Webb Resources, Inc. v. McCoy

• Decision Date: 15 May 1965
• Docket Number: No. 44062,44062
• Citation: 401 P.2d 879,194 Kan. 758
• Parties: WEBB RESOURCES, INC., formerly known as Anschutz Drilling Company, Inc., Appellee, v. Wayne E. McCOY, Kansas State Director of Revenue, Appellant. (In the Matter of Webb Resources, Inc., formerly known as Anschutz Drilling Company, Inc., and the Deficiency Income Tax Assessment levied on such company for the fiscal year 1958.)
• Court: Kansas Supreme Court

Page 879

401 P.2d 879

194 Kan. 758

WEBB RESOURCES, INC., formerly known as Anschutz Drilling Company, Inc., Appellee, v. Wayne E. McCOY, Kansas State Director of Revenue, Appellant (In the Matter of Webb Resources, Inc., formerly known as Anschutz Drilling Company, Inc., and the Deficiency Income Tax Assessment levied on such company for the fiscal year 1958.)

No. 44062.

Supreme Court of Kansas.

May 15, 1965.

Rehearing Denied June 7, 1965.

Syllabus by the Court

1. In an appeal by the director of revenue from an adverse ruling in the lower court under the Kansas income tax law as applied to a multi-state corporation whose gross income is derived from property located and business transacted in part within and in part without the state of Kansas, it is held: On the stipulated facts the assessment of an additional income tax against the corporate taxpayer by the direct method of allocating the taxpayer's net income attributable to Kansas under G.S.1949, 79-3217, was just and equitable, and within the scope and intent of the statutes and regulations, all as more particularly set forth in the opinion.

2. On the stipulated facts set forth in the opinion it cannot be said the business of the taxpayer of exploring for, drilling for, finding, producing and selling oil and gas and other liquid hydrocarbons is of such a unitary character in its multistate operations as to require application of the apportionment or formula method of income allocation to Kansas under G.S.1957 Supp. 79-3218.

Dean Burkhead, Topeka, argued the cause, and C. A. Arterburn, Tr., Topeka, was with him on the brief for appellant.

Mark H. Adams, II, Wichita, argued the cause, and Mark H. Adams, Charles E. Jones, Wm. I. Robinson, J., Ashford Manka, Clifford L. Malone, John S. Seeber and Philip L. Bowman, Wichita, were with him on the brief for appellee.

SCHROEDER, Justice:

This is an appeal by the director of revenue from an adverse ruling in the lower court under the Kansas income tax law as applied to a multi-state corporation whose gross income is derived from property located and business transacted in part within and in part without the state of Kansas.

The principal question involves the proper method of determining the corporation's income allocable to Kansas for income tax purposes.

In accordance with the facts hereafter stated, the director of internal revenue of the state of Kansas assessed additional income tax to the appellant for the fiscal year 1958. This assessment was approved by the board of tax appeals, and the taxpayer appealed to the district court. In the district court the parties agreed upon and read a stipulation of facts into the record. The stipulation, with some omissions, reads:

'This proceeding arises on appeal of Webb Resources, Incorporated, formerly known as Anschutz Drilling Company, Inc., a Colorado corporation, from Order number six of the Board of Tax Appeals of the State of Kansas dated June 20, 1962, as supplemented by supplemental order 6-A, dated August 16, 1962 assessing additional income tax against the appellant Webb Resources Incorporated in the amount of $4,858.33 or $3,877.64, whichever the case may be for appellant's tax year 1958, which is a fiscal year ending June 30, 1958. Appellant has no principal place of business within the state of Kansas * * *.

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'Appellant in preparing and filing its 1958 Kansas State Income Tax return allocated its income and losses to the State of Kansas under the formula allocation provided for in G.S.1949, 79-3218, as amended. The assessment of additional corporate income tax which is here appealed from arises by virtue of the Director's insistence that the appellant should have allocated its income to Kansas under the direct accounting method provided for by G.S.1949, 79-3217. Appellant contends here, and contended below that it was and is a unitary company and is thus required to apportion its income as provided by our 79-3218. Although the Director contends that the appellant here may not change from the direct method to the formula method of allocation which was the basis for its 1958 return, it is conceded by the Director that in the event it is determined and adjudged by the Court that appellant's 1958 return was properly filed under G.S.1949, 79-3218, as amended, the orders of the Board of Tax Appeals should be reversed and the additional corporate income tax here appealed from should be abated in full.

'At all times material hereto appellant was duly authorized to carry on its business within the State of Kansas and within the state of Montana, North Dakota, Utah, Wyoming and Nebraska. The nature of the business carried on by appellant, both within and without Kansas, is exploring for, drilling for, finding, producing and selling oil and gas and other liquid hydrocarbons. The appellant's home office is located in Denver, Colorado, from which its business and operations are managed. There are located its geologists, landmen, production supervisors, company officers and clerical staff. There are made decisions as to all company operations, including whether to undertake the exploration for and the drilling of oil and/or gas wells, whether within the State of Kansas or without. There are retained and used its bank or file of leases of developed and undeveloped acreage located throughout all of the several states in which appellant does business.

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'The products which appellant produces and sells, oil, gas and other liquid hydrocarbons, are wasting natural resources. It is necessary for appellant to follow a constant program of exploration, drilling for, finding and producing such products. Oil or gas are where you find them. The company undertakes to pursue its operations, not only in Kansas but throughout the several states in which it does business.

'The nationwide ratio of wells drilled to wells which encounter sufficient reserves of oil or gas to pay back the initial expense of drilling and completing is approximately forty to one. Appellant's average has been better. On the average it has found one producer for every ten holes drilled; in other words on the average of nine out of ten holes drilled are and have been dry holes. In other words an average of nine dry holes must be drilled before one producer will be found, whether such dry holes are drilled in Kansas or not.

'All of the oil and gas which appellant produced and produces was and is sold to other companies. No oil which it produced within the State of Kansas was moved by it across Kansas borders.

'In its fiscal year 1958, ending June 30, 1958, appellant filed its Federal income tax return reflecting no taxable income for such year. In every other state, with the exception of Kansas, where appellant realized income from oil operations in the fiscal year 1958, appellant was recognized and accepted as a unitary company, and required to apportion its income and losses to such state for tax purposes under a formula apportionment similar to G.S.1961 Supplement 79-3218. Appellant's return to the State of Kansas for fiscal year 1958 apportioned its income and costs to the state under the provisions of G.S.1949, 79-3218, as amended. It was this return which the State Department of Revenue contends did not correctly allocate income to the State of Kansas for the asserted reason that such income should have been directly allocated under G.S.1949, 79-3217.

'Appellant can determine its gross income by state lines in that it knows the exact number of barrels of oil produced from each well. It knows the location of each well. Appellant can determine the exact cost of drilling and the exact cost of equipping each well as well as direct costs of operation by state lines.

'Appellant was incorporated in December of 1955 in Colorado. At that time it was primarily a producer with drilling rigs and exploration, and substantially all of its income was derived from contract drilling. For the years 1955, 1956 and 1957 appellant's returns to the State of Kansas allocated income and costs to the state under the direct accounting statute, G.S.1949, 79-3217. In the first month starting the new fiscal year of 1958, the appellant disposed of all its rigs, * * * In the fiscal year 1958 appellant's primary source of income was derived from disposing of the drilling rigs, plus the sale of an oil payment, and some additional income from the production and sale of oil and gas.

'Under date of December 11, 1957, which, of course, was within the 1958 fiscal year, with the effective date being December 1, 1957 at 7:00 A.M. the appellant, in order to raise the sum of $600,000.00, assigned its oil payment loan of eighty percent of proceeds at the well of all oil and gas, as, if and when produced, saved and marketed from its interests in all of the oil and gas leases which it at that time held both within and without the State of Kansas. The payment burdened all of the producing properties in the states of Colorado, Kansas, Wyoming, Nebraska and North Dakota. In 1958 the company had oil and gas production in all of the states in which it did business except New Mexico, Utah and Montana. In the state of New Mexico in the fiscal year 1958 it continued a contract drilling operation through a wholly owned subsidiary. That was a workover-type rig, which contracted for various companies needing to complete wells.

'During the fiscal year 1958 appellant had twenty-six wells in all other states than in Kansas. It had 110 wells within Kansas. Of the approximately 110 wells the appellant operated within the State of Kansas 84 wells were strippers, a marginal type of production. Because of the cash poor position of appellant it proved necessary to continue to operate those wells as long as they yielded a profit over and above their operating expense, even though the wells did not produce enough to make their depreciation. It was testified to that in the year 1958 the appellant realized an average...