Helvering v. Bankline Oil Co Bankline Oil Co v. Commissioner of Internal Revenue

Citation82 L.Ed. 897,303 U.S. 362,58 S.Ct. 616
Decision Date07 March 1938
Docket NumberNos. 387,388,s. 387
CourtU.S. Supreme Court

[Syllabus from pages 362-364 intentionally omitted] Messrs. Homer S. Cummings, Atty. Gen., and Golden W. Bell, Asst. Sol. Gen., of Washington, D.C., for Commissioner of Internal Revenue.

Mr. Martin J. Weil, of Los Angeles, Cal., for Bankline Oil Co.

Mr. Chief Justice HUGHES delivered the opinion of the Court.

No. 387.—This case presents the question whether respondent, the Bankline Oil Company, is entitled to an allowance for depletion with respect to gas produced from certain oil and gas wells. The ruling of the Board of Tax Appeals that the taxpayer had no depletable interest (33 B.T.A. 910) was reversed by the Circuit Court of Appeals, 9 Cir., 90 F.2d 899. Because of an asserted conflict with the principles applicable under the decisions of this Court, we granted certiorari. 302 U.S. 675, 58 S.Ct. 119, 82 L.Ed. —-.

Respondent in the years 1927 to 1930 operated a casinghead gasoline plant in the Signal Hill Oil Field, Los Angeles county, Cal. Respondent had entered into contracts with oil producers for the treatment of wet gas by the extraction of gasoline. The Board of Tax Appeals made the following findings:

Natural gas, commonly known as 'wet gas' as it flows from the earth, is not a salable commodity. It is only through processing by separation of the gasoline therefrom—rendering it dry, that it may be sold for commercial uses. Conversely, it is only through the separation of dry gas from wet gas that the gasoline is salable. It is this process that produces casinghead gasoline. The content of gasoline in wet gas varies from one-half gallon to six gallons a thousand cubic feet of gas produced, depending upon its richness. Respondent's contracts provided, generally, that it should install and maintain the necessary pipe lines and connections from casing-heads or traps at the mouth of the well to its plant, through which the producer agreed to deliver the natural gas produced at the well and that respondent should extract the gasoline therefrom, respondent to pay the producer 33 1/3 per cent. of the total gross proceeds derived from the sale of gasoline extracted from wet gas, or, at producer's option, to deliver to the producer 33 1/3 per cent. of the salable gasoline so extracted. A slightly different type of contract provided for the outright 'purchase' from the producer of all natural gas produced at a given well, the respondent paying 33 1/3 per cent. of the gross proceeds received by it from the sale of the gasoline extracted from such gas. Some of the dry gas remaining after removal of the gasoline was blown to the air and wasted because there was no market for it, while some was sold to public utilities and in that case respondent accounted to the producer for a proportion of the proceeds provided for under the contract and some was returned to the wells to be used for pressure purposes.

The government maintains that under the contracts respondent took no part in the production of the wet gas, conducted no drilling operations upon any of the producing premises, did not pump oil or gas from the wells, and had no interest as lessor or lessee, or as sublessor or sublessee, in any of the producing wells.

Respondent states that in accordance with the provisions of the contracts it attached pipe lines to the various wells, carried the gas from those wells to its plant, where the gas from the wells of the different producers was commingled, and removed the gasoline therefrom. The gasoline was sold and respondent accounted to each producer 'for one-third of the proceeds of the producer's pro rata of the gasoline made.' Respondent contends that it was entitled to deduct for depletion 27 1/2 per cent. of the difference between the price which it paid for the wet gas and its fair market value at the mouths of the wells. Respondent took the 'prevailing royalty,' which it deemed to be established by the evidence, as that market value, and treated the difference between the amount respondent paid and the greater prevailing royalty as respondent's gross income for the purpose of applying the statute. Revenue Act 1926, §§ 204(c)(2), 234(a)(8), 44 Stat. 14, 41; Revenue Act 1928, §§ 23(l)(m), 114(b)(3), 45 Stat. 799, 821, 26 U.S.C.A. §§ 23 and note, 114 note.

The Circuit Court of Appeals was of the opinion that respondent had acquired an economic interest in the wet gas in place and was entitled to an allowance for depletion. But, as no finding had been made of the market value of the wet gas, or of respondent's net income from the property, the court remanded the case to the Board of Tax Appeals to the end that respondent might supplement its proof and that an allowance for depletion should be made in accordance with the evidence produced.

In order to determine whether respondent is entitled to depletion with respect to the production in question, we must recur to the fundamental purpose of the statutory allowance. The deduction is permitted as an act of grace. It is permitted in recognition of the fact that the mineral deposits are wasting assets and is intended as compensation to the owner for the part used up in production. United States v. Ludey, 274 U.S. 295, 302, 47 S.Ct. 608, 610, 71 L.Ed. 1054. The granting of an arbitrary deduction, in the case of oil and gas wells, of a percentage of gross income, was in the interest of convenience and in no way altered the fundamental theory of the allowance. United States v. Dakota-Montana Oil Co., 288 U.S. 459, 467, 53 S.Ct. 435, 438, 77 L.Ed. 893. The percentage is 'of the gross income from the property,'—a phrase which 'points only to the gross income from oil and gas.' Helvering v. Twin Bell Syndicate, 293 U.S. 312, 321, 55 S.Ct. 174, 178, 79 L.Ed. 383. The allowance is to the recipients of this gross income by reason of their capital investment in the oil or gas in place. Palmer v. Bender, 287 U.S. 551, 557, 53 S.Ct. 225, 226, 227, 77 L.Ed. 489.

It is true that the right to the depletion allowance does not depend upon any 'particular form of legal interest in the mineral content of the land.' We have said, with reference to oil wells, that it is enough if one 'has an economic interest in the oil, in place, which is depleted by production'; that 'the language...

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