A ‘Claim of Right” 

A ‘Claim of Right” 

December 01, 2004

A 'claim of right" led to a tax refund.

Quaker State Corporation bought oil from smaller, independent oil producers in Pennsylvania, but was later accused in a class-action lawsuit filed against it and other oil companies of conspiring to keep oil prices low. It settled the price-fixing suit for $4.4 million.

Quaker State paid taxes each year during the 14-year period at issue in the lawsuit using “inventory accounting,” meaning that it matched its costs each year to the oil it sold that year to calculate its taxable profit. It made payments to settle the lawsuit in 1995 and 1996. By then, tax rates were lower than they had been for part of the period during which it was accused of engaging in price fixing. Had it originally paid the independent producers the full amount for their oil that the settlement suggested it should have paid, then it would have had less income to report during the 14-year period. Because tax rates were higher then, deductions for the extra costs would have been more valuable if taken at the time rather than in 1995 and 1996 when the settlement was paid.

The company made a “claim of right” under section 1341 of the US tax code. That section allows a company that, with the benefit of hindsight, can see it over-reported its income in an earlier year to get the benefit in its current tax year of an adjustment that takes into account the change in tax rates. Quaker State could simply have deducted the settlement payments 1995 and 1996. However, the deductions were inadequate recompense because they were against a lower tax rate.

Quaker State initially filed tax returns for 1995 and 1996 on which it simply deducted the settlement payments. However, it later realized that it was entitled to a larger tax adjustment and filed amended returns claiming another $375,000 in tax reductions. The government objected. The federal Claims Court held for Quaker State in a decision in late October. The case is Pennzoil-Quaker State Co. v. United States.

Keith Martin