Stanolind Crude Oil Purchasing Co. v. Cornish, 1560.

• Decision Date: 10 January 1935
• Docket Number: No. 1560.,1560.
• Citation: 16 F. Supp. 464
• Parties: STANOLIND CRUDE OIL PURCHASING CO. v. CORNISH et al.
• Court: U.S. District Court — Western District of Oklahoma

16 F. Supp. 464

STANOLIND CRUDE OIL PURCHASING CO. v. CORNISH et al.

No. 1560.

District Court, W. D. Oklahoma.

January 10, 1935.

Ray S. Fellows, of Tulsa, Okl., for plaintiff.

C. W. King, L. G. Harries, and A. L. Herr, all of Oklahoma City, Okl., Attys. for Oklahoma Tax Commission, for defendants.

VAUGHT, District Judge.

The plaintiff brings this action alleging that it is a nonresident corporation; that it has been and is now engaged in the business of purchasing on the open market in the state of Oklahoma, crude petroleum, or oil produced from lands situate within said state, delivery of such oil being made by the owners thereof in the tankage into which such oil is run from the wells producing the same; "that ever since the first production of oil in what is now the State of Oklahoma, there has existed a universal custom, usage, and method for measuring and determining the gross amount of oil produced from wells and sold and purchased in tankage, which custom, usage, and method, during all of such time, was well known to and used by all persons engaged in the oil business whether as producer, seller or buyer, by which custom, usage and method the oil as produced from the wells was run into tanks, in which tanks such oil was purchased and sold; that measurements of the dimensions of such tanks were made and the capacity of such tanks was calculated and determined in barrels and fractions of barrels, and so-called `tank tables' were prepared showing the capacity of said tanks in barrels or fractions of barrels from which said tank tables the amount of oil in barrels and fractions of barrels contained in or run from such tanks could be readily computed and ascertained by measuring the depth of the oil in such tanks before and after any amount thereof had been run therefrom; that such method of measurement is now and during all of said period of time has been exclusively used by all producers and purchasers of oil to determine the total amount of oil produced, sold and purchased; that as oil is produced from the earth, it contains quantities of sand, gravel, water, and other impurities and foreign substances which form no constituent part of such oil, but on the contrary detract from its value, quantity and quality; that when oil is stored in tanks for a sufficient length of time, much of such foreign substances or `bottom settlings' are left at the bottom of such tanks when oil is run therefrom and thereafter such foreign substances or bottom settlings are taken from such tanks and destroyed; that a portion of such foreign substances remain in suspension in such oil and can finally be eliminated therefrom only at refinery during the process of refining such oil; that oil is fluid, mobile, volatile, expansive, and contractive in character and the number of barrels in any quantity of oil will increase or decrease as its temperature rises or falls; that as oil is produced from the earth, its fluid and volatile character is such that it evaporates, dissipates, and loses much of its gaseous content, thereby reducing its volume and specific gravity, and such reduction is more or less continuous so long as it exists in the form of crude oil; that the presence of the solid matter, impurities, and foreign substances, as aforesaid, in the oil when produced, and the fact that the oil is subject to diminution in volume by reason of evaporation and by reason of losses in its gaseous content and by reason of changes in temperature, all result in the lessening of its value in its crude state and are, and always have been, factors taken and to be taken into consideration in determining the value thereof at the time of its purchase and in establishing the market price to be paid therefor; that in order to provide and allow for the loss in quantity of the oil resulting from the presence of such foreign substances therein and occasioned by the inherent qualities and characteristics thereof as herein set forth, in the making of the calculations and the preparation of the tank tables as hereinbefore set forth, a deduction is uniformly made of three per cent. from the total capacity of such tanks and such deduction is part and parcel of the above described method of calculating and determining, in barrels, the oil content of such tanks, the number of barrels of oil produced from the ground, the number of barrels run from such tanks and the number of barrels paid for on the sale thereof; that at all times since the first production of oil in what is now the State of Oklahoma, it has been and now is the universal trade custom and practice in said state to make said deduction of three per cent. in volume whenever oil is measured for the purpose of computing its quantity or value; that said method of measuring and valuing oil, inclusive of such deduction, is now and at all of the times herein mentioned, has been the only method used in ascertaining the total amount of oil produced and in determining the actual value thereof at the place of production, the amount of oil sold and the number of barrels to be paid for upon purchase thereof; that if the above described method were not employed, then the producer of oil would be required to provide, at great cost and expense, storage facilities into which the oil could be run and settled and would be required to install and maintain, at great cost and expense, a system of gauging and sampling of said oil before sale thereof; that in recognition of the method of measurement and determination of value above set forth, it has, during all of the times herein mentioned, been the universal practice between the buyers and sellers of oil upon the open market, to buy and sell oil upon written contract or division order, under and by virtue of which it is agreed that the three per cent. deduction heretofore referred to shall be made; that each, all and every of the several laws of the State of Oklahoma providing for a gross production tax on oil have laid and imposed such tax according to the value of the oil and not according to the volume thereof; that the legislature of the State of Oklahoma, at the time of enacting each and every of the gross production tax laws levying a tax upon the value of the oil produced in Oklahoma, well knew of the existence of such method of measuring oil and computing the price to be paid therefor and enacted such laws with due regard to such trade custom, usage and method, intending and knowing that the total production of such oil and the value thereof would be ascertained by such method; that the officials of the State of Oklahoma charged with the execution and administration of such laws and the collection of such gross production taxes upon such oil have, ever since the enactment of the first of said laws in 1908 and to and after the 1st day of July, 1931, construed and interpreted such laws as requiring such tax to be paid upon the value of such oil computed and ascertained in the manner and by the method as herein set forth; that at all of the times herein mentioned, all oil bought and sold upon the open market in the State of Oklahoma was measured and its value determined in accordance with the universal practice and method hereinabove described."

The plaintiff further alleges that it had made its reports promptly according to law and according to the method hereinbefore set out, but that on the 29th of November, 1932, the defendant Cornish, purporting to act as the chairman of said Oklahoma Tax Commission, notified the plaintiff that there was then and there due from this plaintiff to the state of Oklahoma, additional gross production taxes upon oil purchased by this plaintiff between the 30th of June, 1931, and October 1, 1932, which said taxes, together with the alleged accrued penalties, computed from the period of alleged delinquency to and until the 20th of November, 1932, amounted to the sum of $28,618.12.

The petition further alleges that this tax so demanded of the plaintiff and the further taxes thereinafter demanded, all as set out in the petition, were based on the proposition that the plaintiff had failed to pay, for or on behalf of the owners of said oil produced, tax upon three per cent. of the oil actually produced; and the gross production tax demanded of this plaintiff by said tax commission is based upon the assumption that the plaintiff had failed to pay any gross production tax upon 3 per cent. of the oil produced by the owners of the lease and purchased by this plaintiff. The plaintiff further alleges that it has paid gross production tax upon the value of all oil produced by it during the times alleged in said petition, and asks that the defendants, and each of them, be enjoined from the collection of said alleged tax.

The defendants filed their motion to dismiss on the grounds that this court is without jurisdiction and that the bill is without merit. The court reserved its ruling at the time of the motion to dismiss and the defendants answered, denying the allegations of the bill generally, and alleging that the true measure of the value of oil produced was on the basis of 100 per cent., and that the plaintiff, and those represented by it, had failed to pay the gross production tax upon the 3 per cent. of the oil...