Oil Company Says $5.2 Billion Settlement Is Deductible

Anadarko Petroleum Corp. has taken the IRS to Tax Court over the deductibility of $5.2 billion the company paid to settle claims that an affiliate’s corporate restructuring was designed to evade environmental liabilities. …Brandon L. Bloom of Thompson & Knight LLP told Tax Notes that companies typically enter into separation agreements in connection with a spinoff, under which the parent company agrees to indemnify the spun-off subsidiary for pre-spin-off liabilities.

“In that situation, any indemnity payments after the spinoff generally relate back to the spinoff and are treated as a non-deductible capital contribution to the subsidiary under the Arrowsmith doctrine,” Bloom said.

While the petitions indicate that the IRS’s position is based on the Arrowsmith doctrine, Bloom said it isn’t clear whether the underlying claims against Kerr-McGee and Anadarko are based on any indemnification agreement between Kerr-McGee and Tronox.

“Absent such an indemnification in connection with the spinoff, the Arrowsmith doctrine may not apply,” Bloom said.

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