Court Opinion

ID: 9633810
Source: CourtListenerOpinion
Date Created: 2023-08-22 12:01:01.692457+00
Date Added: 2024-06-11T18:08:42.566651
License: Public Domain

WHITAKER, Judge, also joins in this concurring opinion.
Findings of Fact
The court, having considered the stipulation of facts entered into between the parties, and the briefs and argument of counsel, makes findings of fact as follows:
1. Plaintiff is a corporation duly organized and existing under the laws of the State of California. Its principal office is located at San Francisco, California.
2. On or about May 31, 1949, plaintiff duly filed with the Collector of Internal Revenue, First District of California (subsequently designated as District Director of Internal Revenue, San Francisco, California, and herein sometimes referred to as Collector), its corporate income tax return for the taxable year ended December 31,1948, prepared in accordance with the accrual method of accounting.
3. Plaintiff’s corporate income tax return for the taxable year ended December 31, 1948, disclosed ordinary net income in the amount of $1,908,703.91. In arriving at said amount of ordinary net income for normal tax and surtax purposes plaintiff deducted percentage depletion of $357,011.28 on account of payments of $1,298,222.85 received from Southwest Exploration Company, a corporation (hereinafter designated as Southwest).
4. In its corporate income tax return for the taxable year ended December '31, 1948, plaintiff computed and disclosed its corporate income tax liability for such year in the total amount of $724,802.72. The amount of its Federal income tax liability as disclosed by its return was duly paid to the Collector and is not in controversy herein.
5. On December 13,1950, the Internal Revenue Agent in Charge at San Francisco, California, acting on behalf of the *724Commissioner of Internal Revenue, proposed an additional income tax liability for the taxable year 1948 in the amount of $457.54. All of said amount of $457.-54, together with interest thereon, was duly paid by plaintiff to the Collector on February 21, 1951, and is not in controversy herein.
6. Upon subsequent audit and review of plaintiff’s income tax return for the taxable year 1948, the District Director of Internal Revenue, San Francisco, California (formerly the Collector of Internal Revenue and hereinafter referred to as District Director), proposed additional income tax for the taxable year 1948 in the amount of $135,664.29. On December 30, 1954, plaintiff duly paid to the District Director all of said amount of additional tax of $135,664.29, together with statutory interest thereon of $47,138:69.
7. The additional income tax of $135,-664.29 for the yeqr 1948, as determined by defendant and referred to in the preceding paragraph, was based upon the disallowance of percentage depletion of $357,011.28 as claimed by plaintiff on the payments received by it from Southwest during the taxable year 1948 in the amount of $1,298,222.85 referred to in finding 3 above.
8. On January 3, 1955, plaintiff timely filed with the District Director a verified claim for refund of income tax for the taxable year ended December 31, 1948, in the amount of $135,664.29, plus interest thereon of $47,138.69, together with interest on said amounts as allowed by law.
9. In accordance with the applicable provisions ,of the Internal Revenue laws, the Commissioner of Internal Revenue notified plaintiff of the disallowance of its aforesaid claim by registered letter dated January -4, .1955.
10. In 1938 the State of California passed the State Lands Act of 1938, now part of the .Public Resources Code dealing with the .exploitation of oil deposits from the State tidelands. From August 8, 1938, to August 13, 1938, the State Lands Commission published a notice entitled “Notice of Intention of State Lands Commission to Receive Offers to Enter Into an Agreement or Agreements for Extraction of Oil and Gas and Other Hydrocarbons from Certain Tide and Submerged Lands of the State Situate in Orange County, California” (hereinafter referred to as the Notice).
11. The legal description in the Notice referred to in finding 10 divided the land into five parcels, designated A, B, C, D, and E. Each parcel was said to contain 167 acres, more or less. The area of tidelands and submerged lands identified in the original Notice as parcels A to E, inclusive, of said Orange County, California, tidelands and submerged lands constituted the entire area covered by State Easement No. 392 which Southwest subsequently obtained from the State of California in the manner hereinafter set forth.
12. Southwest Exploration Company, a corporation (Southwest), is a corporation organized under the laws of California and was incorporated on June 20, 1933, but remained completely inactive until 1938. Its principal office is located at Los Angeles, California. Prior to the agreements dated August 25, 1938, hereinafter referred to, Southwest did not own, lease, operate or control any of the uplands or littoral lands adjacent to the area referred to in the Notice and subsequently identified as State Easement No. 392.
13. Prior to the transmittal of its bid for State Easement, subsequently identified as State Easement No. 392, Southwest, as Permittee, entered into an agreement for a permit dated August 25, 1938, with Huntington Beach Company, a corporation, plaintiff herein, Pacific Electric Railway Company, a corporation, Pacific Electric Land Company, a corporation, Bolsa Land Company, a corporation, Bolsa Chica Gun Club, a corporation, and Standard Oil Company of California, a corporation, as Permittors. The lands of the Permittors referred to as uplands in the Notice and in the agreement, and more particularly described in *725the first “whereas” paragraph appearing on page 1 of said agreement constituted all of those’ lands referred to as littoral lands and uplands in section 1 of Agreement for Easement No. 392 and elsewhere therein, which are more particularly described in section 1 thereof.
14. On August 25, 1938, Southwest also entered into a second agreement with plaintiff and other upland owners setting forth in detail the procedures to be followed by Southwest in conducting operations from the uplands. Southwest was the only bidder for State Easement No. 392.
15. In accordance with the terms and conditions of the Notice, Southwest submitted its bid to the State Lands Commission on August 30, 1938. With its transmittal letter Southwest filed with the State Lands Commission the folio ing documents:
“(a) Form of Agreement for State Easement, later identified as No. 392, with date omitted but signed by Southwest through its president and secretary; attached to the said Agreement for .State Easement .No. 392 were those portions of that agreement appearing at the end thereof entitled ‘Endorsement by Upland Owners,’ ‘Exhibit A (for entire tract)’ and ‘Exhibit B;’
“(b) The -permit agreement .referred to in finding 13;
“(c) Cashier’s check for $15,000 payable to the Treasurer of the State of California;
“(d) Certified copy of resolutions authorizing Southwest’s officers to execute the permit agreement and the agreement for easement referred to in finding 13;
“(e) Certificate of ownership showing that all of Southwest’s stockholders were residents of the State-of .California.”
Southwest’s bid conformed in all -respects to the requirements of the State Lands Commission. Southwest furnished the $25,000 bond required by the Agreement for State Easement No. 392.
16. In accordance with the terms and provisions of the State Lands Act of 1938, Cal.Stats.Ex.Sess.1938, c. 5, p. 23, Southwest’s bid was accepted, and it entered into an Agreement for State Easement No. 392 with the State Lands Commission on September 26, 1938.
17. There were no “filled lands” as that term is used in Article 6 of the State Lands Act of 1938, Cal.Stats.Ex. Sess.1938, c. 5, which were situated adjacent or contiguous to or otherwise usable or available in the extraction and exploitation of oil, gas or other hydrocarbon substances from the area constituting State Easement No. 392.
18. An agreement dated September 27, 1938, was made between Southwest, as party of the first part, and Huntington Beach Company, a corporation, Pacific Electric Railway Company, a corporation, and Pacific Electric Land Company, a corporation, as second parties.' The agreement of September 27, 1938, supplements the prior agreements of August 25,1938, between Southwest and the, upland owners and provides a manner of computation of the amounts payable to . plaintiff , and other .upland owners in consideration of the rights and - privileges given by the upland owners to Southwest ‘in .the two .agreements entered into on August 25, 1938, referred to in findings 13 .and 14. Southwest entered .into the agreement of September 27, 1938, with plaintiff and other upland owners in consideration of..the .rights and privileges granted to Southwest by the .upland owners in the agreements of August 25,1938.
19. Amendments to the Agreement for State Easement No. 392 were -duly executed on December 6,1938,‘and March 22, 1939, respectively.
20. All surface facilities and operations in connection with and for the drilling of and production of oil and gas from the wells covered by State Easement No. 392 and the tops of all such ■wells drilled pursuant thereto and in accordance with the'terms of Southwest’s *726agreements with the upland owners, during the period here material from which plaintiff received payments from Southwest, computed in accordance with the agreement of the parties dated September 27, 1938, were on upland property owned by Huntington Beach Company, plaintiff herein. Said wells were drilled on a slant toward the ocean and, accordingly, went through and under land owned by the plaintiff herein and land owned or leased by Pacific Electric Railway Company and Pacific Electric Land Company so that the bottoms of said wells were out under the Pacific Ocean.
21. Southwest erected on the lands owned by plaintiff all the ordinary facilities, including its field office, settling and shipping tanks, pipelines, and other equipment and appliances required in connection with its business operations. Under the provisions of State Easement No. 392 it was required that each well be drilled by slant drilling from the uplands to and into the subsurface of the State lands covered by State Easement No. 392. All subsurface operations in connection with the drilling and operation of the wells covered by State Easement No. 392 on account of which plaintiff received payments from Southwest were conducted from and through the land owned by plaintiff herein, and through land owned or leased by Pacific Electric Railway Company and Pacific Electric Land Company.
22. Huntington Beach Company, plaintiff herein, and other upland owners, in accordance with the agreements dated August 25, 1938, and the agreement dated September 27, 1938, received payments during the taxable year which were referred to in the September 27, 1938, agreement as .“an amount equal to the following percentages of the ‘net profits’ ” from the operation of the wells here involved as shown below:
Huntington Beach Company ............ 17.75 percent
Pacific Electric Railway Company............ 1.576 “
Pacific Electric Land Company............ 5.174 “
24.5 “
23. The following tabulation shows the amount paid to the plaintiff by Southwest in the year 1948, and the manner in which that amount was determined:
1948
Total Southwest Income from State Easement
No. 392 ............. $19,148,536.60
Chargeable Expenses ... 11,834,605.01
Southwest’s Net Income ............. 7,313,931.59
Amount paid to Huntington Beach Co. in accordance with agreement ............... 1,298,222.85
24. Under the terms of the Notice issued by the State Lands Commission and referred to in finding 10, each bidder, as a condition precedent to the consideration of his bid for State easement, was required to present evidence satisfactory to the State Lands Commission of his present ability to furnish all necessary sites and rights-of-way without cost or obligation to the State for all operations contemplated under the provisions of the form of bid for State easement to be submitted to the State Lands Commission and any bid not accompanied by such evidence would be rejected by the Commission.
25. The evidence of each bidder's present ability to furnish the above-mentioned sites and rights-of-way had to include (1) an endorsement on the Agreement for State Easement by the owner or owners of the real property described as “uplands” in said agreement that the bidder has been granted all such necessary sites, rights-of-way and easements, and (2) the originals or certified copies of the instrument or instruments vesting in such bidder such sites, rights-of-way and easements.
26. The parties to the August 25 1938, agreement referred to in finding 13, identified therein as Permittors, were the owners of all of the uplands or littoral lands identified as such in the Notice and the Agreement for State Easement No. 392. Under the terms of that agreement of August 25, 1938, the Permittors granted to Southwest the neces*727sary easements, rights and rights-of-way over, on, and through their uplands for the conduct of Southwest’s operations under the form of Agreement for State Easement submitted to the State Lands Commission by Southwest for the extraction of oil, gas and other hydrocarbon substances from the area of State-owned tide and submerged lands described in the Notice issued by the State Lands Commission. The easements, rights and rights-of-way granted Southwest in said agreement by the Permittors remained in eifect only during such time as the State easement, or any modification, renewal, extension of, or substitute therefor, was in force and eifect.
27. Under the terms of the second agreement referred to in finding 14 executed on August 25, 1938, by the plaintiff herein, Pacific Electric Kailway Company, a corporation, Pacific Electric Land Company, a corporation, and Standard Oil Company of California, a corporation, as upland owners and referred to as Permittors and first parties,-and Southwest, as second party, and referred to as Permittee, the parties agree (1) that the surface location and subsurface course of Permittee’s wells drilled through the uplands pursuant to the State easement shall be agreed upon by Standard Oil Company of California, a corporation (Standard) and Permittee; (2) that all drilling schedules of Permittee and all redrilling, deepening and other work designed to change the subsurface course or location of Permittee’s wells through the uplands shall not be undertaken without Standard’s prior approval; (3) that the location of all surface facilities, the quality of all equipment to be used by Permittee in connection with such facilities and the manner of performing all drilling and other operations by Permit-tee shall be first approved by the Permit-tors.
28. That agreement also provided (1) that Southwest (Permittee) should, upon request, furnish Standard, et al., copies of logs, record of well cores, electrical logs or surveys, water entrance surveys, plats and surveys showing the location and course of each and every well drilled by Southwest through the uplands pursuant to the State easement and all other technical information and data concerning said wells. Under the terms of that agreement the rights granted by the Permittors were personal to Southwest, nonassignable without the consent of the Permittors and binding upon the successors and assigns of the parties to said agreement.
29. The Agreement for State Easement No. 392 conformed to the .terms and provisions of the State Lands Act of 1938 and granted Southwest an easement to extract, remove and produce from the State lands oil, gas and other hydrocarbon substances through wells to be drilled, operated and maintained by Southwest, the tops of which wells were required to be located on the littoral lands or uplands described in the Notice for bids issued by the State Lands Commission and owned by the parties identified as Permittors in the agreements of August 25, 1938, referred to in findings 13 and 14.
30. On September 27, 1938, Southwest entered into the agreement, referred to in finding 18, with plaintiff and other upland owners. This agreement supplemented the prior agreements of August 25, 1938, and provided a manner of computation and distribution of rental for the rights and privileges given by the upland owners to Southwest in the August 25, 1938, agreements. Under said September 27, 1938, agreement as sole consideration to plaintiff for permission to use its uplands in the manner provided by the August 25 agreements, Southwest agreed to pay plaintiff, as one of the upland owners, an amount equal to 17.75% of the net profits from the extraction of oil and gas from the wells covered by State Easement No. 392.
31. The September 27, 1938, agreement provided for the calculation of net profits as gross proceeds from Southwest’s operations in a designated portion *728of the State lands, minus chargeable expenses, and the gross proceeds included the sale value of all oil produced and saved and all gas produced and sold and 50 percent of all gasoline extracted from gas, minus State reserves, plus proceeds of rentals, etc., the cost of which had been a chargeable expense. Under the provisions of said agreement chargeable expenses included all normal operating costs.
32. Under the applicable provisions of the State Lands Act of 1938 and the corresponding provisions of the Public Resources Code and the terms of the Notice, the use of the uplands adjacent to the area covered by the Notice and State Easement No. 392 was necessary for purposes of mineral extraction from said State Easement No. 392, and without the use of the surface of the uplands there could be no extraction of oil and gas from said State Easement No. 392.
33. Through their control over production of oil and gas from State Easement No. 392, the upland owners or their Permittees were the only parties qualified to bid for State Easement No. 392. The plaintiff possessed an economic interest in the production and sale of oil and gas from State Easement No. 392.
Conclusion of Law
Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes that as a matter of law the plaintiff is entitled to recover and it is adjudged and ordered that plaintiff recover of and from the United States the sum of one hundred eighty-two thousand eight hundred two dollars and ninety-eight cents ($182,-802.98) with interest according to law.