Caminol Co. v. United States

• Decision Date: 23 October 1941
• Docket Number: 394-B,395-B.,7923-B,276-B,6-B,No. 275-B,786-B,275-B
• Citation: 41 F. Supp. 819
• Court: U.S. District Court — Southern District of California
• Parties: CAMINOL CO., LIMITED, v. UNITED STATES and six other cases.

41 F. Supp. 819

CAMINOL CO., LIMITED, v. UNITED STATES and six other cases.

Nos. 275-B, 276-B, 7923-B, 6-B, 786-B, 394-B, 395-B.

District Court, S. D. California, Central Division.

October 23, 1941.

Dempsey & Mackay, A. Calder Mackay, Thomas R. Dempsey, and Wellman P. Thayer, all of Los Angeles, Cal., for plaintiffs.

Wm. Fleet Palmer, Acting U. S. Atty., (now U. S. Atty.), and E. H. Mitchell, Asst. U. S. Atty., both of Los Angeles, Cal., and Courtnay C. Hamilton, Asst. to Atty. Gen. of U. S., and J. S. Hornback, Sp. Asst. to Chief Counsel, Bureau of Internal Revenue, of Washington, D. C., for defendant.

BEAUMONT, District Judge.

Plaintiffs bring these actions to recover taxes collected by the United States under authority of Section 731 of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 636, on the transportation of crude petroleum by pipe line. Each plaintiff was the owner of the oil transported by such plaintiff, and of the pipe lines so transporting it. The suits were tried together, there being an identity of issues in all the actions. Actions numbered 275 and 276 were consolidated, as were those numbered 394 and 395.

Section 731 of the Revenue Act of 1932 by subsection (a) (1) requires that on all transportation of oil by pipe line a tax equivalent to four per cent of the amount paid for such transportation shall be paid by the person furnishing such transportation. By subsection (a) (2) it imposes, in case no charge for transportation is made either by reason of ownership of the commodity transported or for any other reason, a tax equivalent to four per cent of the fair charge for such transportation, to be paid by the person furnishing such transportation; and by subsection (b) provides for computation of the fair charge indicated in subsection (a) (2) as follows:

"(1) from actual bona fide rates or tariffs, or

"(2) if no such rates or tariffs exist, then on the basis of the actual bona fide rates or tariffs of other pipe lines for like services, as determined by the Commissioner, or

"(3) if no such rates or tariffs exist, then on the basis of a reasonable charge for such transportation, as determined by the Commissioner."

For a proper understanding of the case, it seems advisable to refer to certain matters that were preliminary to the establishment of rates in the oil field known as the Los Angeles Basin. The Commissioner of Internal Revenue after obtaining certain data, and there being no actual bona fide rates existing in such territory, announced that he was preparing to determine the basis for taxation of transportation of oil by pipe line in such area. Major oil companies operating in California thereupon advised the commissioner that they desired to be heard before such rates were finally determined, and requested a conference with him for the purpose of considering what they believed would be a fair basis for such assessment. The commissioner granted this request, and the representatives of the companies met in Washington with the commissioner and his associates. The plaintiffs in these actions — generally regarded as "smaller" companies — were not represented. No taxpayer was asked to be present; there was no requirement that any such conference be held, and all taxpayers attending were present at their own instance. This conference considered oil-taxation matters in various California fields. It was held in October and November of 1933, and extended over a period of five or six weeks. After many discussions the commissioner agreed with the representatives of the companies present that two charges would be established in the Los Angeles Basin, one to be known as a "gathering" and the other as a "transporting" charge.

From the evidence it appears that the agreement of the conference was that gathering is that service rendered in carrying the oil from the point where gauged for royalty purposes to trunk or main-line storage tanks; that transporting was that of delivering the oil from such storage tanks through such trunk or main line to the refinery.¹ The latter was a separate movement from the former. The oil "gathered" in the storage tanks or tank farms adjacent to the main line was forced by pumps maintained at such tank farms from the storage tanks into the main pipe line, and thence through the main line toward destination (refinery). Sometimes additional pumping stations (placed at intervals along the trunk line) were necessary for the continuation of this movement, this usually depending upon the number of miles the oil was so moved. There was a clear interruption of movement between the gathering and the transporting.

(1) The complaints of all the parties are essentially identical as to the legal issues, and each complaint has three causes of action. By reason of the first cause of action of each complaint and the evidence presented in support thereof, plaintiffs contend that they are not transporters of crude oil within the purview of the act; that their movements of oil were not taxable as transportation. This contention is without merit. The evidence shows that the plaintiffs either produced the oil from wells owned or leased by them or purchased it in the vicinity of their refineries in the Los Angeles Basin. Such oil was then pumped by plaintiffs through their own pipe lines to their refineries. The court is of the opinion that such movement is transportation in its more comprehensive sense, and is within the contemplation of Section 731, supra. In Alexander v. Carter Oil Co., 10 Cir., 53 F.2d 964, 966, the court said: "It is possible for oil to go directly from the mouth of the well to the refinery; if so, transportation begins at the mouth of the well." See, also, Alexander v. Cosden Pipe Line Co., 290 U.S. 484, 54 S.Ct. 292, 78 L. Ed. 452; McKeever v. Fontenot, 5 Cir., 104 F.2d 326, certiorari denied, 308 U.S. 588, 60 S.Ct. 113, 84 L.Ed. 492; Dixie Oil Co. v. United States, 5 Cir., 24 F.2d 804; Mohawk Petroleum Co. v. Lewis, D.C., 19 F. Supp. 867.

(2) Grounded on the second cause of action each plaintiff urges that the proof shows the basis employed for the imposition of the tax was unreasonable, and that the commissioner acted arbitrarily in establishing such basis. The provisions of the act imposing a tax on transportation of oil by pipe line and authorizing the Commissioner of Internal Revenue to fix reasonable charges as a basis of taxation have been held constitutional. Standard Oil Co. v. McLaughlin, 9 Cir., 67 F.2d 111; Motter v. Derby Oil Co., 8 Cir., 16 F.2d 717; Meischke-Smith v. Wardell, 9 Cir., 286 F. 785, 786. Was the action of the commissioner arbitrary? There is nothing in the evidence to indicate that the commissioner acted arbitrarily in establishing the basis of the tax in dispute. On the other hand, the evidence shows that he acted fairly. He and his associates had almost daily contact with the representatives of the various oil companies throughout the period of the hereinbefore-mentioned conference, listening to objections, discussing proposals and considering data bearing upon pipe-line transportation. All such matters were carefully examined. His conclusion appears to have been the result of thorough and impartial consideration, coupled with a desire to establish a rate that would be equitable to both the government and the taxpayers. And likewise it does not appear that his determination was unreasonable. Under such showing the commissioner's decision will not be disturbed. Williamsport Wire Rope Co. v. United States, 277 U.S. 551, 48 S.Ct. 587, 72 L.Ed. 985; Houston v. St. Louis Independent Packing Co., 249 U.S. 479, 39 S.Ct. 332, 63 L.Ed. 717; Louisiana v. McAdoo, 234 U.S. 627, 34 S.Ct. 938, 58 LEd. 1506; Bates & Guild Co. v. Payne, 194 U.S. 106, 24 S.Ct. 595, 48 L.Ed. 894; Joseph Joseph & Bros. Co. v. United States, 6 Cir., 71 F.2d 389; Com. v. Spring City Foundry Co., 7 Cir., 67 F.2d 385.

(3) The remaining contention of plaintiffs and that contained in their third causes of action is that even if they are held to be transporters, still they should pay a tax based only on the gathering charge of 2 cents; in other words, that the movement herein considered is at most only gathering and not both gathering and transporting.

Great importance has been attached by the parties to Alexander v. Cosden Pipe Line Co., 290 U.S. 484, 54 S.Ct. 292, 78 L.Ed. 452. The court has carefully read that case. For the purpose of obtaining a more detailed description of the movements of oil involved therein, the court has also read the statement of facts contained in the opinion of the Circuit Court of Appeals, 10 Cir., 63 F.2d 663, when the case was before that court, and has had recourse to a copy of the transcript of the evidence adduced at the trial in the District Court and to the findings of the District Court. It appears from the foregoing that in so far as concerns the causes of action arising from the two claims considered by the Supreme Court, the oil was obtained from various points of production in the Oklahoma oil fields and conveyed by pipe line therefrom to the refinery of Cosden & Company at Tulsa.²

The commissioner decided that the service in said case was both a gathering and a trunk-line (transporting) movement, and determined the tax accordingly.³ The District Court concluded that it was a gathering movement only. The Supreme Court adopted such...