Dupuy v. McColgan

• Decision Date: 16 July 1952
• Citation: 246 P.2d 155,112 Cal.App.2d 237
• Parties: DUPUY v. McCOLGAN, as Franchise Tax Commissioner. Civ. 8107.
• Court: California Court of Appeals Court of Appeals

Page 155

246 P.2d 155

112 Cal.App.2d 237

DUPUY v. McCOLGAN, as Franchise Tax Commissioner.

Civ. 8107.

District Court of Appeal, Third District, California.

July 16, 1952.

Morrison, Hohfeld, Foerster, Shuman & Clark and Leon De Fremery, San Francisco, Walker Slack, San Francisco, for appellant.

Ernest P. Goodman, Deputy Atty. Gen., San Francisco, for respondent.

SCHOTTKY, Justice Pro Tem.

Eight actions were commenced against the State Franchise Tax Commissioner to obtain a refund of personal income taxes paid by plaintiffs under protest for the years 1935 and 1936. The eight actions were consolidated for trial and were tried on a stipulation of facts from which the court made findings and drew the following conclusions of law:

'I

'That the income received by Monarch Investment Company under the oil lease referred to in the findings of fact was income from royalties within the meaning of subdivision (1) of section 2(o) of the California Personal Income Tax Act of 1935. (Statutes 1935, ch. 329, p. 1090).

'II

'That the Monarch Investment Company was a Personal Holding Company within the meaning of section 2(o) of the California Personal Income Tax Act of 1935.

'III

'That the income of Monarch Investment Company was properly includable in the incomes of all the plaintiffs in these actions under the provisions of section 34 of the Personal Income Tax Act of 1935.'

A single judgment was entered in favor of defendant Franchise Tax Commissioner and plaintiffs have appealed.

Section 2(o) of the Personal Income Tax Act of 1935, so far as here relevant, provided:

'The words 'personal holding company' means any corporation (other than a corporation exempt from taxation under section 101 of the Federal Revenue Act of 1934, and other than a bank or trust company incorporated under the laws of the United States or of any State or Territory, a substantial part of whose business is the receipt of deposits, and other than a life insurance company or surety company) if (1) at least eighty per centum of its gross income for the taxable year is derived from royalties, dividends, interest, annuities, and (except in the case of regular dealers in stock or securities) gains from the sale of stock or securities, and (2) at any time during the last half of the taxable year more than fifty per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.'

Section 34 of the Personal Income Tax Act of 1935 provided:

'For the purpose of this act a personal holding company whether or not organized under the laws of this State shall not be recognized as a legal entity separate and distinct from the shareholders thereof. Any such company having more than one shareholder shall be deemed a partnership.'

The portion of the act here involved provides that the income of personal holding companies is taxable 'if (1) at least eighty per centum of its gross income for the taxable year is derived from royalties'. The sole question to be determined upon this appeal is whether the income from the oil lease was 'rent' or 'royalty'. If 'rent', it was not part of the income of a holding company; if 'royalty', it was. As expressed by appellant: 'The solution to the question as to whether Monarch was or was not a personal holding company depends upon whether payments received by Monarch under an oil lease constitute 'royalties' within the meaning of said section. If these payments were not 'royalties', as the word was used in the section, Monarch was not a personal holding company and the decision should have been for the appellants.'

The lease here involved was executed on February 14, 1917, between Sunset Monarch Oil Co. (the name of Monarch Investment Company prior to May 28, 1920) and the Standard Oil Co. and reads that 'the Lessor has leased, let and demised and by these presents does lease, let and demise unto the Lessee * * * the land hereinafter described, with the sole and exclusive right to the Lessee to drill for, produce, extract and take oil, gas, asphaltum and other hydrocarbon substances' etc.

The lease then provides:

'The Lessee shall pay to the Lessor as royalty and rent for said premises one-fifth ( 1/5) part of all oil, asphaltum or other hydrocarbon substances extracted and saved from said premises. For all gas produced and saved and sold off the premises by the Lessee, the Lessee shall pay as rent and royalty one cent (1cents) per thousand (1000) cubic feet * * *. The Lessee shall not be required to account to the Lessor for or pay any rent or royalty on oil, gas or water produced by the Lessee from the premises and used by it in its operations hereunder, but may use such oil, gas and water free of charge.

'Other than the royalty gas, the Lessor's royalty shall be delivered to the Lessor on the part of the land where produced and saved, and, if taken in kind, such royalty shall be delivered as produced and saved into tanks maintained on the land for that purpose by the Lessee, * * * Should the Lessor elect from time to time to have the Lessee purchase such royalty, the Lessee, upon thirty (30) days' notice in writing of such election, hereby agrees to purchase, take and receive all of said rents or royalty, and shall pay therefor the current prices paid by the Lessee from time to time to producers for products of like character, gravity and quality, in the Sunset Oil Field, and such payments shall be made to the Lessor on the 15th day of each month, for all rent and royalty produced during the preceding calendar month.

'The rent and royalty aforesaid shall be ascertained, computed and paid monthly, * * *.'

The original term of the lease was 20 years, but by a supplemental agreement dated December 7, 1931, the term was increased to 30 years.

It is agreed by both appellant and respondent that the definition of a personal holding company contained in Section 2(o) of the California Personal Income Tax Act of 1935 was taken verbatim from the Federal Revenue Act of 1934. In order to ascertain the meaning of 'royalties' in section 2(o) we should consider the scope of the term 'royalties' in the Federal Revenue Act of 1934.

Webster's New International Dictionary, Second Edition, defines the word 'royalty' as '* * * 6. A right, prerogative, due, or perquisite belonging to a king or sovereign; as: a A seigniorage on gold and silver coined at the mint. b(1) Eng. Law. Any of the royal rights constituting the regalia (which see), including various rights in land, such as the right to all gold and silver mines (called royal mines); hence, a percentage paid to the crown of gold or silver taken from mines, or a tax exacted in lieu of such share; an imperialty. (2) Coal Mining. Eng. A tract of coal-mining land, or a portion thereof. 7. Hence: a A share of the product or profit (as of a mine, forest, etc.) reserved by the owner for permitting another to use the property. b A duty or compensation paid to the owner of a patent or a copyright for the use of it or the right to act under it, usually at a certain rate for each article manufactured, used, sold, or the like; also, a percentage, as an output, paid to the owner of an article, esp. a machine, by one who hires the use of it. * * *.'

In Black's Law Dictionary, third edition, the word 'royalty' is defined as:

'A payment reserved by the grantor of a patent, lease of a mine, or similar right, and payable proportionately to the use made of the right by the grantee. (Citations omitted.]

'Royalty also sometimes means a payment which is made to an author or composer by an assignee or licensee in respect of each copy of his work which is sold, or to an inventor in respect of each article sold under the patent.'

It would appear from the foregoing definitions that the term 'royalty' as referring to a share of the product or profit of a mine or of a forest is deeply rooted in English history, and that by common usage the payments of a share of the product under oil leases are referred to as 'royalties'. It is a general rule of...