This was not a "revised" Form

19.

EGPC objected to the disallowance of credits for the 1980-

1981 year.

In January 1992, Ismail prepared a memorandum for the head

of the Tax Department for Joint Stock Companies describing EGPC's

treatment of royalties and foreign partner taxes, concluding that

EGPC's treatment was improper. Ismail discussed the issue with

his superiors in the department. The issue was then referred to

the ETD's Research Department in February 1992. Ismail

subsequently met with personnel from the Research Department,

described the adjustments he had made, and provided them with

copies of EGPC's tax returns and the MCA.

In Ismail's discussions with the Research Department, only

the Arabic text of the MCA was considered. The word "minha" in

Article IV(f)(6) was considered and, following Ismail's belief

that "minha" referred to the method of calculation, Ismail and
 - 47 -

the Research Department concluded that foreign partner taxes and

royalties were costs deductible from income.

In April 1992, in memorandums concerning the 1981-1982,

1982-1983, and 1983-1984 years, Ismail confirmed that EGPC was

allowed to deduct royalties and foreign partner taxes, as a cost,

but not as a credit against taxes.

On April 14, 1992, the ETD issued "revised" notices of

assessment (Forms 19), for the 1981-1982 to 1983-1984 tax years,

disallowing a credit for royalties and foreign partner taxes.

By letter dated May 2, 1992, the Research Department

informed the head of the Tax Department for Joint Stock Companies

that a determination had been made, with the approval of the

chairman of the ETD, that EGPC was not entitled to a tax credit

for royalties and foreign partner taxes. ETD's determination

applied to all Egyptian production sharing agreements and to the

deductibility of both royalty payments and foreign partner taxes.

On May 6, 1992, Lenahan suggested to Pitman that they brief

Banbi as soon as possible in light of the audit controversy. A

May 6, 1992, draft of talking points for a meeting with Banbi

reflects an intent to discuss the following: (1) The IRS concerns

about EGPC taking a credit; (2) the finding that both Craig and

Leithy had intended a deduction; (3) Leithy's suggestion that

Amoco approach Banbi and request that EGPC change its practice to

conform to the intent of Craig and Leithy, and that Leithy

intended to contact Banbi directly, on such issue; (4) the
 - 48 -

problem of creditability for petroleum investment in Egypt; and

(5) that EGPC's practice could be corrected at no cost to the

Egyptian Government. A May 7, 1992, draft adds that ETD's audit

position that EGPC should take a deduction, as reflected in the

May 2, 1992, letter, provides an additional setting for resolving

the matter. Lenahan's pre-meeting notes show that he planned to

tell Banbi that EGPC's agreement to the ETD audit position would

provide an administrative solution to the tax credit problem.

Amoco, represented by Pitman, Chiati, and Lenahan, met with

Minister of Petroleum Banbi on May 13, 1992, where they raised

all of the main talking points, including ETD's audit dispute

with EGPC. Amoco told Banbi that it would be potentially harmful

to Amoco in its dispute with respondent if EGPC vigorously

contested the issue and wrote position papers and appealed the

issue, and Banbi indicated that would not happen. Banbi

indicated that he (1) was aware of the ETD determination, (2) had

already concluded that EGPC would comply with that determination,

(3) already had instructed an EGPC official to quantify the

effect of correcting EGPC's prior credit practice, and (4) was

prepared to do what was right. Banbi further indicated his

preference to find an administrative solution such as that

offered by the ETD audit. Banbi also indicated his awareness

that the U.S. creditability problem applied to all U.S. companies

and that he wanted to remove the cloud of uncertainty regarding

foreign tax creditability. Banbi told Amoco to advise other U.S.
 - 49 -

petroleum companies that the EGPC tax credit problem would be

resolved. Banbi realized that EGPC's tax credit could be changed

at no cost to Egypt. Banbi further made it clear that he knew

the change would have some unfavorable impact on EGPC and on the

Petroleum Ministry, and would have a favorable impact on the

Finance Ministry, and that the bonuses of EGPC's top managers

would be less, while the bonuses of the top managers at the

Finance Ministry would rise.

At the May 13, 1992, meeting, Chiati raised the issue of

obtaining an interpretative law approved by the People's

Assembly, regarding EGPC's right to a deduction. Banbi quickly

dismissed the idea because, while in the end he thought the law

would be passed, it would take too long and would subject him to

scrutiny and criticism. Banbi preferred an administrative

solution, particularly in light of the opportunity presented by

the ETD audit.

Chiati also inquired whether EGPC might seek an opinion in

the State Council that could overrule the ETD's rejection of

EGPC's tax credit position. Banbi initially thought that might

occur, but later indicated that EGPC would agree with the ETD and

not seek such an opinion.

Near the end of the meeting, Amoco indicated it would be

helpful to have official ARE documents showing, inter alia, that

the EGPC tax dispute had been resolved in a manner consistent

with normal resolution of disputes between different branches of
 - 50 -

the ARE. Banbi agreed to provide letters to Amoco to prove the

point.

Banbi indicated that he was relying on A. Radwan for help on

the details of making the change to taking a deduction in a

retroactive manner and met with Banbi after the Amoco

representatives had left.

On May 13, 1992, A. Radwan informed Pitman that Banbi had

instructed him to work out the change of EGPC's tax credit.

A. Radwan told Pitman that EGPC would do its best. Pitman viewed

this as a sign that A. Radwan would not give up the credit so

easily.

Amoco representatives met with A. Radwan on May 14, 1992,

where they made a point of emphasizing that Banbi had given the

go-ahead to work out the change to a deduction retroactively.

A. Radwan raised several obstacles to Amoco's suggestion that a

retroactive change of EGPC's tax credit would be relatively easy

to accomplish. It appeared that A. Radwan was trying to create

as many obstacles as possible to the suggestion that the

retroactive change was relatively easy to accomplish. A. Radwan

described Amoco's request for a retroactive change as a "new

request". A. Radwan reminded Amoco that it had previously

requested EGPC's help to show only two points: (1) That EGPC is

part of the Egyptian Government, and (2) that EGPC does not

receive a subsidy from the Government. When Lenahan asked

A. Radwan point blank whether he agreed with the ruling of the
 - 51 -

ETD concluding that the EGPC credit should be changed to a

deduction, A. Radwan responded no, but that he may change his

mind.

On May 18, 1992, Pitman sent a letter to Banbi setting forth

his understanding of the issues resolved at the May 13, 1992,

meeting, including that EGPC's credit practice would be changed

retroactively, and asking for confirmation of such. By letter

dated May 21, 1992, Banbi replied to Pitman's letter, confirming

its contents and that he had issued instructions to the concerned

staff in EGPC to draft suitable proposals to that end.

Also by letter of May 21, 1992, Banbi wrote the Minister of

Finance concerning the dispute between EGPC and the ETD, and the

dispute between the IRS and U.S. oil companies operating in

Egypt. Stating that such readjustments would have no bearing on

the total amounts to be channeled to the Finance Ministry, Banbi

requested the approval of the Minister of Finance of a procedure

whereby EGPC's past payments of surplus to the Finance Ministry

would be set off against its adjusted tax liability for prior

years. A copy of Banbi's letter was forwarded to the head of the

Department of Tax on Joint Stock Companies. The ETD responded to

Banbi's letter by memo dated May 26, 1992, stating that EGPC had

theretofore disputed the ETD's determination that it was not

entitled to a tax credit.

On May 24, 1992, A. Radwan requested that Amoco help EGPC

sort everything out with the Finance Ministry. Between June and
 - 52 -

December of 1992, Amoco provided the Egyptian officials with

accounting advice on the financial arrangements and numerous

drafts of agreements and letters between the Ministers of

Petroleum and Finance. Amoco attempted to remain apart from the

decision-making aspects of the resolution of the issue, but was

nevertheless involved in the process.

On August 1, 1992, the Minister of Finance responded to

Banbi's May 21, 1992, letter, confirming that EGPC should have

deducted foreign partner taxes from income and not from its

taxes. The Minister further stated that a retroactive accounting

settlement between taxes and surplus would not be feasible and

that instead the Finance Ministry would use EGPC's future surplus

to pay the tax differentials for the previous years up to

June 30, 1992, successively.

By letter dated August 6, 1992, Banbi agreed to the

principles in the August 1, 1992, letter from the Minister of

Finance and asked that instructions be given regarding the

immediate implementation of those principles. On August 11,

1992, the Minister of Finance forwarded Banbi's letter to the

head of the Funding Sector of the Finance Ministry, and to the

chairman of the ETD. The necessary steps were subsequently taken

to implement the agreement of the Ministers of Finance and

Petroleum as to disallowing EGPC's tax credit claims for

royalties and foreign partner taxes for all open years, beginning

with EGPC's tax year ended June 30, 1981.
 - 53 -

At a meeting held August 24, 1992, regarding EGPC's 1980-

1981 tax year, the Internal Committee of the ETD determined that

EGPC was not entitled to a credit for taxes paid on behalf of

foreign partners, but was allowed to deduct such amount from its

revenues in computing taxable income. The Internal Committee

cited both the report issued by the Research Department and the

letter from Minister of Petroleum Banbi agreeing to its

conclusion. Such determination also applied to the 1981-1982 and

1982-1983 tax years.

On September 3, 1992, Pitman met separately with Banbi and

Shaarawy, where he stated Amoco's concern that EGPC do the right

thing procedurally in making up the tax delinquency. Pitman

stated it would be incorrect for EGPC to simply have the Funding

Sector transfer surplus paid to the ETD and that the correct

approach would be for EGPC to write separate checks to the

Funding Sector and to the ETD. Banbi replied that EGPC would do

the right thing procedurally and that he was prepared to lose his

job as minister as a result. Banbi also stated that, as

minister, he could issue a ministerial decree fixing the salaries

and bonuses of EGPC personnel so that they would not be affected

by lower surpluses.

In November 1992, at the request of petitioner's counsel,

the ETD issued a certificate confirming that it had reached a

final determination on the EGPC credit issue, as of May 1992, and

concluding that EGPC had erroneously deducted Amoco Egypt's tax
 - 54 -

payments from EGPC's tax liability rather than from income and

that EGPC should pay all tax differentials for all open years.

Further, it was stated that EGPC would comply with the tax

department's determination both prospectively and retroactively,

and that by December 1992 it was expected that EGPC would have

completed payment of the tax differential for the 1980-1981 tax

year, and that payment for later years would follow a final

assessment by the tax department.

Also in November 1992, EGPC and Amoco Egypt, with the

approval of the Minister of Petroleum, entered into an agreement

whereby EGPC agreed to document for Amoco Egypt its compliance

with the ETD's determination concerning foreign partner taxes for

both prospective and retroactive purposes.

EGPC's deficiencies for the tax years ending June 30, 1981,

June 30, 1982, and June 30, 1983, have been paid. Payments were

made by check and posted to EGPC's tax file (No. 440/6).

In its Egyptian tax return for the taxable year ended

June 30, 1993, EGPC deducted foreign partner taxes in computing

taxable income and did not claim a credit for such amount.

1993 and 1994 Production Sharing Agreements

In 1993, Amoco Egypt, EGPC and the Egyptian Government

finalized a new production sharing agreement for the East

Shukheir Marine area. Under this 1993 agreement, EGPC assumed

the obligation to pay Amoco Egypt's Egyptian income taxes on
 - 55 -

behalf of Amoco Egypt. Article III(g)(6) of the agreement

provides:

6. In calculating its A.R.E. income taxes, EGPC shall
be entitled to deduct all royalties paid by EGPC
to the Government and [Amoco Egypt's] Egyptian
income taxes paid by EGPC on [Amoco Egypt's]
behalf.

The Arabic version of the above provision does not include

the word "minha" as did the MCA at issue herein. The word

"minha" was not used at Amoco Egypt's request.

In a 1994 production sharing agreement entered into between

EGPC and Mobil, the English text includes a provision comparable

to Article IV(f)(6) herein, with the proviso, "but EGPC shall not

credit directly or indirectly CONTRACTOR'S Egyptian income taxes

against EGPC's Egyptian income taxes."

Notice of Deficiency

In calculating allowable foreign tax credits for the taxable

years 1979, 1980, 1981, and 1982, petitioner included Egyptian

income taxes paid on behalf of Amoco Egypt by EGPC, pursuant to

the MCA and other concession agreements between Amoco Egypt,

EGPC, and the ARE, in the following amounts:

Year Amount

1979 $304,015,893
1980 498,086,280
1981 557,873,428
1982 453,586,679

Amoco also included these amounts in its U.S. gross income. On

October 12, 1984, Amoco timely filed amended consolidated
 - 56 -

corporate income tax returns on behalf of itself and its domestic

subsidiaries for the taxable years ended December 31, 1979,

December 31, 1980, December 31, 1981, and December 31, 1982, with

the District Director, Chicago, Illinois, reflecting Amoco's

timely election to: (1) Apply the provisions of the 1983 foreign

tax credit regulations retroactively to the years at issue, and

(2) apply the "safe harbor" method of determining allowable

foreign tax credits with respect to Egyptian taxes.

Applying the "safe harbor" method in its amended returns,

petitioner treated portions of the Egyptian income taxes reported

on its original returns as creditable taxes. The remainder was

deducted in computing taxable income. The amounts reported on

petitioner's amended returns are summarized as follows:

Year Credit Claimed Deducted Total

1979 $215,414,631 $ 88,601,262 $304,015,893
1980 459,881,927 38,204,353 498,086,280
1981 383,993,639 173,879,789 557,873,428
1982 308,490,746 145,095,933 453,586,679

Egyptian income taxes claimed as foreign tax credits by

Amoco in 1979 were not utilized to reduce Amoco's 1979 U.S. tax

liability and were carried forward to 1980 and subsequent tax

years.

On June 18, 1992, respondent issued a statutory notice of

deficiency to petitioner for the 1980, 1981, and 1982 tax years.

In the notice of deficiency, respondent determined that Amoco

Egypt's Egyptian income taxes had not been paid within the
 - 57 -

meaning of section 901 and the regulations thereunder.

Respondent disallowed all of petitioner's foreign tax credits

relating to Egyptian income taxes for the 1980, 1981, and 1982

tax years, as well as the Egyptian foreign tax credit

carryforward from 1979. Respondent also decreased petitioner's

gross income by amounts corresponding to the foreign tax credits

claimed for the 1980, 1981, and 1982 tax years. Petitioner

timely filed a petition with this Court on September 11, 1992,

contesting the proposed deficiencies in tax, and claiming an

overpayment of tax plus interest in respect of other items.9

OPINION

Section 901 allows a domestic corporation a credit against

its Federal income tax in the amount of any taxes paid or accrued

during the taxable years to any foreign country. See American

Chicle Co. v. United States, 316 U.S. 450 (1942). The purpose of

the credit is to reduce international double taxation. Id. at

452. Whether petitioner is entitled to foreign tax credits is to

be determined by applying principles of domestic tax law. United

States v. Goodyear Tire & Rubber Co., 493 U.S. 132 (1989);

Phillips Petroleum Co. v. Commissioner, 104 T.C. 256, 295 (1995).

In applying this mandate, however, we look first to the law of

9
See supra note 2.
 - 58 -

the foreign state in order to determine the nature of the

obligations and rights which form the basis of the claim of a

foreign tax credit. Cf. Phillips Petroleum Co. v. Commissioner,

supra; H. H. Robertson Co. v. Commissioner, 8 T.C. 1333 (1947),

affd. 176 F.2d 704 (3d Cir. 1949). In so doing, we note that the

parties are in agreement that the Egyptian tax involved herein

constitutes an "income tax" within the meaning of section 901.

See also Rev. Rul. 82-119, 1982-1 C.B. 105.

The framework for disposition of this case is the merger

concession agreement (MCA) among Amoco Egypt Oil Company (Amoco

Egypt), a wholly owned subsidiary of petitioner, the Egyptian

General Petroleum Corporation (EGPC), an Egyptian public

authority, and the Arab Republic of Egypt (ARE).

There is no dispute between the parties that, absent the

particular circumstances involved herein, petitioner would be

entitled to the claimed credit in respect of the amounts of such

tax claimed to have been paid to the ARE by EGPC on Amoco Egypt's

behalf out of EGPC's share of the oil production. Additionally,

we note that respondent does not contend that any portion of such

amounts represents a disguised payment for Amoco Egypt's

undertakings under the MCA.

The issues herein are grounded on the effect to be given to

Article IV(f)(6) of the MCA and its interpretation and

application by EGPC. Article IV(f)(6) provides in its English

version:
 - 59 -

In calculating its A.R.E. income taxes, EGPC shall be
entitled to deduct all royalties paid by EGPC to the
GOVERNMENT and Amoco's Egyptian Income Taxes paid by
EGPC on Amoco [Egypt]'s behalf.

The Arabic version of Article IV(f)(6) is the same except for the

addition of the Arabic equivalent of "therefrom" after the phrase

"to deduct".

During the years at issue, EGPC interpreted Article IV(f)(6)

as authorizing it to credit the Egyptian income taxes of Amoco

Egypt against its Egyptian income taxes rather than to deduct

such taxes in calculating its income.

The determination of petitioner's entitlement to a foreign

tax credit under section 901 depends upon the resolution of the

following issues:

(1) Whether Article IV(f)(6) authorizes EGPC to take a

credit for Amoco Egypt's Egyptian income taxes paid by EGPC.

Analysis of this issue involves consideration of whether the MCA

is a contract or a law of the ARE, including consideration of the

impact of the variation between the English and Arabic versions

of Article IV(f)(6), and, in either case, consideration of the

intent of the parties and the extent to which such intent should

be taken into account.

(2) The impact of the position of the Egyptian Tax

Department over the years in respect of the taking of the credit

by EGPC, and particularly its action in 1992, disapproving such
 - 60 -

credit. Implicated in this issue is the application of the "act

of state" doctrine.

(3) Whether the taking of the credit by EGPC for Amoco

Egypt's taxes should be treated as a tax exemption, refund, or

subsidy so as to require the conclusion that the Egyptian income

taxes were not paid within the meaning of section 901. Analysis

of this issue involves, among other considerations, the question

whether EGPC, whose surplus was paid annually to the ARE, should

be treated as an integral part of, or a separate entity from, the

Government of the ARE and, in this context, whether the

characterization of a subsidy can apply where the funds involved

are, at all times, funds of the ARE.

(4) Depending on our resolution of the foregoing issues,

the impact on petitioner's foreign tax credits of the difference

in exchange rates between the time of the payments by EGPC during

the years in issue and its payment of its back taxes after the

disallowance in 1992 of the credits it took for Amoco Egypt's

taxes.

One additional comment is necessary before turning to a

detailed consideration of the above-described issues. Throughout

these proceedings, respondent has sought to capitalize on the

alleged variations over the years in petitioner's and its

counsel's approach to the situation involved herein and on the

activities of representatives or officers of petitioner and Amoco

Egypt, including their counsel. Respondent has expressly
 - 61 -

renounced any assertion of conspiracy or like characterization in

respect of the action of the ETD in 1992 and has confined her

assertions to "orchestration" of such action by petitioner and

Amoco Egypt and less than full disclosure of facts to respondent

in connection with petitioner's requests for rulings. Our review

of the record has satisfied us that respondent's charges and

innuendos are without merit and that the actions of petitioner,

Amoco Egypt, and their counsel represent simply efforts, expended

with skill and professional competence and propriety, to cope

with a troublesome situation. In any event, such activities

neither help nor hinder the accomplishment of the task before us

(namely to reach our own conclusions as to the issues involved),

except to the extent that such activities should properly be

taken into account in determining the intent of the parties.

Under these circumstances, we will make no further comment on the

above-described assertions of respondent.

The initial dispute between the parties involves the

question whether, under Egyptian law, EGPC was entitled to claim

a credit against its income taxes for the payments made on

account of Amoco Egypt's income taxes. Respondent asserts that

Article IV(f)(6) of the MCA unambiguously provides for such a

credit, that the Arabic version of the MCA has the force of law

so that there is no room for interpretation to take into account

the intent of the parties to the MCA, and that, in any event, the

parties to the MCA intended that EGPC would be entitled to such a
 - 62 -

credit under Article IV(f)(6). Petitioner counters with the

assertion that, properly interpreted, both the English and Arabic

versions of the MCA and the income tax law of the ARE only

entitled EGPC to claim a deduction for the income tax which Amoco

Egypt was obligated to pay.

The English version of Article IV(f)(6) of the MCA provides:

"In calculating its A.R.E. income taxes, EGPC shall be entitled

to deduct all royalties paid by EGPC to the GOVERNMENT and Amoco

[Egypt]'s Egyptian Income Taxes paid by EGPC on Amoco [Egypt]'s

behalf." Looking only at this version of Article IV(f)(6), we

think that a strong argument can be made that it provides EGPC

with a deduction of Amoco Egypt's tax from income and not a

credit against EGPC's income tax. Such an interpretation would

accord with the use of the word "deduction" in Annex E of the MCA

which provides that Amoco Egypt's taxes are to be computed on the

"gross income of AMOCO less the costs and deductions * * *".

Such an interpretation would also reflect the intention of the

parties, see infra pp. 66-70. Moreover, it would conform to the

general understanding, under the U.S. tax context, that the word

"deduct" means to subtract from gross income. See, e.g., sec.

62(a) (defining adjusted gross income as "gross income minus the

following deductions"); Black's Law Dictionary at 413 (6th ed.

1990). Before adopting this conclusion, however, we need to deal

with the Arabic version of Article IV(f)(6).
 - 63 -

The Arabic version of Article IV(f)(6) added the word

"minha" after the word "deduct" (which appears as "takhssim").

The parties do not see eye to eye on the English translation

of the Arabic version. Petitioner contends that the correct

translation of the Arabic version of Article IV(f)(6) is:

In calculating its A.R.E. income taxes, EGPC shall be
entitled to deduct therefrom all royalties paid by EGPC
to the GOVERNMENT and AMOCO [Egypt]'s Egyptian Income
Taxes paid by EGPC on AMOCO [Egypt]'s behalf.

Respondent contends the correct translation is:

When EGPC undertakes to calculate income taxes imposed
on EGPC in the A.R.E., EGPC is entitled to subtract
therefrom (or, to credit against them) all of the
royalties EGPC has paid to the government and Amoco
[Egypt]'s Egyptian income taxes which EGPC has paid on
behalf of Amoco [Egypt].

Respondent concedes that the phrase in parentheses, "or, to

credit against them", is not in the original.

The two relevant differences between the translations are:

(1) Whether the Arabic word "takhssim" means "deduct" or

"subtract"; and (2) the meaning to be attributed to the inclusion

of the Arabic word "minha", meaning "therefrom", following

"takhssim".

Regarding the first difference, petitioner's expert argues

that "takhssim" translates only to "deduct" and that the Arabic

word for "subtract" is "yatrah", which is not present.

Respondent's expert argues that "takhssim" is a general term

meaning "subtract", which needs direction by a prepositional

phrase regarding from where to subtract. We think that this is a
 - 64 -

tweedledum-tweedledee situation; "subtract" and "deduct" are

synonymous. Webster's New Dictionary of Synonyms at 793 (1968).

The more critical difference rests on the significance of

the inclusion of the term "minha", meaning "therefrom".

Petitioner argues that "minha" refers not to EGPC's taxes as

finally determined but to the process of calculating EGPC's taxes

articulated in the opening clause of Article IV(f)(6), which is a

feminine concept in Arabic. Petitioner goes on to assert that if

we should conclude that the language of Article IV(f)(6) does not

unambiguously support its position then we should resolve any

ambiguity by looking to the intent of the parties.

Respondent argues that, because the Arabic word for taxes is

feminine, and because "minha" means from it or her, the provision

unambiguously instructs EGPC to deduct Amoco Egypt's taxes from

EGPC's own taxes. Respondent goes on to assert that Article

IV(f)(6) is inconsistent with the generally applicable principles

of deduction from income under Egyptian tax law. This being the

case, there is no basis for looking beyond the language of

Article IV(f)(6) to the intent of the parties since Article II of

the promulgation law, Egyptian Law No. 15 of 1976, accorded the

force of law to the MCA and operates as an exception to other

Egyptian laws, with the result that it should be strictly

interpreted.

We find it unnecessary to dwell upon the allegedly

inescapable conclusion that, because the MCA has the force of
 - 65 -

law, Article IV(f)(6) provides a credit of Amoco Egypt's taxes

against EGPC's taxes rather than a deduction from income. We are

not persuaded that the gender analysis is as compelling as

respondent seeks to have us conclude. We think the juxtaposition

of the word "minha" in Article IV(f)(6) does not require that it

be attributed to the word "takhssim" (taxes) but that there at

least is a question as to the determination of from what the

deduction of taxes should be taken. In this connection, we think

it relevant that respondent's expert testified, with respect to

the new 1993 agreement, that the omission of the word "minha" did

not change the meaning of the tax provision, and that even

without the word, EGPC would be entitled to a credit. In effect,

this line of reasoning makes the presence of the term "minha"

irrelevant, so that the English and Arabic versions are virtually

identical. Such analysis undermines and is in direct conflict

with the evidence that, in 1993, Amoco Egypt, EGPC, and the ARE

intended to remove any doubt that EGPC get a deduction. It is

clear that, given the awareness of the problem and the stakes

involved, careful attention was paid in 1993 to ensuring that

there was no question that EGPC was not granted a right to a

credit. Indeed, this phase of testimony of respondent's expert

tends to weaken the impact of his advocacy of the significance of

the word "minha" in the 1975 MCA involved herein.

In short, we are satisfied that the mandate of the Arabic

version of Article IV(f)(6) is not so clear as to preclude us
 - 66 -

from taking the English version into account10 and examining the

intent of the parties as an aid to interpretation. In so

stating, we note that, in a 1984 case, Judgment of Aug. 26, 1984

(Agypetco v. Minister of Petroleum), Ct. Admin. Justice, Egyptian

State Council, the Administrative Court of the Egyptian State

Council, in describing a concession agreement between EGPC, the

Minister of Petroleum and a private contractor, stated that the

agreement provided that the provisions of the agreement have the

force of law, and shall be in force notwithstanding the

provisions of any legislation contrary thereto. Notwithstanding

that statement, the court considered both the intent of the

parties and the customary practice in the petroleum industry in

rendering its opinion.

We see no purpose to be served by regurgitating the evidence

as to who said what to whom at the time of the original

negotiations in 1975 or at the time of the subsequent discussions

relative to changes in the MCA during the 1980's. Those details

have been set forth at length in our findings of fact.

10
Under Article XXIII of the MCA, any dispute between the ARE
and EGPC or Amoco Egypt is to be referred to the courts of the
ARE. Before the courts of the ARE, Article XXVI provides that
the Arabic version shall be referred to in construing or
interpreting the MCA.

In the event of a dispute between Amoco Egypt and EGPC,
Article XXIII provides the matter is to be settled by
arbitration. In any such arbitration, Article XXVI provides that
the Arabic version, and also the English version, shall be used
to construe or interpret the MCA.
 - 67 -

Nevertheless, it is important to note that the MCA negotiations

were conducted in English and that an English version of the MCA

was the direct product of those negotiations. Moreover, we think

it appropriate to address specifically the question of the impact

of the Esso and Mobil agreements. Respondent seeks to derive

comfort from the facts that those agreements had been concluded

by the time of the MCA negotiations and that the language of

Article IV(f)(6) of the MCA was derived from, and identical to,

that contained in the Esso agreement. In the Arabic version of

the Esso agreement, it appears the term "minha" was inserted in

the final stages of the translation process. Mefferd, the most

senior Esso representative who was familiar with the Arabic

version, did not notice and was not made aware of the addition of

the term "minha", prior to entering into the agreement. There is

nothing in the record indicating which party inserted the term

"minha" into the agreement, and the purpose for so doing. By way

of contrast, before reaching its final form, Article IV(f)(6) was

considered thoroughly by Amoco Egypt and its impact was the

subject of discussions among the negotiators for Amoco Egypt and

EGPC. In view of the foregoing, we think that, despite the

identity of phrasing of Article IV(f)(6), the Esso and Mobil

agreements do not impact the intent of the parties to the MCA

involved herein.

Based upon our evaluation of the entire record herein,

including the testimony of the witnesses whom we saw and heard
 - 68 -

and the arguments of the parties as to the credibility of that

testimony, we conclude the following in respect of the intention

of the parties at the time the MCA was concluded in 1975:11

(1) Amoco Egypt clearly intended that Article IV(f)(6) was

designed to confirm EGPC's right under general Egyptian tax law

to deduct from its income the amount of taxes it was paying on

Amoco Egypt's behalf and not to authorize a credit which would

constitute an exception to such law.

(2) EGPC was uncertain of its right, under the general

Egyptian income tax law, to deduct taxes paid on behalf of

another from its income and, as far as it was concerned, the

purpose of Article IV(f)(6) was to confirm that right. Perhaps

EGPC may have had an unexpressed view that the insertion of the

word "minha" in the Arabic version which followed by rote the

Esso and Mobil agreements provided a basis for obtaining a credit

rather than a deduction. Certainly, its post-1975 actions in

claiming that credit lends some support to such a view although

it clearly does not provide legal blessing of its correctness.

(3) With respect to the Egyptian Government, we find no

discernible intent as to the meaning of Article IV(f)(6). In the

11
The most persuasive single item of evidence on the intent of
Amoco Egypt and EGPC is the letter, dated August 4, 1975, signed
by Craig, president of Amoco Egypt, and initialed by Leithy,
chairman of EGPC, which clearly restates that EGPC is to deduct
Amoco Egypt's taxes from EGPC's income. We are not impressed
with respondent's attacks on this letter and Craig's supporting
testimony.
 - 69 -

Egyptian Government's various reviews of the MCA, there is no

discussion of the computation of taxes.

Respondent argues that intent can be found in the Egyptian

Government's review of the 1973 Mobil agreement. Respondent

refers to a report to the Egyptian State Council, in which it was

concluded that the provision, identical to Article IV(f)(6), in

effect put Mobil on equal footing with a party who enjoyed a tax

exemption. Respondent argues that, by this conclusion, the

Government intended Mobil, and later Amoco, to enjoy a tax

exemption. We are not persuaded. The report merely makes a

common-sense observation, similar to one that could be made about

the U.S. taxpayer in Example (3) of section 1.901-2(f)(2)(ii),

Income Tax Regs.12 Furthermore, there is no evidence that the

report was considered by the State Council or by the Egyptian

legislature, the People's Assembly. The authorization laws for

both the Esso and Mobil agreements were promulgated by

presidential decree, without being enacted by the People's

Assembly.

We find support for our conclusions that the MCA would have

been more explicit in allowing EGPC a credit if that was so

intended. There appears to have been no provision in the general

12
In Example (3) of sec. 1.901-2(f)(2)(ii), Income Tax Regs.,
the U.S. taxpayer's foreign tax obligation is assumed by the
government of the foreign country imposing the tax liability.
The example recognizes that the foreign tax is paid, although
there is no direct out-of-pocket payment from the U.S. taxpayer.
See infra p. 80.
 - 70 -

Egyptian tax law allowing a credit for taxes paid. By contrast,

when EGPC was exempted from certain customs, export and stamp

duties, the exemptions were clearly listed in the enabling

legislation, and the exemptions were discussed in the legislative

history.

Further, we note that, in the 50/50 agreements, where a

credit was intended, the parties used appropriate language, which

is not found in the MCA.

Finally, we are satisfied that the post-1975 events did not

constitute a ratification by Amoco Egypt of any purported right

of EGPC to take the credit for Amoco Egypt's taxes, assuming for

purposes of discussion that such ratification would have created

a right which EGPC did not have as a matter of Egyptian law, an

assumption of doubtful validity since the MCA agreements had the

force of law which would make Article IV(f)(6) inviolate in

respect of changes in meaning by the parties.

We recognize that, in 1980, Amoco learned that EGPC was

claiming a credit by virtue of Article IV(f)(6). EGPC's basis

for taking such a credit was never discussed, and the proper

interpretation remained in dispute when the parties entered into

the amended MCA in 1983. Amoco did not agree that EGPC was

entitled to a credit, but did not press the issue at the time,

first, because it planned on deleting the provision from the MCA,

and later, because Amoco thought, based on EGPC's governmental

status (see infra pp. 81-82), it was irrelevant for U.S. foreign
 - 71 -

tax credit purposes whether EGPC took a credit. Respondent's

assertion of ratification confuses knowledge (which Amoco and

Amoco Egypt had) with approval (which they did not give).

Respondent emphasizes that, in Amoco's ruling requests,

Amoco never stated that EGPC was claiming a credit for taxes paid

on Amoco Egypt's behalf. We are not persuaded that, given its

view as to the governmental status of EGPC, Amoco was obligated

to detail the factual basis for its assertion that no subsidy was

involved, see infra p. 91. In any event, any failure on the part

of Amoco to discharge any such obligation would simply be with

respect to Amoco's ability to rely on those rulings. Neither the

rulings nor the facts on which they were premised are relevant to

our determination.

Of greater significance than the foregoing analysis of the

meaning of Article IV(f)(6) and the relevant Egyptian tax law is

the ruling of the ETD to which we now turn our attention.

From 1975 to 1992, EGPC claimed a credit each year against

its income taxes for Amoco Egypt's income taxes, and its actions

were not challenged by the ETD for the taxable years through June

30, 1980. In 1992, after reviewing the MCA, the ETD determined

that EGPC was not entitled to such credit. EGPC, at the urging,

and with the approval, of the Minister of Petroleum, acquiesced

in the ETD determination and agreed to pay back taxes, calculated

on the basis of a deduction of Amoco Egypt's taxes.
 - 72 -

Petitioner argues that we can rely on the ETD determination.

Respondent counters with several arguments. First, respondent

argues that, prior to 1992, it was settled law that Article

IV(f)(6) provided EGPC with a foreign tax credit. In support of

this argument, respondent points to the fact that, in 1991, the

GPC, a subsidiary of EGPC, prevailed before the Arbitral Tribunal

in a dispute with the Finance Ministry and the ETD over whether a

provision similar to Article IV(f)(6) entitled the GPC to a

credit for taxes paid on behalf of another party. However, the

decision of the tribunal focused on whether GPC in fact paid

taxes on behalf of the foreign partner and did not deal with the

question of whether GPC was entitled to a deduction or a credit

for such taxes. Leaving aside whether the Arbitral Tribunal's

decision constitutes settled Egyptian law, it is obvious that

such decision does not operate to preclude the ETD from

challenging EGPC's credit practice.

As a second point, based on her assertion that settled

Egyptian law provided for a credit under Article IV(f)(6),

respondent argues that "Article IV(f)(6) is a statutory provision

which cannot be amended except by the enactment of another law by

the People's Assembly and the President", and that neither the

ETD determination nor the December 1992 agreement between Amoco

Egypt and EGPC is sufficient to amend the statutory text of

Article IV(f)(6). We think it obvious from our earlier analysis

that this argument is without merit. The ETD determination and
 - 73 -

the later agreement did not seek to amend the law. The ETD

merely sought an interpretation of how Article IV(f)(6), as

originally written, should be applied. Additionally, we reject

respondent's attempt to have us reject the ETD determination

because of prior actions by the Internal Committee in respect of

EGPC taxes where the credit was not disallowed. There is no

evidence that the credit issue was ever addressed prior to 1992.

Moreover, the ETD was not bound by prior inaction any more than

respondent would be in respect of such inaction. See Lozoff v.

United States, 392 F.2d 875 (7th Cir. 1968), affg. 266 F.Supp.

966 (E.D. Wis. 1967); Thomas v. Commissioner, 92 T.C. 206, 226-

227 (1989).

Respondent seeks to undermine the effect of the ETD

determination by arguing that EGPC could have successfully

disputed that determination under substantive and procedural

Egyptian law, and that EGPC would have done so but for

petitioner's efforts to persuade Banbi, the Minister of

Petroleum, to prevent EGPC from doing so. Whether EGPC could

have successfully challenged the ETD determination is unclear,

because there was no precedent focused on the credit versus

deduction issue at the time. In this connection, we note that in

1993, the Refute Committee, on an appeal from the Internal

Committee, supra p. 5, upheld the ETD's interpretation of a

provision like Article IV(f)(6) in an agreement between GPC and

another foreign oil company. The Refute Committee relied on the
 - 74 -

ETD's May 2, 1992, determination, discussed above, supra p. 46,

and the agreement of the Minister of Petroleum, and of EGPC, to

abide by the ETD determination. Regarding its own interpretation

of the tax provision, the Refute Committee held that it means

that GPC could deduct royalties and foreign partner taxes to

arrive at taxable income. In taking this position, the Refute

Committee made no reference to the earlier decision of the

Arbitral Tribunal, see supra p. 71, a further indication that the

Arbitral Tribunal did not reach the credit versus deduction

issue.

We further reject respondent's attempt to discredit the ETD

determination by suggesting that it was motivated by national

interest considerations relating to Egypt's ability to continue

to exploit its oil resources. We do not doubt that such

considerations entered the picture, given the fact that similar

concerns have historically been brought to bear on the U.S.

Treasury Department and the Congress in connection with

substantive positions regarding the taxation of revenues derived

by U.S. taxpayers from international oil sources. See, e.g.,

Hearings before a Subcommittee of the Committee on Government

Operations of the House of Representatives, 95th Cong., 1st

Sess., pp. 315, 442, 452-453 (1977). In any event, we perceive

no reason for us to delve into the motives of a foreign

government in connection with its tax determinations to any

greater extent than we would do so in connection with such
 - 75 -

determination by our own government, at least where there is no

evidence of fraud or corruption, which is the case herein. See

Raheja v. Commissioner, 725 F.2d 64, 66 (7th Cir. 1984), affg.

T.C. Memo. 1981-690; Greenberg's Express, Inc. v. Commissioner,

62 T.C. 324, 327 (1974); cf. W. S. Kirkpatrick & Co. v.

Environmental Tectonics Corp. Intl., 493 U.S. 400 (1989).

Under the foregoing circumstances, we find it unnecessary to

delve into the question whether the ETD determination approved by

the Ministers of Petroleum and Finance, should, as petitioner

argues, be accorded conclusive effect under the act of state

doctrine. See W. S. Kirkpatrick & Co. v. Environmental Tectonics

Corp. Intl., supra.13

One incidental consequence of the ETD determination needs to

be mentioned. The ETD determination could not affect the taxable

periods of EGPC prior to that ending June 30, 1981, because those

periods were barred by the applicable Egyptian statutory period

of limitations. Some of those periods are contained in the

taxable years of Amoco involved herein. Respondent argues that

the credits for Amoco Egypt's taxes taken by EGPC in respect of

those periods should not be affected by the ETD determination.

We disagree. The expiration of the period of limitations does

not substantively legitimatize the barred action; it simply

reflects an inability to enforce the obligation that would

13
See also Norwest Corp v. Commissioner, T.C. Memo. 1992-282,
affd. 69 F.3d 1404 (8th Cir. 1995).
 - 76 -

otherwise exist. Thus, we conclude that the ETD determination is

applicable to all the years involved herein.

Our conclusion that Article IV(f)(6) does not provide a

credit of Amoco Egypt's income taxes against EGPC's income taxes

disposes of respondent's argument that Article IV(f)(6)

constituted a de jure exemption from tax to Amoco Egypt which

would deprive it of the foreign tax credit claimed herein. Amoco

Egypt was subjected to Egyptian income tax by Article IV(f)(1),

and our findings of fact show: (1) Amoco Egypt filed Egyptian

income tax returns; (2) pursuant to Article IV(f)(3) of the MCA,

EGPC agreed to pay Amoco Egypt's Egyptian taxes; (3) EGPC paid

such taxes to the Egyptian Tax Department on a timely basis; (4)

those payments were posted to Amoco Egypt's tax file number; and

(5) Amoco Egypt has official receipts from the ETD evidencing the

payments made on behalf of Amoco Egypt. Furthermore, petitioner

has satisfied the substantiation requirements of section 905(b).

Respondent argues, based on her contrary interpretation of

Article IV(f)(6) that, as a result of EGPC's later failure to

dispute the 1992 ETD determination, its payments pursuant to that

determination were voluntary, and the compulsory tax provisions

of section 1.901-2(e)(5), Income Tax Regs., have not been

satisfied. Under the foregoing circumstances, this argument

falls by the wayside.

Our analysis, and the conclusions we have thus far reached,

are not, however, dispositive of the foreign tax credit issue
 - 77 -

involved herein. We are still left with questions stemming from

the fact that, whether or not authorized by Article IV(f)(6),

EGPC credited Amoco Egypt's income taxes paid by it against its

income taxes. These issues relate to the assertion by respondent

that such action on EGPC's part constituted a refund or subsidy

which should deprive Amoco Egypt of its claimed foreign tax

credit. Arguably, our disposition of these issues in favor of

petitioner could have obviated our lengthy analysis of the proper

interpretation of Article IV(f)(6). However, we decided to set

forth such analysis, not only because the parties extensively

argued the issue of such interpretation but because we concluded

that such analysis would provide useful background for resolution

of the issues that still remain. Moreover, we note that even

though the credit was not, at any time, proper under Article

IV(f)(6), EGPC's action in taking the credit for periods prior to

the period ending June 30, 1980, and the running of the period of

limitations would require us, to that extent, to deal with such

action as a separate matter. We now turn to the refund and

subsidy issues.

With respect to the existence of a refund, section 1.901-

2(e), Income Tax Regs., provides in pertinent part as follows:

(1) In general. Credit is allowed * * * for the
amount of income tax * * * that is paid to a foreign
country by the taxpayer. * * *

(2) Refunds and credits--(i) In general. An
amount is not tax paid to a foreign country to the
extent that it is reasonably certain that the amount
 - 78 -

will be refunded, credited, rebated, abated, or
forgiven. * * *

Petitioner argues that this regulation is inapplicable

because it contains no indirect refund rule, and because a refund

must be authorized by the foreign government. Respondent argues

that, because the entire amount of Amoco Egypt's tax was claimed

as a credit by EGPC, there was a refund. Respondent reasons that

because "paid by" as used in section 1.901-2(f)(2), Income Tax

Regs., infra p. 80, is defined as meaning "paid or accrued by or

on behalf of" in section 1.901-2(g)(1), Income Tax Regs., section

1.901-2(e)(2), Income Tax Regs., applies to EGPC.

Respondent's position rests, in the first instance, on her

position that the credit taken by EGPC was authorized by Article

IV(f)(6) of the MCA. Our rejection of that position creates a

situation where it could hardly be said that it was "reasonably

certain" that any amount of Amoco Egypt taxes would be refunded,

etc. In any event, such a credit could not have been considered

a refund, etc., to Amoco Egypt. There is no question that Amoco

Egypt was subject to Egyptian income tax, and those taxes were,

at least initially, paid. The credit was against EGPC's taxes,

and no part of that credit inured to Amoco Egypt.

Steel Improvement & Forge Co. v. Commissioner, 36 T.C. 265

(1961), revd. on other grounds 314 F.2d 96 (6th Cir. 1963),

relied on by respondent, is clearly distinguishable. In that

case, the U.S. taxpayer claimed foreign tax credits for taxes
 - 79 -

deemed paid under section 131(f) of the Internal Revenue Code of

1939, the predecessor to section 902, with respect to a dividend

from a Canadian corporation of which it owned more than 10

percent. Some time after the U.S. taxpayer had sold its stock in

the corporation, the Canadian tax authorities refunded the

Canadian corporation's tax payments. We held the U.S. taxpayer

was not entitled to a credit because the taxes deemed to have

been paid by the U.S. taxpayer were deemed to have been refunded

to the U.S. taxpayer. In the instant case, there is no question

the taxes paid on behalf of Amoco Egypt were not refunded to

Amoco Egypt.

Similar reasoning disposes of respondent's attempt to

support her position as to the existence of a refund by

analogizing Example (2) of section 1.901-2(e)(2)(ii), Income Tax

Regs., which addresses the situation where a U.S. taxpayer, A, is

entitled to an investment credit and a credit for charitable

contributions in country X. The example finds that the amount of

tax paid by A is A's initial income tax liability less the amount

of the investment credit and credit for charitable contributions.

The example is inapplicable because it involved a refund directly

to the U.S. taxpayer.

In our view, section 1.901-2(e)(2), Income Tax Regs.,

applies only if the refund is made to or for the account of the

U.S. taxpayer claiming credit for the foreign tax. The absence

of a refund to Amoco Egypt leaves us with the question to which
 - 80 -

we now turn our attention: whether the credits which EGPC in

fact took for Amoco Egypt's taxes can, whether or not authorized

by Article IV(f)(6), be considered a subsidy to Amoco Egypt.

Several regulations are implicated in considering the

subsidy question. Section 1.901-2(e)(3), Income Tax Regs.,

provides in part:

(3) Subsidies--(i) General rule. An amount is not
an amount of income tax paid or accrued by a taxpayer
to a foreign country to the extent that--

(A) The amount is used, directly or
indirectly, by the country to provide a subsidy by any
means (such as through a refund or credit) to the
taxpayer; and

(B) The subsidy is determined, directly
or indirectly, by reference to the amount of income
tax, or the base used to compute the income tax,
imposed by the country on the taxpayer.

(ii) Indirect subsidies. A foreign country is
considered to provide a subsidy to a taxpayer if the
country provides a subsidy to another person that--

(A) Owns or controls, directly or
indirectly, the taxpayer or is owned or controlled,
directly or indirectly, by the taxpayer or by the same
persons that own or control, directly or indirectly,
the taxpayer, or

(B) Engages in a transaction with the
taxpayer, but only if the subsidy received by such
other person is determined, directly or indirectly, by
reference to the amount of income tax, or the base used
to compute the income tax, imposed by the country on
the taxpayer with respect to such transaction.

Section 1.901-2(f), Income Tax Regs., provides in pertinent

part:

(f) Taxpayer--(1) In general. The person by
whom tax is considered paid for purposes of sections
 - 81 -

901 and 903 is the person on whom foreign law imposes
legal liability for such tax, even if another person
(e.g., a withholding agent) remits such tax. * * *

(2) Party undertaking tax obligation as part of
transaction--(i) In general. Tax is considered paid
by the taxpayer even if another party to a direct or
indirect transaction with the taxpayer agrees, as a
part of the transaction, to assume the taxpayer's
foreign tax liability. The rules of the foregoing
sentence apply notwithstanding anything to the contrary
in paragraph (e)(3) of this section. See § 1.901-2A
for additional rules regarding dual capacity taxpayers.

(ii) Examples. The provisions of paragraphs
(f)(1) and (f)(2)(i) of this section may be illustrated
by the following examples:

* * * * * * *

Example (3). Country X imposes a tax called the
"country X income tax." A, a United States person
engaged in construction activities in country X, is
subject to that tax. Country X has contracted with A
for A to construct a naval base. A is a dual capacity
taxpayer (as defined in paragraph (a)(2)(ii)(A) of this
section) and, in accordance with paragraphs (a)(1) and
(c)(1) of § 1.901-2A, A has established that the
country X income tax as applied to dual capacity
persons and the country X income tax as applied to
persons other than dual capacity persons together
constitute a single levy. A has also established that
that levy is an income tax within the meaning of
paragraph (a)(1) of this section. Pursuant to the
terms of the contract, country X has agreed to assume
any country X tax liability that A may incur with
respect to A's income from the contract. For federal
income tax purposes, A's income from the contract
includes the amount of tax liability that is imposed by
country X on A with respect to its income from the
contract and that is assumed by country X; and for
purposes of section 901 the amount of such tax
liability assumed by country X is considered to be paid
by A. By reason of paragraph (f)(2)(i) of this
section, country X is not considered to provide a
subsidy, within the meaning of paragraph (e)(3) of this
section, to A.

Section 1.901-2(g)(2), Income Tax Regs., provides:
 - 82 -

(2) The term "foreign country" means any foreign
state, any possession of the United States, and any
political subdivision of any foreign state or of any
possession of the United States. * * *

Initially, we note that our reasoning in respect of the

existence of a refund disposes of any question of a direct

subsidy within the meaning of section 1.901-2(e)(3)(i), Income

Tax Regs. Indeed, respondent does not contend that the credit

constituted a direct subsidy. Rather, she has focused on the

existence of an indirect subsidy.

At the outset, we note that the existence of an indirect

subsidy does not depend upon finding that the U.S. taxpayer

derived an actual economic benefit. Norwest Corp. v.

Commissioner, 69 F.3d 1404 (8th Cir. 1995), affg. T.C. Memo.

1992-282; see also Continental Illinois Corp. v. Commissioner,

998 F.2d 513, 519-520 (7th Cir. 1993), affg. in part and revg. in

part T.C. Memo. 1991-66, affg. T.C. Memo. 1989-636, and affg. in

part and revg. in part T.C. Memo. 1988-318. We note, however,

that such a principle does not mean that no person involved in

the transaction need derive any benefit. In fact, the parties

agree that the key question is whether EGPC benefitted from the

credits of Amoco Egypt's taxes which it took against its own

income taxes. Petitioner argues that EGPC, although a separate

legal entity, should be considered part of the Egyptian

Government and that, as a result, EGPC is not "another person"

within the meaning of section 1.901-2(e)(3)(ii), Income Tax
 - 83 -

Regs., and Amoco Egypt is entitled to the benefit of Example (3)

of section 1.901-2(f)(2)(ii), Income Tax Regs. Petitioner

further argues that EGPC derived no benefit from the credits

because it was required annually to remit its surplus to the

Egyptian Finance Ministry. Respondent argues that EGPC is a

separate legal entity which should not be equated to the Egyptian

Government and that Example (3) therefore has no bearing on the

issue before us and that, as a result, EGPC is "another person"

within the meaning of section 1.901-2(e)(3)(ii), Income Tax Regs.

Respondent further argues that the benefit EGPC derived from the

credits for Amoco Egypt's income taxes is not negated by the

requirement that EGPC transfer its surplus annually to the

Egyptian Government. Consequently, respondent concludes that

Amoco Egypt received an indirect subsidy with the result that the

foreign tax credits claimed by petitioner for the Egyptian income

taxes of Amoco Egypt should not be allowed.

We first discuss EGPC's status.

Pursuant to Egyptian Law No. 20 of 1976, EGPC "is a Public

Authority endowed with an independent juristic personality,

engaged in developing and properly utilizing the petroleum wealth

and in supplying the country's requirements of the various

petroleum products." It is wholly owned and controlled by the

Egyptian Government. Upon EGPC's dissolution, all of its assets

revert to the Egyptian Government.
 - 84 -

EGPC is affiliated with the Petroleum Ministry. It is

governed by a board of directors, the chairman of which is

appointed by decree of the President of the ARE, and the members

of which are appointed by decree of the Prime Minister of the ARE

on the recommendation of the Minister of Petroleum and Mineral

Resources. Resolutions of the EGPC Board of Directors are

forwarded to the Minister of Petroleum for ratification. He is

empowered to amend or cancel such resolutions. The chairman of

EGPC is empowered to furnish data and information to the

Petroleum Ministry and State bodies.

EGPC's funds are obtained from the State's shares in certain

public sector companies, its share of joint ventures with foreign

partners, and funds allocated by the government.

Subject to the provisions of Egyptian Law No. 53 of 1973

regarding the State budget, EGPC has an independent budget

prepared in the same manner as a commercial budget. EGPC's funds

are considered "privately owned State funds." Except for amounts

set aside in reserve accounts, EGPC's after-tax surplus is

remitted annually to the public treasury. The treasury in turn

bears the burden of deficit subsidies. EGPC has historically

been an important source of funds for the Egyptian Government.

EGPC is exempt from a variety of taxes and duties but not from

income taxes.
 - 85 -

We compare the foregoing elements with those elements in the

decided cases where the courts have equated a separate legal

entity to the government of which it was a part.

In Cherry Cotton Mills v. United States, 327 U.S. 536

(1946), the Supreme Court held that, where a party brought a

claim for tax refund in the Court of Claims, the Reconstruction

Finance Corporation (RFC) could bring a counterclaim for debts

owed under the statute authorizing counterclaims "on the part of

the Government of the United States". Describing the RFC, the

Court stated:

Its Directors are appointed by the President and
confirmed by the Senate; its activities are all aimed
at accomplishing a public purpose; all of its money
comes from the Government; its profits, if any, go to
the Government; its losses the Government must bear.
That the Congress chose to call it a corporation does
not alter its characteristics so as to make it
something other than what it actually is, an agency
selected by Government to accomplish purely
governmental purposes. * * * [Id. at 539.]

In First Natl. City Bank v. Banco Para El Comercio, 462 U.S.

611 (1983), the Supreme Court allowed Citibank to apply a setoff

of the value of its assets seized by the Cuban Government,

against amounts sought by Bancec, a Cuban Government owned bank,

from Citibank. The Court found that the Cuban Government

supplied all the capital and owned all the stock of Bancec.

Bancec's stated purpose was to contribute to and collaborate with

the international trade policy of the Government. Bancec was

empowered to act as the Government's exclusive agent in foreign
 - 86 -

trade. The Cuban treasury received all of Bancec's profits,

after deduction for capital reserves. Delegates from Cuban

governmental ministries governed and managed Bancec, and its

president was also Minister of State. The Court applied

equitable principles of domestic and international law, focusing

in part on the fact that denying the right of setoff would have

benefitted only the Cuban Government, as the owner of Bancec.

The separate legal status of Bancec was specifically considered

and disregarded. Id. at 630 (quoting from Bangor Punta

Operations, Inc. v. Bangor & Aroostook R. Co., 417 U.S. 703, 713

(1974)).

In Lebron v. National R.R. Passenger Corp., 513 U.S. ,

115 S.Ct. 961 (1995), the Supreme Court considered the question

whether the National Railroad Passenger Corp., commonly known as

Amtrak, is a U.S. Government entity for First Amendment purposes.

Describing Amtrak as a Government-created and -controlled

corporation, the Court decided that it was. Specifically, the

Court focused on two factors: Amtrak was created by a special

statute, explicitly for the furtherance of Federal governmental

goals; and six of its eight directors were appointed by the

President of the United States with the advice and consent of the

Senate.

In Vial v. Commissioner, 15 T.C. 403 (1950), this Court

determined that the employees of the Corporacion de Fomento de la

Produccion (Fomento) were employees of the Chilean Government,
 - 87 -

whose compensation was exempt from tax under former section

22(b)(8) of the Internal Revenue Code of 1939. We held that,

although Fomento was created as a separate entity by law, it was

not a corporation as understood in our legal system, and in fact

was part of the Government. Relevant facts that we took into

account included that Fomento had no stockholders or members; its

governing body was fixed by law; the members of its governing

council were ex-officio or were appointed by the legislative or

executive branch of the Government; its operations were closely

regulated by law and subject to the supervision and approval of

Government departments and officers; its purposes and activities

were of a governmental nature; it was created by a public law;

its head was a cabinet member and its activities were closely

coordinated with his department; and it was supported in large

part by taxes. We compared Fomento's employees to those of the

U.S. Maritime Commission, or to the U.S. Reconstruction Finance

Corporation, whose employees were regarded as Government

employees.

In In re Investigation of World Arrangements, 13 F.R.D. 280

(D.D.C. 1952), the District Court for the District of Columbia

stated that, in determining whether or not a given corporation is

an instrumentality of its government, the object and purpose of

the corporation were most relevant. The court found that a

corporation acquired in 1914, to insure a proper supply of

petroleum, crude oil, and other products for the British fleet,
 - 88 -

was indistinguishable from the Government of Great Britain. Id.

at 290-291.

In State of Michigan v. United States, 40 F.3d 817 (6th Cir.

1994), the question was whether the investment income of the

Michigan Education Trust was exempt from Federal income tax under

section 115(i) which provided that "gross income does not include

income derived from any public utility or the exercise of any

essential governmental functions and accruing to a State or any

political subdivision thereof". The trust was a public "quasi-

corporation" established to help parents provide for their

children's college education by receiving and investing advance

payments. The trust had a board of directors which was

authorized to enter into contracts on behalf of the State; the

State treasurer was an ex officio member of the board whose

members were appointed by the governor and confirmed by the

Michigan senate; the trust was "within" the treasury department,

although it acted independently; assets of the trust were not

considered State money, common cash, or State revenue although

such assets could be pooled with pension funds and other

investments of the State and invested by State employees; the

Michigan auditor general was responsible for auditing the books

of the trust and the trust was required to submit annual reports

to the governor and the State legislature. Finding that the

provision of education was an essential State function, and after

analyzing all the facts and circumstances, the Court of Appeals
 - 89 -

held that the trust was part of the State government and that its

investment income was excludable under section 115(i).

We recognize that each of the foregoing cases involves

different circumstances so that it can be argued that each case

is distinguishable. However, we think the most significant

single element is that in none of them did the court feel

compelled to reach a different conclusion because a separate

legal entity was involved, the factor upon which respondent

heavily relies. Nor are we persuaded by respondent's efforts to

find support for her position in the application of the

commercial activity exception to the sovereign immunity of a

foreign state under 28 U.S.C. section 1603 (1988). The Egyptian

Government is not a party to this proceeding so that the issue of

sovereign immunity is not involved. Similarly, we are not

impressed with respondent's reliance on Qantas Airways Ltd. v.

United States, 62 F.3d 385 (Fed. Cir. 1995),14 which held that

the plaintiff was not entitled to be treated as part of the

Government of Australia under section 1.892-1(b), Income Tax

Regs.,15 dealing with the exemption of income of foreign

14
See also Rev. Rul. 87-6, 1987-1 C.B. 179.
15
A foreign government is defined in sec. 1.892-1(b), Income
Tax Regs., as follows:

(b) Foreign government defined--(1) Classes of a
foreign government. For purposes of this section, a
foreign government consists only of integral parts or
controlled entities of a foreign sovereign to the
(continued...)
 - 90 -

governments from Federal income tax. The Court of Appeals

reasoned that the specific exception which the regulations set

forth was a permissible exercise of regulatory authority and

that, since Qantas was clearly within the terms of the exception,

it could not escape from that exception by claiming it was

entitled to the benefit of the broad general category of a

foreign government out of which the specific exception to the

exemption was carved. It does not follow from that conclusion

that, absent the specific exception, Qantas would have been

denied "foreign government" status. In fact, it is the absence

of that exception in the provision of the regulations containing

Example (3) of section 1.901-2(f)(2)(ii), Income Tax Regs., which

provides the critical difference in the instant case. Compare

15
(...continued)
extent not engaged in commercial activities in the
United States.
* * * * * * *
(3) Controlled entity. An entity which is
separate in form from a foreign sovereign or otherwise
constitutes a separate juridical entity is a controlled
entity if it satisfies the following requirements:
(i) It is wholly owned and controlled by a
foreign sovereign directly or indirectly through one or
more controlled entities;
(ii) It is organized under the laws of the
foreign sovereign by which owned;
(iii) Its net earnings are credited to its own
account or to other accounts of the foreign sovereign,
with no portion of its income inuring to the benefit of
any private person; and
(iv) Its assets vest in the foreign sovereign
upon dissolution.
 - 91 -

our subsequent discussion of the effect of Example (4) of the

regulations under section 901(i), infra pp. 93-95.

It cannot be gainsaid that exploitation of mineral reserves

is a significant governmental function. Such being the case and

applying the analysis and results of the foregoing cases, we are

satisfied that EGPC should be included within the meaning of the

term "foreign country" under section 1.901-2(e)(3)(ii) and

(g)(2), Income Tax Regs., and Example (3), supra at 80.

We are still left with the question whether Example (3),

supra, applies to the instant situation so as to justify the

conclusion that the credits taken by EGPC did not constitute an

indirect subsidy to Amoco Egypt. The parties have devoted

considerable attention to the issue whether the application of

Example (3) effectively eliminates the payment requirement.

Petitioner argues that Example (3) substitutes a "considered

paid" standard making the actual transfer of funds irrelevant.

Respondent counters with the argument that such a "considered

paid" construction would emasculate the implementation of foreign

tax credit provisions and consequently should not be adopted.

The parties have also parted company on whether a conclusion that

Article IV(f)(6) did not authorize EGPC to take a credit for the

Egyptian income taxes of Amoco Egypt is determinative of the

availability of the foreign tax credit claimed herein.

Petitioner urges that it should not be subjected to the loss of

the foreign tax credit for such taxes because of EGPC's
 - 92 -

unauthorized action. Respondent counters that the critical fact

is that EGPC took the credit and that whether such action was or

was not authorized is irrelevant.

As to the issue in respect of authorization, we note that

EGPC in fact took the credit in the pre-June 1980 years and that

collection based upon a disallowance of such action by the ETD

would have been barred by the period of limitations. Although,

as we have pointed out, see supra p. 74, the running of the

statute of limitations does not constitute approval of EGPC's

action, it is the equivalent to authorization in substantive

result. This circumstance raises the issue of an authorized

credit constituting a subsidy.

We find it unnecessary to resolve the differences between

the parties as to these two issues, i.e., payment16 or

authorization, because of our conclusion in respect of the

application of Example (3), particularly in light of the last

sentence of the example specifically exempting from the subsidy

rules a transaction which complies with its terms.

Respondent points to the reference to Example (3) in

Continental Illinois Corp. v. Commissioner, T.C. Memo. 1991-66,

affd. in part, revd. in part 998 F.2d 513 (7th Cir. 1993). In

that case, we cursorily dismissed Example (3) as inapplicable.

16
We note that, as our findings of fact show, EGPC in fact paid
Egyptian income taxes of Amoco Egypt, and they were specifically
credited to the latter's tax account by the ETD.
 - 93 -

Since that case turned on the absence of a legal liability for

the foreign withholding tax on the part of the withholding agent

and the U.S. taxpayer as well, id. T.C. Memo. 1991-66 at n. 46,

the inapplicability of Example (3) was obvious. Certainly the

case offers no support for respondent's position herein where

there clearly was a legal liability on the part of Amoco Egypt

and the assumption of that liability by EGPC.

Respondent's reliance on Nissho Iwai American Corp. v.

Commissioner, 89 T.C. 765 (1987), is misplaced. In Nissho, a U.S.

taxpayer had engaged in a net loan transaction with a private

borrower in Brazil, whereby the borrower agreed to pay interest

at a certain rate net of any Brazilian withholding taxes.

Simultaneous with remittance of the tax by the borrower, the

borrower received a subsidy from the Brazilian Government based

on the amount of the tax paid. The Court applied the indirect

subsidy rule in the temporary regulations, section 4.901-

2(f)(3)(ii), Temporary Income Tax Regs., 45 Fed. Reg. 75653-75654

(Nov. 17, 1980), which it held was reasonable, and denied foreign

tax credits to the taxpayer for the amount of tax which was

credited to the Brazilian borrower.

The holding in Nissho is based upon the finding that the

borrower received the subsidy by virtue of the refund of the

withheld tax. The borrower was a private party, and thus there

was no question it obtained a benefit, so that it does not aid us

in our determination herein. Continental Illinois Corp. v.
 - 94 -

Commissioner, 998 F.2d 513 (7th Cir. 1993), affg. in part and

revg. in part T.C. Memo. 1991-66, affg. T.C. Memo. 1989-636, and

affg. in part and revg. in part T.C. Memo. 1988-318, and Norwest

Corp. v. Commissioner, T.C. Memo. 1992-282, affd. 69 F.3d 1404

(8th Cir. 1995), are inapplicable for the same reasons.

Respondent's reliance on the regulations under section

901(i), and the background material of those regulations, is also

misplaced. Section 901(i) was added to the Code in 1986, to

codify the subsidy rules in section 1.901-2(e)(3), Income Tax

Regs. See H. Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 1,

593; S. Rept. 99-313 (1986), 1986-3 C.B. (Vol. 3) 1, 325; H.

Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 1, 352.

The background material, cited by respondent, provides:

Special treatment for government (or government-
owned) entities also was rejected because it would
create the potential for a credit to be claimed for a
tax nominally paid by or on behalf of a U.S. person
when the substance of the transaction with a government
entity was to grant a tax holiday to the U.S. taxpayer.
This is especially true in the case of a transaction
with a government entity that pays taxes: where a tax
holiday for the U.S. taxpayer is intended, the
government entity could simply assume a tax liability
that was nominally borne by the U.S. person and receive
a tax credit against its own liability in the amount of
the tax nominally paid on the U.S. person's behalf.
* * * [T.D. 8372, 1991-2 C.B. 338.]

Example (4) of section 1.901-2(e)(3)(iv), Income Tax Regs.

(1991), discusses a situation very similar to the one herein,

providing that a credit to a State petroleum authority for a

portion of the income taxes paid by it on behalf of a U.S.
 - 95 -

taxpayer is a subsidy, and that the U.S. taxpayer is not entitled

to a foreign tax credit for the amount of the subsidy.17 Section

901(i), as well as the regulations thereunder, are applicable

only to foreign taxes paid or accrued in taxable years beginning

after December 31, 1986. Tax Reform Act of 1986, Pub. L. 99-514,

sec. 1204(a), 100 Stat. 2085, 2532; sec. 1.901-2(e)(3)(v), Income

Tax Regs. (1991). We need not decide whether petitioner would be

entitled to foreign tax credit for foreign taxes paid or accrued

after December 31, 1986. See T.D. 8372, 1991-2 C.B. at 340. We

note, however, that the focus of the background material seems to

confirm concern on respondent's part that prior law did not

17
Sec. 1.901-2(e)(3)(iv) Example (4), Income Tax Regs. (1991),
provides:

Example 4. (i) B, a U.S. corporation, is engaged
in the production of oil and gas in Country X pursuant
to a production sharing agreement between B, Country X,
and the state petroleum authority of Country X. The
agreement is approved and enacted into law by the
Legislature of Country X. Both B and the petroleum
authority are subject to the Country X income tax.
Each entity files an annual income tax return and pays,
to the tax authority of Country X, the amount of income
tax due on its annual income. B is a dual capacity
taxpayer as defined in § 1.901-2(a)(2)(ii)(A). Country
X has agreed to return to the petroleum authority one-
half of the income taxes paid by B by allowing it a
credit in calculating its own tax liability to Country
X.

(ii) The petroleum authority is a party to a
transaction with B and the amount returned by Country X
to the petroleum authority is determined by reference
to the amount of the tax imposed on B. Therefore, the
amount returned is a subsidy as described in this
paragraph (e)(3) and one-half the tax imposed on B is
not an amount of income tax paid or accrued.
 - 96 -

disallow foreign tax credits in certain situations where a

government owned entity assumed a U.S. taxpayer's foreign tax

liability. In this connection, it is at least arguable that just

as the presence of a specific exception in the regulations in

Qantas Airways Ltd. v. United States, supra, saved the day for

respondent, its absence produces the opposite result herein. The

reasoning of the Court of Appeals in State of Michigan v. United

States, supra, which reflects an unwillingness to carve out an

exception to a general statutory provision, in the absence of

evidence of specific intent to that effect, lends support to this

view. Compare Larson v. Commissioner, 66 T.C. 159, 185 (1976),

where we applied regulations, establishing criteria for

determining whether an organization was a partnership or a

corporation, as they were written but recognized that respondent

might have prevailed if the regulatory power had been exercised

to its full extent.

Respondent insists that Example (3) was intended to be

confined to the establishment of an equivalence between gross

transactions (where the U.S. taxpayer receives the income and is

liable for and pays the foreign income tax directly) and net

transactions (where the U.S. taxpayer receives the income net of

the taxes otherwise owed to the foreign government). Respondent

urges us to recognize that the application of Example (3) to the

situation herein goes beyond the net transaction situation.

Respondent's position is based on the premise that EGPC should
 - 97 -

not be equated with the Egyptian Government. Given our holding

to the contrary, it follows that respondent's argument should be

and is rejected. Indeed, having concluded that EGPC was part of

the Egyptian Government, a finding of a subsidy would mean that

one can subsidize one self. In so stating, we do not imply that

respondent is necessarily precluded from treating, by regulation,

entities such as EGPC as separate from the foreign government and

therefore "another person" for purposes of determining the

existence of a subsidy.

Thus, respondent may well have salvaged its position in

respect of Example (3) by Example (4) under the section 901(i)

regulations although there is still a residual confusion because

of the presence of the two examples in different regulatory

provisions. Compare sec. 1.901-2(f)(2)(ii), Example (3), Income

Tax Regs., with sec. 1.901-2(e)(3)(iv) Example (4). See Blessing

& Pistillo, "Final Regulations on the Denial of the Foreign Tax

Credit by Reason of Certain Subsidiaries," Tax Mgmt. Intl. J. p.

78 (Feb. 14, 1992). Such confusion has been a characteristic of

the turbulent history of the foreign tax credit, particularly as

applied to oil companies such as petitioner herein. See

Isenbergh, "The Foreign Tax Credit: Royalties, Subsidies, and

Creditable Taxes," 39 Tax L. Rev. 227, 247-269 (1984); 1

Isenbergh, International Taxation 495-529 (1990).

The long and the short of the matter is that respondent

seeks to equate what might have been with what was in the taxable
 - 98 -

years before us. This we will not do. We hold that the instant

case is governed by Example (3) and that, by virtue of the last

sentence thereof, the subsidy rule of section 1.901-2(e)(3),

Income Tax Regs., does not apply.

Given our conclusion that there was no subsidy, we need not

address the question whether, if Example (3) did not apply and

EGPC were treated as "another person" under section 1.901-

2(e)(3)(ii), Income Tax Regs., see supra p. 81, EGPC's obligation

to transfer its surplus annually to the Finance Ministry (which

also received Amoco Egypt's taxes paid by EGPC) in and of itself

negated any benefit to EGPC and therefore precluded a finding of

a subsidy. Similarly, we need not address the question whether

the potentially different impact of a credit versus a deduction

on the bonuses of EGPC employees would be sufficient to warrant a

finding of an indirect subsidy to Amoco Egypt. Finally, our

disposition makes it unnecessary for us to deal with the impact

on petitioner's foreign tax credit of the difference in exchange

rates between the time of the payments by EGPC during the years

in issue and its payment of back taxes in 1992.

In view of the fact that there are other issues to be

resolved in this case,

An appropriate order will be issued

disposing of the foreign tax credit

issue.