                        T.C. Memo. 1999-247



                      UNITED STATES TAX COURT



   EXXON CORPORATION AND AFFILIATED COMPANIES, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 18618-89, 18432-90.            Filed July 28, 1999.



     Robert L. Moore II, Frederick H. Robinson, Lisa F. Opoku,

and Jordan L. Klingsberg, for petitioners.

     Allan E. Lang, Christopher Fisher, and Todd Ludeke, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   The issue for decision is the proper accrual,

under the all-events test of section 461, of approximately

$900 million in interest expense relating to increases in
                               - 2 -


petitioners' Federal income taxes for the years 1972 through

1978.1

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.


                         FINDINGS OF FACT

     During the years in issue, petitioners constituted an

affiliated group of more than 175 U.S. and 500 foreign subsidiary

corporations.   Petitioner Exxon Corp. was the common parent of

the affiliated group.   Hereinafter, petitioners will be referred

to simply as Exxon.

     The businesses in which Exxon was engaged primarily involved

exploration, production, transportation, and sale of crude oil

and natural gas and manufacture of petroleum products.

Additional businesses in which Exxon was engaged involved

exploration and mining of coal and uranium, production of nuclear

fuel, and businesses unrelated to the energy field such as

manufacture and sale of office supply equipment.

     Exxon constituted one of the largest groups of industrial

corporations in the United States.

     Exxon filed consolidated U.S. corporation income tax

returns.   The preparation of Exxon’s consolidated corporation



1
      Other issues were tried and briefed separately and will be
the subject of separate opinions.
                                - 3 -


income tax returns constituted a time-consuming and difficult

undertaking for employees, accountants, and other tax

professionals and staff hired by Exxon for that purpose.    The

preparation of Exxon’s consolidated corporation income tax

returns was particularly difficult due to the large volume, size,

and variety of the many businesses in which Exxon was engaged,

the quantity of information required for the preparation of the

tax returns relating to the businesses in which Exxon was

engaged, and the significant complexity of U.S. and foreign tax

laws to which Exxon’s businesses were subject.

     Exxon’s consolidated corporation income tax returns that

were filed with respondent consisted of documents several feet

thick and thousands of pages.   During the year and during the

months immediately after the end of the year up until the date on

which each of Exxon’s consolidated corporation income tax returns

was filed, employees in Exxon's tax department gathered

information from Exxon's numerous subsidiary and affiliated

corporations located in the United States and throughout

the world and prepared and assembled Exxon’s consolidated

corporation income tax returns.

     In spite of extensive and good faith efforts by Exxon’s

employees to obtain all of the relevant information for

preparation of Exxon’s consolidated corporation income tax

returns, by the time the income tax returns were due to be filed
                                - 4 -


with respondent (including extensions of time granted by

respondent), much information and many documents necessary for

Exxon to file with respondent complete and accurate income tax

returns were not available to Exxon’s income tax return

preparers.

     After filing the original consolidated corporation income

tax returns with respondent, Exxon’s employees responsible for

the accuracy and filing of Exxon’s income tax returns continued

to gather information relating to Exxon’s many businesses in the

United States and throughout the world with respect to various

income, expense, and credit items.

     For each of the years 1972 through 1978, respondent's

representatives audited Exxon’s consolidated corporation income

tax returns.   During the audits, Exxon's and respondent's

representatives maintained a relatively open and congenial

relationship with each other.   Respondent's audits commenced with

a meeting between representatives of Exxon and respondent during

which guidelines and ground rules for the conduct of the audits

were discussed and agreed upon.   Procedures were agreed upon for

the exchange of information and for the handling of proposed

adjustments.

     During the audits, the general intent of Exxon’s and of

respondent’s representatives was to resolve by agreement and

without protest, appeal, or litigation as many adjustments as
                               - 5 -


possible.   No agreement, however, was entered into or reached

between Exxon’s and respondent’s representatives as to

specifically when and how Exxon’s representatives would

communicate to respondent’s representatives Exxon’s agreement

with and decision not to protest discrete audit adjustments.

     During respondent’s audits, respondent's representatives

examined Exxon’s books and records and, generally through

information document requests (IDR's), requested information and

documents from Exxon.

     As adjustments were identified with regard to Exxon’s

Federal income tax liabilities, respondent's representatives

would prepare and provide to Exxon’s representatives written

Notices of Proposed Adjustment (Forms 5701) describing the

amounts and nature of the adjustments.

     Also during the audits, Exxon’s representatives would

provide to respondent’s representatives information regarding

income, expense, and credit items that Exxon's representatives

had identified as not being reflected accurately on Exxon’s

consolidated corporation income tax returns.   Items so provided

by Exxon’s representatives to respondent's representatives are

referred to by Exxon and herein as “volunteered” adjustments.

Some of the volunteered adjustments represented adjustments in

favor of Exxon and some in favor of respondent.
                                   - 6 -


     Upon receipt of information regarding volunteered

adjustments, respondent’s representatives would not automatically

accept the proposed adjustments.        Rather, respondent’s

representatives would review, analyze, and audit the information

provided by Exxon’s representatives and would make determinations

after discussions and negotiations with Exxon's representatives

as to the appropriate adjustments, if any, and respondent’s

representatives would propose the adjustments so determined in

Forms 5701 that were given to Exxon’s representatives.2


2
      IDR No. 85 (Trial Exhibit 137), bears upon the so-called
volunteered adjustments for the years 1974, 1975, and 1976. It
establishes: (1) Respondent’s representatives' awareness of and
expectation that volunteered adjustments would be received from
Exxon; and (2) respondent’s and Exxon’s representatives'
understanding that respondent's representatives would not
automatically accept the information with regard to volunteered
adjustments provided by Exxon's representatives but rather would
review and audit the information. Set forth below is language
from IDR No. 85 describing the information requested of Exxon by
respondent’s representatives:

     IDR No. 85, Description of Documents Requested
          (1) After a return is filed, taxpayers frequently discover errors
          in the return that was filed which include the following:

                (a)   Deductions claimed which are not deductible
                (b)   Deductions not claimed which are deductible
                (c)   Income reported which is not taxable
                (d)   Income not reported which is taxable
                (e)   Credits not claimed which should be on the return
                (f)   Credits claimed which are not proper

          (2) Please submit a list of any such items which have been
          discovered subsequent to the filing of the returns for 1974, 1975,
          and 1976.

          (3) Please submit a detailed explanation of the items under (2) so
          this agent can determine if the items should be corrected by
          including them in the RAR as an adjustment.
                               - 7 -

     There were located on the original and copy of the Forms

5701 that respondent’s representatives provided to Exxon’s

representatives a set of boxes, and Exxon’s representatives were

requested to check one of the boxes to indicate whether they

agreed, agreed in part, or disagreed with the proposed

adjustments and to return to respondent's representatives the

copies of the Form 5701.   Exxon's representatives, however,

following a policy decision that had been made, did not indicate

in the boxes or otherwise on the Forms 5701 whether or not Exxon

agreed, agreed in part, or disagreed with respondent's proposed

adjustments.

     Over the years, Exxon’s representatives used different

methods to communicate in writing to respondent’s representatives

Exxon’s agreement to specific adjustments.   As indicated, the

Forms 5701 were not used by Exxon’s representatives to

communicate to respondent's representatives Exxon’s agreement to

specific adjustments.   Exxon’s representatives did communicate in

writing to respondent’s representatives Exxon’s agreement to

certain adjustments that respondent had raised for the years in

issue by entering into written Form 870 agreements (Waiver of

Restrictions on Assessment and Collection of Deficiency in Tax

and Acceptance of Overassessment) and Form 870-AD agreements

(Offer to Waive Restrictions on Assessment and Collection of Tax

Deficiency and to Accept Overassessment) and by making
                              - 8 -

concessions or signing written stipulations of settlement that

were filed with this Court during pendency of these cases.

Occasionally, Exxon's representatives indicated agreement to

proposed audit adjustments in their written responses to IDR's.

     For each year, more than 250 audit adjustments to Exxon’s

consolidated corporation income tax returns were identified and

proposed by respondent’s representatives.

     During respondent's audits of Exxon’s consolidated

corporation income tax returns for 1972 through 1978, there were

what Exxon refers to as four major agreed adjustments that were

identified and raised by respondent’s representatives and that,

by the end of each audit, were agreed to by Exxon’s and

respondent’s representatives and that increased Exxon's U.S.

source income for each year (the four major agreed adjustments).

However, in their petitions to this Court with regard to income

tax deficiencies that respondent determined against Exxon for

1979 through 1982, Exxon did object to and did challenge the

correctness of the four major agreed adjustments.

     The four major agreed adjustments represent approximately

85 percent of the total adjustments that, by the end of

respondent's audits of Exxon for 1972 through 1978, were agreed

to by Exxon’s and respondent’s representatives and that were not

further protested or litigated by Exxon (the agreed adjustments).
                               - 9 -

     The agreed adjustments do not include significant other

adjustments that were raised by respondent on audit and that were

protested by Exxon or that were raised by Exxon in claims for

refund and that are still pending in litigation.

     A brief description of each of the four major agreed

adjustments is set forth below.


G&G Costs

     The first of the four major agreed adjustments relates to

costs of geological and geophysical (G&G) activity and the

deductibility of such costs as current business expenses or the

nondeductibility thereof as capital expenditures.   G&G activity

involves work of geologists and geophysicists in obtaining and

analyzing geographical seismic data for purposes of identifying

energy-related natural resources.

     Generally, at the time Exxon’s consolidated corporation

income tax returns were filed, information was not yet available

to Exxon’s geologists and geophysicists (and therefore it was not

available to those individuals preparing and filing Exxon’s

income tax returns) as to whether particular G&G costs incurred

in a year resulted in the discovery of commercially exploitable

energy resources.   However, on Exxon’s consolidated corporation

income tax returns as originally filed for each year, all of

Exxon’s G&G costs that were incurred in a year were treated by
                             - 10 -

Exxon’s income tax return preparers as not resulting in the

discovery of commercially exploitable energy resources and

therefore as currently deductible business expenses.

     During the audits for the years in issue, Exxon’s and

respondent’s representatives generally agreed as to the

applicable law relating to the treatment of G&G costs.    They

generally understood that to the extent they could agree that

information provided during the audits to respondent's

representatives established which particular G&G activity led to

the discovery of commercially exploitable energy resources, the

related G&G costs would be disallowed as current expenses and

would be treated as nondeductible capital expenditures.

     Upon receipt during the audits from Exxon's representatives

of information regarding particular G&G activity that had

occurred in a year, respondent's representatives would review and

analyze the information, discuss the information with Exxon's

representatives, make inquiries with regard thereto, and

negotiate with Exxon's representatives over whether such

information established that particular G&G activity had or had

not led to the discovery of commercially exploitable energy

resources and whether the related costs should be treated as

ordinary expenses or as capital expenditures.

     The following schedule for 1972 through 1978 reflects the

amount of claimed G&G costs that, on audit by respondent, were
                              - 11 -

disallowed and that Exxon’s representatives agreed constituted

nondeductible capital expenditures because they led to

commercially exploitable energy resources that produced income

for Exxon over the course of a number of years:


          Year               Capitalized G&G Costs
          1972                    $ 2,029,833
          1973                      4,114,117
          1974                      9,289,354
          1975                      8,701,886
          1976                      9,359,770
          1977                     16,631,441
          1978                     21,757,729


Proratables Adjustment

     The second of the four major agreed adjustments (referred to

by the parties as the “proratables adjustment”) was made only for

1972 through 1976 and involves the characterization or allocation

of certain of Exxon's administrative expenses between U.S. and

foreign sources.   Allocations of Exxon's expenses to foreign

sources decreased Exxon's foreign source income and reduced

foreign tax credits that Exxon could claim against its U.S. tax

liabilities.

     Similar to G&G activity, Exxon’s and respondent’s

representatives generally agreed as to the applicable law

relating to the allocation of administrative expenses between

U.S. and foreign sources.   Upon receipt during the audits from

Exxon's representatives of information relating to Exxon's
                             - 12 -

administrative expenses, respondent's representatives would

review and analyze the information.

     After discussions and negotiations with regard to the

information, Exxon's and respondent's representatives reached

agreement as to allocation of Exxon's administrative expenses

between U.S. and foreign sources.   Pursuant thereto, Exxon’s

proratable expenses were reallocated to Exxon’s foreign source

income in the following amounts:


                         Administrative Expenses Reallocated
          Year                To Foreign Source Income
          1972                       $38,375,438
          1973                        46,152,229
          1974                        53,111,300
          1975                        40,790,620
          1976                        45,235,003


Other Sourcing Adjustments

     The third major agreed adjustment (the so-called "other

sourcing adjustments”) involves for 1972 through 1977 the

characterization or allocation of certain expenses of Exxon's

affiliated companies as between U.S. and foreign sources.

Similar to the G&G and proratables adjustments, Exxon’s and

respondent’s representatives generally agreed as to the

applicable law relating to the other sourcing adjustments.    Upon

receipt during the audits from Exxon's representatives of

information relating to expenses of Exxon's affiliated companies,
                                - 13 -

respondent's representatives would review and analyze the

information.

     After discussions and negotiations with regard to the

information, Exxon's and respondent's representatives agreed that

expenses of Exxon's affiliated companies should be reallocated

from U.S. sources to foreign sources as follows:


                            Expenses Relating To Exxon’s Affiliates
          Year                Reallocated To Foreign Source Income
          1972                            $21,911,570
          1973                             18,948,396
          1974                             12,418,119
          1975                             10,923,260
          1976                              3,381,041
          1977                             13,935,690


Oil Refinery Repair Costs

     The fourth major agreed adjustment relates to the treatment

for 1972 through 1976 of costs of repairing Exxon’s oil

refineries as current expenses or as capital expenditures.

     Similar to the G&G costs, proratables, and other sourcing

adjustments, Exxon’s and respondent’s representatives generally

agreed on the applicable law relating to the oil refinery repair

costs adjustment.   Upon receipt during the audits from Exxon's

representatives of information relating to the repair of Exxon's

oil refineries, respondent's representatives would review and

analyze the information.
                             - 14 -

     After discussions and negotiations with regard to the

information, Exxon's and respondent's representatives agreed that

costs relating to repair of Exxon's oil refineries that on

Exxon's consolidated corporation income tax returns had been

expensed were to be capitalized as follows:


          Year        Capitalized Refinery Repair Costs
          1972                   $ 9,807,560
          1973                     8,084,376
          1974                    11,963,680
          1975                     4,515,610
          1976                     2,504,448


     In general, adjustments made by respondent that Exxon

formally protested beyond the audit level to respondent's

Appellate Division and/or in litigation represented issues of

importance to Exxon and to the oil and gas industry.    Examples of

such protested adjustments are the treatment of construction

costs of offshore drilling platforms as intangible drilling and

development costs and the eligibility of pipeline right-of-way

costs for depreciation and investment tax credits.

     For 1972 through 1978, respondent's audits concluded with

issuance to Exxon of Revenue Agent’s Reports (RAR’s).   Each RAR

summarized respondent's proposed adjustments and set forth

proposed income tax deficiencies for each year.

     By the end of respondent’s audits of Exxon for 1972 through

1978, respondent had made hundreds of adjustments to Exxon’s
                             - 15 -

consolidated corporation income tax returns, and Exxon’s and

respondent’s representatives had reached agreement on 78 percent

of the total number of adjustments, of which, as indicated, the

four major agreed adjustments represented approximately

85 percent of the net agreed adjustments.   Respondent’s audit of

Exxon for 1972 and 1973 ended in 1981.   Respondent's audit of

Exxon for 1974, 1975, and 1976 ended in 1985.   Respondent's audit

of Exxon for 1977 and 1978 ended in 1989.

     After or simultaneously with receiving respondent's RAR's

relating to the years 1972 through 1977, Exxon’s representatives

signed Forms 870 with respect to the agreed adjustments and to

the portions of the proposed tax deficiencies that were agreed.

Respondent then assessed the taxes agreed to and statutory

interest due thereon, and Exxon soon thereafter paid the amount

of the assessed tax deficiencies and interest (the amount of the

interest accrued from the due date of Exxon's consolidated

corporation income tax returns to the date of payment).   Also for

1972 through 1977, with regard to certain unagreed issues and tax

deficiencies determined by respondent relating thereto,

respondent issued to Exxon notices of deficiency.

     For 1978, at the conclusion of respondent's audit, Exxon did

not enter into a Form 870 agreement.   For 1978, respondent issued

a notice of deficiency and assessed the tax deficiency and

statutory interest that Exxon paid.
                             - 16 -

     For 1972 through 1978, after paying the agreed tax

deficiencies determined by respondent on audit and the interest

due thereon, Exxon filed with respondent a number of claims for

refund relating to unrelated items of income, expense, and

credit, which claims for refund for a number of the years exceed

the amounts paid by Exxon as tax deficiencies relating to the

agreed adjustments for each year.

     As indicated, however, petitioners did not contest, through

protests or refund claims, the adjustments relating to the four

major agreed adjustments or the adjustments relating to the other

agreed adjustments.

     For financial accounting purposes, Exxon accrued ratably for

each year interest on estimated net tax deficiencies.


Accrual of Deficiency Interest on
Exxon’s Income Tax Returns

     Exxon’s consolidated corporation income tax returns for 1972

through 1978 were prepared on the accrual method of accounting,

and Exxon used the accrual method of accounting to accrue

interest expense.

     On its consolidated corporation income tax returns as filed

for 1972 through 1978, Exxon did not accrue ratably interest on

the income tax deficiencies that respondent determined for each

year until the underlying and related tax deficiencies were set

forth in agreed Forms 870, in closing agreements, or until the
                             - 17 -

tax deficiencies were assessed by respondent (namely, in 1981,

for the interest relating to the 1972 and 1973 tax deficiencies;

in 1985, for the interest relating to the 1974, 1975, and 1976

tax deficiencies; and in 1989, for the interest relating to the

1977 and 1978 tax deficiencies).

     In 1989 and 1990 in the petitions filed in these cases,

petitioners made the claim that the total statutory interest that

related to Exxon’s agreed income tax deficiencies for 1972

through 1978 should be accrued not in and for the year the audits

for those years were concluded and in which the Form 870

agreements were entered into or the year in which the assessments

occurred (namely, 1981, 1985, and 1989), but that the interest

should relate back to the years 1973 through 1989 and should

accrue ratably in each year to which the interest relates.


                             OPINION

     Under section 461(a), a deduction is to be allowed in the

proper taxable year under the method of accounting used in

computing a taxpayer’s income.

     Under the all-events test of the accrual method of

accounting, a liability expense accrues in the year in which all

the events have occurred which establish the fact of liability

for the expense and in which the amount of the liability can be

determined with reasonable accuracy.   See United States v.
                               - 18 -

Anderson, 269 U.S. 422, 441 (1926); sec. 1.461-1(a)(2)(i), Income

Tax Regs.

       As the Supreme Court has explained:


       It is fundamental to the “all events” test that,
       although expenses may be deductible before they have
       become due and payable, liability must first be firmly
       established. This is consistent with our prior
       holdings that a taxpayer may not deduct a liability
       that is contingent * * * [United States v. General
       Dynamics Corp., 481 U.S. 239, 243 (1987).]


       As we have further explained:


       The all-events test is based on the existence or
       nonexistence of legal rights or obligations at the
       close of a particular accounting period, not on the
       probability--or even absolute certainty--that such
       right or obligation will arise at some point in the
       future. * * * [Hallmark Cards, Inc. v. Commissioner, 90
       T.C. 26, 34 (1988).]


       If, at the end of a year, a taxpayer's liability for an

expense remains contested and contingent, the expense will not be

treated as being established under the all-events test of section

461.    See Security Flour Mills Co. v. Commissioner, 321 U.S. 281,

284 (1944); Dixie Pine Prods. Co. v. Commissioner, 320 U.S. 516,

519 (1944).    A contested liability will not be regarded as

sufficiently established until resolution of the contest.      See

Dixie Pine Prods. Co. v. Commissioner, supra; Dravo Corp. v.

United States, 172 Ct. Cl. 200, 348 F.2d 542, 545 (1965).
                              - 19 -

     As stated by the Supreme Court in Dixie Pine Prods. Co. v.

Commissioner, supra at 519:


     in order truly to reflect the income of a given year,
     all the events must occur in that year which fix the
     amount and the fact of the taxpayer’s liability for
     items of indebtedness deducted though not paid; and
     this cannot be the case where the liability is
     contingent and is contested by the taxpayer. * * *
     [Fn. refs. omitted.]


     In section 1.461-2(b)(2), Income Tax Regs., definition of a

“contested liability” is provided, as follows:


     Any contest which would prevent accrual of a liability
     under section 461(a) shall be considered to be a
     contest in determining whether the taxpayer satisfies
     paragraph (a)(1)(i) of this section. A contest arises
     when there is a bona fide dispute as to the proper
     evaluation of the law or the facts necessary to
     determine the existence or correctness of the amount of
     an asserted liability. * * *


     Generally, whether a bona fide dispute exists as to the

proper law and facts, whether a liability is contested, and when

a contested liability is resolved involve questions of fact to be

answered on the basis of the facts and circumstances of each

particular situation.   See Phillips Petroleum Co. & Affiliated

Subs. v. Commissioner, T.C. Memo. 1991-257.

     In General Communication Co. v. Commissioner, 33 T.C. 640,

654 (1960), we stated as follows:
                             - 20 -


     The presence of an admission, express or   implied,
     serves as direct proof that the taxpayer   was not
     contesting liability. But absence of an    admission,
     while not conclusive proof of a contest,   certainly
     leaves a gap in petitioner’s proof * * *   [Id. at 654.]


     There are a number of court opinions involving a variety of

factual situations and the question of whether accrual basis

taxpayers' liabilities with regard to tax adjustments and the

related statutory interest should be regarded as sufficiently

settled, as fixed and definite, and whether the amounts thereof

were determinable with reasonable accuracy, or whether the

taxpayers' liabilities therefor should be regarded as contingent

and contested.

     A number of courts have defined a contest narrowly and have

suggested that affirmative acts by taxpayers which establish

clearly the existence of the contest should be present in order

for the asserted tax liabilities to be regarded as contested.    In

Hollingsworth v. United States, 215 Ct. Cl. 328, 568 F.2d 192,

202-203 (1977), a dispute with a State agency, not with

respondent, over a change in method of accounting and what was

regarded merely as a “naked suggestion” (not as an objection) by

the taxpayer to respondent that a proposed adjustment not be made

until a following year were treated as not rising to the level of

a contest with respondent over the related income tax deficiency

and interest.
                             - 21 -

     In Dravo Corp. v. United States, 348 F.2d at 544-546, a

taxpayer’s liability for additional State taxes was asserted

during an audit occurring in a later year.   The taxpayer paid the

additional State taxes without protest or appeal.    The Court of

Claims rejected the argument that the mere filing of a tax return

acknowledging a liability in a stated amount automatically should

be regarded as giving rise to a contest with regard to additional

amounts asserted on audit by a taxing authority.    The Court of

Claims stated that a contest “should be evidenced by * * *

objective acts; i.e., lodging a formal protest with the tax

authorities or instituting a suit in a court of law”.    Id.

at 546.

     In Lutz v. Commissioner, 396 F.2d 412, 414 (9th Cir. 1968),

revg. 45 T.C. 615 (1966), the taxpayer accrued State sales tax on

its Federal income tax returns even though other taxpayers were

contesting their liability therefor.   The Court of Appeals for

the Ninth Circuit allowed the accrual, explaining that a third

party’s contest of a liability does not necessarily make the

liability of a similarly situated taxpayer (who did not contest

the liability) contingent.

     In Woodmont Terrace, Inc. v. United States, 261 F. Supp.

789, 792-793 (M.D. Tenn. 1966), questions raised with a State

official within a few months after the end of a liquidating

corporation’s last taxable year over a State franchise tax audit
                              - 22 -

adjustment were not treated as making the tax adjustment

contested and nonaccruable.

     H.E. Fletcher Co. v. Commissioner, a Memorandum Opinion of

this Court dated Oct. 26, 1951, involved a taxpayer’s attempt to

accrue interest relating to tax adjustments in the year in which

the interest was paid, not for years to which the interest

related.   The case involved no evidence that the tax adjustments

were contested or other than fixed and definite.   The Court did

not allow the accrual basis taxpayer to accrue the interest in

the later year in which the interest was paid.

     As we understand the above authorities, situations which

would allow the accrual of interest relating to tax audit

adjustments for the years to which the interest relates generally

are distinguishable from situations such as those involved herein

(namely, situations where facts relating to the tax audit

adjustments and the amounts thereof are, for a number of years,

indefinite, where the adjustments are eventually developed based

largely on information available to both taxpayers’ and

respondent’s representatives only over the course of years after

the filing of the tax returns, where negotiations occur with

regard to the nature and character of the underlying transactions

giving rise to the tax adjustments, and where agreements with

regard to the tax adjustments are reached through such

negotiations years after the filing of the tax returns to which
                               - 23 -

the tax adjustments relate).   In the latter situations, because

of the uncertainties relating to the appropriate adjustments to

be made, the taxpayers' liability therefor is to be regarded as

not sufficiently fixed and definite until the agreements relating

to the tax adjustments are entered into in a clear and formal

manner.   In such situations, for Federal income tax purposes, the

statutory interest relating to the eventually agreed-upon tax

adjustments is not accruable until the agreements are entered

into and are clearly established.

     Exxon relies on language in section 1.461-2(b)(2), Income

Tax Regs., that describes certain “affirmative” acts that are to

be treated as commencing a protest of an asserted liability.

That language provides as follows:


     An affirmative act denying the validity or accuracy, or
     both, of an asserted liability to the person who is
     asserting such liability, such as including a written
     protest with payment of the asserted liability, is
     sufficient to commence a contest. Thus, lodging a
     protest in accordance with local law is sufficient to
     contest an asserted liability for taxes. It is not
     necessary that the affirmative act denying the validity
     or accuracy, or both, of an asserted liability be in
     writing if, upon examination of all the facts and
     circumstances, it can be established to the
     satisfaction of the Commissioner that a liability has
     been asserted and contested.


     We do not construe the above language as necessarily

requiring a particular affirmative act of protest or litigation

to a proposed tax adjustment in order for the adjustment to be
                              - 24 -

regarded as unsettled and contested.     The language of the

regulation indicates only what is “sufficient” to commence a

contest and does not purport to be exhaustive.     See Consolidated

Indus., Inc. v. Commissioner, 82 T.C. 477, 483 (1984), affd.

per curiam 767 F.2d 41 (2d Cir. 1985).     In our opinion, the key

portion of the above regulatory language is that found in the

last sentence, namely, what do the “facts and circumstances” of

each situation establish?   As stated in Phillips Petroleum Co. &

Affiliated Subs. v. Commissioner, T.C. Memo. 1991-257:


     Ultimately, a determination must be made, based upon a
     consideration of all the facts and circumstances.


     Exxon alleges that the adjustments in question (and

therefore the statutory interest) should be treated as automatic

and uncontested, that the existence and amount of the adjustments

should be regarded as simply a matter of gathering information

from Exxon's worldwide operations, and that when the figures were

finalized with regard to the tax adjustments, the adjustments

should be regarded as relating back and as having been fixed,

definite, and uncontested from the end of the tax years to which

they relate.   Accordingly, Exxon argues, the related statutory

interest should relate back and should be accruable ratably for

each year from the due dates of the tax returns to which the tax

adjustments relate.   We do not agree.
                               - 25 -

     With regard particularly to the four major agreed

adjustments, we note the series of post-tax-return events that

had to occur in order to establish Exxon’s liability with regard

thereto.    Additional information had to be gathered from Exxon’s

many units and affiliated companies.    That information had to be

organized and analyzed by Exxon’s representatives and submitted

to and audited by respondent’s representatives.    Discussions and

negotiations with regard to the information had to occur.

Disagreements with regard to characterization questions had to be

resolved.   Any disagreements had to be negotiated, and agreements

reached or not reached.   All of these activities or events

occurred during the audits, years after the consolidated

corporation income tax returns were filed.

     Exxon argues that for each year 1972 through 1978, of

necessity and in spite of good faith and reasonable efforts to

file more complete and accurate income tax returns by the due

dates thereof, Exxon's representatives who were in charge of

preparing and filing Exxon’s income tax returns knew and

understood that adjustments to the income tax returns would be

necessary and that appropriate and agreed adjustments to the tax

returns were to be communicated and volunteered to respondent’s

representatives by Exxon’s representatives either formally via

amended returns or informally during the audits of Exxon's tax

returns.    This may be true for certain adjustments.   The
                              - 26 -

evidence, however, does not indicate that the four major agreed

adjustments constituted volunteered adjustments.

     Further, even with regard to the so-called volunteered

adjustments, respondent’s representatives did not automatically

agree to the adjustments suggested by Exxon’s representatives.

Rather, as we have found, information with regard thereto was

reviewed and audited by respondent’s representatives, and the

amounts of the adjustments determined by respondent’s

representatives were set forth in the Forms 5701 that were

provided to Exxon.

     Because the four major agreed adjustments represent

approximately 85 percent of the total of the agreed tax

deficiencies and because the balance of the agreed tax

adjustments were “similarly compromised”, Exxon argues that all

of the agreed adjustments should be treated as uncontested

adjustments.   We disagree.

     Not until the end of the audits are the adjustments in

question in these cases to be treated as agreed.   That is when

the Forms 870 were entered into and/or the assessments were made.

By then, the adjustments were agreed to, and respondent

acknowledges that the all-events test was satisfied.    Prior

thereto, the adjustments in question had been discussed,

proposed, negotiated, and subject to agreement and compromise on

factual issues such as the characterization of the costs.     These
                              - 27 -

circumstances do not reflect the stuff of “fixed and definite”

liabilities.

     Exxon emphasizes that, in spite of Exxon’s failure to

indicate on the Forms 5701 its agreement or disagreement to the

adjustments, respondent’s representatives generally throughout

the audits had a “feeling” as to whether proposed adjustments

reflected in the Forms 5701 were agreed to or were contested by

Exxon’s representatives.   Exxon argues that once its

representatives informally and orally communicated to

respondent’s representatives its intent not to protest an

adjustment, Exxon regarded itself, and Exxon should be treated,

as having made a commitment not to do so.

     Further, because of its general policy objective and intent

to seek agreement on as many proposed adjustments as possible,

Exxon argues that, by default, all adjustments made by respondent

that were not specifically protested and not expressly contested

should be regarded, throughout the audits, as “agreed” and

“uncontested” adjustments that relate back to the due dates of

the tax returns.   We disagree.

     The bottom line is that prior to the end of the audits and

prior to the time the Form 870 agreements were entered into or

assessments were made, insufficient specific communications were

provided to respondent’s representatives reflecting Exxon’s

agreement to the agreed adjustments.
                              - 28 -

     The trial evidence establishes that the four major agreed

adjustments were resolved in the course of the audits.     But the

trial evidence does not establish when, during the course of the

audits, the four major agreed adjustments were resolved, short of

the end of the audits.   The mere fact that respondent’s

representatives may, during the course of the audits, have had a

“feeling” for where Exxon’s representatives stood on the major

agreed issues does not rise to the level of an agreement.

     In our opinion, the adjustments in question and the related

statutory interest are to be treated as not fully settled, as not

sufficiently fixed and definite, as contested, and as not

resolved until the end of respondent's audits, when assessments

of the tax deficiencies relating thereto were agreed to or when

the assessments occurred, at which point in time deficiency

interest relating to the adjustments is accruable.

     We note the following points that, taken together, we regard

as objective evidence that Exxon's liability for the agreed

adjustments was not fixed and definite until the end of the

audits when the Form 870 agreements were entered into without

further protest or litigation by Exxon or when the assessments

occurred:


     (1) Exxon’s consolidated corporation income tax returns
     reflected amounts different from those reflected in the
     agreed adjustments;
                             - 29 -

     (2) The adjustments were raised by respondent in
     written format in Forms 5701;

     (3) Exxon did not indicate on the Forms 5701 agreement
     to the adjustments;

     (4) With few exceptions, Exxon did not provide any
     other written statements to respondent of agreement to
     the adjustments until the Form 870 agreements were
     entered into; and

     (5) In petitions filed in this Court for 1979 through
     1982, Exxon did challenge a number of the so-called
     agreed adjustments, contrary to Exxon’s claim that
     these adjustments were routinely agreed to for each
     year.


     Based on the evidence before us, we conclude that the

statutory interest in question, relating to the agreed

adjustments and agreed tax deficiencies assessed by respondent

against Exxon at the conclusion of the audits for the years 1972

through 1978, does not satisfy the all-events test of section 461

and is not accruable until the end of the audits when Exxon, for

the years 1972 through 1977, reflected its agreement thereto in

the Form 870 agreements or, for 1978, when the assessment

occurred.

     In light of our findings and conclusion set forth above, it

is not necessary to address other arguments made by respondent as

to the proper accrual of the interest in question.
                             - 30 -

     Our holding in this opinion will be incorporated into the

decisions to be entered in these cases when all other issues are

resolved.
