New Silver Bell Min. Co. v. Lewis and Clark County

• Decision Date: 30 June 1955
• Docket Number: No. 9272,9272
• Citation: 284 P.2d 1012,129 Mont. 269
• Parties: The NEW SILVER BELL MINING COMPANY, a Montana Corporation, Plaintiff and Appellant, v. The COUNTY OF LEWIS AND CLARK, a political subdivision of The State of Montana, Defendant and Respondent, and The State of Montana and the State Board of Equalization of the State of Montana, Intervenors and Respondents.
• Court: Montana Supreme Court

Page 1012

284 P.2d 1012

129 Mont. 269

The NEW SILVER BELL MINING COMPANY, a Montana Corporation, Plaintiff and Appellant, v. The COUNTY OF LEWIS AND CLARK, a political subdivision of

The State of Montana, Defendant and Respondent, and

The State of Montana and the State Board of Equalization of

the State of Montana, Intervenors and Respondents.

No. 9272.

Supreme Court of Montana.

Submitted Jan. 11, 1955.

Decided June 17, 1955.

As Amended on Denial of Rehearing June 30, 1955.

C. E. Pew, Helena, argued the case orally for appellant.

Arnold H. Olsen, Atty. Gen., Vera Jean Heckathorn, Asst. Atty. Gen., H. O. Vralsted, Chief Tax Counsel, Bd. of Equalization, and Sp. Asst. Atty. Gen., and Lyman J. Hall, Deputy Tax Counsel, Helena, for respondent. H. O. Vralsted argued the case orally.

DAVIS, Justice.

The appellant as plaintiff brought this action in the district court for Lewis and Clark County against the respondent county as defendant to recover certain taxes for the year 1949 demanded under R.C.M.1947, Secs. 84-5406, 84-5409, and paid under protest. The state and the state board of equalization intervened to join with the county in a general demurrer to the appellant's amended complaint. This demurrer was sustained. Judgment of dismissal followed. From that judgment this appeal has been taken.

Hereafter reference to the parties will be made as in the court below.

The only question for determination is whether the amended complaint states a cause of action for the recovery of the challenged taxes. We agree with the district court that it does not and therefore affirm its judgment.

Summarized the amended complaint and the exhibit thereto annexed set forth these pertinent facts: The plaintiff as lessor gave Swansea Mines, Inc., its lessee, a lease and option of date October 6, 1942, on certain of its mining claims in Lewis and Clark County. Under this lease the lessee operated the mines on these claims during 1949 at a net loss, but as stipulated in the lease paid the plaintiff certain percentages of its net smelter returns from its operations for that year amounting to $1,516.05, which in accordance with the option given to purchase the demised claims were to be 'credited as payments upon the unpaid balance' of the agreed purchase price of $45,000. This royalty, as the amended complaint describes these net smelter returns, the defendant board assessed at the full cash value of the amount paid the plaintiff. Upon the basis of this assessment the treasurer of the defendant county demanded a tax of $98.24, which was paid under protest.

Recovery of this tax is prayed upon the ground that it contravenes sections 1, 3, and 11 of 'Article XII of the Constitution of the State of Montana, and violates the provisions of the first subdivision of the Fourteenth Amendment to the Constitution of the United States', (1) because 'said Chapter 54 [R.C.M.1947, Secs. 84-5401 to 84-5415, both inclusive], to the extent that it may be construed as requiring the payment of the tax so levied upon said royalty where such royalty is not a part of net proceeds from the production of metals or other minerals, is in contravention of said constitutional provisions above mentioned', and (2) because the 'royalty so paid to plaintiff by said Swansea Mines, Inc., is not a part of net proceeds of any operation of any mine, but is simply based upon the amount of net smelter returns.'

The case thus made and submitted presents for decision the narrow question whether the state and county proceeding under Secs. 84-5406, 84-5409, supra, may tax as royalties the plaintiff's share of the net smelter returns coming to it for the year 1949 from the operations of its lessee on the leased claims, although the operator itself realized no net proceeds within the meaning of our Constitution and statutes.

Reserving for consideration later the question of the constitutionality of these statutes, we think the problem here would not be difficult of solution, if there were in the record the usual mining lease by the mine owner as lessor to its lessee as the operator with the stipulation that annually the owner should have from the operator a specified share of the minerals produced in kind or in cash. The owner would then take from the operator what certainly is a landowner's royalty (and here we speak of no other) within the definition of that word which this court has heretofore laid down and to which other courts pretty generally adhere.

The tax laid by the statutes cited would then certainly be due in any case where there were net proceeds realized by the operator equal to, or greater than, the royalties so paid; and this is the case we shall first consider. Compare Bryne v. Fulton Oil Co., 85 Mont. 329, 333, 336, 278 P. 514.

For then the owner would have not only a part of the operator's net proceeds, but also a share of the product or profit of the mines leased paid for permitting the operator to use its property, which is a true landowner's royalty. Homestake Exploration Corp. v. Schoregge, 81 Mont. 604, 615, 264 P. 388; Marias River Syndicate v. Big West Oil Co., 98 Mont. 254, 264, 38 P.2d 599; Hinerman v. Baldwin, 67 Mont. 417, 432, 215 P. 1103; Santa Rita Oil & Gas Co. v. State Board of Equalization, 101 Mont. 268, 289, 54 P.2d 117; Patterson v. Texas Co., 5 Cir., 131 F.2d 998, 1001; Bellport v. Harrison, 123 Kan. 310, 312, 313, 255 P. 52; Indiana Natural Gas & Oil Co. v. Stewart, 45 Ind.App. 554, 560, 90 N.E. 384; Kissick v. Bolton, 134 Iowa 650, 652, 112 N.W. 95; Palmer v. Crews, 203 Miss. 806, 818, 35 So.2d 430, 4 A.L.R.2d 483; Koppers Coal Co. v. Alderson, 125 W.Va. 747, 753, 26 S.E.2d 226; Miller v. Carr, 137 Fla. 114, 122, 123, 124, 125, 188 So. 103; Saulsberry v. Saulsberry, 162 Ky. 486, 488, 172 S.W. 932, Ann.Cas.1916E, 1223; 40 C.J., Mines and Minerals, Sec. 632, p. 1027; 58 C.J.S., Mines and Minerals, Sec. 185, pages 396, 397; 77 C.J.S., Royalty or Royalties, pages 542, 543.

Moreover, in determining whether under the lease at bar the net smelter returns paid the plaintiff are taxable consistent with our statutes as royalties we must construe the provisions of that instrument for what they really are, 'regardless of the designation given by the parties.' Forbes v. Mid-Northern Oil Co., 100 Mont. 10, 20, 45 P.2d 673, 678. In other words, we are not bound to accept at its face value the stipulation of the lessor and lessee that the net smelter returns paid over are 'not royalties but are payments upon the purchase price for said mining claims and appurtenances,' etc.

It follows then that the application of the statutes (sections 84-5406, 84-5409, supra), as they are written, to the net smelter returns which the plaintiff receives under this lease, if paid out of the operator's net proceeds, is as clear and as certain as language can record the legislative intent. For they are royalties fairly within the definition of that term as we have defined it above, and are therefore under the applicable statutes to be 'taxed on the same basis as net proceeds of mines are taxed as provided by [R.C.M., 1947] section 84-301.'

Nor do we think the case altered by the peculiar stipulations of the agreement of October 6, 1942. We have here (1) a true lease coupled with (2) a continuing offer (option) by the owner-lessor to sell for the price of $45,000, which may only be accepted by the payment in full of that sum. Then and not until then is a unilateral contract closed with the owner such that it is bound to convey. See Ide v. Leiser, 10 Mont. 5, at page 11, 24 P. 695, 24 Am.St.Rep. 17, and Thomas v. Standard Development Co., 70 Mont. 156, at page 171, 224 P. 870.

The term of this lease is defined (1) in paragraph 4, viz., '* * * so long as it [the operator-lessee] shall keep, observe and perform all of the terms and conditions hereof on its part, * * *'; and (2) by paragraph 9, which provides for the delivery of deeds conveying the described mining claims to the lessee upon the 'payment in full to first party [plaintiff] of the balance of said purchase price in accordance with the terms of this agreement.'

The obligation to pay the stipulated percentages of the net smelter returns is coextensive with the term thus limited by the lease, and ceases only when the term itself ends; i. e., upon the delivery of the deeds mentioned or the cancellation theretofore of the leasing for the lessee's default.

In this particular the net smelter returns paid the plaintiff differ not at all from the royalties paid the landowner under the familiar oil and gas lease given for a term of ten years and as long thereafter as oil or gas is produced. There too the royalty is coextensive with the term, because it is paid until the lease ends when the deposit of oil and gas is exhausted or the lessee defaults and forfeits the leasehold. No one denies that under such a lease the landowner receives a royalty taxable under our statutes.

No rent is reserved eo nomine under the agreement of October 6, 1942; but that is immaterial, if that leasing is supported otherwise by a sufficient consideration. State v. McCombs, 156 Kan. 391, 401, 402, 133 P.2d 134; Ault Woodenware Co. v. Baker, 26 Ind.App. 374, 58 N.E. 265; Bachenheimer v. Palm Springs Management Corp., 116 Cal.App.2d 580, 591, 254 P.2d 153; Huus v. Ringo, 76 N.D. 763, 772, 39 N.W.2d 505; Barnett v. Lincoln, 162 Wash. 613, 618, 299 P. 392; Wilcox v. Bostick, 57 S.C. 151, 35 S.E. 496. To read the various covenants of the lease on the part of the operator-lessee is to spell out a consideration more than sufficient to sustain it.

So also it is immaterial that in essence the term of this lease depends upon the will of the operator-lessee. It is nonetheless a lease that it terminates when the lessee fails to perform with no other liability incurred than forfeiture and the obligation to pay over to the lessor any sums accruing to it under the agreement. Dubois v. Gentry, 182 Tenn. 103, 184 S.W.2d 369; Myers v....