Texaco

I. Background

Texaco was engaged in an integrated petroleum business. Between 1973 and 1981, Texaco made certain sales of crude petroleum and refined petroleum products at prices that exceeded the price ceilings set by federal petroleum price reg- ulations. Texaco included these overcharges as gross income on its corporate tax returns for the years 1973 through 1981. 1 On October 9, 2001, Texaco Inc. became a wholly-owned, indirect subsidiary of ChevronTexaco Corporation. TEXACO INC. v. UNITED STATES 6847 The Department of Energy (DOE) took various administrative actions against Texaco which eventually resulted in a consent degree requiring Texaco to pay $1,250,000,000 plus interest. Texaco made the payments and deducted the settlement amount on its federal income tax returns for those years as ordinary and necessary business expenses.

In February 2001, Texaco filed Refund Claims for the years 1988, 1990, 1991, and 1992, claiming that the tax benefit of the ordinary and necessary business expense deductions should have been calculated in accordance with 26 U.S.C. § 1341(a). The government denied the Refund Claims on the ground that § 1341(b)(2) rendered § 1341(a)…