Amoco Production Co. v. Newton Sheep Co., s. 94-4242

• Decision Date: 06 June 1996
• Docket Number: 95-4169,Nos. 94-4242,s. 94-4242
• Citation: 85 F.3d 1464
• Parties: -2533, 96-2 USTC P 50,362 AMOCO PRODUCTION COMPANY, a Delaware Corporation, Plaintiff-Appellee, v. NEWTON SHEEP COMPANY, a limited partnership, Defendant-Appellant, and United States of America, et al., Defendants. Scott NEWTON; Florence Bentine; Virginia Burke; Jane Ann Holman, trustee of the James Newton Trust; Edna Newton; George Newton; Ralph Newton, individually and as trustee of the Bessy Newton Trust, Plaintiff-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1464

85 F.3d 1464

77 A.F.T.R.2d 96-2533, 96-2 USTC P 50,362

AMOCO PRODUCTION COMPANY, a Delaware Corporation, Plaintiff-Appellee, v. NEWTON SHEEP COMPANY, a limited partnership, Defendant-Appellant, and United States of America, et al., Defendants.

Scott NEWTON; Florence Bentine; Virginia Burke; Jane Ann

Holman, trustee of the James Newton Trust; Edna Newton;

George Newton; Ralph Newton, individually and as trustee of

the Bessy Newton Trust, Plaintiff-Appellants, v. UNITED STATES of America, Defendant-Appellee.

Nos. 94-4242, 95-4169.

United States Court of Appeals Tenth Circuit.

June 6, 1996.

Dale E. Anderson, Spencer & Anderson, Salt Lake City, Utah (Claron C. Spencer with him on the briefs), for Defendant-Appellant and Plaintiff-Appellants.

Jeffrey E. Nelson, Van Cott, Bagley, Cornwall & McCarthy, Salt Lake City, Utah, for Plaintiff-Appellee.

Gilbert S. Rothenberg and Bridget M. Rowan, Attorneys, Tax Division, U.S. Department of Justice, Washington, DC, on the brief, for Defendant-Appellee.

Before TACHA, BALDOCK, and KELLY, Circuit Judges.

TACHA, Circuit Judge.

The first of these cases began as a suit by Amoco Production Company (Amoco) to quiet title to oil and gas in certain lands in Summit County, Utah. The defendants in that action were originally the United States and its lessees, who claimed title to one-half of the oil and gas, and the Newton Sheep Company (the Newtons), a Utah family limited partnership, and its grantees, who claimed title to all of the oil and gas. In addition, there was a related dispute between the Newtons and Bass Enterprises Production Co., one of the Newtons' grantees, over title to one-half of the oil and gas. The issues relating to the ownership of the oil and gas were resolved in two decisions by this court in 1988. Amoco Prod. Co. v. United States, 852 F.2d 1574 (10th Cir.1988); Amoco Prod. Co. v. United States, 852 F.2d 1581 (10th Cir.1988). Thereafter, disagreements arose between Amoco and the defendants other than the United States regarding Amoco's accounting for the proceeds of the oil and gas that Amoco had purchased from the production of the leased lands during the years of the title dispute (1976-1988). Most of these accounting issues were settled. However, the Newtons' claim that Amoco had improperly withheld, on behalf of the Newtons, windfall profit taxes from unpaid oil proceeds during the years 1980-1987 was not resolved. The Newtons maintain that they did not become liable for the tax until 1990, after the title dispute was settled and the first payment to the Newtons from Amoco's oil purchases was authorized, and claim that Amoco now owes the Newtons interest on the withheld royalties. The Newtons also contend that Amoco did not properly report the withholdings to them, and that they were consequently unable to obtain a refund, with interest, from the United States. The Newtons filed a motion for summary judgment on these issues in the district court. The district court held that Amoco did not owe the Newtons interest on the withheld royalties. The Newtons now appeal that decision.

The second case involves the same windfall profits tax withholdings as the first, except that the owners of the Newton Sheep Company seek a refund of the interest on the withheld royalties from the United States, as an alternative to recovering against Amoco. The district court held that the three-year statute of limitations in 26 U.S.C. § 6511(a) and the two-year monetary cap on recovery in 26 U.S.C. § 6511(b)(2)(B) bar the Newtons from recovering the interest on the withheld royalties from the United States. The Newtons now appeal that decision. This court consolidated the Newtons' appeals in the two cases. We exercise jurisdiction pursuant to 28 U.S.C. § 1291 and affirm both decisions of the district court.

I. Background

Amoco sued to quiet title to the oil and gas in 1976. The proceeds of Amoco's oil and gas purchases that would have been paid to the Newtons, but for the title dispute, were suspended and held by Amoco in an escrow account from the beginning of production in 1976 until January 1982. At that point, the district court ordered that all royalties retained by Amoco and the other plaintiffs, as well as all future royalties, were to be deposited with the clerk of the district court and invested in U.S. Treasury Bills. In 1988, this court resolved the issues of title to the oil and gas. Amoco Prod. Co. v. United States, 852 F.2d 1574 (10th Cir.1988); Amoco Prod. Co. v. United States, 852 F.2d 1581 (10th Cir.1988). In July 1989, the district court ordered that all funds that had been deposited with the clerk, as well as all future royalties, be deposited in an escrow account with a bank in Salt Lake City, Utah, where they were to remain until further order of the court. On July 17, 1990, the district court authorized the first of three distributions of the money (principal and interest) held in the escrow account. This was the first occasion on which the Newtons received any of the proceeds from Amoco's purchases.

In February 1980, during the quiet-title phase of this litigation, Congress enacted the Windfall Profit Tax on domestic crude oil, 26 U.S.C. §§ 4986-4990. This tax remained in effect until it was repealed on August 23, 1988, as to crude oil removed on or after that date. 102 Stat. 1322 (1988). Beginning in June 1982, Amoco began sending to the Newtons copies of Amoco's periodic checks to the clerk of the court. Amoco also sent to the Newtons statements that detailed, with respect to each piece of property, the total quantity of oil purchased by Amoco, various deductions including "crude oil excise tax [windfall profit tax] deductions," and the pre-tax and post-tax interests of the producers (royalty owners). Amoco also filed Form 6248, Annual Information Return of Windfall Profit Tax, with the Internal Revenue Service (IRS) each year, as required by 26 C.F.R. § 51.4997-2(a) (1983). Beginning in January 1983, Amoco also mailed to the clerk of the district court a copy of IRS Form 6248, indicating the withholdings for the previous year. Amoco did not send additional copies of the Forms 6248 to the Newtons. None of the annual Forms 6248 indicated the Newtons' specific share of Amoco's oil purchases or of the windfall profit taxes withheld. This information would not become available until the resolution of the quiet title action. In November 1990, Amoco provided the first accounting that allocated to the Newtons an amount of unpaid oil proceeds and an amount of windfall profit tax withheld. The accounting provided this information on a monthly basis for the years 1980-1987. In all, $215,518.85 in windfall profit taxes allocated to the Newtons were withheld by Amoco for the years 1980-1987. The time value of the money withheld, as of the briefing of this court, was approximately $328,000.

On April 15, 1994, the Newtons filed administrative claims with the IRS for a refund of windfall profit taxes withheld plus statutory interest, arguing that Amoco was not required to make the windfall profit tax withholdings during the period of the title dispute. The IRS denied the Newtons' refund claim, arguing that it was time-barred by the three-year statute of limitations in 26 U.S.C. § 6511(a).

II. The Point at which the Proceeds Became Taxable

We review the district court's summary judgment rulings de novo. Wolf v. Prudential Ins. Co., 50 F.3d 793, 796 (10th Cir.1995). The threshold question in this case is whether the proceeds that Amoco suspended during the years 1980-1982 and deposited with the district court clerk during the years 1982-1987 were actually taxable at the time that Amoco withheld the windfall profit taxes. We conclude that they were not. Although the Windfall Profit Tax was not an "income tax" as such, see Hall v. United States, 975 F.2d 722, 726 (10th Cir.1992) (stating that the mitigation provisions of 26 U.S.C. §§ 1311-14 "relate to claims for refund of income taxes, not other taxes such as the windfall profit tax...."), it was a tax that was determined in part by the recognition of income from oil proceeds.

Section 4986 of the Internal Revenue Code imposed a tax on the windfall profit from taxable crude oil removed from the premises during each taxable period. 26 U.S.C. § 4986. Section 4988(b)(1) provided a net income limitation (NIL), such that the windfall profit on any barrel of crude oil could not exceed ninety percent of the net income attributable to that barrel. 26 U.S.C. § 4988(b)(1). According to 26 C.F.R. § 51.4988-2(b)(1)(iii), the calculation of the number of barrels that were taken into account for NIL purposes required a determination of the "number of units ... sold within the taxable year," as defined by 26 C.F.R. § 1.611-2(a)(2). Under section 1.611-2(a)(2), a barrel was considered sold in the year in which the taxpayer recognized the income from that sale under its method of accounting. Thus, in order for the NIL provisions of the Windfall Profit Tax to have effect, the income had to be recognized by the taxpayer. Income from funds held in escrow is not recognized until the funds are released. Therefore, the oil proceeds involved in this case did not become taxable under the Windfall Profits Tax until their release to the Newtons in July 1990.

This understanding of the timing of income recognition for windfall profit tax purposes is further supported by 26 U.S.C. § 4988(b)(3). According to section 4988(b)(3), subject to certain exceptions, the taxable income from the oil-producing property is determined under the rules stipulated in 26 U.S.C. § 613(a), which govern the calculation of depletion allowances for income from mines, wells, and other natural deposits. This court has established that, with respect to the depletion allowance, income recognition does not occur where proceeds are held in an escrow account. Crews v. Commissioner, 89 F.2d 412 (10th Cir.1937). "[G]ain or profit from property, though it...