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Appealed from: United States Court of Federal Claims Senior Judge Reginald W. Gibson

This is a federal income tax case. Appellant Exxon Mobil Corporation (“Exxon”) appeals the December 29, 1999 judgment of the United States Court of Federal Claims denying-in-part Exxon’s claim for a reimbursement for federal income taxes paid for the 1975 tax year on proceeds from sales of natural gas. The United States cross-appeals the trial court’s decision, arguing that the court applied an incorrect legal standard in determining whether Exxon was entitled to its claimed deductions. Exxon filed a timely notice of appeal to this court on February 14, 2000. The government filed a timely cross-appeal on February 17, 2000. This court has jurisdiction pursuant to 28 U.S.C. � 1295(a)(3). We heard oral arguments in this appeal on February 5, 2001. Because we find that the trial court applied the proper legal standard in determining whether Exxon was entitled to calculate its deduction based on percentage depletion, we affirm the trial court’s judgment on the government’s cross-appeal. On Exxon’s appeal, we find no clear error in the trial court’s ruling that Exxon failed to carry its burden of demonstrating that the casinghead gas sold pursuant to the contracts at issue was entitled to the claimed deduction, and accordingly we affirm the trial court’s judgment on the casinghead gas issue. However, we conclude that the Excess Royalty Reimbursement clause of Exxon’s contract with Houston Light & Power Company (“HL&P”) is equivalent, as a matter of law, to the permissible price increase provisions recited in Treas. Reg. � 1.613A-7(c)(5). Moreover, we conclude that the Additional Gas clause of the HL&P contract did not disqualify the contract from being treated as a “fixed contract” under I.R.C. � 613A(b)(2)(A) because the challenged price increases were equivalent to an above-market surcharge on additional gas, and because HL&P, not Exxon, retained control over whether the price increases would occur. Accordingly we reverse the conclusion of the trial court that the HL&P contract was disqualified from treatment as a “fixed contract” under I.R.C. � 613A(b)(2)(A). We remand for calculation of the amount of the tax refund owed to Exxon.

I. Factual and Procedural Background

 
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