Chevron Oil Company v. United States, 220-68.

Decision Date18 January 1973
Docket NumberNo. 220-68.,220-68.
Citation471 F.2d 1373
CourtU.S. Claims Court

Harry R. Horrow, San Francisco, Cal., attorney of record, for plaintiff; Pillsbury, Madison & Sutro, San Francisco, Cal., of counsel.

Joseph Kovner, Washington, D. C., with whom was Asst. Atty. Gen., Scott P. Crampton, for defendant.




This case was referred to Trial Commissioner Kenneth R. Harkins with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 134(h). The commissioner has done so in an opinion and report filed on December 27, 1971. Exceptions to the commissioner's findings of fact and recommended conclusion of law were filed by plaintiff and the case has been submitted to the court on the briefs of the parties and oral argument of counsel. Since the court agrees with the commissioner's opinion, findings of fact and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. It is therefore concluded that plaintiff is not entitled to recover and its petition is dismissed.


HARKINS, Commissioner:

Plaintiff sues to recover $3,997.17, plus interest, for disallowed claims for refunds of federal documentary stamp taxes and assessed interest paid on two conveyances made in 1964 and 1966. The question presented is whether documents that transfer what are commonly described and known in the oil industry as "carved out" production payments were subject to the stamp tax then imposed by Section 4361 of the Internal Revenue Code of 1954 on instruments that transferred or conveyed "lands, tenements, or other realty".1 The conveyances of carved out production payments executed by plaintiff were instruments lawfully subject to the documentary stamp tax. Plaintiff, accordingly, may not recover.

On June 9, 1970, plaintiff and defendant agreed to a stipulation of facts that incorporated fourteen contractual and other documents. The parties, however, could not agree as to which provisions in particular documents should be identified as legally significant for interpretation of the transaction. Plaintiff contended that each of the incorporated documents in its entirety was necessary to provide a proper factual basis for argument and decision. The detailed findings of fact included with this opinion are based upon analysis and consideration of all of the documents incorporated in the June 9, 1970, stipulation. The detailed findings of fact that are involved in the 3-party relationships created in the documents, and the plaintiff's accounting treatment of these transactions, are complex and tedious. Facts significant to the decision are summarized here.

The plaintiff, Chevron Oil Company, is a wholly owned subsidiary of the Standard Oil Company of California, one of the major international oil companies. Chevron is in the business of oil and gas exploration, production, refining and marketing in most of the continental United States, exclusive of certain Western States.

During the period relative to this litigation, it was the practice of plaintiff annually to execute a number of "carved out" production payment agreements. The production payments were carved out of plaintiff's working interests in leased properties.2

During the period 1960-65, in the petroleum industry, sales of carved out production payments increased in frequency.3 During this period, the Internal Revenue Code permitted an oil company with a working mineral interest to obtain, from the sale of a carved out production payment, additional ordinary income subject to depletion in the year received. The amounts used to pay the production payment were excluded from income by the oil company during the payout period. The expenses attributable to producing the income necessary to pay off the production payment, however, could be deducted in the year incurred. Sale of carved out production payments permitted an oil company to avoid the statutory provision that limited the percentage depletion deduction to 50 percent of net income from the property in the payment year. Sale of carved out production payments, in addition, permitted avoidance of the foreign tax credit limitation, the 5-year net operating loss carryover limitation, and the 7-year investment credit carryover.4

In the period from December 1961 through December 31, 1966, plaintiff executed conveyances for at least 12 carved out production payments for a total consideration of approximately $50 million. The largest, valued at $29.1 million, was made on November 29, 1962, and the smallest, valued at $155,000, was made on December 29, 1966. All of these conveyances were made during the last 6 weeks of the calendar year and 10 were made during the last 2 weeks of December. In all cases, plaintiff's production payments were conveyed to charitable organizations, exempt from federal taxes. Purchase of the production payment was financed by the charitable organization by money borrowed from a banking institution on a promissory note that was secured by a mortgage or assignment of the oil payment. Principal and interest on the loans from the banks were less than the total to be received by the charity from the plaintiff from the production payments.

With respect to each of the production payments conveyed during the period, the consideration received was reported as ordinary income for federal income tax purposes and a deduction for percentage depletion was claimed. For financial accounting purposes, however, in reports to stockholders, the proceeds from sales of the production payments were not taken into income. The production payments were reflected as current liabilities under "Accounts Payable" in the corporation's consolidated balance sheets, with adjustments as necessary to offset federal tax expense that resulted from inclusion of the amounts in income for tax purposes.

This case is concerned with two of the plaintiff's carved out production payment transactions, a conveyance in 1964 to the Sutter Charitable Foundation, and a conveyance in 1966 to the Thirteen Hundred Foundation, Inc. After audits, the Internal Revenue Service assessed plaintiff an additional $50,951.45 in stamp taxes on nine production payment conveyances made from 1961 to 1965, and an additional $3,177.35 for three conveyances of production payments made in 1966. Plaintiff has paid these assessments, and filed for a refund of $3,785.10 with respect to the Sutter conveyance, and for a refund of $170.50 with respect to the Thirteen Hundred conveyance. The claims were disallowed in full by the Internal Revenue Service. In its claims for refund and in its petition, plaintiff seeks to recover only the tax and interest assessed and paid with respect to the 1964 transaction and the 1966 transaction, and not for other conveyances involved in the deficiency assessments.

On December 29, 1964, plaintiff executed with the Sutter Charitable Foundation, a nonprofit California corporation, a document entitled "Conveyance of Production Payments and Agreement." This document conveyed two production payments from properties offshore Louisiana to Sutter for a total consideration of $3,441,000. On December 29, 1966, plaintiff executed a similar document with Thirteen Hundred Foundation, Inc., a Louisiana nonprofit corporation. The 1966 document with Thirteen Hundred was entitled, "Conveyance of Production Payment and Agreement" and conveyed one production payment from properties in Oklahoma for a total consideration of $155,000.

Essentially, the documents with each of the charities contained the same provisions. In each the plaintiff did "* * * grant, bargain, sell and convey * * *" a production payment to the charity that was payable out of a specified percentage of crude oil or other hydrocarbons to be "* * * produced, saved and sold" from specifically identified properties leased by the plaintiff. The production payments were "* * * payable only out of production * * *" from the identified properties. Each conveyance provided that the charity would receive proceeds from a "* * * percentage of crude oil herein conveyed * * *" plus an additional amount equal to a specified percentage equivalent to interest on the unpaid balance. The documents provided that the production payment conveyed to the charity would "* * * apply to and be a burden upon the oil and gas lease" involved and that the charity's interest would terminate when the gross amount due had been paid.

Each conveyance provided that the charity "* * * shall own all * * *" of the crude oil and other hydrocarbons "* * * allocable to the production payment." In each document, plaintiff was obligated to deliver the charity's oil free of cost to the same parties that customarily received plaintiff's production and on the same terms and conditions.

Each document included an Habendum and Warranty clause that stated, in part:

TO HAVE AND TO HOLD the interest hereby conveyed, together with all and singular the rights, privileges, hereditaments and appurtenances thereto in anywise belonging, unto Assignee, its successors and assigns. * * *

Each document specifically exempted plaintiff from personal liability for the production payment conveyed to the charity, and required the charity to "* * * look exclusively to the percentage * * *" of oil conveyed. In the event that cash proceeds from the charities' percentage of oil were not equal to the gross amount of the production payment, plaintiff was not to be liable to any person for the difference.

In each document, the production payment conveyed to the charity was to continue until the gross amount was paid or for a maximum period of 15 years. Prior to execution of the documents, plaintiff and the charity had exchanged estimates that indicated...

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2 cases
  • Thrifty Corp. v. County of Los Angeles, B033602
    • United States
    • California Court of Appeals Court of Appeals
    • May 19, 1989
    ...for five years is not taxable even if the right is granted to renew it for several successive terms.' " (Chevron Oil Company v. United States (1973) 471 F.2d 1373, 1379, 200 Ct.Cl. 449; accord 62 Ops.Cal.Atty.Gen. 87, 90 [Under the former federal act "interests for a term of years [was clas......
  • Texaco, Inc. v. U.S., s. 77-2271
    • United States
    • U.S. Court of Appeals — Fifth Circuit
    • August 11, 1980
    ...payments until a 1966 revenue ruling, which it could not apply retroactively to these assignments. In Chevron Oil Co. v. United States, 471 F.2d 1373, 200 Ct.Cl. 449 (Ct.Cl.1973), the plaintiff, Chevron Oil Co., raised these same arguments before the Court of Claims. The Court of Claims rej......

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