Court Opinion

ID: 8594609
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:01:38.815972+00
Date Added: 2024-06-11T16:54:49.513893
License: Public Domain

Per Curiam:
This case was referred to Trial Commissioner Kenneth B. Harkins with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Buie 134(h). The commissioner has done so in an opinion and report filed on December 27, 1971. Exceptions to the commissioner’s findings of fact and recommended conclusion of law were filed by plaintiff and the case has been submitted to the court on the briefs of the parties and oral argument of counsel. Since the court agrees with the commissioner’s opinion, findings of fact and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. It is therefore concluded that plaintiff is not entitled to recover and its petition is dismissed.
OPINION OF COMMISSIONER
Harkins, Commissioner:
Plaintiff sues to recover $3,997.17, plus interest, for disallowed claims for refunds of federal documentary stamp taxes and assessed interest paid on two conveyances made in 1964 and 1966. The question presented is whether documents that transfer what are commonly described and known in the oil industry as “carved out” production payments were subject to the stamp tax then imposed by Section 4361 of the Internal Bevenue Code of 1954 on instruments that transferred or conveyed “lands, *452tenements, or other realty.1 The conveyances of carved out production payments executed by plaintiff were instruments lawfully subject to the documentary stamp tax. Plaintiff, accordingly, may not recover.
On June 9,1970, plaintiff and defendant agreed to a stipulation of facts that incorporated fourteen contractual and other documents. The parties, however, could not agree as to which provisions in particular documents should be identified as legally significant for interpretation of the transaction. Plaintiff contended that each of the incorporated documents in its entirety was necessary to provide a proper factual basis for argument and decision. The detailed findings of fact included with this opinion are based upon analysis and consideration of all of the documents incorporated in the June 9, 1970, stipulation. The detailed findings of fact that are involved in the 3-party relationships created in the documents, and the plaintiff’s accounting treatment of these transactions, are complex and tedious. Facts significant to the decision are summarized here.
The plaintiff, Chevron Oil Company, is a wholly owned subsidiary of the Standard Oil Company of California, one of the major international oil companies. Chevron is in the business of oil and gas exploration, production, refining and marketing in most of the continental United States, exclusive of certain Western States.
During the period relative to this litigation, it was the practice of plaintiff annually to execute a number of “carved out” production payment agreements. The production pay*453ments were carved out of plaintiff’s working interests in leased properties.2
During tbe period 1960-65, in tlie petroleum industry, sales of carved out production payments increased in frequency.3 During this period, the Internal Revenue Code permitted an oil company with a working mineral interest to obtain, from the sale of a carved out production payment, additional ordinary income subject to depletion in the year received. The amounts used to pay the production payment were excluded from income by the oil company during the payout period. The expenses attributable to producing the income necessary to pay off the production payment, however, could be deducted in the year incurred. Sale of carved out production payments permitted an oil company to avoid the statutory provision that limited the percentage depletion deduction to 50 percent of net income from the property in the payment year. Sale of carved out production payments, in addition, permitted avoidance of the foreign tax credit limitation, the 5-year net operating loss carryover limitation, and the Y-year investment credit carryover.4
In the period from December 1961 through December 31, *4541966, plaintiff executed conveyances for at least 12 carved out production payments for a total consideration of approximately $50 million. The largest, valued at $29.1 million, was made on November 29,1962, and the smallest, valued at $155,-000, was made on December 29,1966. All of these conveyances were made during the last 6 weeks of the calendar year and 10 were made during the last 2 weeks of December. In all cases, plaintiff’s production payments were conveyed to charitable organizations, exempt from federal taxes. Purchase of the production payment was financed by the charitable organization by money borrowed from a banking institution on a promissory note that was secured by a mortgage or assignment of the oil payment. Principal and interest on the loans from the banks were less than the total to be received by the charity from the plaintiff from the production payments.
With respect to each of the production payments conveyed during the period, the consideration received was reported as ordinary income for federal income tax purposes and a deduction for percentage depletion was claimed. For financial accounting purposes, however, in reports to stockholders, the proceeds from sales of the production payments were not taken into income. The production payments were reflected as current liabilities under “Accounts Payable” in the corporation’s consolidated balance sheets, with adjustments as necessary to offset federal tax expense that resulted from inclusion of the amounts in income for tax purposes.
This case is concerned with two of the plaintiff’s carved out production payment transactions, a conveyance in 1964 to the Sutter Charitable Foundation, and a conveyance in 1966 to the Thirteen Hundred Foundation, Inc. After audits, the Internal Kevenue Service assessed plaintiff an additional $50,951.45 in stamp taxes on nine production payment conveyances made from 1961 to 1965, and an additional $8,171.85 for three conveyances of production payments made in 1966. Plaintiff has paid these assessments, and filed for a refund of $8,785.10 with respect to the Sutter conveyance, and for a refund of $170.50 with respect to the Thirteen Hundred conveyance. The claims were disallowed in full by the Inter*455nal Bevenue Service. In its claims for refund and in its petition, plaintiff seeks to recover only the tax and interest assessed and paid with respect to the 1964 transaction and the 1966 transaction, and not for other conveyances involved in the deficiency assessments.
On December 29, 1964, plaintiff executed with the Sutter Charitable Foundation, a nonprofit California corporation, a document entitled “Conveyance of Production Payments and Agreement.” This document conveyed two production payments from properties offshore Louisiana to Sutter for a total consideration of $3,441,000. On December 29, 1966, plaintiff executed a similar document with Thirteen Hundred Foundation, Inc., a Louisiana nonprofit corporation. The 1966 document with Thirteen Hundred was entitled, “Conveyance of Production Payment and Agreement” and conveyed one production payment from properties in Oklahoma for a total consideration of $155,000.
Essentially, the documents with each of the charities contained the same provisions. In each the plaintiff did “* * * grant, bargain, sell and convey * * * ” a production payment to the charity that was payable out of a specified percentage of crude oil or other hydrocarbons to be “ * * * produced, saved and sold” from specifically identified properties leased by the plaintiff. The production payments were “ * * * payable only out of production * * * ” from the identified properties. Each conveyance provided that the charity would receive proceeds from a “ * * * percentage of crude oil herein conveyed * * * ” plus an additional amount equal to a specified percentage equivalent to interest on the unpaid balance. The documents provided that the production payment conveyed to the charity would “ * * * apply to and be a burden upon the oil and gas lease” involved and that the charity’s interest would terminate when the gross amount due had been paid.
Each conveyance provided that the charity “* * * shall own all * * *” of the crude oil and other hydrocarbons “* * * allocable to the production payment.” In each document, plaintiff was obligated to deliver the charity’s oil free of cost to the same parties that customarily received plaintiff’s production and on the same terms and conditions.
*456Each, document included an Habendum and Warranty clause that stated, in part:
TO HAVE AND TO HOLD the interests hereby conveyed, together with all and singular the rights, privileges, hereditaments and appurtenances thereto in anywise belonging, unto Assignee, its successors and assigns. * # sf*
Each document specifically exempted plaintiff from personal liability for the production payment conveyed to the charity, and required the charity to “ * * * look exclusively to the percentage * * * ” of oil conveyed. In the event that cash proceeds from the charities’ percentage of oil were not equal to the gross amount of the production payment, plaintiff was not to be liable to any person for the difference.
In each document, the production payment conveyed to the charity was to continue until the gross amount was paid or for a maximum period of 15 years. Prior to execution of the documents, plaintiff and the charity had exchanged estimates that indicated the production payments would be paid out in a substantially shorter period than the 15-year maximum term. The 1'5-year maximum term was not intended by the parties to coincide with the actual term of the production payment payout.
The consideration paid to plaintiff for the production payment was obtained by each charity by bank loans simultaneous to the transfer of the production payment. Sutter borrowed $3,441,000 from the Wells Fargo Bank of San Francisco, California, on a demand promissory note, secured with a “Collateral Mortgage of Mineral Eights.” Thirteen Hundred borrowed $155,000 from the Whitney National Bank, New Orleans, Louisiana, on a demand promissory note, secured by a “Collateral Assignment of Production Payment.”
The $3,441,000 that plaintiff received from Sutter in 1964 and the $155,000 received from Thirteen Hundred in 1966 were reported as ordinary income on the consolidated federal income tax return which was filed by Standard Oil Company of California. A depletion deduction was taken with respect to these amounts on the returns for tax years 1964 and 1966. For accounting purposes other than income tax reporting, however, the principal amounts received from the sale of the *457production, payments were not included in revenues for the respective years. The principal amounts for tbe production payments provided from the agreements were included under “Accounts Payable” in Standard Oil Company of California’s consolidated balance sheet.
Section 4361 of the Internal Revenue Code of 1954 imposed a tax on each “* * * deed, instrument or writing by which any lands, tenements, or other realty sold shall be * * * conveyed.” 5 The instruments entitled “Conveyance of Production Payment and Agreement” executed by the plaintiff and the respective charities were instruments that sold and conveyed an ownership interest to a portion of crude oil in place on properties leased by the plaintiff. The production payments conveyed were fractional interests in the mineral leases that were owned by the plaintiff and from which they were carved. In the event production and sale of the crude oil was inadequate to pay out the production payment, plaintiff had no other liability to the charity-purchaser. The charity, however, would continue to be liable on its promissory note to the bank.
Application of the documentary stamp tax to leasehold estates, particularly leases of mineral interests in the extractive industries, has involved developing legal concepts and has not been consistent. Development of the law pertaining to this tax has involved changing concepts on the applicability of local law, differentiation among various types of leasehold interests, and, ultimately, specialized application to conveyances of mineral interests.
Prior to 1941, Treasury regulations on the documentary stamp tax provided that the meaning of the term “lands, tenements, or other realty” was determinable by the laws of the state in which the property was situated, and that leases of real property were not subject to the tax.6 In Morrow v. Scofield,7 in 1940, the taxpayer appealed Internal Revenue *458Service application of the tax to the assignment of oil and gas leases in Texas on the ground that the tax would not have uniform application because the same instrument would be taxable in Texas, where it conveyed title to an interest in land, but not in Louisiana, where it passed a servitude on the land. In Morrow, the court reversed the concept that local law should determine what is land or realty and ruled for uniform application of the tax in all states. The court affirmed application of the tax and said:
We cannot agree with appellant. The Texas decisions aside, and they are uniform to the effect that mineral leasehold interests are interests in lands, tenements or other realty, we think the comprehensive language of the federal statute makes it quite plain that it was the intention of Congress to require the affixing of stamps to instruments of this kind, instruments which in substance convey interests in lands, tenements or other realty without regard to the particular legal effects and consequences which may be attached to them by the laws of a particular state.8
The Morrow ruling was incorporated in Treasury regulations on November 25, 1941.9 As amended, the regulation provided that stamp tax liability was not to be controlled by state law definitions of land or realty. State law determined the character of the rights conveyed, but federal law determined when and how they were to be taxed. With respect to leasehold interests, the amended regulations provided that “Ordinary leases of real estate for a definite term of years” were not subject to tax.10
On December 19,1941, Jones v. Magruder held that an assignment of a lease for 99 years, with a covenant for renewal from time to time forever, on certain lots situated in Baltimore City was subject to the stamp tax.11 For purposes of the *459tax, the court included in the words “lands, or other realty” conveyance of an “* * * interest or estate in land constituting a substantial ownership in whole or in part, as distinguished from a mere license or temporary right of possession such as pertains to an ordinary lease.”12 The court emphasized that the tax applied not to the subject matter of lands, tenements, or other realty, but on its conveyance by deed or other written instrument.
On August 31,1942, in the light of Morrow and Jones, the Internal Revenue Service changed its position on the applicability of the stamp tax to leasehold interests in land.13 The new policy had prospective application and superseded prior inconsistent memoranda and rulings. Although Morrow was concerned with mineral interests, the IRS ruling differentiated taxable leasehold interests from exempt interests on the basis of certainty of the term. The ruling defined taxable leasehold interests as follows:14
For the purpose of determining liability for the stamp tax imposed by section 3482 of the Internal Revenue Code, as amended, supra, 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 fixed 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 interests first above mentioned. Thus, for example, a lease of real estate for 999 years, or a lease for 99 years renewable forever 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.
*460Characteristics that distinguish leases of mineral interests, and production payments associated with their exploitation, from ordinary leases have been delineated by the Supreme Court in a series of income tax cases that involve application of the depletion allowance. By 1940, the cases had established that oil and gas reserves, and other minerals in place, are wasting assets, and this quality generated relationships in commercial production that required recognition of Special interests in land for tax purposes. The production of oil and gas was treated as an operation in which capital assets were consumed in the production of income through the severance of minerals. Thus, the holder of a royalty interest (a right to a specified percentage of all oil and gas produced during the term of a lease) had “an economic interest” in the oil in place that is depleted by severance; cash bonus payments when included in a royalty lease were considered advance royalties, with the same tax consequences; and reserved production payments (the right to a specified sum, payable out of a specified percentage of oil or the proceeds received if, as, or when such oil was produced) were considered to withhold from the grant an amount of oil sufficient to make the agreed payments. The decisions “* * * did not turn upon the particular instrument involved, or upon the formalities of the conveyancer’s art, but rested upon the practical consequences of the provision for payments of that type.”15
In 1949, the G.C.M. 28295 definitions of leases subject to the tax were challenged by Phillips Petroleum Company.16 This case involved mineral leases in Oklahoma for a stipulated primary term, usually 5 years, “* * * and as long thereafter as oil, gas or other mineral is produced.” The leases also provided for termination at the end of 1 year unless a well was commenced and drilled with due diligence, or, in lieu thereof, annual stipulated rentals were paid for the primary term of the lease. Phillips Petroleum contended that the law of Oklahoma and Kansas, as well as earlier federal law, held that such conveyances granted only a privi*461lege to go upon land to explore and produce oil and to reduce it to possession as personalty, and that an oil or gas lease did not constitute a sale of realty sub ject to the stamp tax. The court ruled that an Oklahoma oil and gas lease, nevertheless, in the light of industry development and practice, for all commercial purposes was realty or an interest in realty, and subject to the tax in uniform application of a nationwide rule. The court stated:17
It may be conceded that when judged by the laws of the states of Oklahoma and Kansas, or the general federal law, an oil and gas lease is not realty or an estate therein. But even so, we are concerned only with the meaning and application of a federal excise tax, imposed by Congress in the exercise of its plenary power under the Constitution. It is the will of Congress which controls, and in the absence of express language to the contrary, the Act is to be interpreted to give uniform application to a nation-wide scheme of taxation. The critical language in the act is undoubtedly taken from state rules of property, having their genesis in English feudal law. Its technical definition belongs to antiquity, but it takes its color and content from modern business practices and the legal relationships they create. * * *
Judicial development of the special nature of mineral leases and mineral production payments culminated in the P. G. Lake case. There, the Supreme Court considered five cases that involved the status of carved out production payments for income tax purposes. All five cases were disposed of from an initial premise that “* * * oil payments are interests in land.”18 The Court concluded that the consideration received for the assignment of carved out production payments was taxable as ordinary income, subject to depletion, and not as a long-term capital gain.
Prior to August 31, 1959, the Internal Revenue Service had ruled that conveyances of mineral production payments were not subject to the stamp tax. P. G. Lake necessitated a change in this policy that resulted in Revenue Ruling 59-282.19 The 1959 ruling dealt with conveyances of two reserved *462production payments, a Primary Production Payment and a Secondary Production Payment, that became effective after the Primary Production Payment was fully liquidated and discharged. Both the Primary Production Payment and the Secondary Production Payment were sold to other parties on the same day that the working interest was assigned. On the basis of the Phillips Petroleum case,20 the 1959 ruling stated that an oil or gas lease conveys an interest in the natural resource content of land, that reserved rights to production payments in an assignment of other interests are retained interests in land in place, and that the assignment of such retained interests in oil, gas and minerals in place is a sale of realty within the meaning of the stamp tax.21
In 1966, the concepts that were the basis for Revenue Ruling 59-282 specifically were ruled to be applicable to conveyances of carved out production payments.22 Inasmuch as there is no practical difference between the “interest in land” that exists in a reserved production payment from the interest that exists in a carved out production payment, Revenue Ruling 66-88 was stated to be an amplification of the 1959 ruling. It has retroactive effect as to conveyances of carved out production payments executed after August 31, 1959.
Taxation of leases and production payments in the extractive industries has experienced a succession ¡of changes that give increasing recognition and effect to the special characteristics that differentiate this commerce from other leasing relationships. A mineral lease conveys an interest in land in place that permits the lessee to reduce to possession *463and to dispose of part of the land involved. A production payment is a fractional or proportionate interest in a mineral lease, that, when naked without further obligation or guarantee, as here, is a right to reduce to possession and to dispose of sufficient minerals to achieve the value specified. Whether the production payment is reserved out of 'a transfer of all other interests in the mineral in place, or is carved out of a larger interest, the holder of the production payment owns the same kind of an interest in the land. Instruments that transfer such rights, whether a lease, a retained production payment, or a carved out production payment, convey an interest in “land, tenements, or other realty” for purposes of the stamp tax.
Plaintiff contends that the transactions with Sutter and Thirteen Hundred, and the banks, when considered in their entirety, at most involved the conveyance of a security interest, exempt from the stamp tax by section 4362(a) of the Internal Bevenue Code. The security interest created and transferred in the documents was to be used only to provide for contingent liabilities or to assure performance of contractual obligations.
The agreements among the three parties involved in these transactions clearly involve more than a simple secured debt. The instrument, “Conveyance of Production Payment and Agreement,” that plaintiff transferred to the charities differed materially from the instruments that the charities executed for the banks to evidence a secured debt. Plaintiff was not personally obligated, or a guarantor of the production payment, until the oil had been produced, saved and sold for its account. In the event, unlikely as it might be in the light of industry technology and experience, that plaintiff could not produce oil from the leased properties, and other agents for the charities were unable to obtain production sufficient to satisfy the production payment, plaintiff would have no obligation to the charities. In such a situation, however, the charities nonetheless would be liable to the banks on their promissory notes. The “Conveyance of Production Payment and Agreement” sold and transferred to the charities an ownership interest to all of the oil, gas and *464other hydrocarbons that were allocable to the production payment. This was an interest in “lands, tenements, or other realty” and was pledged by the charities to the banks as security for the promissory notes.
Prior constructions of the documentary stamp tax statute by the Internal Eevenue Service do not preclude imposition of the tax either to the 1964 conveyance to Sutter or to the 1966 conveyance to Thirteen Hundred. Recognition of the special nature of a mineral lease that distinguishes it from an ordinary lease that conveys a mere right to possession has been a developing judicial and administrative concept. The Internal Revenue Service has adapted its interpretive posture to changes in industry practice as they occurred and were identified. When such adaptations were made, however, in 1942 with respect to leases, and in 1959 with respect to production payments, notice of the change was given and the new rulings were prospective in application. Prior administrative practice is always subject to change through the exercise of the continuing rulemaking powers of the agency.23
After Phillips Petroleum24 and P. G. Lake,25 the changing tax law with respect to the nature of mineral leases and production payments preclude reliance on earlier administrative practice relative to either reserved or carved out production payments. The 1959 revenue ruling gave effect to these changes and put the industry on notice that the stamp tax henceforth would apply to such instruments. Although the 1959 ruling was concerned with retained production payments, at that time instruments that transferred unguar-anteed carved out production payments embodied similar concepts. The 1966 revenue ruling applied to carved out production payments the concepts that had been announced in 1959. Its retroactivity to 1959 was appropriate.
The production payments plaintiff conveyed to the charities, and all other rights in the agreements, had a maximum duration of 15 years from the effective dates of the agreements. A lease for a fixed period of years, without renewal rights, and for a term that concededly is not lengthy, in the *465absence of special attributes, would fall into the classification of an exempted conveyance under the Stamp Tax Regulations.26 A “mineral lease,” however, is not the “ordinary” lease that grants only a temporary right to possession. A mineral lease and a production payment gives the right to sever and remove for all time from the underlying mineral reserve all or a proportionate part of the mineral in place. Duration of the term of the right granted is not the significant characteristic that distinguishes a mineral lease from other leaseholds. The fact that the production payments sold by the plaintiff had maximum terms of 15 years does not determine that the instrument should be exempt from the stamp tax.
The 15-year term was not intended by the parties to be coextensive with the payout period of the production payment, and, in fact, all of the production payments were discharged in less than 2 years. Viewed in its entirety, the 15-year term of the production payment and of the rights granted in the agreement was not a substantial aspect of the transaction. The conveyance of a right to produce oil and exhaust a proportionate part of the reservoir, however, was primary to the transaction. OBy 1959, both judicial and administrative rulings had recognized this characteristic of mineral leases and production payments.
In sum, plaintiff’s conveyances in 1964 and 1966 of carved out production payments were subject to the stamp tax then imposed by Section 4361 of the Internal Revenue Code of 1954. The plaintiff is not entitled to recover.
Findings op Fact
introduction
The facts in this case have been fully stipulated. The parties, however, disagreed on the legal significance of some provisions of the documents attached to and incorporated in the stipulation. In view of these differences and differences regarding ultimate findings, it has been necessary for coun*466sel to submit their respective briefs and requests for findings of fact. The following is a summary of the stipulations, and their accompanying exhibits, to the extent deemed relevant to the issues involved.
1. Plaintiff taxpayer, Chevron Oil Company, incorporated in California, is a wholly owned subsidiary corporation of Standard Oil Company of California (hereinafter “SOCAL”), a Delaware corporation, which conducts an integrated petroleum business in a number of countries throughout the world. Plaintiff is the surviving corporation from a statutory merger in 1965 between Chevron Oil Company, a Delaware corporation, and California Oil Company, a California corporation. The California Oil Company was the successor to The California Company, which was the surviving corporation in a statutory merger of several corporations in 1960. References to plaintiff include California Oil Company and The California Company, as appropriate. Plaintiff’s principal business is oil and gas exploration, producing, refining and marketing activities in most of the continental United States, exclusive of certain Western States.
2. Sutter Charitable Foundation (hereinafter “Sutter”) is a California nonprofit corporation. Thirteen Plundred Foundation, Inc. (hereinafter “Thirteen Hundred”), is a Louisiana nonprofit corporation. Both Sutter and Thirteen Hundred have been ruled by the Internal Revenue Service to be tax-exempt organizations as described in Section 501(c) (3) of the Internal Revenue Code of 1954.
3. (a) During the period from December 1961 through December 31, 1966, plaintiff annually executed a number of agreements for the conveyance of production payments, which were commonly described and known in the industry as “the conveyance of a carved out production payment.”1 In this period, plaintiff conveyed at least 12 such carved out production payments for a total consideration of approximately $50 million. The largest, valued at $29.1 million, was made on November 29, 1962, and the smallest, valued at $155,000, was made on December 29, 1966. With the exception of the conveyance on November 29, 1962, and a con*467veyance on November 25, 1964, all were made during the last two weeks of December. In all cases, plaintiff’s production payment conveyances were to charitable organizations exempt from federal taxes. Purchase of the production payment was financed by the charitable organizations by money borrowed from banking institutions, by means of a promissory note and a mortgage or assignment of the oil payment given as collateral security. The principal and interest payable to the bank for such loans were less than the amount to be received from the plaintiff by the charitable organization from the purchase of the production payment. With respect to each of the production payments conveyed during the period, plaintiff reported the consideration received as ordinary income on its federal income tax returns, and claimed thereon a deduction for percentage depletion.
(b) Two of plaintiff’s carved out production payment transactions, a conveyance on December 29, 1964, to Sutter and a conveyance on December 29, 1966, to Thirteen Hundred, are at issue in this case. Detailed findings of fact on the Sutter and the Thirteen Hundred transactions are made below. The Sutter and Thirteen EEundred conveyances are substantially similar to plaintiff’s other production payment agreements made during the period.
(c) The practice of annually entering into production payment agreements has provided plaintiff with certain business advantages, which include a convenient method of raising additional working capital.
4. Sutter Foundation A greement.
(a) On December 29,1964, plaintiff and Sutter Charitable Foundation entered into a written agreement entitled “Conveyance of Production Payments and Agreement” (hereinafter the “1964 Agreement”). The 1964 Agreement provided for two separate production payments in total amount of $3,441,000; the first in the principal amount of $2,520,000; the second in the principal amount of $921,000.
(b) In consideration of the execution and delivery of the 1964 Agreement, on December 29, 1964, plaintiff received cash in the amount of $3,441,000. The 1964 Agreement was validly executed and delivered and was fully performed by *468each, party according to its terms. It was not recorded in the official records of the State of Louisiana.
(c) In form, the 1964 Agreement was a conveyance of rights applicable to specific real property. Among other provisions, the 1964 Agreement included:
CONVEYANCE OF PRODUCTION PAYMENTS
Assignor does hereby grant, bargain, sell, convey, assign, transfer and set over unto Assignee, its successors and assigns, the production payments that are described in Exhibit A attached hereto. There is set forth in Exhibit A the principal amount of each production payment herein conveyed, the property out of which such principal amount is payable, and the percentage herein conveyed of crude oil produced, saved and sold from each property (such percentage being hereinafter referred to as “the assigned share”). Each production payment described in Exhibit A shall be separate; and each production payment (including the principal amount set out in Exhibit A and the two additional amounts specified in subparagraphs (b) and (c) hereof) shall he payable only out of production from the property to which such prod/uction payment is related in Exhibit A. All of the provisions of this agreement shall apply separately to each separate production payment. [Emphasis supplied.]
With respect to each production payment herein conveyed, the proceeds of the percentage of crude oil herein conveyed to Assignee shall be paid to Assignee free and clear of all development, operating, production, extraction, and other costs and expenses, until Assignee shall receive the sum of:
(a) the principal amount set out in Exhibit A, plus
(b) an additional amount equal to the aggregate of all taxes described in Paragraphs 8 and 4 of Section II which are paid by Assignee, plus
(c) an additional amount equal to interest at the rate of four and five-eighths per cent (4-%%) per annum on the unpaid balance * * * 2
Each production payment hereby conveyed and the covenants of Assignor with respect thereto shall apply to, and be a burden upon, the oil and gas lease related to such production payment in Exhibit A, up to the total amount set forth in paragraphs (a), (b) and (c) above, and also upon any renewals, extensions or amendments *469of such lease and any new leases, or interests therein, acquired by Assignor on all or any part of the lands covered by such lease. When Assignee shall have received the gross or ultimate amount of any production payment conveyed herein, all of the interest of any kind of As-signee in such production payment and all rights herein conveyed to Assignee shall automatically terminate and, to evidence the fact, Assignee then shall execute and deliver to and in favor of Assignor full release.3
(d) The 1964 Agreement provided that the assignee (Sut-ter) “ * * * shall own all of the crude oil allocable to the production payment.” 4 The 1964 Agreement obligated plaintiff to deliver Sutter’s proportionate part of the production at the wells, or into pipelines that connected the wells, to the same parties that received plaintiff’s share of the production on the same terms and conditions.5
(e) The 1964 Agreement obligated plaintiff to pay all costs and expenses allocable to the assigned share incurred in the operation of the properties involved, and to save Sutter harmless from any litigation expenses.6 Other provisions obligated plaintiff to pay all taxes, except income taxes, imposed on the producing properties or upon the production payment. If Sutter paid any such taxes, the amount would be added to the production payment.7
(f) The 1964 Agreement provided that plaintiff would operate the leases subject to the agreement “ * * * in good and workmanlike manner in accordance with sound and customary practice prevailing in the industry * * subject to all applicable governmental rules and regulations.8 Plaintiff was obligated to operate each leased property as long as the income from the particular reservoir involved exceeded all costs, expenses and charges incurred in connection with production from such reservoir. In this connection, the 1964 Agreement specifically provided:
* * * It is the intention hereof to require that, with respect to the reservoirs affected by this agreement, each *470lease referred to in Exhibit A be operated and produced to its economic limit as though, the production payments hereby created did not exist.9
(g) The 1964 Agreement defined plaintiff’s conduct that could constitute an event of default in performance, and provided that in such event Sutter would have the right to assume operation of the properties “ * * * affected by any production payment herein conveyed * * In such event, Sutter could
* * * operate the same and take over and use, without cost or liability, all lease equipment and well equipment and other physical property owned by Assignor and located upon or used in connection with such property, and to produce oil, gas, casinghead gas or other hydrocarbons from such property and market the same.10
(h) Plaintiff was not personally liable for, and did not guarantee, the production payment conveyed to Sutter. The 1964 Agreement in this connection stated:
It is expressly understood that Assignor shall never personally be liable for payment of the production payments herein conveyed and that Assignee shall look exclusively to the percentage of crude oil herein conveyed for the payment thereof. If the cash proceeds from the percentage of crude oil herein conveyed to Assignee do not equal the gross or ultimate amount of any production payment, Assignor shall not be liable to any person for any difference between the two.11
(i) The 1964 Agreement specifically excluded from the conveyance any interest in any of the lease or well equipment used in connection with production from the leased properties, other than a right to use such equipment in operations in the event of a default.12
(j) The rights and obligations of the 1964 Agreement were assignable by the parties and “* * * all of the terms and provisions hereof shall be treated and construed as covenants running with the lands and leases, * * 13
*471(k) The conveyance and the 1964 Agreement applied to crude oil produced after 7 a.m. on January 1, 1965.14 The assignee could record the agreement at its option; but assignor could not record the agreement without assignee’s consent.15
(l) The 1964 Agreement contained an Habendum and Warranty provision as follows:
HABENDUM AND WARRANTY
TO HAVE AND TO HOLD the interests hereby conveyed, together with all and singular the rights, privileges, hereditaments and appurtenances thereto in anywise 'belonging, unto Assignee, its successors and assigns; and Assignor covenants with Assignee, its successors and assigns, that it is the lawful owner of the oil and gas leasehold interests set forth and described hi said Exhibit A, free and dear of all liens, burdens and encumbrances ; that said oil and gas leases are valid and subsisting and in full force and effect; that all rentals and royalties, and other sums due and payable with respect to said oil and gas leases have been paid; that Assignor has good right and authority to convey the production payments herein conveyed and that it will warrant and defend the rights herein granted against the claims and demands of all persons claiming or to claim the same, or any part thereof. However, regardless of any provisions herein contained with reference to warranty of title, any failure of title or any breach of warranty shall not operate to reduce the amount of any production payment herein provided for or create any offset against such production payment.16
(m) The production payments and the 1964 Agreement had a term of 15 years, as follows:
DURATION OE PRODUCTION PAYMENTS
Notwithstanding anything to the contrary herein-above contained, each of the production payments and all other rights, title and interests hereby conveyed shall terminate fifteen (15) years from the date hereof, unless sooner terminated as hereinabove provided in this instrument.17
*472(n) An exhibit attached to the 1964 Agreement defined the production payments conveyed. The first production payment, in the principal amount of $2,520,000, was payable out of 76.5 percent of 100 percent of crude oil produced, saved and sold from certain reservoirs under Lease OCS-0814, Ship Shoal Block 107 Field, Offshore Louisiana. This lease had been granted by the United States of America to the California Company on March 1, 1960. The second production payment, in the principal amount of $921,000, was payable out of 69.9 percent of 100 percent of crude oil, produced, saved and sold for the account of California Oil Company from certain designated reservoirs in Louisiana State Lease No. 1263 — OCS-0374. This lease had been granted by the State of Louisiana to the California Company on August 5, 1947. All of the leasehold properties specified in the 1964 Agreement are submerged lands in the Gulf of Mexico subject to the jurisdiction of either the State of Louisiana or of the United States of America, or both.
(o) Properties subject to the 1964 Agreement were operated by plaintiff, who delivered the crude oil produced and saved, including the production payment allocated to Sut-ter, to buyers under crude oil sales contracts that had been negotiated and entered into by plaintiff. Crude oil included in the first production payment was sold by plaintiff to a buyer under the terms of preexisting crude oil sales agreement. Crude oil included in the second production payment was sold by the plaintiff under a preexisting crude oil sales agreement until February 17, 1965, at which time a new sales agreement with a different buyer became effective. Plaintiff sold the crude oil from the leased properties subject to the production payment at the market price prevailing in the area. Sutter was not a party to any of the crude oil sales agreements nor to any division orders, or similar documents, related thereto. Sutter was not asked to give and did not give its consent to the terms of the crude oil sales agreements. Plaintiff satisfied its obligations in the 1964 Agreement to pay the principal amounts of the production payments, together with additional amounts equal to interest as provided in the 1964 Agreement, by delivering to the as-*473signee of Sutter a series of monthly checks drawn on plaintiff’s funds in the amount of Sutter’s percentage share of the proceeds received by the plaintiff in the sale and delivery of crude oil in the preceding month.
;(p) The first production payment included in the 1964 Agreement was paid out by June 4,1965, a period of 5 months from the date of the agreement. In the aggregate, plaintiff paid Sutter’s assignee $2,520,000 as principal, plus $27,015.11 equal to interest. Of the amount paid as interest, $26,284.97 represented interest owed by Sutter to its 'assignee and the remaining $730.14 represented the share retained by Sutter’s assignee for the account of Sutter.
(q) The second production payment was paid out on March 4, 1966, a period of 14 months from the date of the 1964 Agreement. In the aggregate, plaintiff paid Sutter’s as-signee $921,000 as principal, plus $32,230.99 equal to interest. Of the amount paid as interest, $31,359.88 represented interest owed by Sutter to its assignee, and the remaining $871.11 represented the share retained by Sutter’s assignee for the account of Sutter.
(r) During the payout periods of the production payments, no event of default occurred as defined in the 1964 Agreement and, accordingly, plaintiff remained throughout in full possession and operation of the properties from which the production payment was made. Sutter furnished plaintiff with the release provided for in Section I of the 1964 Agreement.
(s) Prior to the execution of the 1964 Agreement, plaintiff had estimated that the first production payment would be paid out within a period of 5 months and that the second production payment would be paid out within a period of 12 months. Plaintiff’s estimates were disclosed to Wells Fargo Bank, Sutter’s assignee. On December 28, 1964, an independent oil and gas engineering and geological firm, Geology and Earth Science Services, Inc., included in a report to Wells Fargo Bank an analysis of the 1964 Agreement and an evaluation of the properties related to the production payments conveyed. This report estimated that the required time to pay out the first production payment, including in*474terest and additional amounts, would be 6 months and the required time for the second production payment, including interest and additional amounts, would be 14 months.18 The 15-year period for termination of !all rights conveyed to Sutter by the 1964 Agreement was agreed to by the parties without the intention of coinciding with the payout period for the production payments conveyed.
(t) In December 1964, plaintiff produced and saved approximately 276,000 barrels of crude oil from wells on the leased properties from which the first production payment was payable. As of December 81, 1964, plaintiff estimated that the recoverable crude oil reserves -under the leased properties, subject to the first production payment, were equal to 31,288,523 barrels. In December 1964, plaintiff produced and saved approximately 19,500 barrels of crude oil from wells on the leased properties out of which the second production payment was payable. As of December 31, 1964, plaintiff estimated that the recoverable crude oil reserves under the leased properties, subject to the second production payment, were equal to 10,974,911 barrels. At the time the parties executed the 1964 Agreement there was reasonable certainty that sufficient crude oil could be produced, saved and sold from the leased properties specified in the Agreement, together with the amounts equal to interest as specified therein.
5. Butter-Wells Fargo BanJe Agreement.
(a) On December 29, 1964, Sutter executed a promissory note in the amount of $3,441,000, at an interest rate of 4% percent per annum, payable to bearer and due on demand at Wells Fargo Bank, San Francisco, California. On the same date, Sutter executed a document entitled, “Collateral Mortgage of Mineral Eights with Pledge of Eights Eelating to Minerals,” which named Wells Fargo Bank as mortgagee. On December 29, 1964, Wells Fargo Bank loaned Sutter $3,441,000 and received delivery from Sutter of said note and Collateral Mortgage of Mineral Eights with Pledge of Eights Eelating to Minerals. Wells Fargo Bank was incor*475porated under the laws of the State of California, until 1968, when it converted to a national banking institution.
(b) The Promissory Note executed by Sutter included among its provisions:
The property described on the reverse hereof and any property that may be substituted therefor or added thereto are hereby pledged and delivered to said Bank to secure the payment of this note, and of any note given in extension or renewal thereof. * * *
On the non-performance of this promissory note in whole or part, * * * this note shall forthwith mature and become due and payable, * * * and full irrevocable power and authority are hereby granted and given to said Bank, thereupon, * * * to sell, assign, transfer, and effectively deliver the whole of the property of every kind pledged hereby, or any part thereof, or substitutes therefor, or additions thereto, at public or private sale; without recourse to judicial proceedings and without either demand, appraisement, advertisement, or notice of any kind, all of which are hereby expressly waived. * * *19
(c) Sutter gave as security for the Promissory Note, the “Collateral Mortgage of Mineral Eights with Pledge of Eights Eelating to Minerals.” 20 The Collateral Mortgage instrument, among other provisions, contained:
And now, in order to secure the full due and punctual payment of the above described note, in principal and ■interest, as well as all costs, taxes, assessments, charges, insurance premiums and attorney’s fees incurred or paid hereunder, and to secure the faithful observance and performance of all of the obligations, agreements, covenants and stipulations herein contained, the said Mortgagor declares that Mortgagor does by these presents, specially mortgage, pledge and hypothecate unto and in favor of any future holder or holders of said note, *476whether the same be held as an original obligation or in pledge, the said Mortgagor being bound to warrant and defend the right to so mortgage, pledge and hypothecate such property, all and singular the following described mineral rights (as defined by La. R.S. 9:5101, as amended):
The two separate and distinct production payments acquired by Mortgagor from California Oil Company by instrument dated as of December 29, 1964, and being payable out of crude oil produced, saved and sold after seven o’clock A.M. on January 1, 1965, free and clear of all development, operating, production, extraction and other costs and expenses; * * * 21
Additional provisions of the mortgage instrument include the following:
The Mortgagee and any future holder or holders of said note shall be under no liability or responsibility for, nor shall the lien and security hereof be in any way affected by reason of their failure or inability to collect any proceeds from oil, gas or other minerals produced from the above described property; nor shall the receipt of any monies, including but not limited to monies received by virtue of any oil, gas and/or mineral assignment for the note above described, in any manner change or alter in any respect the obligations of the Mortgagor with respect to the said note, or the maturity of either principal or interest thereon, but said note shall be and continue to be a valid and subsisting obligation, subject to any credits made thereon, in accordance with the terms thereof, and shall be due and payable strictly according to its tenor and effects; nor shall the release of any other security for the payment of the indebtedness secured hereby, or any wise alter, vary or diminish the force and effect or lien of this instrument or any renewal or extension thereof or of the note within described, and the lien thereof shall continue as to all of the remaining leases and property above described, not expressly released, until all sums with interest and charges hereby secured are fully paid.22
# * as as as
In addition to all other rights and remedies of the Mortgagee herein, Mortgagor further agrees that in *477case of breach of any condition or default in the performance of any obligation of Mortgagor contained herein, Mortgagee shall have the right to take over the operation of the property herein mortgaged, to the same extent as the Mortgagor, including the right to use all property covered by this mortgage which is referred to in the next preceding paragraph hereof; and, upon satisfaction of the indebtedness secured by this mortgage, Mortgagee shall return same to Mortgagor in as good condition as when taken over by Mortgagee, ordinary wear and tear excepted. Mortgagee shall have the right to retain the share of production attributable to the property mortgaged and apply the same to the discharge of the mortgage indebtedness, both in principal and interest, it being understood that the rights afforded by this paragraph shall be in addition to other rights available to Mortgagee under existing law.23
* * ❖ ❖ *
_ Mortgagor and Mortgagee expressly direct the undersigned Notary Public to refrain from recording this instrument and relieve and release said Notary from any liability or responsibility in connection therewith.24
6. Plaintiff’s parent, Standard Oil Company of California, in its consolidated federal income tax return for calendar year 1964 reported the cash payment of $3,441,000 received from Sutter on December 29,1964, as ordinary income realized by plaintiff in 1964. Under Section 613 of the Internal Revenue Code, percentage depletion was claimed against such income. In its reports for the year ended December 31, 1964, to stockholders and certain public regulatory authorities, SOCAL did not include in its revenue for the year the $3,441,000 cash payment made by Sutter on December 29, 1964. In its annual report to stockholders and regulatory authorities, SOCAL’s income statement for the year ended December 31,1964, was adjusted to offset federal income tax expense by an amount of miscellaneous revenue equal to the net amount of federal income tax liability attributable to the ordinary income reported in the 1964 consolidated federal income tax return on the December 29,1964, payment by Sut-*478ter. The consolidated balance sheet of December 31, 1964, submitted by SOCAL in its annual report to stockholders and regulatory authorities, include the principal amounts of the production payments provided by the 1964 Agreement as current liabilities under “Accounts Payable” after reduction by an amount equal to said income tax adjustment.
7. On or about January 22, 1965, plaintiff purchased a federal documentary stamp in the amount of $0.55 which was affixed to the 1964 Agreement and duly canceled. Plaintiff’s books and records for the period December 1, 1961, through December 31, 1965, were examined by the Internal Revenue Service. In a report dated September 15,1967, the examining officer proposed assessment of additional federal documentary stamp tax liability in the amount $50,951.45, which amount included proposed liability on the 1964 Agreement in the amount of $3,784.55.25 On October 20, 1967, plaintiff was assessed additional federal documentary stamp tax liability in the above amounts, and said assessment was satisfied on October 30, 1967, by payment. No deficiency interest was assessed against or paid by plaintiff in connection with this deficiency. On November 2, 1967, plaintiff filed a claim for refund of $3,785.10 of federal documentary stamp taxes paid with respect to the 1964 Agreement. This total represented the $0.55 paid on January 22,1965, plus the $3,784.55 paid on October 30,1967. Plaintiff’s claim was disallowed in full on July 12,1968.
8. Thirteen Hundred Foundation Agreement.
(a) On December 29, 1966, plaintiff and Thirteen Hundred Foundation, Inc. entered into a written agreement entitled, “Conveyance of Production Payment and Agreement” (hereinafter “the 1966 Agreement”). The 1966 Agreement provided for a production payment in the amount of $155,000.
(b) On execution and delivery of the 1966 Agreement on December 29, 1966, plaintiff received cash in the amount of $155,000. The 1966 Agreement was validly executed and delivered, was recorded in the official records of Love County, Oklahoma, and was fully performed by each party. *479All of the leased properties specified in the 1966 Agreement were and are lands in Love County, Oklahoma.
(c) In form, the 1966 Agreement was a conveyance of rights applicable to specific real property. Among other provisions, the 1966 Agreement included:
CONVEYANCE OE PRODUCTION PAYMENT
Assignor does hereby grant, bargain, sell, convey, assign, transfer and set over unto Assignee, its successors and assigns, the production payment that is described in Exhibit A attached hereto. There is set forth in Exhibit A the principal amount of the production payment herein conveyed, the property out of which such principal amount is payable, and the percentage herein conveyed of oil, gas, casinghead gas and other hydrocarbons produced, saved and sold from each property (such percentage being hereinafter referred to as “the assigned share”).
With respect to the production payment herein conveyed, the proceeds of the percentage of oil, gas, casing-head gas and other hydrocarbons herein conveyed to As-signee shall be paid to Assignee free and clear of all development, operating, production, extraction, and other costs and expenses, until Assignee shall receive the sum of:
(a) The principal amount set out in Exhibit A, plus
(b) an additional amount equal to the aggregate of all taxes described in Paragraphs 3 and 4 of Section II which are paid by Assignee, plus
(c) an additional amount equal to interest at the rate of six and one-eighth per cent (6% %) per annum on the unpaid balance. * * *
* !!: * * *
The production payment hereby conveyed and the covenants of Assignor with respect thereto shall apply to, and be a burden upon, the oil and gas leases related to such production payment in Exhibit A, * * *. When Assignee shall have received the gross or ultimate amount of the production payment conveyed herein, all of the interest of any kind of Assignee in such production payment and all rights herein conveyed to Assignee shall automatically terminate and, to evidence the fact, Assignee then shall execute and deliver to and in favor of Assignor full release.26
*480(d) The 1966 Agreement provided that the assignee (Thirteen Hundred) “* * * shall own all of the oil, gas, casinghead gas and other hydrocarbons allocable to the production payment.”27 'Plaintiff was obligated to deliver Thirteen Hundred’s proportionate part of the production at the wells, or into pipelines that connected the wells, to the same parties that received plaintiff’s share of the production on the same terms and conditions.28
(e) The 1966 Agreement obligated plaintiff to pay all costs and expenses allocable to the assigned share incurred in the operation of the properties involved, and to save Thirteen Hundred harmless from any litigation expenses.29 Other px*ovisions obligated plaintiff to pay all taxes imposed on the producing properties or upon the production payment, other than income taxes. If Thirteen Hundred paid any such taxes, the amount would be added to the production payment.30
(f) The 1966 Agreement provided that the plaintiff would operate the leases subject to the agreement “* * * in good and workmanlike manner in accordance with sound and customary practice prevailing in the industry * * subject to all applicable governmental rules and regulations.31 Plaintiff was obligated to operate each leased property as long as the income from the particular lease exceeded all costs, expenses and charges incurred in connection with the operations involved in production from that lease. In this connection, the 1966 Agreement specifically provided:
* * * It is the intention hereof to require that, with respect to the leases affected by this agreement, such leases be operated and produced to their economic limit as though the production payment hereby created did not exist.32
(g) The 1966 Agreement defined plaintiff’s conduct that could constitute an event of default in performance, and provided that in said event Thirteen Hundred had the right to *481assume operation of the properties “* * * affected by the production payment herein conveyed * * In such event, Thirteen Hundred substituted itself for the plaintiff, and could
* * * operate the same and take over and use, without cost or liability, all lease equipment and well equipment and other physical property owned by Assignor and located upon or used in connection with such property, and to produce oil, gas, casinghead gas and other hydrocarbons from such property and market the same * * *.35
(h) Plaintiff was not personally liable for and did not guarantee the production payment that was conveyed to Thirteen Hundred. The 1966 Agreement specifically provided:
It is expressly understood that Assignor shall never personally be liable for payment of the production payment herein conveyed and that Assignee shall look exclusively to the percentage of oil, gas, casinghead gas and other hydrocarbons herein conveyed for the payment thereof. If the cash proceeds from the percentage of oil, gas, casinghead gas and other 'hydrocarbons herein conveyed to Assignee do not equal the gross or ultimate amount of the production payment, Assignor shall not be liable to any person for any difference between the two.34
(i) The 1966 Agreement specifically excluded from the conveyance any interest in any of the lease or well equipment used in connection with production from the leased properties, other than a right to use such equipment in operations in the event of a default.33
(j) The rights and obligations of the 1966 Agreement were assignable by the parties and “* * * all of the terms and provisions hereof shall be treated and construed as covenants running with the lands and leases, * * 36
(k) The conveyance and the 1966 Agreement applied to oil, gas, casinghead gas and other hydrocarbons produced after 7 a.m. on January 1,1967.37 The assignee was authorized *482to record the 1966 Agreement at its option; the assignor could not record the agreement without assignee’s consent.38
(l) The 1966 Agreement contained an Habendum and Warranty clause, as follows:
Habendum and Warranty
TO HAVE AND TO HOLD the interests hereby conveyed, together with all and singular the rights, privileges, hereditaments and appurtenances thereto in _ anywise belonging, unto Assignee, its successors and assigns ; and Assignor covenants with Assignee, its successors and assigns, that it is the lawful owner of the oil and gas leasehold interests set forth and described in said Exhibit A, free and clear of all liens, burdens and encumbrances ; that the oil and gas leases described in Exhibit A are valid and subsisting and in full force and effect; that all rentals and royalties and other sums due and payable with respect to said oil and gas leases have been paid; that Assignor has good right and authority to convey the production payment herein conveyed and that Assignor will warrant and defend the rights herein granted against the claims and demands of all persons claiming or to claim the same, or any part thereof. However, regardless of any provisions herein contained with reference to warranty of title, any failure of title or any breach of warranty shall not operate to reduce the amount of the production payment herein provided for or create any offset against such production payment.39
(m) The production payment and the 1966 Agreement had a term of 15 years, as follows:
Duration of Production Payment
Notwithstanding anything to the contrary hereinabove contained, the production payment and all other rights, title and interests hereby conveyed shall terminate fifteen (15) years from the date hereof, unless sooner terminated as hereinabove provided in this instrument.40
(n) An Exhibit A attached to the 1966 Agreement defined the production payment conveyed. The principal amount of the production payment, $155,000, was payable out of 100 *483percent of tlie oil, gas, casinghead gas, and other hydrocarbons, produced, saved and sold for the account of Chevron Oil Company from the lands and leases conveyed by a “Lease Consolidation Agreement” executed as of May 15, 1964, between California Oil Company and certain royalty owners. The Lease Consolidation Agreement recorded in Volume 170, page 457, in records of Love County, Oklahoma, applied to thirteen leases. The leases and plaintiff’s interest in each are described in Exhibit A to the 1966 Agreement. All of the leasehold properties subject to the 1966 Agreement are located in Oklahoma. The production of oil and gas in Oklahoma is subject to regulation by the Corporation Commission of Oklahoma and the leased properties covered by the 1966 Agreement were subject to the jurisdiction of the Corporation Commission of Oklahoma.
(o) Properties subject to the 1966 Agreement were operated by plaintiff, who delivered the crude oil produced and saved, including the production payment conveyed to Thirteen Hundred, to the same person who had bought the production from the leases immediately prior to the execution of the 1966 Agreement. The only production produced and saved during 1967 was crude oil, which plaintiff sold under the terms of a preexisting hydrocarbon sales agreement. Plaintiff sold the crude oil from the leased properties subject to the production payment at the market price prevailing in the area. Thirteen Hundred was not made a party to such preexisting sales agreement, nor to any division orders or similar documents involved. Thirteen Hundred was not asked to give and did not give its consent to the terms of the preexisting hydrocarbon sales agreement and did not receive payments from the buyer named in such agreement. Plaintiff discharged its obligations to pay the production payment, with interest as specified, by delivering to the assignee of Thirteen Hundred a series of monthly checks drawn on plaintiff’s funds in the amount of Thirteen Hundred’s percentage share of the proceeds received by plaintiff from the sale and delivery of crude oil during the preceding month.
(p) The production payment conveyed in the 1966 Agreement was paid out in December 1967, 11 months from the *484date of the agreement. In the aggregate, plaintiff paid Thirteen Hundred’s assignee $155,000 as principal, plus $4,919 equal to interest. Of the interest paid, $4,818.59 represented interest owed by Thirteen Hundred to its assignee and the remaining $100.41 represented earnings retained by Thirteen Hundred’s assignee for the account of Thirteen Hundred.
(q) During the payout period of the 1966 production payment, no event of default occurred as defined in the 1966 Agreement. Accordingly, plaintiff remained throughout the payout period in full possession and operation of the properties from which the production payment was made. Thirteen Hundred provided plaintiff with the release provided for in Section I of the 1966 Agreement.
(r) Prior to the execution of the 1966 Agreement, plaintiff estimated that the production payment would be paid out within a period of 12 months. Plaintiff disclosed its estimate to Thirteen Hundred’s assignee, Whitney National Bank of New Orleans. The 15-year period for termination of all rights conveyed to Thirteen Hundred in the 1966 Agreement was agreed to by the parties without the intention of coinciding with the payout period for the production payment conveyed.
(s) In December 1966 plaintiff produced and saved approximately 6,288 barrels of crude oil for its own account from wells on the leased properties from which the production payment was payable. As of December 31,1966, plaintiff estimated that recoverable crude oil reserves in the reservoirs under the leasehold properties were equal to 316,300 barrels after reduction of royalty interests that burdened plaintiff’s working interest. At the time the parties executed the 1966 Agreement there was reasonable certainty that sufficient crude oil could be produced, saved and sold from the leased properties specified in the 1966 Agreement to satisfy in full the production payments provided for in the Agreement, together with the amounts equal to interest as specified therein.
9. Thirteen Hwndred-Whitney National Bank Agreement.
(a) On December 29, 1966, Thirteen Hundred executed a *485Promissory Note in the amount of $155,000, at an interest rate of 6 percent per annum, payable to bearer and due on demand at Whitney National Bank of New Orleans, Louisiana. On the same date, Thirteen Hundred executed a document entitled, “Collateral Assignment of Production Payment,” which named Whitney National Bank as assignee. On December 29,1966, Whitney National Bank loaned Thirteen Hundred $155,000 and received delivery from Thirteen Hundred of said Promissory Note and the Collateral Assignment of Production Payment. Whitney National Bank at all times relevant to the transaction involved was a national banking institution.
(b) The Promissory Note executed by Thirteen Hundred Foundation, Inc., included among its provisions:
This note is secured by a Collateral Assignment of Production Payment covering a production payment on certain oil and gas leases in Love County, Oklahoma, and the maker hereof agrees to apply all sums received by him under such production payment, to the payment of the principal and interest due hereunder.41
(c) The Collateral Assignment of Production Payment, which was given by Thirteen Hundred to secure the demand note for $155,000, recited that Chevron Oil Company had “* * * conveyed unto Thirteen Hundred Foundation, Inc. the production payment that is described in Exhibit A attached hereto * * 42 The assignment to the Bank included “* * * all rights, benefits and sums of money accruing and to accrue under the production payment described in Exhibit A attached hereto, together with all interests in the percentage of production of oil, gas, casinghead gas and other hydrocarbons from the properties therein * * 43 Among other provisions, the Collateral Assignment contained:
The Assignor also, for the purpose of securing the indebtedness aforesaid hereby transfers, assigns and sets *486over to the Assignee, its successors and assigns, the proceeds of the sale of all of that portion of the production from said described properties out of which said production payment is to be made subject to the following terms and conditions:
(a) This instrument shall be and constitute full and complete authority to or for any purchasers o'f any of the oil, gas, casinghead gas and other hydrocarbons _ produced from said properties or any other person liable therefor to make payment to the Assignee, its successors or assigns, of the Assignor’s proportionate part of the proceeds of such sales, and to the extent of any payment so made, such purchaser or other person making such payment shall be released and discharged from any further liability therefor to the Assignor or to the Assignor’s Successors in Interest.44
* * # * *
(e) This Assignment of the proceeds shall not in any manner be construed to limit or diminish said Assignor’s liability according to the terms of said note or notes or this instrument securing the same, nor relieve the Assignor from the performance of any of the covenants or obligations as set forth in said note or notes or in this instrument.45
10. Plaintiff’s parent, Standard Oil Company of California, in its consolidated federal income tax return for the calendar year 1966, reported the cash payment of $155,000 received from Thirteen Hundred on December 29, 1966, as ordinary income realized by plaintiff in 1966. Under Section 613, Internal Revenue Code, percentage depletion was claimed against such income. In its reports for the year ended December 31, 1966, to stockholders and certain public regulatory authorities, SOCAD did not include in its revenue for the year the $155,000 cash payment made by Thirteen Hundred on December 29,1966. In its annual report to stockholders and regulatory authorities, SOCAL’s income statement for the year ended December 31, 1966, was adjusted to reduce the federal income tax expense account from the *487amount otherwise attributable to the operations for the year by the net amount of federal income tax liability attributable to the ordinary income reported in the 1966 consolidated federal income tax return on the December 29,1966, payment made by Thirteen Hundred. The consolidated balance sheet of December 31, 1966, in SOCAL’s annual report to stockholders and certain public regulatory authorities, reflected the principal amount of production payment provided by the 1966 Agreement as a current liability under “Accounts Payable.” The current liability account entitled, “Federal and Other Taxes Based on Income” was adjusted by reduction in the amount equal to said income tax adjustment.
11. On or about January 3,1967, plaintiff purchased a federal documentary tax stamp in the amount of $0.55 which was affixed to the 1966 Agreement and duly canceled. Plaintiff’s books and records for the period ended December 29, 1966, were examined by the Internal Kevenue Service. In a report dated October 20, 1967, the examining officer proposed assessments of additional federal documentary stamp tax liability in the amount of $3,177.35, which amount included liability on the 1966 Agreement in the amount of $169.95.46 On April 26,1968, plaintiff was assessed for additional federal documentary stamp tax liability in the above amounts. Said assessment was satisfied on May 13, 1968, by payment of $3,954.54, which included interest of $777.19. On May 14, 1968, plaintiff filed a claim for refund of $170.50 of federal documentary stamp taxes paid with respect to the 1966 Agreement. This total represented the $0.55 paid on January 3,1967, plus the $169.95 paid on May 13,1968. Plaintiff’s claim was disallowed in full on July 12, 1968.
CONCLUSION or Law
Upon the foregoing findings of fact and opinion, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover, and the petition is dismissed.

 26 U.S.C. § 4361 (1970). The Excise Tax Reduction Act of 1965, Pub. L. 89-44 (June 21, 1965), repealed, as of January 1, 1968, documentary stamp taxes on conveyances of real estate. Section 4361, as amended, reads as follows:
“Imposition op tax
“There is hereby imposed, on each deed, instrument, or writing by which any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers, or any other person or persons, by his or their direction, when the consideration or value of the interest or property conveyed (exclusive of the value of any lien or encumbrance remaining thereon at the time of sale) exceeds $100, a tax at the rate of 55 cents for each $500 or fractional part thereof. The tax imposed by this section shall not apply on or after January 1, 1968. * * *”

 A production payment is a right to a fixed amount of production from a mineral property, if, as and when the production occurs. Dependent upon the manner in which it is created, a production payment may be classified as either “carved out” or “retained”; it may be for a specific dollar amount, and it usually bears interest. The production payment is secured by an interest in the minerals, and usually the known mineral reserves available are substantially in excess of the amount required for the production payment.
In a “retained” production payment the owner of a mineral interest sells the working interest but reserves the production payment in himself. A “carved out” production payment is created when the owner of a mineral property sells a portion of his future production. It may be carved out of any mineral interest having a duration greater than the interest conveyed. See generally Tax Reform, Studies and Proposals, U.S. Treasury Department, Joint Publication of Committee on Ways and Means, U.S. House of Representatives, and Committee on Pinanee, U.S. Senate, Pebruary 5, 1969, pp. 256-63; J. Lane Peck, Federal Documentary Stamp Tax Aspects of Oil and Gas Transactions, 1963 Tulane Tax Institute, pp. 270-92.

 In 1965 the Treasury Department reported that carved out production payment transactions totaled $214 million. In 1966 reported carved out production payment transactions had more than doubled to a figure of $540 million. Treasury Department Study, supra n. 2, at 256.

 H.R. Rep. No. 91-413 (Part 1), 91st Cong., 1st Sess. 139 (1969). Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 630, 26 U.S.C. § 636, revised income tax treatment of mineral production payments. As amended, a carved out production payment is required to be treated as a mortgage loan on the property and does not qualify as an economic interest in the mineral property.

 26 U.S.C. § 4361 (1970).

Treas. Reg. 71 (1932 ed.), Arts. 84(a) and 108. The stamp tax on documents -was first enacted in 1917, and reenacted by successive Congresses until 1926. After a lapse in the 70th and 71st Congresses, it was reenacted in 1932 and each succeeding Congress until 1941 when the 77th Congress made it a permanent tax. Phillips Petroleum Co. v. Jones, 176 E. 2d 737, 738 (10th Cir. 1949), cert. denied, 339 U.S. 904 (1950).

 Morrow v. Scofield, 116 F. 2d 17 (5th Cir. 1940), cert. denied, 313 U.S. 573 (1941).

 Id. at 19.

 Treas. Reg. 71, §113.83 (1941) : Conveyances Subject to Tax.

 Treas. Reg. 71, § 113.84 (1941).

 Jones v. Magruder, 42 F. Supp. 193 (D.C. Md. 1941). On tbe desirability of uniform nationwide application of the stamp tax, the court noted:
“It is, however, not probable that Congress intended in this modern taxing act to use the phrase ‘lands, tenements, or other realty’ in the technical nicety of the common law with respect to interests in lands flowing from a system of feudal tenure which did not exist in this country after the American Revolution. I have been unable to find any legislative history of the statute which throws any light upon the sense in which the words were used; but after considerable reflection I have reached the conclusion that the expression is sufficiently general but nevertheless definite to have a uniform nationwide application. * * * [at 198.]”

 Id. at 198.

 G.C.M. 23295, 1942-2 Ctrai. Bull. 271.

 Id. at 275. Tlie General Counsel’s definition, substantially unchanged, was incorporated and continues in the regulations. 26 C.F.R. § 47.4361-1 (a) (4) (i) (1971) reads in part:
“(4) For purposes of the regulations in this part—
“(i) The term ‘realty’ includes—
“(a) Those interests in Teal property 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
“(S) Those interests enduring for a fixed period of years but which, either by reason of the length of the term or the grant of a right ito extend the term by renewal or otherwise, consist of a bundle of rights approximating those of the class of interests mentioned in (a) of this subdivision.”

 Anderson v. Helvering, 310 U.S. 404, 409-11 (1940), and cases therein cited.

 Phillips Petroleum Co. v. Jones, supra n. 6.

 Id. at 740-41.

 Commissioner v. P. G. Lake, Inc., 356 U.S. 260, 264 (1958).

 1959-2 Com. Boll. 832.

 Supra n. 6.

 Rev. Rul. 59-282, 1959-2 Cum. Bull. 332, 333, In part states:
“It has been held that the leasing of oil and gas property, -which creates In the lessee an Interest In the natural resource content of the land, Is a conveyance of realty within the meaning of section 4361 of the Code and is subject to the tax imposed by that section. See M.T. 16, C.B. 1943, 1170; Phillips Petroleum Co. v. Jones, supra. To the extent that the assignors reserved to themselves the right to the production payments, they excluded from the assignments of their interests in the leases and retained for themselves Interests in the oil, gas and minerals in place. It is held, therefore, that the sale, by the assignors, or such retained interests in the oil, gas and minerals in place is a conveyance of realty sold within the meaning of section 4361 of the Code and is subject to the tax imposed under that section.”

 Rev. Rul. 66-88, 1966-1 Cum. Bulx.. 25.8.

 Helvering v. Reynolds, 313 U.S. 428, 432 (1941).

 Supra n. 6.

 Supra n. 18.

 Section 47.4361-2(1)) (8) provides as an example of conveyance not subject to tax: “(8) Ordinary leases of real property for a definite term of years.”

 Stip. ExR. G.

 Stip. Exh. A, I.

 Stip. Exh. A, I.

 Stip. Exh. A, II, 1.

 Stip. Exh. A, II, 1.

 Stip. Exh. A, II, 2.

 Stip. Exh. A, II, 3 and 4.

 Stip. Exh. A, II, 5.

 Stip. Exh. A, II, 5.

 Stip. Exit. A, II, 6.

 Stip. Exli. A, III, 1.

 Stip. Exh. A, III, 2.

 Stip. Exli. A, III, 5.

 StJp. Exh. A, III, 6.

 Stip. Exh. A, III, 8.

 Stip. Exh. A, IV.

 Stip. Exh. A, V.

 Stip. Exh. D.

 Stip. Exh. E.

 La. Rev. Stat., Title 9, § 5191 (1950), as amended, defines “Mineral Rights,” as follows:
“§ 5101. Minebal bights
“Mineral rights are susceptible of mortgage, as is any corporeal immovable under the law of the state.
“Por the purpose of this Section, mineral rights are defined to mean the rights to the minerals in and under the land, or to a portion of the minerals, or to the minerals down to a particular depth or stratum, or to one or more specific minerals, or a portion thereof.”

 Stip. Exh. E, p. 2.

 Stip. Exh. E, p. 7.

 Stip. Exh. F, p. s.

 Stlp. Exli. F, p. S.

 Stip. Exh. a.

 Stip. Exh. I, I.

 Stip. Exh. I, IX. 1.

 Stip. Exh. I, II, 1.

 Stip. Exh. I, II, 2.

 Stip. Exh. I, II, 3 and i.

 Stip. Exh. I, II, 5(a).

 Stip. Exh. I, II, 5(b).

 Stip. Exh. I, II, 6.

 Stip. Exh. I, III, 1.

 Stip. Exh. I, III, 2.

 Stip. Exh. I, III, 5.

 Stip. Exh. I, III, 6.

 Stip. Exh. I, III, 8.

 Stip. Exli. I, IV.

 Stip. Exli. I, V.

 Stip. Exh. K.

 Stip. ExR. L, p. 1.

 Stip. Exll. L, p. 2.

 Stip. Exh. !L, p. 2.

 Stip. Exh. E, p. 3.

 Stip. Exh. M.