Supreme Court Rules Against Oil Firms in Tax Case

The Supreme Court, in a significant ruling for state treasuries, Monday upheld a New Jersey tax that 13 major oil companies said unfairly is costing them tens of millions of dollars.

The court, by an 8-0 vote, said New Jersey officials lawfully refused to allow state tax deductions for what the oil companies paid in federal windfall profit taxes.

Lawyers for the oil industry, mining interests and natural gas producers had contended that a New Jersey victory in the nation’s highest court could encourage other states to adopt similar tax systems.

Writing for the court, Justice Harry A. Blackmun said the state tax does not unduly interfere with interstate commerce.

Tax on Oil Retrieval

The oil companies involved in the case operate numerous refineries in New Jersey but do not drill for oil there.

The federal windfall profits tax was imposed on oil retrieval.

The federal tax was imposed after President Jimmy Carter announced that he would gradually remove controls on domestic crude oil prices beginning in mid-1979. The price controls had been imposed by President Richard M. Nixon in 1971.

Through the windfall profits tax, the federal government recovered billions of dollars in increased profits the oil companies realized by the jump in oil prices resulting from decontrol.

The windfall tax, which yielded more than $78 billion in federal revenue, was repealed by Congress last year but there may be some companies still paying on past earnings.

Add-Back Provision

New Jersey’s corporate business tax imposes a levy on a portion of the “entire net income” of a corporation that does business in the state.

Under the state tax formula, a corporations’s entire net income is the same as its federal taxable income “before net operating loss deduction and special deductions.”

The state tax law also includes an “add-back” provision that says “entire net income shall be determined without the exclusion, deduction or credit of . . . taxes paid or accrued to the United States on or measured by profit or income.”

The oil companies sought to avoid “adding back” the amount of their federal windfall profit taxes--in effect claiming a deduction for that tax from its “entire net income.”

New Jersey authorities disallowed such a deduction, and the state’s action was upheld Monday.

“We conclude that the add-back provision does not discriminate against interstate commerce,” Blackmun said.

The 13 oil companies paid an extra $88.5 million in taxes to New Jersey from 1980 through 1984 because they were not allowed to deduct the federal windfall profits taxes they were paying.

Lawyers for the companies said at least six other states also disallow state tax deductions for windfall profit taxes paid. They are Georgia, Iowa, Minnesota, New York, South Carolina and Wisconsin.

The companies that challenged the New Jersey tax are Amerada Hess, Atlantic Richfield, Conoco, Cities Service, Exxon, Phillips, Chevron, Mobil, Union Oil of California, Gulf, Shell, Tenneco and Texaco.

In another ruling, the court said federal courts are empowered to decide disputes in which the Federal Savings and Loan Insurance Corp. takes over failing state-chartered thrift institutions.

In its ruling on FSLIC, the court’s 9-0 decision overturned a federal appeals court ruling that gave state courts authority in such cases. The Justice Department argued that the lower court ruling, if allowed to stand, could have had serious consequences for FSLIC, which is under financial strains to insure deposits in failing savings and loan associations.

FSLIC acts as receiver in helping liquidate scores of state-chartered savings and loan institutions.

Monday’s ruling allows FSLIC to sue in federal court when it seeks to collect money, potentially hundreds of millions of dollars, allegedly owed to the failing thrift institutions.

The appeals court threw out a federal court complaint by FSLIC against former directors of Manning Savings & Loan Assn. in Illinois.

The former directors are accused of declaring two illegal dividends in the early 1980s.

An Illinois regulatory agency ruled the dividends violate state law because Manning’s net worth was insufficient.

The Federal Home Loan Bank Board in 1983 appointed FSLIC receiver for Manning to preside over liquidation of the S&L;’s assets.

FSLIC then sued in federal court in Illinois, accusing the former directors of violating federal law in declaring the dividends.

The Justice Department said the appeals court ruling would prevent FSLIC from recovering any of the money because the deadline for suing the Manning directors in Illinois state courts has passed.