Ohio Oil Co. v. Wright

• Court: Illinois Supreme Court
• Writing for the Court: GUNN
• Citation: Ohio Oil Co. v. Wright, 386 Ill. 206, 53 N.E.2d 966 (Ill. 1944)
• Decision Date: 21 March 1944
• Docket Number: Nos. 27705-27707.,s. 27705-27707.
• Parties: OHIO OIL CO. et al. v. WRIGHT, State Treasurer, et al.

386 Ill. 206

53 N.E.2d 966

OHIO OIL CO. et al.

v.WRIGHT, State Treasurer, et al.

Nos. 27705-27707.

Supreme Court of Illinois.

March 21, 1944.

Suit by the Ohio Oil Company and others against Warren Wright, State Treasurer, and others, to recover taxes paid under protest and to enjoin the State Treasurer from transferring the fund into state treasury. From a decree dismissing the suit, plaintiffs appeal.

Reversed and remanded with directions.Appeal from Circuit Court, Sangamon County; Lawrence E. stone, judge.

Brown, Hay & Stephens and Robert A. Stephens, Jr., all of Springfield, George D. Brabson, of Findlay, Ohio, Thomas J. Reilly, of Houston, Tex., W. L. Summers, of Urbana, and John D. Watkins, of New York City, for appellants.

George F. Barrett, Atty. Gen. (Harry L. Arnold, of Rockford, and William C. Wines, of Chicago, of counsel), for appellees.

GUNN, Justice.

In September, 1941, appellant, The Ohio Oil Company, filed in the circuit court of Sangamon county its complaint for injunction and relief against the Treasurer of the State of Illinois and others to test the validity of ‘An Act in relation to a tax upon persons engaged in the business of producing oil in this State, and providing for the collection and payment of the tax by persons handling or receiving the oil so produced.’ (Approved May 29, 1941.) The amended complaint alleges the taxes required to be paid by said act were paid under protest, and this suit is for the recovery of all sums so paid, and enjoining and requiring the State Treasurer to hold the same in the protest fund, and not pay them into the State treasury, pending the determination of the case.

The complaint further alleges the tax violates the constitution in many ways. The defendants filed a motion to strike and dismiss, which was allowed by the court, and a temporary injunction theretofore issued dissolved and the complaints dismissed for want of equity. This case in this court bears the number 27705.

Suits alleging substantially the same facts were filed by the Superior Oil Company,designated in this court as No. 27706, and by the Shell Oil Company, Inc., designated as No. 27707. All were tried at the same time and the briefs and abstracts in the three cases were filed as one. The challenge of the constitutionality of the law authorizes a direct appeal to this court.

The statute purports to place a tax upon the production of oil both as to the actual operator and as to the landowner who executed the lease. Ill.Rev.Stat. 1941, chap. 120, parts. 416.1 to 416.19. In a general way it places a tax of three per cent upon the production of oil based upon ownership of the oil at the time it is taken from the land. It makes the operators drilling for the oil liable as well as the retained interest of the lessor, which is designated royalty. It provides for the collection of the tax by making the producers or the purchasers, receivers or managers, liable to make returns to the Director of Finance. It requires the purchasers, as well as the producers, to obtain a registration certificate, make monthly returns, and be subject to examination by the agents of the Department of Finance. It provides severe penalties for infraction of the law, and for hearings in case of dispute as to liability, for review by the circuit courts, and authorizes the Department of Finance to make and provide rules for its administration. It is unnecessary to set forth all of the provisions of the act, as the principal questions revolve around sections 1, 2 and 19 of the act. Section 1 contains the definitions of the different terms used, and contains the following: “Producer' or ‘person engaged in the business of producing oil’ means any person owning oil or having a royalty interest therein at the time it is taken from the earth or water in this State, whether taken by him or by some other person in his behalf.' Ill.Rev.Stat. 1941, chap. 120, par. 416.1. Section 2 provides: ‘A tax is imposed upon each person engaged in the business of producing oil in this State at the rate of three per cent (3%) of the value on all oil which is produced in this State by such person after June 30, 1941. This tax shall be borne by each such person in proportion to his interest in the value of oil so produced.’ Ill.Rev.Stat. 1941, chap. 120, par. 416.2.

The Ohio Oil Company operates certain oil lands under leases from the owners and produces oil therefrom, and pays to the owners of the land, their lessors, the royalty provided in the lease, usually the value of one eighth of the oil after it is taken from the ground and into the pipe line. It also has assigned some of its leases, and retains a royalty and sometimes an overriding royalty interest therein, and sometimes buys oil from other operators which it renders available for use in its own refineries.

Many constitutional objections are urged by appellants, the first of which to engage our attention is whether the act as a whole violates section 1 of Article IX of the constitution of Illinois, Smith-Hurd Stats., both as to oil companies owning and operating leases, and as to royalty holders owning the fee in the land. This section provides in substance that the General Assembly shall raise revenue by levying a tax by valuation so that every person and corporation shall pay taxes in proportion to the value of his, her or its property, the value to be ascertained by some person elected or appointed as directed by the General Assembly. This section of the constitution authorizes a direct tax on property based upon valuation, which is required to be uniform in its operation. These taxes are commonly designated property taxes. The constitution also authorizes the legislature to impose certain excise taxes, which in this State have been limited to occupation, privilege and franchise taxes, which, however, must be uniform as to the class upon which they operate.

The first question for decision is whether the tax in question is levied upon the oil as property of the person entitled to drill for or produce the oil, or of the royalty holders, or both of them; because, if such is the case, it may not be levied in the manner specified in the act, since it is not ascertained and valued by the officers designated by the General Assembly. If it should appear that only one of the class of persons required to pay the tax is exempt from its application, then the further question occurs as to whether the tax as to the remaining party complies with the requirements of uniformity necessary for the legality of the imposition.

Appellants place considerable stress upon the proposition that leases to drill for oil and to receive royalties are real estate and therefore not subject to a tax on production. On the other hand the appellees contend it is an occupation tax, or, in the alternative, a privilege tax, and that therefore no tax is levied upon property requiring valuation or uniform assessment.

When the definition of producer or person engaged in the business of producingoil is transposed from section 1 to section 2 which imposes the tax, we find that the ‘producer’ of oil, as defined in the act, is taxed on the value of the oil ‘at the time it is taken from the earth or water.’ It is true we have held that oil underlying land is included within the term minerals, and is a valuable right and a part of the land (Jilek v. Chicago, Wilmington & Franklin Coal Co., 382 Ill. 241, 47 N.E.2d 96, 146 A.L.R. 871), and that the property granted to a lessee or driller by the fee owner is a right to explore and reduce oil to possession and constitutes a freehold estate in land (Greer v. Carter Oil Co., 373 Ill. 168, 25 N.E.2d 805), yet the statute does not purport to tax these interests. Section 1 refers to the producer as a person ‘owning oil,’ not when it is in the ground or in place, but ‘at the time it is taken from the earth.’ These words clearly import it is the ownership of severed oil, and not the interest in land or real estate that creates the class upon which the tax is imposed.

The ordinary construction of the terms used, when the whole context is considered, indicates that the value of this oil at the time of separation fixes the basis of the amount to be paid, but the tax is imposed upon the business of separating the oil from the real estate and putting it into the channels of commerce. With this conception of what the legislature has enacted it can readily be seen a different situation is presented as to an oil company owning an interest in lands on which it has a right to drill wells and produce oil, and does by its operations produce oil, and that of an owner of land who has executed a lease or deed authorizing an oil company to go upon his land and explore for and procure oil, even though the part interest which he may have in discovered oil occurs contemporaneously with the interest of the lessee in the other part of the oil. Inasmuch as the complaint purports to be not only on behalf of the oil company, but on behalf of other producers and royalty owners and part-interest owners of oil, we will first determine the situation of the so-called royalty owner.

The business of extracting oil from the earth and of transporting and marketing it is different from handling other minerals, and has been the subject of legislation considering it to be a class by itself. The interest possessed by the lessor or owner of the fee in the land has also had consideration as to whether it constitutes property or income, or if it be an occupation. It is necessary to determine whether the royalty owner is in an occupation, or whether he is in the receipt of income; because if in the first classification, he may be subject to an excise tax, and if in the other classification, he can be taxed only as an owner of property in the manner required by the constitution.

In Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199, it was determined that royalty from oil or gas wells is income and...