Mobil Oil Corp. v. State, Dept. of Treasury

• Decision Date: 24 January 1983
• Docket Number: Docket No. 61016
• Citation: 328 N.W.2d 367,121 Mich.App. 293
• Parties: MOBIL OIL CORPORATION, Petitioner-Appellant, v. STATE of Michigan, DEPARTMENT OF TREASURY, Respondent-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 367

328 N.W.2d 367

121 Mich.App. 293

MOBIL OIL CORPORATION, Petitioner-Appellant, v. STATE of Michigan, DEPARTMENT OF TREASURY, Respondent-Appellee.

Docket No. 61016.

Court of Appeals of Michigan.

Submitted June 16, 1982.

Decided Oct. 1, 1982.

Released for Publication Jan. 24, 1983.

Dickinson, Wright, Moon, Van Dusen & Freeman by Peter S. Sheldon, Lansing, for petitioner-appellant.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Richard R. Roesch and Curtis G. Beck, Asst. Attys. Gen., for respondent-appellee.

Before HOLBROOK, P.J., and T.M. BURNS and McDONALD, ^* JJ.

PER CURIAM.

Petitioner appeals as of right from a decision of the Michigan Tax Tribunal finding petitioner liable for a single business tax deficiency of $77,705.

The issue raised in the Tribunal involved payments made by petitioner to landowners in connection with the production of oil and gas by petitioner from wells on the landowners' property. It does not involve the initial payments made by the petitioner for the right to explore the property. The case was presented to the Tribunal pursuant to a stipulation of facts entered into by the parties. The pertinent provisions thereof provide as follows:

"9. When oil or gas is produced from a well covered by an oil and gas lease of the sort represented by the attached Exhibit A, the nonoperating owner of the premises (therein denominated as 'Lessor'), is entitled either to retain his one-eighth share of such production, in kind, or to sell same to Petitioner or to anyone else.

"10. If the nonoperating owner of the premises covered by a producing oil or gas well elects to sell his one-eighth share of production to Petitioner, Petitioner accounts on its books and records for the transaction by debiting an account entitled 'Purchase Outside' and by crediting an account entitled 'Accounts Payable-Royalty.' Then, when the account payable represented by the above entry is liquidated by payment to the nonoperating owner, Mobil Oil Corporation, on its books and records, records that transaction by debiting 'Accounts Payable-Royalty' and by crediting 'Cash.'

"11. If, at the close of an accounting period, the oil purchased by Petitioner from the nonoperating owner is not sold by Petitioner, it is included on Petitioner's books and records as an asset account, inventory.

"12. At the close of an accounting period, if the oil purchased by Petitioner from the nonoperating owner has been sold by Petitioner, an entry is made on the books and records of Petitioner so as to reduce inventory and increase cost of goods sold.

"13. For the fiscal year of Petitioner during which it makes the entry identified in paragraph 12 above (a debit to cost of goods sold and a credit to inventory), a deduction on Petitioner's federal income tax return is taken so as to reflect the extent of its cost of goods sold.

"14. Petitioner is not required to include in its income any portion of the nonoperating owner's one-eighth interest in oil or gas produced on property covered by oil and gas leases of the sort attached hereto as Exhibit A, nor is Mobil Oil Corporation permitted to record, as a business expense, the account payable to the nonoperating owner until such time as the oil or gas inventory giving rise to such account payable is converted into an expense item by becoming a part of cost of goods sold.

"15. The parties stipulate and agree that Petitioner shall be entitled to prevail in connection with the $77,705 sum in dispute hereunder if:

"(a) Payments made by Petitioner to nonoperating owners of premises covered by oil and gas leases of the sort described in the attached Exhibit A are not 'royalties,' as the meaning of that term is intended in Section 9(4)(g) of the Single Business Tax Act; or

"(b) Payments made by Petitioner to nonoperating owners of premises covered by oil and gas leases of the sort described in the attached Exhibit A are not 'deducted in arriving at (Petitioner's) federal taxable income,' as the meaning of that clause is intended in Section 9(4)(g) of the Single Business Tax Act."

The Tribunal found that the payments involved are "royalties", as that term is used in M.C.L. Sec. 208.9(4)(g); M.S.A. Sec. 7.558(9)(4)(g), and that they were deducted by petitioner in arriving at its federal taxable income. Therefore, it ruled that petitioner was required to add the amounts thus deducted to its tax base in determining its single business tax liability.

The Single Business Tax Act (SBTA) provides for a specific tax of 2.35% on the adjusted tax base of every person with business activity within the state that is allocated or apportioned to this state. M.C.L. Sec. 208.31; M.S.A. Sec. 7.558(31). The base is computed by adding to federal taxable income certain items which were previously deducted, and by then subtracting certain items which were included in federal taxable income. M.C.L. Sec. 208.3(3); M.S.A. Sec. 7.558(3)(3); M.C.L. Sec. 208.9; M.S.A. Sec. 7.558(9); Stockler v. Dep't of Treasury, 75 Mich.App. 640, 255 N.W.2d 718, lv. den. 402 Mich. 802 (1977), app. dis. 435 U.S. 963, 98 S.Ct. 1598, 56 L.Ed.2d 54 (1978).

The items which are deducted from federal taxable income that must be added back to determine the tax base for SBTA purposes include:

"(4) Add, to the extend deducted in arriving at federal taxable income:

* * *

* * *

"(g) All royalties."

M.C.L. Sec. 208.9(4)(g); M.S.A. Sec. 7.558(9)(4)(g). (Emphasis added.)

The items which are included in federal taxable income that must be deducted to determine the tax base for SBTA purposes are the following:

"(7) Deduct, to the extent included in arriving at federal taxable income:

* * *

* * *

"(c) All royalties."

M.C.L. Sec. 208.9(7)(c); M.S.A. Sec. 7.558(9)(7)(c). (Emphasis added.)

Certain deductions and exemptions are then subtracted from the tax base to arrive at the adjusted tax base. M.C.L. Sec. 208.23; M.S.A. Sec. 7.558(23); M.C.L. Sec. 208.35; M.S.A. Sec. 7.558(35).

Petitioner claimed that the amounts it pays to nonoperating owners of property in connection with the production of oil and gas are not "royalties", as the term is used in the SBTA. The Tribunal found as follows:

"As to Petitioner's first contention, this Tribunal is not persuaded that the payments involved herein are not royalties. As Respondent pointed out in its brief, the payments made are categorized as 'royalty' payments both on Petitioner's books and are considered as such in the common parlance of the oil and gas industry. [See Alexander v. King, 46 F.2d 235, 74 A.L.R. 174 (CA 10, 1931), cert. den. 283 U.S. 845, 51 S.Ct. 492, 75 [L.Ed.] 1455 (1931); 38 Am.Jur.2d, p. 670, Sec. 189].

"Regardless of how these payments are characterized by Petitioner, they are considered to be 'royalties' at the federal level and are used in comparable context in the laws of the United States relating to federal income taxes and thus have the same meaning for purposes of the Single Business Tax. It makes no difference whether these 'royalties' are deducted or excluded from gross income, they are still 'royalties'. Further, quoting from Patrick and Michael Eyde v. Charter Twp. of Lansing [109 Mich.App. 641, 311 N.W.2d 438] (1981):

" 'In interpreting statutes, every word should be given meaning and no word should be treated as surplusage if at all possible. Stowers v. Wolodzko, 386 Mich. 119, 191 N.W.2d 355 (1971). When certain things are specified in a law, the intention to exclude all others from its operation may be inferred. Wolverine Steel Co v. Detroit, 45 Mich.App. 671, 207 N.W.2d 194 (1973).'

"When reading Section 9(4)(g) and applying the above criteria, it is clear that since the legislature used the word 'all', they intended to include every type of royalty."

The term "royalties" is not defined in the SBTA. However, section 2 of the act provides in part the following:

"(2) A term used in this act and not defined differently shall have the same meaning as when used in comparable context in the laws of the United States relating to federal income taxes in effect for the tax year unless a different meaning is clearly required. A reference in this act to the internal revenue code includes other provisions of the laws of the United States relating to federal income taxes." M.C.L. Sec. 208.2(2); M.S.A. Sec. 7.558(2)(2).

It is clear that under section 162 of the federal income tax, 26 U.S.C. Sec. 162, the payments made by petitioner did constitute royalties. Although the term "royalties" is not defined in section 162, petitioner concedes that the courts have universally held that the one-eighth share paid by the operating lessee to nonoperating owners in connection with the production of oil and gas and other minerals from the property of such landowners is considered to be a "royalty" for federal income tax purposes. Anderson v. Helvering, 310 U.S. 404, 60 S.Ct 952, 955, 84 L.Ed. 1277 (1940). See also Barry v. Frizzell, 371 P.2d 460, 464 (Okl.1962); Delta Drilling Co. v. Simmons, 325 S.W.2d 222, 226 (Tex.1959). See also Anno: What constitutes oil or gas "royalty", or "royalties", within language of conveyance, exception, reservation, devise, or assignment, 4 A.L.R.2d 492. Michigan courts have also included the sort of payments involved here within the definition of "royalties". People v. Blankenship, 305 Mich. 79, 86, 8 N.W.2d 919 (1943). It is well established that where a term has a well-defined meaning at the time of a legislative enactment, it is presumed that in using such term in the statute, the Legislature intended that meaning to be employed. Thomas v. Dep't of State Highways, 398 Mich. 1, 9, 247 N.W.2d 530 (1976).

Petitioner contends that even if these payments were "royalties", as the term is used in the federal act, they are not "royalties", as that term is used in section 9 of the SBTA. It contends that because royalties paid by lessees under oil and gas leases are exclusions from income under the federal act, as opposed to...