Phillips Petroleum Co. v. Jones

• Decision Date: 12 October 1949
• Docket Number: No. 3878.,3878.
• Parties: PHILLIPS PETROLEUM CO. v. JONES.
• Court: U.S. Court of Appeals — Tenth Circuit

176 F.2d 737 (1949)

PHILLIPS PETROLEUM CO. v. JONES.

No. 3878.

United States Court of Appeals Tenth Circuit.

August 2, 1949.

Rehearing Denied October 12, 1949.

Rayburn L. Foster, Bartlesville, Okl. (Don Emery, R. B. F. Hummer, Hilary D. Mahin, Bartlesville, Okl., Rufus Y. Bandy, Jr., and Harry D. Turner, Oklahoma City, Okl., on the brief), for appellant.

Lester L. Gibson, Washington, D. C. (Theron Lamar Caudle, Assistant Attorney General, Ellis N. Slack and F. A. Michels, Special Assistants to the Attorney General, and Robert E. Shelton, United States Attorney, Oklahoma City, Okl., on the brief), for appellee.

Before PHILLIPS, Chief Judge, and HUXMAN and MURRAH, Circuit Judges.

MURRAH, Circuit Judge.

The sole question here is whether the conventional "thereafter" and "unless" Oklahoma oil and gas lease is within the incidence of Sections 3480 and 3482, Title 26 U.S.C.A., which, together impose a documentary stamp tax upon a "deed, instrument, or writing * * * whereby any lands, tenements, or other realty sold shall be granted, assigned, transferred or otherwise conveyed * * *."

During the years 1942, 1943, 1944 and 1945, inclusive, the Phillips Petroleum Company purchased oil and gas leases in Oklahoma, which by their terms granted and leased exclusively unto Phillips described land "for the purpose of investigating, exploring, prospecting, drilling, and mining for and producing oil, gas and all other minerals * * *" for a stipulated primary term (usually five years), "and as long thereafter as oil, gas or other mineral is produced from said land hereunder". The leases also generally provided that the lease would terminate at the end of one year, unless a well was commenced thereon and drilled with due diligence, or in lieu thereof annual stipulated rentals paid for the primary term of the lease.

On the premise that these leases sold and conveyed "lands, tenements, or other realty", the Commissioner assessed the stamp tax, which Phillips paid in an agreed amount under protest, and brought this suit against the Collector to recover. It was alleged and contended that since, under controlling Oklahoma, Kansas, or federal law, an oil and gas lease is not realty, but a mere right or privilege to go upon the land to explore, produce and convert the oil to the lessee's possession as personal property, the execution of a lease, or an assignment thereof, on lands in Oklahoma and Kansas does not constitute a sale of "lands, tenements, or other realty" within the meaning and purposes of the taxing act. Phillips has appealed from a judgment in favor of the Collector.

The taxing act was originally enacted in 1917, and re-enacted in almost identical language by each succeeding Congress until 1926. It was again re-enacted in 1932, and all subsequent Congresses, until 1941, when it was made a permanent tax. See 55 Stat. 706, Sec. 505. From 1920 until 1926, and from 1932 until 1941, applicable treasury regulations (Reg. 71, art. 84) provided that "(a) What constitutes `lands, tenements, or other realty' is determinable by the law of the state in which the property is situated * * *". Pursuant to this interpretation of the statute, and applying the law of Oklahoma and Kansas, the Treasury ruled at various times during this period that oil and gas leases, and assignments thereof, were not subject to the stamp tax in Oklahoma and Kansas.

Beginning in 1941, however, the applicable Treasury regulations omitted any definition of the critical phrase "lands, tenements or other realty", and on August 31, 1942, by General Counsel Memorandum No. 23295, the Bureau of Internal Revenue repudiated Article 84 of Regulations 71, by ruling that what constitutes "lands, tenements, and other realty" for purposes of the stamp tax liability was not controlled by state law, and paraphrasing Mr. Justice Stone in Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed 199, ruled that henceforth reference would be made to state law to determine the character of the rights conveyed, but whether conveyances of such rights were taxable would be determined under federal law. The Memorandum went on to state that for the purposes of determining liability for stamp tax, the phrase "lands, tenements, or other realty embraces those interests which endure for a period of time, the termination of which is not fixed or ascertained by a specific number of years, such as an estate in fee simple, life estate, perpetual easement, etc., and those interests enduring for a period of years but which either by reason of the length of the term or the grant of a right to extend the term by renewal or otherwise, convey a bundle of rights approximating those of the class of interest first above mentioned. Thus, for example, a lease of real estate for 999 years, or a lease for 99 years renewable for ever or for several succeeding terms is taxable. On the other hand, a lease for five years is not taxable even if the right is granted to renew it for several successive terms." This rule was expressly made prospectively applicable in determining liability under the taxing statute, and it was under this authority that the Commissioner imposed the taxes involved here.

On appeal, Phillips first invokes the so-called "reenactment rule", contending that under well settled principles applicable to revenue acts, the repeated and consistent reenactment of the taxing statute as administratively interpreted froze the administrative interpretation into the act, and the Commissioner is without authority to give it another and different meaning upon which taxability depends, without Congressional sanction, citing United States v. Cerecedo Hermanos Y. Compania, 209 U.S. 337, 28 S.Ct. 532, 52 L.Ed. 821; Helvering v. R. J. Reynolds Tobacco Co., 306 U.S. 110, 59 S.Ct. 423, 83 L.Ed. 536; McFeely v. Commissioner, 296 U.S. 102, 56 S.Ct. 54, 80 L.Ed. 83, 101 A.L.R. 304. The taxpayer adopts the argument of the Commissioner in Morrow v. Scofield, 5 Cir., 116 F.2d 17, to the effect that state law does control taxability, and that undoubtedly under the law of Oklahoma and Kansas, an oil and gas lease cannot be classified or legally characterized as realty or an interest therein.

Indisputably, Oklahoma and Kansas, without deviation have held that an oil and gas lease is a chattel real, a profit a prendre, or an incorporeal hereditament, which grants only the exclusive right, subject to legislative control, to explore by drilling operations; to reduce to possession, and thus acquire title to the oil and gas, which is personalty. See cases cited in Continental Supply Co. v. Marshall, 10 Cir., 152 F.2d 300. For Kansas decisions, see Connell v. Kanwa Oil, Inc., 161 Kan. 649, 170 P.2d 631; Wilson v. Holm, 164 Kan. 229, 188 P. 2d 899. In Oklahoma, it is said that while an oil and gas lease creates an estate in realty, that interest or estate is not "real estate" within the meaning of the Oklahoma statute relating to the "sale of realty". Duff v. Keaton, 33 Okl. 92, 124 P. 291, 42 L.R.A.,N.S., 472; see also State v. Shamblin, 185 Okl. 126, 90 P.2d 1053.

But tax statutes and tax regulations have never been static. "Experience, changing needs, changing philosophies inevitably produce constant change in each." Helvering v. Wilshire Oil Co., 308 U.S. 90, 60 S.Ct. 18, 23, 84 L.Ed. 101. In that case, the Supreme Court confined the reenactment rule to "the situation where the validity of administrative action standing by itself may be dubious or where ambiguities in a statute or rules are resolved by reference to administrative practice prior to reenactment of a statute; and where it does not appear that the rule or practice has been changed by the administrative agency through exercise of its continuing rule-making power." 308 U.S. at page 100, 60 S.Ct. at page 24. It is said that where the administrative agency is possessed of a continuing rule-making power, as is the Commissioner of Internal Revenue, the...