Court Opinion

ID: 6871392
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:01:43.92009+00
Date Added: 2024-06-11T16:05:24.682317
License: Public Domain

PHILLIPS, Circuit Judge
(dissenting).
The declaration of trust of February 1, 1923, in part, read:
“Whereas The Midwest Oil Company, a corporation of the State of Arizona, is the holder of a certain lease from the *82State of Wyoming, dated the 1st day of October, 1919,1 and
“Whereas The Wyoming Associated Oil Corporation, a corporation of the State of Delaware, is entitled to receive the undivided share in the benefits and net proceeds realized by The Midwest Oil Company under said lease and all renewals and extensions thereof, as hereinafter set forth ;
“Now, Therefore, In consideration of the premises and in consideration of other good and valuable considerations paid to The Midwest Oil Company by the Wyoming Associated Oil Corporation, said The Midwest Oil Company doth hereby declare that it holds an undivided fifty per cent. (50%) interest in said lease and in the benefits and net proceeds to be realized therefrom and all renewals and extensions thereof for the use and benefit of said The Wyoming Associated Oil Corporation, and reserves the beneficial interest in the remaining fifty per cent. (50%) thereof to itself.”
The contract of February 1, 1923, in part, read:
“This Agreement Made as of the First day of February, A. D. 1923, between The Midwest Oil Company, a corporation of the State of Arizona, and Wyoming Oil Fields Company, a corporation of the State of Wyoming, and The Wyoming Associated Oil Corporation, a corporation of the State of Delaware, parties of the first part, hereinafter called the ‘Producing Companies,’ and The Midwest Refining Company, a corporation of the State of Maine, party of the second part, hereinafter called the ‘Refining Company’; Witnesseth:
“Whereas The Producing Companies among them own in the several fractions hereinafter set forth leases covering the following described lands in the Salt Creek Oil Field, Natrona County, Wyoming, to-wit: * *
“The so-called ‘State School Lease,’ * * held in trust by the Midwest Oil Company for the benefit of The Midwest Oil Company to the extent of an undivided 50 per cent interest and for the benefit of The Wyoming Associated Oil Corporation to the extent of an undivided 50 per cent, interest.”
The lease of April 19, 1923 from the state of Wyoming to the Midwest Oil Company covering the school section provided that it should not be assigned without the consent and approval of the state. The record does not disclose the consent or approval by the state of any assignment of an interest in the lease to Associated Oil Corporation. It seems to me when regard is had for tlie substance of the transactions, what Associated Oil Corporation really acquired was a right to share equally with the Midwest Oil Company in the net profits, if any, derived from the operation of the lease. The right to manage and operate the lease was vested wholly in the Midwest Oil Company. It alone contracted with the state. The state looked to it alone for the performances of the covenants of the lease. If there were no net profits, Associated Oil Company acquired nothing and it was not expressly obligated to contribute to any losses. The tax was laid upon the net profits after they were segregated and divided between the Associated Oil Corporation and the Midwest O.il Company.
Under these circumstances, was the one-half of the net profits, when segregated and paid to the Associated Oil Corporation, immune from federal taxation? The immunity from taxation accorded to governmental instrumentalities .is for the protection of the government in its exercise of governmental functions and extends no further than is necessary for that purpose. Indian Territory Illuminating Oil Company v. Board of Equalization, 288 U.S. 325, 327, 53 S.Ct. 388, 77 L.Ed. 812. The effect of the decisions since Gillespie v. Oklahoma, 257 U.S. 501, 42 S.Ct. 171, 66 L.Ed. 338, has been to restrict rather than to extend this doctrine of immunity. In Burnet v. Coronado O. & G. Co., 285 U.S. 393, 398, 52 S.Ct. 443, 444, 76 L.Ed. 815, the court said:
“We are disposed to apply the doctrine of Gillespie v. Oklahoma strictly and only in circumstances closely analogous to those which it disclosed.”
In Fox Film Corp. v. Doyal, 286 U.S. 123, 128, 52 S.Ct. 546, 547, 76 L.Ed. 1010, the court said:
“The principle of the immunity from state taxation of instrumentalities of the federal government, and of the corresponding immunity of state instrumentalities from federal taxation — essential to the maintenance of our dual system — has its inherent limitations. It is aimed at the protection of *83the operations of government (McCulloch v. Maryland, 4 Wheat. 316, 436, 4 L.Ed. 579), and the immunity does not extend ‘to anything lying outside or beyond governmental functions and their exertion.’ (Indian Motocycle Co. v. United States, 283 U.S. 570, 576, 579, 51 S.Ct. 601, 603, 75 L.Ed. 1277). Where the immunity exists, it is absolute, resting upon an ‘entire absence of power’ (Johnson v. Maryland, 254 U.S. 51, 55, 56, 41 S.Ct. 16, 65 L.Ed. 126), but it does not exist ‘where no direct burden is laid upon the governmental instrumentality, and there is only a remote, if any, influence upon the exercise of the functions of government.’ (Willcuts v. Bunn, 282 U.S. 216, 225, 51 S.Ct. 125, 127, 75 L.Ed. 304 [71 A.L.R. 1260]).”
See, also, Helvering v. Atlas Life Insurance Co. (C.C.A. 10) 78 F.(2d) 166, 168; Taber v. Indian Territory I. O. Co., 300 U.S. 1, 3, 4, 57 S.Ct. 334, 81 L.Ed. 463.
In Jaybird Mining Co. v. Weir, County Treasurer, 271 U.S. 609, 46 S.Ct. 592, 593, 70 L.Ed. 1112, an attempt was made to lay an ad valorem tax upon ores mined under a lease of restricted Indian land and in the bins on the land. A tax was assessed on the ores in mass, the royalties or equitable interest of the Indians not haying been paid or segregated. ‘The court said: “The lessee is an agency or instrumentality employed by the government for the development and use of the restricted land and to mine ores therefrom for the benefit of its Indian wards,” and held that the tax was laid upon a federal governmental instrumentality. However, in the later case of Indian Territory I. O. Co. v. Board of Equalization, 288 U.S. 325, 53 S.Ct. 388, 389, 77 L.Ed. 812, where an ad valorem tax was laid upon the lessee’s share of the ore produced under a restricted Indian lease after the royalties or equitable interests of the Indian lessors had been segregated and paid to them, immunity was denied. In the latter case the court said:
“There is a recognized distinction between a non-discriminatory tax upon the property of an agent of government, albeit the property is used in, or has relation to, the business of the agency — where there is only a remote, if any, influence upon the exercise of the functions of government— and a tax which is deemed to impose a direct burden upon the exertion of governmental powers.” 2
In Burnet v. A. T. Jergins Trust, 288 U. S. 508, 53 S.Ct. 439, 440, 77 L.Ed. 925, the city of Long Beach, California, made an oil and gas lease to the Jergins Trust covering part of a tract of land owned by the city and used by it for water supply and other purposes. Under the lease the oil and gas recovered was jointly sold by the parties to the lease and the proceeds were divided in stated proportions between them. The Commissioner of Internal Revenue proposed a deficiency in income taxes on account of the proceeds derived by the Jer-gins r Trust from the sale of oil. The Jergins Trust asserted that the income was immune from taxation. The court said:
“If the respondent is exempt from the exaction, the conclusion must follow, because the tax directly burdens the functions of the state acting through the ’city of Long Beach. Considerations which have led to the condemnation of taxes in other circumstances are here absent. The levy is not upon the property of the municipality, nor upon the income it derives from its property, is not upon the city’s share of the oil recovered, the lease, or the gross income therefrom. The law measures the assessment by the net income of the respondent, whose operations are carried on in a private, and not in a public, capacity for the personal gain of its cestuis que trust. The government asserts that the incidence of the tax is so remote from the activities of the municipality as to have no substantial adverse effect upon them. The respondent insists that as lessee of the lands in question it is a governmental agency, and any tax laid upon its income directly burdens governmental functions. * * *'
“The application of the doctrine of implied immunity must be practical (Union P. Railroad Co. v. Peniston, 18 Wall, 5, 31, 36, 21 L.Ed. 787), and should have regard to the circumstances disclosed. We think that in the present instance the subject of the tax is so remote from any governmental function as to render the effect of the exaction inconsiderable as respects the activities of the city. Compare Alward v. Johnson, 282 U.S. 509, 514, 51 S.Ct. 273, 75 L.Ed. 496, 75 A.L.R. 9. Its collection is not inconsistent with and does not trench upon the immunity of the state as a sovereign. The income of the respondent from the lease is not immune from federal income tax.”
*84It has been held that the income derived by a sub-lessee under, or an assignee of a mineral lease from a state of lands owned by the state, is not .immune from taxation although the sub-lessee or assignee is required by the terms of the lease to perform the obligations of the lessee under the original lease from the state. Helvering v. Atlas Life Ins. Co. (C.C.A. 10) 78 F.(2d) 166; Hobart Iron Co. v. Commissioner (C.C.A. 6) 83 F.(2d) 25, certiorari denied 299 U.S. 543, 57 S.Ct. 26, 81 L.Ed. 400; Wanless Iron Co. v. Commissioner (C.C.A.8) 75 F.(2d) 779 Cert. denied 295 U.S. 765, 55 S.Ct. 924, 79 L.Ed. 1706. Here the Associated Oil Company had no direct contractual relation with the state. Its right under the contracts with the Midwest Oil Company was to share in the net proceeds of the lease. The tax was laid upon the Associated Oil Company’s share of the net proceeds of the lease after they had been segregated and divided.
It is my opinion that the incidence of the tax is so remote in its influence or effect upon the exercise by the state of its governmental functions as to have no substantial adverse effect upon them. I, therefore, respectfully dissent from so much of the majority opinion as holds that the net proceeds derived by the Associated Oil Company under the declaration of trust of February 1, 1923 are immune from taxation by the federal government. In all other respects I concur in the majority opinion.

 The school section lease.

 See discussion of these cases in Taber v. Indian Territory I. O. Company, 300 U.S. 1, 4, 5, 57 S.Ct. 334, 81 L.Ed. 463.