Santa Rita Oil Co. v. State Board of Equalization

Decision Date12 September 1941
Docket Number7504.
PartiesSANTA RITA OIL CO. v. STATE BOARD OF EQUALIZATION et al.
CourtMontana Supreme Court

Original proceeding by the Santa Rita Oil Company against the State Board of Equalization and others to enjoin assessment, levy and collection of certain taxes. On defendant board's petition to vacate an injunction order, 54 P.2d 117, 101 Mont. 268.

Motion granted and injunction vacated in part.

MORRIS J., dissenting.

Louis P. Donovan, of Shelby, for plaintiff.

John W Bonner, Atty. Gen., Howard M. Gullickson, Asst. Atty. Gen and I. W. Choate, counsel for State Board of Equalization, of Helena, for defendants.

JOHNSON Chief Justice.

The defendant State Board of Equalization has petitioned for the vacation of the injunction order issued by this court on February 20, 1936, pursuant to its decision rendered on January 22, 1936, reported in 101 Mont. 268, 54 P.2d 117, 128. The order to show cause was issued and served upon the plaintiff, Santa Rita Oil and Gas Company, and upon the Texas Company and the Blackfoot Indian Tribe, interveners in the original action. A hearing was held on the order to show cause and briefs were filed. The modification is sought upon the ground that since the rendition of the decision and the issuance of the injunction order there have been changes in the applicable law, rendering the continuance of the injunction unjust, unreasonable and inequitable.

There is no occasion to repeat here the court's analysis of the original pleadings and issues. It is sufficient to say that in the complaint plaintiffs sought injunctive relief against the computation, assessment, levy and collection of certain taxes on oil and gas production under a lease of trust patent Indian land, upon the sole ground that in extracting the oil and gas the plaintiff was an instrumentality of the federal government and thus immune from taxation by the state. In its opinion this court found that the injunction should be issued forbidding the defendant board to take any steps for the collection of (1) royalty owners' net proceeds tax (imposed by Chapter 189 of the Political Code, sections 2088 to 2096.2, inclusive, Rev.Codes 1935), for the reason that the royalty interests accruing to the Indian allottee under a trust patent of lands whose legal title remains in the federal government may not become the subject of state taxation; (2) the operators' net proceeds tax (imposed by the same statutes), and the oil producers' license tax or gross production tax (imposed by Chapter 217 of the Political Code, sections 2397 to 2408, inclusive, Rev.Codes 1935) for the reason that the lessee under an oil and gas lease of Indian trust patent land was an instrumentality of the federal government and thus not taxable by the state. Thus the reasons for the decision were that the taxes were upon (1) the property or (2) an instrumentality of the federal government. The decision provides that the injunction is to continue "until such time as [appropriate] and valid congressional consent is given to the imposition of any or all of these taxes." The injunction was issued "forever" restraining and enjoining defendant in the premises without referring to the above limitation, but the omission was immaterial, as noted in Santa Rita Oil & Gas Co. v. State Board of Equalization, 112 Mont. 224, 114 P.2d 521. It should be borne in mind (1) that the royalty owners' net proceeds tax was enjoined as a tax upon the property of the federal government, and (2) that the operators' net proceeds tax and the oil producers' license tax or gross production tax were enjoined as taxes upon an instrumentality of the federal government. While defendant's application is for the vacation of the entire injunction order it makes no attack upon the first ground, that the royalty owners' net proceeds tax was invalid because amounting to a tax upon the federal government's property, but only upon the second ground, that the taxes upon the operator were invalid because constituting taxes upon the federal government's instrumentality. No reason appearing why the injunction should not stand against the defendant board and its members as to the royalty owners' net proceeds tax, that matter is eliminated from consideration.

With reference to the other two taxes the defendant's contention is that the law has been changed, not by congressional Act, as contemplated in the decision, but by judicial interpretation. As its authority upon the question this court in its decision cited Choctaw, O. & Gulf R. R. v. Harrison, 235 U.S. 292, 35 S.Ct. 27, 59 L.Ed. 234; Gillespie v. State of Oklahoma, 257 U.S. 501, 42 S.Ct. 171, 66 L.Ed. 338; Jaybird Mining Co. v. Weir, 271 U.S. 609, 46 S.Ct. 592, 70 L.Ed. 1112, and Burnet v. Coronado Oil and Gas Co., 285 U.S. 393, 52 S.Ct. 443, 76 L.Ed. 815. The Choctaw, Gillespie and Jaybird cases held the lessees of Indian trust patent land to be such instrumentalities of the federal government, and the Coronado case held lessees of state school lands to be such instrumentalities of the state government, that their proceeds under the leases could not be taxed by the other government. The United States Supreme Court clearly considered the questions identical and in each case denied the right of either the state or the federal government to impose the tax on the instrumentality of the other. In 1938 the United States Supreme Court in Helvering, Com'r of Internal Revenue, v. Mountain Producers Corporation, 303 U.S. 376, 58 S.Ct. 623, 626, 82 L.Ed. 907, involving a federal tax upon the producer's share of oil taken from state school lands, expressly overruled the Gillespie and Coronado cases upon the point, and in so doing necessarily overruled also the Choctaw and Jaybird cases and many others like them. The holding was not that the lessee of State or federal land was not an instrumentality of the state or federal government, but rather that the tax upon the instrumentality did not under the circumstances constitute an interference with governmental functions.

The court said in the Mountain Producers decision, written by Mr. Chief Justice Hughes:

"The Coronado case was decided as a corollary to the case of Gillespie v. Oklahoma, 257 U.S. 501, 42 S.Ct. 171, 172, 66 L.Ed. 338. The Court there denied to Oklahoma the right to enforce its tax upon net income derived by a lessee from sales of his share of oil and gas received under leases of restricted Indian lands. See Choctaw, O. & G. R. Co. v. Harrison, 235 U.S. 292, 35 S.Ct. 27, 59 L.Ed. 234; Indian Territory Illuminating Oil Co. v. Oklahoma, 240 U.S. 522, 36 S.Ct. 453, 60 L.Ed. 779. As Oklahoma was thus barred from enforcing its tax upon the income of a federal lessee of Indian lands, the Court in the Coronado case held that a similar principle should be applied to the enforcement of a federal tax upon the income of the state's lessee of school lands. ***

The ground of the decision in the Gillespie case, as stated by Mr. Justice Holmes in speaking for the Court, was that 'a tax upon the leases' was "'a tax upon the power to make them, and could be used to destroy the power to make them," 240 U.S. page 530, 36 S.Ct. 453, 60 L.Ed. 779,' and that a tax 'upon the profits of the leases' was 'a direct hamper upon the effort of the United States to make the best terms that it can for its wards.' In the light of the expanding needs of state and nation, the inquiry has been pressed whether this conclusion has adequate basis; whether in a case where the tax is not laid upon the leases as such, or upon the government's property or interest, but is imposed upon the gains of the lessee, like that laid upon others engaged in similar business enterprises, there is in truth such a direct and substantial interference with the performance of the government's obligation as to require immunity for the lessee's income. We have held that the ruling in the Gillespie case should be limited strictly to cases closely analogous (Burnet v. Coronado Oil & Gas Co., supra), and the distinctions thus maintained have attenuated its teaching and raised grave doubt as to whether it should longer be supported.

In numerous decisions we have had occasion to declare the competing principle, buttressed by the most cogent considerations, that the power to tax should not be crippled 'by extending the constitutional exemption from taxation to those subjects which fall within the general application of non-discriminatory laws, and where no direct burden is laid upon the governmental instrumentality, and there is only remote, if any, influence upon the exercise of the functions of government."'

The decision then cited a number of authorities and concluded:

"These decisions in a variety of applications enforce what we deem to be the controlling view--that immunity from non-discriminatory taxation sought by a private person for his property or gains because he is engaged in operations under a government contract or lease cannot be supported by merely theoretical conceptions of interference with the functions of government. Regard must be had to substance and direct effects. And, where it merely appears that one operating under a government contract or lease is subjected to a tax with respect to his profits on the same basis as others who are engaged in similar businesses, there is no sufficient ground for holding that the effect upon the government is other than indirect and remote. We are convinced that the rulings in Gillespie v. Oklahoma, supra, and Burnet v. Coronado Oil & Gas Co., supra, are out of harmony with correct principle and accordingly they should be, and they now are, overruled.

In the instant case, we find no ground for concluding that the tax upon the profits of Wyoming Associated...

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