# Appendix — Exxon Corp. v. Department of Revenue of Wis. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_0996%3A02 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1980 - **Citation:** 447 U.S. 207 ## Text *~ 4 ote. > ey 7 a > Lie PO Be mmm Cone Th PLP am iy 4 ‘ ‘ . 4 APPENDIX (VOL. I) fF SAR © 1980 == . | ji eet 2 , | Iu the Supreme Court of the United States Ocroper Term, 1979 No. 79-509 EXXON CORPORATION, Appellant, vs. WISCONSIN DEPARTMENT OF REVENUE, Appellee. On Appeal From the Supreme Court of Wisconsin a iain UNITED STATES LAW PRINTING CO., CHICAGO, ILLINOIS 60618 (312) 525-6581 Jurisdictional Statement Filed September 26, 1979 Probable Jurisdiction Noted November 26, 1979 Volume I—Pages A. 1 to A. 600 INDEX APPENDIX VOL. I PAGE Transcript of Proceedings _ ...............--.-.--- A. 1-A. 600 VOL. Il TEE 2 one eee A. 601 WTI a icicseccaiicseniosicinsttacatonictcanianscticannmnenmtie A. 627 WE DEG B, | rvsccicccsscnricteicsceccsinenicteni Biers A. 636 | | ab & ) An ree nnenanmaen aren Tene A. 661 TE BEF vicssscensvvesitce neice etnioeans A. 675 RE TIA cece A. 693 Exhibit 11-11 (without exhibits) —........................ A. 720 WE FI saan seessssnssnssasguepncecivinnctenhectnterh oliochesistamaa A. 744 | _* Evan nPE DIN serena om mmernvewnhUnsne aecsincssnsnsishsxevioncenisiinsetenspenaaniatlaainice Damiana A. 786 TE TR ccietheicncncrenccihacincccocciecasnueareinheaemainmahaas A. 791 TNE OP) tiitcctenininienceiennieenmonnets A. 799 li The following decisions, statutory references, peti- tion and exhibit have been omitted in printing this appendix because they appear on the following pages Iu the in the appendix to the printed Jurisdictional State- ment: Supreme Court of the United States PAGE s , / OcroserR TERM, 1979 Decision Of Wisconsin Supreme Court. ......... ..App. 1 Judgment And Memorandum Decision Of Cir- COUN CE Sisicccccincchcrvcieceeninetneciancalantindiminmnaneaaaas App. 34 No. 79-509 Decision, Findings Of Fact And Conclusions Of Law Of Wisconsin Tax Appeals Commission ....App. 66 EXXON CORPORATION, . Appellant, Whe: Btat. STRGTE) . nena App. 80 Wis: Stat. LT) App. 80 ba Petition For Review EEE NOON SEO I App. 81 WISCONSIN DEPARTMENT OF REVENUE, Appellee. Exhibit 29 .............. } ee a en ee A. 85 Q. And there you had the basic course in economies re- quired for the degree? A. Yes. Q. Any other courses in economics? A. Not that I recall. Q. Any graduate courses or seminars in economics? A. Not that I recall. I don’t think so. Q. And no other economic training? _ A. No formal training. Q. If I remember correctly you are at CPA? A. Yes. Q. Do you have any other professional designations? A. No. Q. Have you ever practiced accounting other than with the Department of Revenue? A. No. Q. And you have never had any other auditing experi- ence except with the Department of Revenue? A. As I mentioned in the deposition, I think I audited the books of the Officer’s Mess aboard ship. Q. We will note that. You were the assigned auditor on the initial audit of Humble for the years 1960 through 1964? A. Yes. Q. When was that audit assigned? A. I don’t know exactly when it was assigned. Prob- ably in the early months of 1966. Q. And when was the audit completed? A. It was begun in April, on April 4th of 1966; and as I recall the report was issued on December 9th of 1966. Q. Was this your first oil and gas audit? A. No. It was the first audit of a major—so-called major oil company I would say, yes. There was another company that I—I don’t recall if it had an Exploration and Production Operation or not. A. 86 Q. I believe on the discovery deposition you refused to identify that Company and you still refuse? A. I didn’t refuse. I would like to answer it but we are prohibited from doing that. Q. By whom? A. The law. Q. And what other audits did you have after the Hum- ble audit? A. What other audits, by name? Q. Well, first by number. A. I don’t have any idea. Finished Humble in 1966 and, as I said, I became the field audit reviewer in 1967 toward the end of the year. So, I am—I imagine there were several. Q. Do you recall telling us on the discovery deposition that you audited two other oil companies after Humble? A. Yes. Q. Is that a correct statement? A. Yes, along with several other multi-state cor- porations. Q. I take it your current duties have nothing to do with oil and gas producers? A. Up to this point, yes. Q. What contact with oil and gas accounting have you had since the completion of these oil and gas audits we have just mentioned? A. None. Q. Now, at the discovery deposition you refused to identify these two companies that you audited after Hum- ble. Do you still refuse? A. No, I don’t refuse. I would like to answer but I am prohibited from answering by the law. Q. And do you refuse to give us the basis on which these companies were assessed? A. 87 A. No. I think I could tell you that. They were as- sessed on the same basis as Humble, as are all major oil companies. Q. Do you refuse to give us the basis on which they had reported their income? A. The other companies? Q. Yes. A. I think they all—Humble is the only company that refuses to file an apportionment so that they used appor- tionment. Q. Are you familiar with the Union Oil case before the Tax Appeals Commission? A. No. Q. You don’t know then that they are making a protest to apportionment similar to Humble’s? A. I don’t know that as a fact, no. Q. Will you at this time provide us with copies of these other audits so that we can examine and determine whether your statements there were assessed on the same basis as Humble are correct? A. Which other audits? Q. These other two audits that we have mentioned that you made. A. No, I don’t refuse. I would like to but I am pro- hibited from doing that by the law. I think that would be very enlightening. Q. Prior to the Humble audit or actually the audit of the first oil company, what multi-state audit training had you been given by the Department? A. Similar to Tom’s. When you begin with the De- partment you are put through a formal training course for several weeks. Then you are assigned to a senior au- ditor who has a great deal of experience in auditing the bigger companies; and you work with those senior auditors for at least a year so that you have a year of training, a a year plus of training. A. 88 Q. What formal training have you had by the Depart- ment? A. In auditing multi-state corporations? —Q. Yes. A. No formal training in the formal classroom train- ing other than the first several-week course. Q. Well, with the prior witness I talked about the paper that you presented in October of 1968, which is admitted herein evidence as Exhibit 11-11. When was that paper prepared? : A. I would say very shortly before the date of pre- sentation. Q. How many oil company audits had you prepared prior to the preparation of that paper? A. Those that we talked about, the two subsequent to Humble and those that I have done before, which I think was the only one, so probably four. Q. Now, the paper is sitting in front of you there on the wtiness stand, and I ask you to open it up and thumb to the back and look at the schedules that are attached to that paper, if you would, please. A. Any particular one? Q. Where do the figures that appear on these schedules come from? A. Which schedule? Q. Well, let’s start with Exhibit E, Page E-1. A. As I recall, when I prepared this paper I used the combination of my imagination and numbers from one of the companies that I had audited. Q. Could perhaps that eompany have been Humble Oii and Refining Company? A. Yes, it could. Q. In fact, it was, wasn’t it? A. I think it was. A. 89 Q. What familiarity did you have prior to the Humble audit with the Department’s manual which has been ad- mitted here in evidence as Exhibit 11-10 and a couple of chapters which are before you on the witness stand? A. I had read and studied it. Q. Including its definitions and its explanations of the mechanics? A. Iam sure | had, yes. Q. And had you had any discussions with other em- ployees of the Department concerning the techniques for auditing oil companies? A. I suppose with may supervisor at the time prior to doing the audit. I may have called—talked to some other auditors who had done oil companies. Q. Would you say it is a fair statement that an oil company audit is a new and different experience from other company audits? A. It is a new and different experience, yes. Every audit of a multi-state company is a new and different ex- perience. They are all different. Q. But the application of the barrel formula and the manner in which you apply it is a very complex procedure, would you agree? A. I don’t think so. The barrel formula is rather sim- ple to an accountant who is accustomed to working with numbers and a percentage, then it really is quite simple. Q. Well, maybe we will give you an opportunity to explain it to us and the Commission at some point. Prior to the Humble audit, what books had you read on the oil and gas companies and/or taxation of the applicable and—the applicable concepts that relate to multi-state corporations as applied to oil and gas companies? A. That is a long sentence. Q. Yes. A. I don’t think— A. 90 Q. Do you understand the question? Otherwise I will re-state it. A. Well, you talk first of oil companies and then about all companies. I suppose—I don’t recall reading many textbooks on the computation of income, taxable income of multi-state corporations other than our train- ing manual prior to the audit of Humble. Of course we always read the law and we always read the court cases and our actions are always based on what the courts have decided. That is our Bible I think. Q. Now, in your paper that is Exhibit 11-11 there is a one-page sheet listing about four textbooks in the inside cover, and I believe you told me on discovery that those were books that you may have reviewed in connection with your oil company audits. A. I think I did during the course of the audit and after the audit, and after the field work of that audit. Q. Were there any other books? A. Not that come to mind. I don’t think there were. Q. I believe you told us there were no other books? A. That’s correct. Q. Had, at that point, you read the work by Altman and Kiesling on Allocation of Income and State Taxation? A. No. Q. And had you read an article by Mr. Kiesling pub- lished in Hasting’s Law Journal? A. No. Q. Had you ever read anything at that point by Mr. Fred C. Allvin? A. I don’t think so. You are going back a long time. This is eight years. Q. Well, what training had you been given with the Department in the concepts of, first, business income in Wisconsin? | A. 91 A. What training had I had in the concept of de- termining business income in Wisconsin? Q. Correct. A. What we talked about, our training course, our experience as a junior with a senior auditor, and our ex- perience then in auditing. Q. Has there been any specific training devoted te the determination of what is business in Wisconsin? A. I am sure during the first training course that we received—there is no doubt—several sessions devoted just to that topic. Q. This was the oral training course? A. The oral training course. Q. Are there any materials you studied on this? A. I think there were pass-outs, problems, examples, what have you. Q. Are they still available in the Department? A. I threw mine away a few years ago after the book came out, after this training course was put in manual form, I think I disposed of my notes from that course. Q. At the discovery proceedings we had served a sub- poena requesting copies of all documents in that area, do you recall that? A. Yes. Q. And to the best of your knowledge were the docu- ments that were produced all of the documents relating to that? A. Yes. Q. So that what is in the manual constitutes everything that there is with the Department right now— A. No, I probably have forgotten to talk about the auditor’s conferences that are held in which papers are given, technical papers prepared by auditors who had ex- perience with given problems. Those also constituto an available source of information for auditors. A. 92 Q. Several papers were produced—yours, Mr. Long- horn’s, and I believe one by Mr. Lins. Are you aware of any other paper? A. Certatinly. Q. On the subject of oil and gas taxation? A. No. Those are the three I know on oil and gas. You talk about this being my paper, as you notice, there are two authors on this. I was one of the authors. Q. And Mr. Paul was a junior at that time? A. No. He had audited as much as I had at this point, maybe more, so he had quite a bit of input into this paper. Q. Had you received any specific training in the de- termination of what is a unitary business? A. Formal training, no, other than our classroom train- ing, and of course the paper by Mr. Longhorn which was presented, I think, at a conference prior to the time I be- gan with the Department, so my only knowledge of that was to read it, and of course reading all of the court cases that deal with that issue. Q. But you had not been instructed by the Department in the procedure for determination of what is a unitary business? A. No. Q. Had you been instructed by the Department in the procedure for determining what is an integral part of a unitary business? A. No, other than what we talked about. Q. I believe you testified that you had no oil and gas accounting training? A. That’s correct. Q. And that you attended no oil and gas seminars? A. I am not quite sure what you mean there. As part of when I was with the Motor Field Tax Division or unit, I attended many conferences having to do with oil and gas. | A. 93 They were after the paper was written, though, so— Q. Was that on oil and gas accounting? A. Not accounting. Q. Now based upon your experience, are you aware of any oil and gas companies that have E and P functions in the State of Wisconsin? E and P activities in the State of Wisconsin? A. No, I am not. Q. And are you aware of any oil companies that have refining facilities here? A. Yes. Q. Who is that? A. I believe that is Murphy Oil Company. Q. Are you aware of any others? A. No. Q. Have you audited Murphy Oil Company? A. No. (Hearing adjourned, 4:25 p.m.) A. 94 STATE OF WISCONSIN WISCONSIN TAX APPEALS COMMISSION Docket No. I-3806 EXXON CORPORATION, (f/k/a Humble Oil and Refining Company), Petitioner, - VS - WISCONSIN DEPARTMENT OF REVENUE, Respondent. CERTIFICATION KAREN A. CHERRY MINDLA COMINS LORETTA PETERS, hereby certify that as the duly appointed reporters, we took in shorthand the testimony and proceedings had in the foregoing matter on the 2nd day of October, 1974, and that the attached is a true and correct transcription of said shorthand notes and of the whole thereof. Dated this 2nd day of October, 1974. Karen A. Cherry Karen A. Cherry Mindla Comins Mindla Comins Loretta Peters Loretta Peters A. 95 TRANSCRIPT OF PROCEEDINGS in the above-en- titled matter held before the Wisconsin Tax Appeals Com- mission, in Room 229, City-County Building, Madison, Wis- consin, on the 3rd day of October, 1974, commencing at 9:45 in the forenoon. e e & Mr. Timken: Back on the record. Mr. Kaspar, you have already been sworn. KURT KASPAR, recalled as a witness, having been previ- ously sworn under oath testified as follows: Examination By Mr. Ragatz: Q. Mr. Kaspar, who in the Department originally formulated that approach to the audit of multi-state gas companies? A. The barrel formula? Q. The whole overall approach including the barrel formula? A. I don’t really know. That happened long before my time. Q. Now, who is credited with the development of the methods and procedures of auditing oil companies? ‘A. I don’t know if any one person is. Q. How about Lins? A. He was an auditor that audited many oil companies years ago, as I understand it. Q. Do you recall telling us on discovery that he was at least thought to be the leader in the development of this audit approach? A. Idon’t specifically recall that, but I could have said that; that he was one of those that was a leader. Q. Do you know what his experience was? A. I think the same as most of us, that he had the same kind of training and probably worked up from smaller companies into the larger companies over a period of time. A. 96 Did you ever train under him? No, I did not. Did you ever meet him? Never met him. I take it he is no longer with the Department? No. He is not. Is he still living? I think he is deceased for two or three years. I believe you indicated at discovery that in auditing Humble you reviewed another set of working papers. Would you identify the company whose working papers you re- viewed? A. I don’t know as I can. Mr. Shapiro: That has been identified. The Witness: It was the Continental Oil Company. By Mr. Ragatz: Q. And you used the Continental Oil Company’s papers, as I remember it, as a model for your Humble audit? A. I never used the word ‘‘model’’. I certainly took them along and studied them and the barrel formula was used in the audit so that was the first time I had seen that formula. Q. And you had these work papers with you when you went to Houston to perform your audit? A. Yes. Q. Is it a fair statement that your schedules and your approach is patterned after the Continental work papers and the Continental audit approach? A. No, I don’t think that you can say that. The audit ‘approach—lI don’t think that the audit approach was mine. The manner in which the audit report was put together was probably patterned somewhat after that audit. Q. Now, on discovery you declined to indicate the basis on which Continental had reported its income. Do you still decline to respond to that question? OPOoOPOPOo PS ee net ee et am ns A. 97 A. I don’t know. How do you stand in that area? Frankly, first of all, I don’t recall how they reported it so I don’t think that I can answer that question. How they filed their return, I assume is your question. I don’t re- member how they filed their return. Q. Did your audit approach on Humble differ from the audit approach on Continental? A. The audit approach? Q. The method you used to arrive at the assessment? A. Basically I would say it was the same, but expanded upon. I think the audit of Continental was a much similar audit in that it didn’t have nearly the activities that Humble had at that time. Q. Now, on discovery you declined to respond to the question of what differences there were in the treatment of Continental versus the treatment of Humble. Do you still decline to answer that question? A. Not if I am able to give you that information. Mr. Shapiro: May it please the Commission, in its order, the Commission has decided that information rela- tive to the Continental Oil Company audit was properly excluded under the secrecy law. I would like to submit this at this point. Mr. Timken: You are objecting to this line of ques- tioning? Mr. Shapiro: We object to this line of questioning with respect to information relating to the Continental Oil Com- pany. Mr. Ragatz: If I might be heard on that, the line of questioning I am pursuing is designed to determine whether our client was given fair and equal treatment as compared to this other oil company, which we were told on discovery was used as a model for the audit of our client, and I think we are entitled to know that. A. 98 We are aware of that Commission’s decision on the pro- duction of the Continental work papers, but I still intend to preserve the question of whether we are entitled to re- view that document and examine on that subject, and that is the reason I am asking the questions at this time. Mr. Timken: We will take a break for a second. Mr. Timken: It seems to be that Mr. Ragatz merely is doing what he did with the first witness and we will allow him to do that, and these are questions along the line that you still maintain your answer that you won’t answer that question, and I think we can do that, and we will allow him to do it so he can preserve the record. Mr. Shapiro: Yes. Mr. Timken: That doesn’t disturb our ruling on dis- covery, you understand? Mr. Shapiro: I understand. I think it is appropriate for counsel of respondent to instruct the witness that in- formation that might be contained in the Continental work papers should not be disclosed. Mr. Timken: That was your position before and still is your position? Mr. Shapiro: Yes. Mr. Timken: ‘Well, you may continue. By Mr. Ragatz: Q. Mr. Kaspar, what years were involved in the Con- tinental audit? A. I don’t remember, but I think that audit covered years, several years earlier than the years I was doing with Humble; as I was doing 1960 through 1974 with Humble, Continental may have covered the middle years of the 1950’s. Q. At least that audit had been completed prior to the start of your Humble audit? A. Yes. adel sw: 22 Pee ena eh LO ee ee ml adr sa dite Osher Bice we pn al A. 99 Continental is a multi-functional oil company? As I recall it was, yes. Who was the auditor on the Continental audit? John Leidiger. Do you still refuse to provide us with copies of the audit report and audit working papers on the Con- tinental audit? A. Yes, although I don’t know. That question puzzles me because I really have no control over these papers. These aren’t mine to give or not to give. Q. But they were a part of the subpoena that was served on you by stipulation for respondent upon the dis- covery examination? A. They were served on me. Q. It was in effect served on you and the other wit- nesses by stipulation and you as agent of the Department of Revenue would have to respond to the subpoena if the Commission directed that that was a subject proper for exercising the power of the subpoena? Mr. Shapiro: May I say at this point that the Con- tinental work papers are in the possession of the Depart- ment and that they are considered to be privileged docu- ments, it is our position. Q. Who was your supervisor at the time the Humble audit was assigned? A. David F. Garno. Q. And what was his position? A’. I believe he was chief auditor of the Corporation Section. Q. And who did he directly report to in the chain of command? A. John Leidiger at that time, at the time of the assign- ment of the audit. Q. And what was Mr. Leidiger’s position? A. Section chief of the Corporation Section. OPoPO A. 100 Q. What instructions were you given at the time the Humble audit was assigned to you? A. I don’t recall that there were any written instruc- tions. Probably verbal instructions since I was, as I said, in the Madison office where the audit was assigned, instruc- tions to go down and do the audit, look into the returns filed, determine if they were fi'ed on a correct basis and to recompute the income as it should be, if they were in- correct. Q. Were you told that Humble was a prime candidate for change to the apportionment method? A. I don’t recall being told that. Q. You don’t deny that, though? A. I don’t deny it. Q. Did you confer with Mr. Garno or Mr. Leidiger dur- ing the course of your audit on Humble? A. Yes, many times. Q. On what subjects? A. Probably dozens, all important subjects. The most important being what basic method to use to compute their income; and prior to that, whether or not the company was unitary. Q. What instructions were you given as to how to de- termine whether or not the company was unitary? A. Well, I was always instructed to follow the guide- lines set forth in the one paper that we have referred to prepared by Mr. Longhorn. Q. You are referring to the paper which I believe is Exhibit 12-B in this proceeding? A. I don’t know the number. Q. I show you what has been admitted into evidence as Exhibit 12-B and ask you if that’s the paper you are referring to? A. It is. In addition to that, of course, we were in- structed to follow the—any procedures or guidelines given in the training manual. We are always instructed to look eRe « A. 101 into the activities both within Wisconsin and without Wis- consin to see how Wisconsin fits into the overall picture in order to test the various unitary concepts that are in- volved. Q. How thoroughly did you follow that outline con- tained in Mr. Longhorn’s paper? A. As thoroughly as it was possible. Q. I see. And that would all be laid out in your work papers? A. I think we covered that in the pretrial hearings that most of it is, some of it is not. I found that it was very difficult to obtain information about exactly how the opera- tions in Wisconsin were conducted. 1 asked for that in- formation repeatedly. Unfortunately, I didn’t record those requests in the work papers, as you know. During my first visit at Humble we had quite a long talk with the state tax manager of Humble. At that time I told him that I would be auditing the returns of Humble first to determine if the return filed was correct. And to do that I would have to look into the unitary nature of business and that I would need a great deal of information in that area. Mr. Heidner was the manager of the State Tax Department and he said he would get me what he could. Q. Isn’t it a fact that your working papers really do not reflect whether or not you asked him many of the ques- tions contained in the outline procedures of the Longhorn paper? A. That’s correct. Q. Now you mentioned that your first job was to de- termine whether the returns as filed were correct. Did you make a specific examination of the tax returns on the separate accounting basis on which they were filed? A. Well, first I attempted to look into the unitary nature of the business, of course, to determine whether A. 102 or not it would even be necessary to examine the return as filed. If it’s unitary the return as filed was meaningless also as we all know. Q. Well, you haven’t yet answered my question. Did you or did you not make a separate accounting and ex- amination? A. I made some tests of the returns as filed. Q. And I believe you testified on discovery that you audited the reported sales back to the print-outs and you accepted them as filed? A. That’s correct. Q. So they actually reflected the gross revenues from Wisconsin activities as far as you could determine? A. So far as I could determine from the print-outs. Q. And you have no basis to challenge the amount of sales reported in the State of Wisconsin? A. That’s correct. Q. And I believe you also said that you traced back the cost of sales? A. I don’t recall if I said that I traced back the cost of sales. Q. And you found no basis on which to challenge the reported cost of sales figures? A. I did say that and that disturbed me since I said that. Q. My question was did you say that on the discovery proceedings? A. Is it in the proceedings? Q. Would you like me to read it back to you? A. Yes, if you would like to. Q. This is the transcript of a discovery proceeding which was taken on the 15th and 16th days of January, 1974. This is admitted as Exhibit 8 in this proceeding, the transcript having been made part of this record. iat at na AM a ne SS ee A. 103 I refer you to Page 29 of this discovery transcript: ‘*Question. So you found no basis on which to challenge the cost of sales figures used on the return for the purposes of a separate accounting reporting procedure? Answer. That’s right.’’ Now I believe you said also on discovery that you were willing to accept the operating and overhead expenses; but you had also later said that you did have some ques- tions about allocated area expenses. Now do you know which of the reported expenses were directly reflected and which were allocatd from the Chicago Region? A. I did at that time. Q. Let’s, for example, take the 1964 return which is I believe 4 here. | am looking for operating expenses and overhead. I think I have now all of the pages of the re- turn here for you and I ask you which of the expenses shown, first looking at Page 4 under ‘‘Other Ordinary Necessary Expenses’’ you might question? A. As being what? Q. As being other than directly reported relating to expenditures incurred in the /Wisconsin operation. A. You can’t tell from that schedule. Q. But you testified on the discovery proceedings that you had some questions on, I believe you said they were area expenses? A. Right. As I recall my examination disclosed that many expenses of the Chicago area such as advertising, insurance, credit, administrative overhead expenses of that nature were allocated to Wisconsin on a formula basis. Q. And did you try to verify that formula? A. I attempted to get some information about it. I learned something about the nature of the formula and something about the expenses that were put into a pool and a part of which were then allocated to Wisconsin. A. 104 Q. And did you find that any expenses had been dispro- portionately allocated to Wisconsin? A. It was my thought that the allocation could have been attacked, yes. Q. And I believe you indicated on discovery that there were several of these area expenses that you thought fell into that category and thai those area expenses totalled in the neighborhood of $800,000. Now I ask you to turn to the front of the return and ask you to state what the return indicates as to the reported loss for the year 1964? A. The return shows a net loss of $842,158. Q. And isn’t it a fact then that you could have disal- lowed all of the area expenses or virtually all of them and still not come out with taxable income for the State of Wisconsin? A. That’s correct, if that was all I did. Q. Now I believe you also indicated that you had no questions on the sales, cost of sales, expenses for the other years in issue under your audit. A. I had no question at the time of the last hearing. I believe I had a question at the time of the audit that I over- looked at the time of the last hearing. Q. Now I asked you at the last hearing whether you had any questions on sales or cost of sales in the other four years of your audit and you responded that you didn’t. And I would be happy to read that back to you if you would like me to do that. A. No, you just read that and I recall that I said that. Q. And you were testifying under oath at the time? A. That’s correct, but I wasn’t testifying falsely as to my recollection. Q. Now I believe you also indicated to me that because of the losses and the considerable margin that even if you eliminated half or more of the allocated expenses you would Le a A nt ANNE Dina a eS ne ee ee A. 105 still have losses, and because you couldn’t challenge the sales or the cost of sales, that any way you sliced a separate accounting reporting, you would still fail to come up with taxable income for the State of Wisconsin; isn’t that cor- rect? A. I remember my response to that, too. I said that’s correct, but that’s not the way you slice it. Q. Well, then, you really have no way of saying, though, that Humble’s Wisconsin operating results as reported on the basis of separate accounting do not truly reflect the activities of Humble in Wisconsin during the years of your audit? A. I think we do. Q. Well, you haven’t given me any factual basis on which you could make a challenge to separate accounting reporting. A. You haven’t asked me for any. Q. Well, we went through sales and we went through cost cf sales, we went through operating expenses. What else is there? A. You are talking about challenging separate account- ing reporting. Q. No, my question is that you haven’t given us any factual data on a separate accounting approach that would indicate that the separate accounting figures were so incor- rect that they wouldn’t have produced taxable income dur- ing the years in issue. A. I have been trying ifs you into the cost of sales which you have been avoiding. Q. I think I read your sworn testimony on cost of sales and— A. Yes, you have. Q. —and I don’t think that you need to take the oppor- tunity to change your sworn testimony. If you want to do that on direct examination that will bear on the credibility of perhaps all of your testimony. A. 106 Q. Just to wind up on separate accounting, Mr. Kaspar, assuming that separate accounting were deemed an appro- priate method of reporting, you really have no basis on which to challenge the separate accounting figures as re- ported, or at least a basis sufficient that would have put the taxpayer in a profit position in the State of Wisconsin during the years of your audit, do you? A. That is a question impossible to answer, Mr. Ragatz. Q. All right, then don’t try. A. I can explain why it is impossible. Q. You can have your chance on direct examination. Now during Mr. Sheridan’s audit did you have any con- tacts with him? A. I believe not—nothing in a formal nature at all. There may have been a conversation informally in the office when he was in for other reasons, there may have been a telephone conversation, but I don’t recall them. Q. Do you know whether or not he used your paper that is Exhibit 11-11 in this proceeding? A. I assume he did. Q. You indicated yesterday that your co-author of that paper had at least as much oil and gas auditing experience as you had, is that correct? A. I believe that is correct, yes. Q. And according to my mathematics, that means he had at least four or five oil gas audits? A. Yes, I couldn’t verify the number. As I recall, he began auditing oil companies before I did, but you can get that information from others. Q. That is a fair statement that between the two of you there may have been ten or more oil and gas audits behind you at the time that that paper was prepared? A. Yes, and of course in the preparation of that paper we weren’t working in a vacuum. We were working with our supervisor, our section chief, and with others who had audited other oil companies. ee ee oe A. 107 Q. Did John Leidiger contribute to the effort? A. No, I don’t think so. He was no longer with us at that time. Q. Did Carl Hoel contribute? A. I am sure that we discussed our thoughts with him, and they wouldn’t have put something in a technical paper if we didn’t think it was approved by the Department, that that approach was approved. Q. Did Dave Garno participate in the preparation of that? A. In the same manner as Carl I am sure. Q. At the time that paper was prepared, the two authors plus other people contributing had a pretty fair—had a pretty fair opportunity to find out how oil companies do things and how the industry worked, hadn’t they? A. We had had some experience. I think we—yes, we had had some experience. Q. And that paper, I believe you indicated on discovery, represents now the policy paper of the Department on auditing oil and gas? A. I have no idea. Q. Who requested the preparation of the paper? A. It was either Carl Hoel or Dave Garno. Q. In your paper you indicate that posted field prices are arms’ length prices determined in the field. Do you know whether posted field prices are used in valuing the interest of royalty owners in gas and oil brought out of the ground? A. I have no idea. Q. You don’t know that? A. I would guess that it might be considered. Q. Did you make any investigation or examination of that in the course of your audit? A. 108 A. When you speuk of, are they used in valuing the interest of royalty owners as oil comes out of the ground, are you speaking of the valuation of crude oil as it comes out of the ground? Q. You are aware, I am sure, that much of the oil and gas produced is produced on property owned by others or in which others have reserve royalty interests or working interests? A. There is a myriad of those interests. Q. And those others are unrelated third parties? A. That is— Q. And the others are looking for the most value they can get out of their interest in the property? A. I would think so. Q. LIrepeat my question; are you aware that posted field prices are used in evaluating the interest of the third party royalty owners? A. No, I am not. Q. You don’t know that. Are you aware as to whether the posted field prices are used in evaluating the interests of third parties, only working interests in the wells and other interests? A. Is that a different question from your previous one? Q. Yes, because working interests are different than your previous one? Q. Yes, because working interests are different than royalty interests. A. Well, the answer would have to be the same for all of the interests. I am not aware of how any one interest is computed by any given person. I suppose they can all do it differently. Q. Are you aware as to whether posted filed prices are used in determining depletion deductions? A. I think they are. A. 109 Q. Are you aware that those posted field price deter- mined values are accepted by the Internal Revenue Service? A. No, I am not. Q. Are you aware— A. Wait a minute. I assume they are because I believe that depletion is based on profit and is limited to profit at the well head or at a lease so they are no doubt considered and approved in some manner. Q. Are you aware that the posted field price determined values are used for the purposes of calculating severance taxes to the various producing states? A. No, I am not. ae Q. I presume you are not aware that the producing states accept these values as determining posted field prices? | A. I am aware that the posted field price has a wide range of usages. Q. Did you make any audit verification of severance taxes? A. No. Q. Isn’t a severance tax a deduction in arriving at Wisconsin base income for the exploration and production department? A. I would think it would be. . Q. You did accept the internal integrity of the E and P department’s net income by using that figure as one of the base figures in your audit, didn’t you? A. I think, yes. Q. Now did you verify the integrity of the transfer prices used by Humble in transferring crude oil and nat- ural gas between its E and P department and its Refining department? A. Did I verify— Q. Yes. A. In what way? A. 110 Q. Well, did you make an audit verification as to whether the prices used were the third party posted field prices? A. No, I did not. Q.. Did you make an audit verification as to the prices used on the transfers of product between Humble’s Refin- ing Department and its Marketing Department? A. No, I did not. Q. Are you familiar with the Fisk formula for eval- uating the value of natural gas? A. No. Q. Are you familiar with the Platt’s Oil Gram publica- tion? A. No. Q. I take it you made no inquiry whatsoever as to transfer prices between the Refining Department and the Marketing Department? A. Iam sure I did. Q. You did make an inquiry? A. Iam sure we discussed it. That would be an impor- tant item to discuss at one point and to arrive at a con- clusion as to whether you want to accept the company figures. Q. Apparently you did accept the company figures? A. Obviously. Q. I take it that you also accepted the company’s figures on royalties paid and working interest paid? A. Yes, we did. Q. And on severance taxes paid? A. Yes. As I explained at the prior hearing, one year of auditing a multi-state unitary business that when the percentage of that business income taxable to Wiscousin is less than 1 per cent, any given expense really isn’t very important. A. 111 You can have $500,000 tax deduction and if you mul- tiply that by two-tenths of one per cent, the result is not very iarge so as a practical audit procedure it is not very practical to challenge the various individual expenses un- less you can find them to be large enough to be significant. Q. You had no basis for challenging any items? A. No basis. Q. And you did look at these items as part of your audit? A. That’s correct. Q. Did you find any basis for challenging the calcula- tions of the taxpayer’s federal depletion? A. I don’t believe I even looked at it since federal depletion is not deductible on the Wisconsin return. Q. But you did have to figure that in your formula to arrive at the Wisconsin basis, didn’t you? A. We used it to reverse it out, that’s all. Q. Now, I show you what has been admitted into evi- dence as Exhibit 2 which is the Wisconsin audit report and notice of assessment for the years 1960 through 1964. Now, that is the doeument that resulted from your audit of this taxpayer, is it not? A. Yes. Q. And for the purposes of clarity, we have typed the figures as opposed to relying on the Xeroxed copies of your handwritten figures, but I understand counsel for respondent is satisfied that the figures have all been prop- erly typed. Now, I ask you to refer to Page 22 of your report en- titled ‘‘Comments Regarding Nonapportionable Income’’ where you cite, ‘‘Income from crude oil and gas produced by the taxpayer and sold before entering the refining process is not apportionable because such net income is of the same nature as income from a mine or quarry.’’ Is that the policy of the Department? A. 112 A. It was at that time. Q. Now, would you please turn to Page 14 of your paper. A. I don’t have it in front of me. Q. Now, the last paragraph on that page—and for the record this is Exhibit 11-11—indicates that, ‘‘As men- tioned briefly earlier, the theory behind this treatment is the same as that applied to income derived from farms, mines or quarries.”’ Now, there you are referring to the same principle tuat I just read to you out of the audit report, aren’t you? A. Yes. Q. That is the Department’s construction of 71.07 (1)? A. It was at that time. Q. Then your paper goes on to read, ‘‘To the extent that products obtained from farms, mines or quarries owned and operated by a manufacturing concern are con- sumed or become components of end products of the manu- facturing company, that portion of the net income of the farms, mines or quarries generated by these products is unitary business income. To the extent that products of the farms, mines or quarries do not enter the unitary op- eration; in other words, are sold in the same state as they are in when produced, the net income generated therefrom follows the situs of the property from which derived, pur- suant to Section 71.07 (1) of the Statutes.’’ And that is the distinction that the Department made as to what income from the oil well was allocable for situs and what income was considered to be apportionable? A. Yes. Q. Then the test is where the product goes, I take it? A. The test is whether the company as part of its unitary business performed any service on that product, as I understand the test. cae sinha Cr ae a Tle) ait ais a A. 113 Q. But if the crude oil, for example, is sold at the well head to a third party, it’s allocable income, and if the crude oil goes to the company’s own refinery, then its value is included in the apportionable income? A. Yes. Q. So the test is where the product goes, correct? A. Together with what I just told you. I think we are saying the same thing. Q. As against that conclusion, where did you make the factual determination that the various functional busi- nesses of Humble were unitary businesses? A. Where did I make the determination that the vari- ous functions were unitary business? Q. Yes. A. I attempted to make that determination while I was at Humble as I did receive much information in that regard. I think—and that information is in the work papers. Q. Do you acknowledge that the gasoline marketed by Humble in Wisconsin was not produced by Humble’s E and P Department? A. The gasoline marketed by Humble where? Q. In Wisconsin, A. That is what I was told. Q. You don’t have any basis on which to challenge that A. That’s correct. Q. And do you further acknowledge that the gasoline marketed by Humble in Wisconsin was not refined by Humble’s Refining Department? A. That’s what I was told. Q. And as to each of these questions the same is true as to fuel oil and heating oil, isn’t it? A. 114 A. No. If you recall the one statement from Humble’s tax managers—I think it is in my papers—he said spe- cifically that fuel oil and industrial oil and automotive oil was produced by Humble from crude oil produced by Humble’s wells, refined in Humble’s wells and sold in Wisconsin. Will you please do so. r. Shapiro: Off the record. (Discussion off the record) Mr. Timken: Gentlemen, we will take ten minutes, (Recess) Mr. Timken: Back on the record. You may proceed Mr. Ragatz. By Mr. Ragatz: Q. Prior to the break I asked you to identify where im your working papers you indicated you had been told Humble manufactured heating oil, fuel oil. Can you now do that? A. You asked me if I could do what? I didn’t catch one word. Q. Where you identified where you had been told that Humble manufactured heating oil and fuel oil? A. I think this is the work paper which contains that information. Q. Would you identify the exhibit number and the pages? A. Exhibit number is 3, page D-13. Q. D-13. And I am also looking at that page and that indicates that you are talking about something ten percent or less of the Wisconsin sales, correct? A. Well, let’s see what it says. Q. Can you find that statement in your papers? A. Can I find it? Q. Yes. A. Yes. Q. M RP Re SCAL AcE aha, dis A. 115 During the period 1960 through 1962 approximately 90 percent of Humble’s sales were made through bulk and retail service stations, purchases are almost entirely from outsiders, the main supplier being Shell Oil Company, Jones Island. The balance of our sales consisted of fuel oil and industrial oil sales which products were manufac- tured by Humble. In 1963 and 1964 Humble entered into exchange agreements with Cities Service whereby we row received products from Indiana and Chicago, [Illinois through a products pipeline— Q. So what you are saying, what you are basing your statement on, is the period 1960 through 1962? A. I didn’t finish that paragraph. One more thing. Fuel oil and industrial oils are still being supplied almost en- tirely by Humble. Q. But you are talking about the ten percent or less factor of Wisconsin sales? A. Of products that they say come directly from Hum- ble’s manufacturing, that’s correct. Q. Now would you agree that from the standpoint of accounting, unrealized, derived profits, can be determined at any functional level of an oil company? A. I suppose you could compare anything if you want it badly enough. Yes. To answer your question, yes. Q. And you did rely on the Humble determined E and P net income or profit in your audit I believe you indicated? A. Yes. Q. Now isn’t it true, Mr. Kaspar, that the Department concluded automatically to apply the apportionment form- ula of the statutes to Humble and then developed the theory on which to attempt to justify its conclusion? A. No. Mr. Ragatz: No further questions. A. 116 Mr. Timken: You are excused, Mr. Kaspar. Thank you. (Witness excused) Mr. Timken: You may call your next witness. Mr. Ragatz: Petitioner calls Carl Hoel adversely. Mr. Shapiro: Same continuing objection. Mr. Timken: Mr. Shapiro, your objection is noted and overruled. CARL HOEL, called as a witness, and after being first duly sworn, testified on oath as follows: Examination By Mr. Ragatz: Please state your full name. Carl John Hoel. Where do you live, Mr. Hoel? Stoughton, Wisconsin. How old are you? Fifty-six. -By whom are you employed? Wisconsin Department of Revenue. How long have you been so employed? Twenty-six years, What is your current position? Chief of the Corporation Section of the Audit Bureau of the Division of Income, Sales and Excise Taxes. Q. How long have you held that position? A. Since January of 1967. Q. What position did you have prior to that time? A. I was Chief Auditor of the Income, Sales and Ex- cise Tax Division. Q. For how long? A. From 1962 to 1967. Q. Prior to that, what position did you have? POPOPOoPOPOPS - =a ata Ae stead Stiaiantinibia t= Bi aa Mantis Satria ae Lan —— on —E A. 117 A. I was Chief Auditor of the Corporation Section from 1958 to 1962; prior to that time I was a field auditor for the Corporation Section from 1948 to 1958. Q. Did you graduate from college? A. I graduated from the University of Wisconsin in 1940 with a Major in Accounting. Q. What other experience besides working for the De- partment have you had since graduation from college? A. I was in the Navy for five years and worked in the General Accounting Department of Ohio Chemical and Manufacturing Company for two years. Q. Did that experience have anything to do with oil and gas accounting? A. No. Q. Have you ever practiced accounting? A. No. Q. Have you ever had any other accounting-related experience? A. No. Q. What was your average in college? A. I think it was slightly above a C average. Q. And I believe you are a CPA? A. Yes. Q. Do you have any other professional designations? A. No. Q What experience have you had with the oil and gas industry? A. The only experience I have had was through our audits of those companies in a supervisory capacity. Q. Have you conducted any audits of oil and gas com- panies yourself? A. No. Q. Approximately how many oil and gas audits have you served as supervisor on? A. 118 A. Well, direct supervisor between 1958 and 1962, I don’t recall specifically any oil companies that were as- signed at that time, but as Chief of the Section I probably signed, oh, 10 or 12 audit assessments of oil companies. Q. When you say you signed the assessments, does that mean that you thoroughly reviewed the audit and ap- proved it? A. It means that I would normally review the audit report that was attached to the assessment letter. I would look at the various exhibits and schedules. Q. Is this before or after it is prepared in final form? A. This is when it is ready to go to the taxpayer. Q. And do you frequently make changes in the audit report at that point? A. I don’t recall ever making any on any oil company. Q. Have you attended any outside seminars or confer- ences relating to the oil and gas accounting? A. No. Q. And have you read any books on oil and gas ac- counting? A. No. Q. I take it then that you are not familiar with the book by Mr. Altman and Mr. Kiesling entitled ‘‘ Allocation of Income and State Taxation’’? A. Yes, I am, but that isn’t about oil companies spe- cifically. That is about apportionment. Q. Were you familiar with that at the time of the two Humble audits? A. Yes, I think I first saw that book in about 1949 or 1950. Q. Is that a book that you are very familiar with? A. No, I haven’t read the whole book. I have read— back then I did read sections on the unitary business and apportionment. A. 119 Q. Are you familiar with any other articles or books written by Mr. Kiesling? A. No. . Q. Have you reviewed any articles or books written by Fred Allvin? A. No, I haven’t. Q. Would you state your relationship to the first audit of Humble? A. That was Mr. Kaspar’s audit, right? Q. That’s correct. A. I don’t recall specifically. I may have sat in on the first informal conference. I believe I did, which was shortly after I had taken over as Section Chief. The audit had been completed, I think, prior to that time. Was Mr. Garno working for you at the time? Yes, And he was the direct supervisor over Mr. Kaspar? That’s right. Did you review that audit thoroughly? I would have had no occasion to review the audit prior to the time that the assessment notice was prepared. I would have looked over the audit report and the assess- ment notice before I signed it. Q. You made no suggestions for changes? A. Not that I recall. Q. Is it the policy of the Department of Revenue to allow divisional apportionment of multi-functional com- panies? A. No. Q. How long has this policy been in effect? A. Well, I would imagine since probably the early 60’s, the early 1960’s. Q. And who originated this policy? A. I think it probably came about under—when Mr. Dugan was the Section Chief of the Corporation Section. POPrOPOS A. 120 Q. What was the rationale for that policy? A. Well, not having participated in any of the discus- sions concerning that change in policy, I couldn’t answer that specifically, but I assume that the way Section 71.07 (2) reads, this is not provided for in that section. Q. Under your interpretation? A. Yes. Q. It is possible, though, to have more than one busi- ness in a single corporate entity, isn’t it? A. Oh, yes. Q. And do you treat all multi-state corporations as unitary? A. Well, I am not familiar with all of them, but I am aware of a few that have been permitted to report on separate accounting, not necessarily a divisional account- ing. Q. Would you identify them? A. No, I couldn’t do that. Q. You refuse? A. Well, I don’t think I am permitted to under 71.11 (44), ay Q. You are refusing on the basis of your interpretation of the secrecy statute? A. Yes. Q. So you will not allow us to examine other multi-state companies who have been permitted to report on separate accounting? A. That is correct. As a matter of fact, I probably couldn’t think of the names of any if I were permitted to answer. Q. Would you agree, though, that a corporation having a non-Wisconsin functionally independent business should be a candidate for treatment of separating that business off, not considering that as part of a unitary business with the other operations that might be conducted in the State of Wisconsin? be re A. 121 A. I think that would depend entirely on the facts in the particular case. Q. But conceptually that would be a compatible defini- tion, a construction of the statute as you understand it? A. Yes. Q. Now, assuming that you could be satisfied that a divisional accounting would fairly reflect the results of operations if the divisional business were deemed unitary, would the Department nevertheless as a matter of policy refuse to accept a divisional apportionment? A. The law provides that we may permit separate accounting, even on the unitary business, and I believe there has been at least one occasion where we have per- mitted the taxpayer to separate account, even though it costs the taxpayer more Wisconsin tax. He wanted to separate account fer his Wisconsin operations and since we were getting more tax than we would have on the apportionment basis, we didn’t have any objection. Q. I take it your flexibility decision had something to do with the fact that you are getting more tax? A. I don’t think we would have permitted it if we had got less tax. Q. Revenue is an influencing factor, I take it? A. Well, I think we have to protect the interests of the State. Q. I believe you indicated on discovery examination that you felt that Mr. Lins was responsible for the estab- lishment of the methods and procedures to approach the audits of oil and gas companies? A. Yes. Q. And Mr. Lins is now deceased? A. Yes, he is. Q. Just for identification purposes, I show you what has been admitted into evidence as Exhibit 12-A and ask you to identify that. A. 122 A. This is a summary of a presentation that Mr. Lins gave at an auditors’ conference in 1956; the subject matter of which is the determination of Wisconsin taxable in- come of oil companies. Q. And the document itself is a copy of only a portion of a paper? A. It is a summary of a paper. These were all pre- sentations at that time and Mr. Dugan requested that each participant summarize his paper and submit it to him for distribution. Q. And that is the same Mr. Lins that you indicated is at least credited in your mind as being the originator of that approach to auditing oil and gas companies? A. Yes. Q. Did he develop the interpretation that where the product goes determines whether income is allocable or apportionable? A. Well, the particular method of allocating E and P income I believe was originated by him, but I think he was merely filing the statute. Q. But he originated it, as far as you know that? A. As far as I know he was the field auditor to audit oil companies after the law changed in 1949. Q. So he first applied the tax of where the product goes as to determining whether the income is allocable or apportionable? A. Yes. Q. Are there any rules or regulations prescribed and published relating to an explanation of the method for auditing oil and gas companies? A. Not to my knowledge, no. Q. Now, I have just referred to this paper by Mr. Lins and in previous testimony we have referred to that Kaspar paper which is Exhibit 11-11. These documents are not public documents, I take it? Di aos -e re ON 4th eri? BE A. 123 A. They ar not. Q. And until our discovery proceedings in January these were not disclosed to any taxpayer, to the best of your knowledge? A. They were not supposed to be. Q. And they are still not published or made available to the public? A. That’s correct. Q. Now, do the Lins and Kaspar papers still represent the policy of the Department? A. Yes, as far as the corporation section is concerned. Q. Now, if an auditor assigned to an oil and gas com- pany audit is convinced that the company is unitary, is he still nevertheless charged with the responsibility of making verification of the separate accounting figures? A. Well, I think that is up to the judgment of the audi- tor. I think I mentioned previously in the prior hearing that the auditor was first determined or obtained infor- mation to the extent of finding out if in his judgment whether the operation was unitary before proceeding fur- ther in the audit, and if it was determined by himself or through consultation with his superiors that we felt that the company should be changed, he would not devote time to auditing the separate accounting figures. Q. Now, after that amendment in the statutes in 1949, the Department developed an informal policy to put all oil and gas companies on apportionment, didn’t they? A. I couldn’t answer that because I wasn’t—I was a field officer at the time. Q. To the best of your knowledge. A. To the best of my knowledge I believe that many of the oil companies automatically changed their method of reporting to the apportionment method. They were audited separately though. A. 124 Q. I believe you indicated at the discovery proceedings that after the law changed Mr. Dugan assigned audits of all the major oil companies? A. Yes. Q. The purpose was to put all the oil companies on the apportionment method, wasn’t it? A. I don’t know what the purpose was, but these that were reporting on the apportionment method, obviously the purpose would not be to change. I am sure those who would continue to report on separate accounting—these were certainly in mind when he assigned the audit. Q. Are you familiar with any oil companies other than Union Oil of California which is currently contesting an assessment based upon apportionment by the Depart- ment of Revenue? A. Am I familiar with corporations—with oil compa- nies other than Union of California that are contesting assessments based upon apportionment? Well, I read the list of exhibits and I believe that lists Clark Oil as having something before the Commission. Mr. Shapiro: I would like to correct that. There has been a subsequent version and that was eliminated. The Witness: Oh, is that right? Mr. Shapiro: Yes. The Witness: I am sorry. Frankly, I don’t know any others than what I read on the paper that I mentioned. Q. In your current position do your responsibilities still include the citing of audit reports, the approval of audits? A. Yes. Q. And including oil and gas company audits? A. Yes. Q. And your testimony is that you are not aware of any other major oil companies contesting an assessment made by the Department of Revenue? Se ee ee ee At eahho ee Me A. 125 A. Well, I think I mentioned previously through a re- organization of the Department—about two years ago— we now have an appellate bureau that handles applications for abatement so once an assessment is involved I am not involved in the application for abatement or conferences subsequent to that time. Q. Is your answer then that you are not aware of any other companies? A. I am not aware of any other companies. Q. How about Clark Oil and Refinery? A. Well, I don’t know. I may have spoken out of turn. I thought that the document that I had seen was a common effort of the petitioner and the Department’s attorney, and, therefore, if Clark was mentioned on there— Mr. Shapiro: I think the record should be clarified to this extent, the original document submitted to the respon- dent by petitioner’s counsel included the name of that company. The Witness: I see. Mr. Shapiro: Subsequently negotiations were under- taken with respect to limiting the contents of that. The Witness: I assume that any petition before the Tax Appeals Commission is a matter of public record. That is, in fact, I thought that they published the docket numbers as CCH of cases before the Commission. I may be wrong. By Mr. Ragatz: Q. Did you have any participation in the audit and as- sessment of Clark Oil and Refining Company? A. Well, I don’t know to what extent I can discuss Clark Oil at all. Mr. Shapiro: I believe it follows the same line as the other questions propounded by counsel, that we are pro- hibited by law from disclosing facts relating to another company. A. 126 Mr. Timken: I think that is true, but I think he was asking whether or not he was involved in it. Mr. Ragatz: I haven’t asked for any facts yet. I may, but I haven’t yet. Mr. Timken: I would agree with Mr. Shapiro’s expla- nation on details, but I think he can answer whether he was involved at all. A. Yes, I am sure that | signed the assessment notice. Q. And you are familiar with the facts that Clark has filed a petition for review before the Tax Appeals Com- mission? A. This I am not positive except to the extent that I saw this on a list of companies that had filed petitions. I don’t know personally that they have filed a petition. Q. Counsel indicated yesterday he would agree to stipu- late that the copy that has already been marked Exhivit 18 is a true copy of the petition on file with the Wisconsin Tax Appeals Commission of a petition for review by Clark Oil and Refining, and that the answer attached is a true and correct copy of the answer of the Department of Reve- nue. A. Then I would answer, yes, it appears that Clark does have a petition before the Tax Appeals Commission. Q. To the best of your knowledge Clark is a multi- functional oil and gas company? A. Well, I don’t believe that I can answer that under 71.11(44). Q. You refuse to acknowledge that Clark has explora- tion and production and refining and marketing functions? A. Yes. Q. When we talked about this on discovery proceedings you indicated that there was an oil company that had E and P losses. Do you recall that? A. Yes. A. 127 Q. And that was Clark that you were talking about, wasn’t it? A. I can’t answer that. Q. I supposed you wouldn’t answer either whether your testimony at the discovery that that company’s E and P operations are similar to those of Humble? A. I can’t answer that, now. Q. And I supposed you wouldn’t answer either to the facts that—strike that. You also will refuse to make available to us the audit report and work papers of Clark Oil and Refining Corpo- ration? A. Yes. Q. Is there any other public data, public records on that case that can be made available? A. Iam not aware of any in our possession. Q. 1 suppose you will also refuse to acknowledge that Clark had exploration and production losses? A. Yes, I would refuse to. Q. And I suppose you would also refuse to acknowledge that the Department refused to allow the inclusion of these losses in Clark’s apportionable income? A. I refuse. Mr. Shapiro: I believe counsel is testifying, giving tes- timony into the record by this line of testimony. Mr. Ragatz: I am asking questions; that’s all Mr. Timken: Objection overruled. Mr. Ragatz: Follow up to the discussion of the general subject that we had yesterday, I am willing to offer Exhibit 8 into evidence. There is at least an appearance from the review of the public record document filed in the office of the Tax Appeals Commission that the Department policy as to the taxpayer Clark is inconsistent with its policy as to taxpayer Humble. A. 128 Without the opportunity to examine a witness who will respond, I have no way to test the consistency of the posi- tions so at this time | offer Exhibit 18 into evidence so at least the record in this case will show what the public rec- ord shows as to the potential inconsistencies of positions as to the two oil and gas companies. Mr. Shapiro: First, respondent submits that the coun- sel’s statement with reference to inconsistencies is an as- sumption on his part. Secondly, we object to the admission on the same grounds that we did with respect to Union, on the grounds of relevancy. Mr. Shapiro: Before we break to consider this exhibit, I think the record should show that. this Commission was faced with making a decision on whether we should allow the petitioner to explore, as it needs to explore or think it needs to explore to support its constitutional case, facts that deal with other companies, other oil companies. This Commission deliberated that question and unani- mously agreed that we have to choose between the Depart- ment’s position of secrecy, privilege as expressed in the statutes and the petitioner’s right or its desire to show, establish possible alleged grounds for constitutional ques- tions, and this Commission, after the deliberation, arrived at its own decision that the secrecy provision would pre- vail, and I want to read that into the record at this point because it has come up several times, and that was de- cided at the discovery procedure, and that was unanimous by the three Commissioners. Mr. Smrz, do you wish to add anything? Mr. Smrz: No, I don’t. (Recess) Mr. Timken: Gentlemen, this Commission is not bound, as you know, by strict rules of evidence. Exhibit 18 is a public record by statute, so we are going to accept it, re- ceive it in the record and overrule respondent’s objection to Exhibit 18’s receipt. You may proceed. Fm IEC BE Sat. A. 129 By Mr. Ragatz: Q. Is the policy of the Department, Mr. Hoel, to deny the apportionment of exploration and production activi- ties of oil and gas companies if they result in losses? A. No, I don’t think that is a policy. I think we fol- low the same procedure with respect to E and P Depart- ments on oil companies, all oil companies. It depends on what portion of the production goes into their own refin- ing and what portion is sold off at the well head. Q. It is where the product flows? A. Specifically where the product flows as to that which flows not into their own production, what flows into the sale at the well head. Q. You realize, I assume, that the Humble produced and refined product, that no Humble produced or refined product of crude or gasoline comes into the State of Wis- consin? A. That has been testified to here, yes. Q. You have no basis to challenge that? A. No, no basis. Q. If it could be demonstrated that a separate ac- counting would fairly reflect the operating results in Wis- consin of a corporation, multi-state corporation you deem to be unitary, would the Department nevertheless insist that the apportionment method be applied? A. Generally, yes. I think the Butler Brothers case indicates that if a company’s operation is unitary, you can’t disprove by separate accounting that the income in a particular state was not as determined— Q. My question was, if you could be satisfied by a demonstration that separate accounting would fairly re- flect the operating results in Wisconsin, even though you might otherwise deem the corporation to be unitary, would you permit separate accounting reporting? A. 130 A. I think I testified previously that we had permitted this where the revenue of the State was not harmed. Q. Where it was to your revenue advantage? A. Correct. Q. You indicated previously that after the 1949 Amend- ment of the Statutes, oil companies began filing on the apportionment method? A. Some of them did. Q. Some of them? A. Yes. Q. Isn’t it also a fact that some of them only appor- tioned certain divisions? A. That I could not answer. Q. You don’t know? A. I don’t know. Q. I asked you on discovery examination about a pro- cedure for separate accounting determination, and I be- lieve sou testified that you would agree if the separate accounting sales could be verified, they would be deemed reliable and reflective of the gross revenues of the par- ticular business in the State of Wisconsin, is that a fair statement? A. The sales, the revenue? Q. The sales could be verified, they would then be truly reflective of the gross revenues generated by the operation in the State of Wisconsin? A. On separate accounting—did I testify to that? Q Well, I can read it back to you, if you prefer. A. Well, I don’t think just the gross revenues in Wis- consin would be determinative of what Wisconsin should get under a separate accounting. Q. Well, in terms of a correct Separate accounting pro- cedure, if the sales in ‘Wisconsin could be verified, would you agree that the verified figure would be reflective of the gross revenues produced in the State of Wisconsin? A. Yes, I think that follows. ~ a tt lh A. 131 Q. And I believe on discovery you acknowledged that Humble—-that no Humble-produced crude oil flowed into Wisconsin and that no Humble-refined product came into Wisconsin, with the possible exception of the packaged products which are minor in percentage, do you recall that? A. I believe that was probably testified to by your wit- ness, so that I have no reason to disagree. Q. I had no witness on discovery proceeding. I am re- minding you that you said that, and I will be happy to read it back to you, if you don’t recall? A. I think it would help. Q. Pardon me? A. Please, if you would. Q. I am referring to the discovery examination of Mr. Hoel which is dated January 16, 1974, and I am referring to Page 43 of that transcript: ‘Question: Do you know as a fact whether any Humble-produced crude oil, in fact, flows into the State of Wisconsin? Answer: I don’t know for a fact. Question: What is your understanding? Answer: Well, my understanding is that there is none.’’ Were you testifying truthfully at that time? A. Yes, I would have said ‘‘yes’’ if you had phrased this question that way, but you included refined products in your present question. Q. Do you know as a fact that Humble—any Humble- refined product, fuel oil, gasoline, heating oil, came into the State of Wisconsin during the years 1965 through 1968? A. I don’t know as a fact, but I believe that has been testified to by other witnesses. Q. That it did or didn’t? A. That it did not. A. 132 Q. I believe you indicated that you did know—again tes- tifying at discovery—that a very large percentage of Humble’s Wisconsin sales were from—were of products purchased from third parties? A. That is my understanding, yes. Q. And I believe you agree that it was a fair state- ment that the cost of sales under these circumstances would be very hard to challenge? A. Certainly if they paid the specific price to somebody else and it is a matter of record, it would be hard to chal- lenge, yes. Q. And on this basis a gross profit determined from verified sales and third party purchases should accounting- wise provide a reliable measure of the gross profit of the corporation or of the business? A. Accounting-wise, yes, that would follow. Q. Okay. Then if overhead and operating expenses could be verified, the deduction of overhead and operating expenses from this gross profit would then produce from the standpoint of accounting the net profit or loss from operating that business, wouldn’t it? A. If your direct expenses—if this particular operation was exclusively Wisconsin and the direct expenses were all Wisconsin, without any allocation of expenses from out- side of the State or any activities from outside of the State affecting the Wisconsin operation, that would be your net profit, yes. Q. And if it could be shown that any expenses that were allocated from outside of the State were correctly al- ‘located, that wouldn’t change your answer, would it? A. As I said, accounting-wise, yes. Q. That is the way I asked it. A. Accounting-wise, yes. Q. Could we have five minutes? Mr. Timken: Yes. ° te eee ies ore A. 133 (Recess, 11:25—11:30 a.m.) Q Mr. Hoel, referring to any month multi-functional corporations, if it could be demonstrated—l mean, as op- posed to the oil companies that I have already asked you about, if it could be demonstrated that a separate account- ing would fairly reflect their operations in the State of Wisconsin, but nevertheless you deemed the corporation to be a unitary business, would you, as » matter of policy or would your department as a matter of policy, still re- fuse to accept separate accounting reporting unless it produced more revenue to you? A. I think generally that would be our policy. I might like to add there that on a unitary business, I think the concept is that separate accounting, you cannot demon- strate that it’s a fair allocation of that account. Q. My question, though, assumes that it could be demon- strated. I am just looking for a policy. A. On any one particular year it might be; but it could fluctuate from year to year. Q. You do know that the only operations of Humble Oil and Refining Company in Wisconsin during the years in issue in this case were marketing operations? A. That’s my understanding. Q. Now I believe you told me rather inadvertently that the Continental Oil working papers were those used by Mr. Kaspar on his audit. A. I believe that’s in the prior testimony. @. And prior to that disclosure the Continental papers or the method used in the Continental papers had not been prescribed or published in any way so the information would be available to taxpayers like our client? A. No. Q. Now do you view the disclosure you made of the identity of the Continental Oil Company as a violation of the statute you have been claiming? A. 134 A. Well, I think if I had to testify over again, why, I would refuse to answer or name a specific company. Q. So you admit that you violated the statute as you interpret it? A. Well, I don’t know if that’s a violation. Mr. Shapiro: I object. Mr. Timken: Objection sustained. Q. Did you review Mr. Sheridan’s audit and compare it to Mr. Kaspar’s audit? A. No, I didn’t make any comparison. Q. Did you review Mr. Sheridan’s audit? A. I reviewed the report before it went out. Q. Extensively? A. I don’t recall specifically but I think on every oil company or every large multi-state corporation I looked through all of the exhibits to determine whether, particular- ly on the oil companies, that the treatment has been the same treatment as we have given other oil companies with respect to the EK and P Department particularly. Mr. Ragatz: Now that answer is not responsive and unless the witness is willing to answer questions so that I can test whether that is in fact true, I am going to ask that his answer be stricken from the record. Mr. Timken: Would you read the question back, please. (Pending questions and answers read) Mr. Timken: Do you want to be heard, Mr. Shapiro? Mr. Shapiro: I believe the witness responded fairly to the question. Mr. Timken: It is the ruling of the Chair that this witness is testifying adversely. Counsel for the respon- dents will have the opportunity to call him as their own witness if he sees fit at a later stage. The answer was not responsive and the answer is stricken. The Witness: Do you want a new answer? A. 135 By Mr. Ragatz: Q. You answered that you couldn’t remember whether you had reviewed it or not, I believe. A. The reason I qualified that is that normally I will review all reports and sign them. Now there may be a dozen reports in any one week. Now possibly I could be on vacation or on a particular day when an audit report is going out at which time David Garno would sign the assessment letter for me. Now I can’t remember specifical- ly if I signed this particular assessment. If I could see the signature on the assessment letter, then I could answer you specifically. Q. I show you Exhibit 1 which has been admitted into evidence and the first page there. A. Yes, that’s my signature and I would have reviewed the report. Q. Did I ask you if you had compared the Sheridan report with the Karpar report? A. You did and I said no. Q. You did review the Kaspar report before it went out? A. I believe John Leidiger would have been the one to review and sign that one. Q. You answer is you didn’t? A. If you could tell me specifically the date that Mr. Leidiger’s report went out, I could answer definitely. Mr. Kaspar’s report? Mr. Kaspar’s report. I show you what has been admitted as Exhibit 2. Yes, John Leidiger reviewed that. And you did not review it? I did not. Did you have any role in the audit by Mr. Kaspar by conferring or participating in conferences in connec- tion with that audit? OPOoPporsd A. 136 A. Not to my recollection except—oh, I believe I par- ticipated in the informal conference afterwards. Q. Are you familiar with the term ‘*posted field price’’? A. I am familiar to the extent that the information | have received through participating in these hearings and through discussions with our auditors on matters of oil companies. Q. And you are familiar with the diseussion of posted field prices contained in Mr. Kaspar’s paper which is Exhibit 11-11 herein? A. Yes. Q. And that paper represents the policy of the De- partment? A. Yes. Q. Are you familiar with the Fisk formula for valuing natural gas? A. No, I am not. Q. Are you familiar with the Platt’s Oil Gram publica- tion? A. No. Q. Do you have any knowledge in regard to the transfer prices used by Humble on the transfer of crude and natural gasoline between its E and P Department and its Refining Department? A. I don’t have any direct knowledge except to the extent that I believe its transfers at posted field prices adjusted for transportation. Q. To the best of your knowledge? A. To the best of my knowledge. Q. And do you have any knowledge as to the transfer prices between Humble’s refining function and its market- ing function? A. No. Q. Now from an accounting standpoint would you agree that unrealized, derived profits can be determined at any functional level? A. 137 A. Yes, accounting-wise. Mr. Ragatz: No further questions. Mr. Timken: You are excused, Mr. Hoel. Gentlemen, it is very close to lunch. We will break until 1:30. (Noon recess, 11:45 a.m.) Mr. Timken: Back on the record. Mr. Ragatz, you may call your next witness. Mr. Ragatz: Petitioner calls John Leidiger adversely. Mr. Timken: Same objection? Mr. Shapiro: Same objection. Mr. Timken: Objection overruled. Your objection is noted. JOHN LEIDIGER, called as a witness and being duly sworn under oath testified as follows: Direct Examination By Mr. Ragatz: State your name for the record. J. Kilan Leidiger. Where do you live? Madison. How old are you? Fifty-one. What is your occupation? . Iam an Administrator with the Wisconsin Depart- ment of Revenue. How long have you held this position? My current position about a year and nine months. What position did you have prior to that time? . Director of the Bureau Field Operations for four years, 1968 through 1972. Q. And prior to that? A. Prior to that I was a specialist assistant to the Secretary of Revenue from the year 1967. BPOPOPOoPO POP>O A. 138 Q. Prior to that? A. Director of the Corporation Taxation section. Q. For how long? A. August, 1964 through December of 1966. Q. And prior to that? A. Field auditor for the Corporation Taxation section. Q. For how long? A. Approximately 15 years. Q. Does that go back to the commencement of your em- ployment with the Department? A. Yes, it does. Q. What year did you commence that employment? A, 1949. Q. Where did you go to school? A. University of Wisconsin in Madison. Q. What year did you graduate? A. 1949. Q. With what degree? A. Bachelor of Business Administration. Q. Did you have other than the basic courses in economics required for that degree? A. No. Q. Have you had any other advanced education? A. No. Q. Have you had any other economic training? A. No. Q. Are you a CPA? A. Yes. Q. Are you currently in any professional designations? A. No. Q. Are you a member of any professional organiza- tion? A. Wisconsin Society of CPA’s. Q. Any others? A. No. Miia iicici nmin: A. 139 Q. Other than your service with the Department of Revenue have you had any other accounting experience? A. No. Q. Have you ever practiced accounting? A. No. Q. Starting with the time that you were director of the corporation section, will you describe your duties in that office? A. As director of the corporation section | was respon- sible for all of the hiring and supervision of the audit staff as well as the clerical staff, and reviewing all completed assessments, claims for returns; all acts of the section. Q. And this included any audits of oil and gas com- panies? A. Yes, it did. Q. As a field auditor what oil and gas experience did you have? A. I audited approximately eight or ten oil companies. Q. Over what period of time? A. Probably beginning in the late 50’s up until through 1963-64. Q. Did this include major oil companies? A. Yes. @. Did this include the Continental Oil Company? A. Yes. Q. You were the auditor on the Continental audit that was discussed in evidence this morning during the testi- mony of Carl Hoel? A. Yes. Q. And it was your audit that was used by Mr. Kaspar then as the pattern for the first audit of Humble Oil and Refining Company? A. He so testified. Q. Well, you were the head of that section at the time that Mr. Kaspar’s audit was done? A. Yes. A. 140 Q. Do you know of your own knowledge whether or not he used your Continental audit? A. I can’t recall. Q. What years did it cover? A. I don’t recall. Q. It was completed though prior to Mr. Kaspar’s audit? A. Apparently. Q. What participation did you have in the audit by Mr. Kaspar? © A. There was several staff conferences when the audit was in process in which I participated. Q. Did you have any participation in the assignment of the audit? No. Initially? No. Who would have done that? Mr. Garno. Q. He was the one responsible for the assignment of audits? A. Yes. Q. How did it happen that a particular company would be assigned for an audit? A. I would guess I am not familiar with that, but we have an index system of several hundred, probably 400 large corporations in which some information is main- tained which are reviewed and some information which is less available and the needs of our people, the assignments are made. Q. Do you know whether or not the Humble audit was assigned through that procedure? A. I don’t know how the audit was assigned? Q. What other oil and gas company experience have you had? A. None. POoOPO b> A. 173 Q. Well, let’s talk about the Sheridan audit. A. Well, initially the auditor made the decision, I might add that the time the case was assigned I assumed it was unitary because the company had paid a tax on that basis previously. Q. You are aware that the company paid it under protest, aren’t you? A. They had a qualifying statement to that effect, yes. Q. So that the second audit was started with the pre- conceived notion that Humble was unitary, is that what you are saying? A. Yes. Q. And it was started with the preconceived notion that the business of the taxpayer in Wisconsin was an in- tegral part of that unitary business? A. Yes. Q. Who made the decision as to Humble being unitary in the first audit? A. I believe that was a joint decision arrived at by Mr. Leidiger, our chief counsel, Mr. Barber, and myself, and of course the auditor. Q. Starting with the preconceived notion that you could get a bundle of tax if you put Humble on apportionment? A. We knew there was this possibility, of course. Q. Well, what facts do you know that make Humble a unitary business—the overall Humble operation? A. Of my own knowledge or——or what I was told by others? Q. Your own personal knowledge. A. Ihave no personal knowledge of Humble’s activities other than what is shown in their returns and what their auditors have developed. Q. What do you believe to be the facts that support this conclusion ? ' A. 174 A. The principal fact in my opinion is that Humble’s Wisconsin operations as constituted could not function without the intervention of activities by employees of Humble outside of Wisconsin. Q. Is it your testimony that the activities of Humble in Wisconsin could not function without the assistance of the E and P function of Humble? A. In the manner that is (set) up, this is my opinion, yes. Q. Well, what do you base that on? A. Again, I am—I don’t have direct facts here, but it is my impression that a good part of the product that Humble sells or sold in Wisconsin is obtained through, first of all, its crude activities of the E and P Department. Q. Now you are aware— A. In other words because—may I add—because of the activities of that Department, Humble is able to obtain product either through its own manufacturer or from others for sale in Wisconsin. Q. There are lots of sources of supply. What do you base your statement on? A. The statement I just indicated, because of the activi- ties outside of Wisconsin, the taxpayer is getting a product to sell in Wisconsin. Q. What activities outside of Wisconsin? A. Well, there is the manufacture of greases, indus- trial oils that are sold in this state, the gasoline that is sold here, I believe that is obtained through exchange agreements which, as I understand it, gets involved in the E and P functions. Q. What do you mean— A. Refining. Q. What do you know about that? What does E and P have to do with exchange agreements? A. 175 A. The taxpayer can exchange crude for crude of other oil companies to use in its refineries. This becomes part of the product then sold in Wisconsin, and through other exchange agreements I believe the taxpayer is able to obtain gasoline and home fuel oil for sale in Wisconsin. Q. Did you review Mr. Hoel’s testimony at the deposi- tion? A. Yes, I did. Q. And are you aware that he testified on several occa- sions that he acknowledges that the exchange agreements are mere purchases and sales? A. I believe that is true. Q. Then I fail to understand your attempt at explain- ing what the E and P function has to do with the sale of gasoline in Wisconsin, and I am sure you know from at least in the prior testimony that not one drop of gasoline produced by Humble flows into the State of Wisconsin for sale, so please explain now what you feel the E and P Department has to do with the operation in the State of Wisconsin. A. Well, I thought I just did. First of all, I should add that part of the production of the E and P Department does get into the taxpayer’s refinery. Part of the product of that refinery gets into Wisconsin for sale. Q. What kind of products are you talking about? A. Industrial oils, greases, lubricants. Q. Which is a very minor part of the total sales volume in the State of Wisconsin by Humble during the years in issue, wasn’t it? A. I don’t know. What do you mean by ‘‘minor’’? Q. Well, did you hear the prior testimony of Mr. Sheri- dan that it was just a few percentage points and during Mr. Kaspar’s period it might have been as much as 10 per cent? A. 176 A. Ten per cent can be a significant amount. Q. But 90 per cent is a much more significant amount, wouldn’t you say? A. Yes, nine times greater. Q. Now what dependence does the marketing operation in the State of Wisconsin have on the Humble’s E and P function, in your mind? A. In my mind as I have tried to say, because of Humble’s E and P functions, it is able to obtain either through its own manufacturer or by exchanging with others a product that it sells in Wisconsin. Q. Are you telling me that Humble’s service stations in the State of Wisconsin wouldn’t have gasoline to sell if it wasn’t for Humble’s E and P function? A. They might be able to obtain gasoline in other ways, but I think this is the way it has been done. Q. Certainly there are a lot of independent marketers in the State of Wisconsin that don’t have an E and P function out of the state to back them up, aren’t there? A. I assume so. Q. They all get gasoline? A. Fine. Q. Why (couldn’t) Humble obtain their gasoline from somebody else? A. I don’t know if the taxpayer would permit them to. Q. Haven’t you heard the testimony that, in fact, they did get the gasoline from third parties? A. I thought you were referring to direct purchases from third parties without any intervention from other em- ployees of Humble, such as an independent would. Q. Well, I am asking you right now about the E and P function and I will ask you about the refining function, and I will ask you about the marketing function, but I take it it is your testimony that you really have no infor- a A. 177 mation that would indicate that any part of the E and P function made any contribution direct or indirect to the activities in the State of Wisconsin from which you could conclude that the Wisconsin marketing operations were dependent upon the E and P function? Do you or do you not have facts on that? A. As I began this line of testimony, I told you I have no direct facts. Q. How about the refining function? A. As I have indicated, the refining function does pro- duce a product that is sold in Wisconsin. Q. A minor amount of packaged product? A. I would not admit it is minor. I don’t know if that is relevant or not. Q. But you accept the fact that had been previously testified that 90-some per cent of the sales in Wisconsin were products bought from third parties? A. Yes, I am not sure if it is bought or exchanged. Frankly I don’t have a good knowledge of exchange agree- ments. I have never seen one to read. Q. You don’t deny that an exchange is a purchase and a sale? A. Iam not sure that it is. Q. You don’t know? A. I don’t know. Q. Well, how would the Wisconsin marketing opera- tions conceivably be dependent upon the E and P (or) refin- ing operations as to the 90 per cent or whatever of product that was purchased or acquired from third parties? A. Well, if the taxpayer has gasoline available or crude available, however it is working here, you are talking refinery now? Q. I am talking refining department. A. Okay. If for economic reasons, the taxpayer has has refined gasoline, let us say in Texas, and finds it more A. 178 profitable to dispose of that gasoline by an exchange agree- ment with another oil company that has gasoline available let’s say in Chicago, it would be economically more feasible for the taxpayer to obtain the other company’s gasoline in Chicago and sell it in Wisconsin. Q. So they sell gasoline in Texas and they buy it in Chicago? A. They may sell or exchange, I am not sure how it works. : Q. Well, were there—a sale is a sale, whether it is paid for in kind or in cash, wouldn’t you agree? A. If it is a sale, yes. Q. Well, how do you define a sale? A. A sale is a transfer of the product from one party to another for a consideration. Q. From an (accounting) standpoint, Mr. Garno, isn’t it a fact that unrealized income, net income derived, can be determined on a functional basis? A. You are not referring to tax accounting? Q. I am referring to generally-accepted principles of accounting consistently applied. A. Yes. Mr. Ragatz: No further questions. Mr. Timken: You are excused, Mr. Garno. (Witness excused) Mr. Timken: You may call your next witness. Mr. Ragatz: The petitioner calls Mr. Oral Luper. ORAL L. LUPER, called as a witness, and after being first duly sworn, testified on oath as follows: (Exhibits 19 A, B, C and D marked for identifica. tion) Mr. Ragatz: We have just marked Exhibits 19 A, B, © and D which are copies of pages of the Milwaukee J ournal, one taken from each of the years 1965, 6, 7, 8. And this A. 179 is an exhibit of the respondent but it will be introduced at this time (stipulating) that it is authentic, and so that the current witness can be examined on it both on direct and on cross. Mr. Timken: Mr. Shapiro, do you so stipulate? Mr. Shapiro: We so stipulate. Mr. Timken: Exhibits 19 A, B, C and D are received. Examination By Mr. Ragatz: Q. Would you give your full name? A. My name is Oral L. Luper. Q. Where do you live? A. I reside at 11107 Meadowick Drive, Houston, Texas. Q. How old are you? A. I am 60. Q. Would you briefly summarize your academic back- ground? A. I attended the University of Oklahoma from the years 1931 and graduated in 1936; received a Bachelor of Science degree from the School of Busines Administration in 1936. Q. And what was your major? A. Accounting. Q. Did you take any post graduate work? A. Yes, I took post graduate work at the Northwestern University in Chicago, Illinois in the years 1937-38. Q. And are you a Certified Public Accountant? A. Yes, in the States of Texas and New York. Q. And how long have you been a CPA? A. About 34 years I believe. Q. Would you trace your private employment history after graduating from college? A. When I graduated from the University of Oklahoma I became employed with the El Reno Mill Elevator Com- pany in El Reno, Oklahoma, a subsidiary of General Mills, Inc. A. 180 Q. In what capacity were you employed there? A. As an accountant. Q. And what responsibilities did you have? A. Primarily the maintenance of inventory records and the determination of product cost. What kind of product was this? Feed. Flower and feed. And how long were you with General Mills? About six months. And what was your next employment? I was employed then by Price Waterhouse and Com- pany in Buffalo, New York. Q. And what were your duties with that employment? A. I was a staff accountant then. Q. And public accounting practice? A. Public accounting practice, engaged in auditing of various companies. Q. What kinds of businesses did you have experience auditing? Oil and gas companies, airplane, electronics, utilities. How long were you with Price Waterhouse? Till 1941. And what happened in 1941? I entered the U.S. Armed Services. And what branch were you in? In the Quartermaster Corps. And how long had you lived in the armed services, Mr. Lanert A. From April 1941 until April of 1946, I believe. Q. Did your work in the armed services have anything to do with your academic background or your prior ex- perience? A. Only in a general way. Q. What employment did you accept upon the release from the armed services? Erorore FOPOP>OPOP a ee A. 181 A. I was employed by the Humble Oil and Refining Company in Houston, Texas. And that was what year? In 1946. What was your first position? I was a supervisor of a systems and staff. And this related to accounting? Yes, this was involved in accounting systems, finan- cial reporting systems—all types of systems related to financial information. @. Now would you generally trace the different posi- tions you have held with Humble from that time forward? A. Well, after I believe it was in 1949 I became as- sistant general auditor and in 1950 I became general auditor for the company ; and in that capacity I was respon- sible for directing new activities of the company’s internal audit staff which involved the auditing of the various ac- counting, financial departments of the company, the audit- ing of the operational departments of the company, the auditing of other companies with whom we had joint ven- tures, the auditing of contractors which were employed on a cost-plus basis, same activities. Q. How long did you serve in that job? A. In 1952 I believe it was I became assistant to the comptroller and then in 1953 I became the comptroller of Humble Oil and Refining Company. Q. Was the comptroller of Humble, as it is with many companies, the chief accounting officer? A. Yes, it was. Q. Would you describe a little bit the duties and respon- sibilities of that position? A. As the comptroller of Humble I had responsibility for directing and maintaining the accounting systems of the company including responsibilities for the development and implementation of budgeting plans, the development PoPOPS A. 182 and planning and maintenance of planned work for finan- cial reporting, the development of the systems for financial forecasting, supervision of the internal audit staff, super- vision of the systems and computing staff. Q. What was your next position? A. In 1959 I became comptroller of a new company which is also Humble Oil and Refining Company, but this was the Humble Oil and Refining Company of Delaware. This new company came as a part of a reorganization in which the Standard Oil Company of New Jersey acquired the entire stock ownership of Humble Oil and Refining Company of Texas, the former company. And shortly thereafter the domestic petroleum companies, which were wholly owned (subsidiaries) of Standard Oil Company of New Jersey, were merged into the new Humble Oil and Refining Company of Delaware at, | believe, December 31, 1959. Q. How long did you serve in that capacity? A. Until 1962. Q. Now, during that period was that the time that the subsidiary Pate Oil Company that we talked about in the stipulation in this case was merged into Humble Oil and Refining Company? A. Yes. The Pate Oil Company was merged into the Humble Oil and Refining Company of Delaware, I believe, on June 30th or July Ist of 1960. Q. Thereafter the business of Pate was continued by Humble? A. Yes, it was. Q. What was your next position? A. I became a general manager of the (Esso) Standard Eastern Region of our Marketing Department in 1962. Q. What were your duties there? A. I was responsible for the marketing activities of that region. Pe ne A. 183 Q. How long did you have these responsibilities? A. Until 1963 when I became the assistant to the presi- dent of the Standard Oil Company of New Jersey. Q. Identify the relationship between Standard Oil of New Jersey and Humble Oil and Refining at that point in time. A. At that point in time the Standard Oil Company of New Jersey was the parent of Humble Oil of Delaware and it was a wholly-owned subsidiary. Q. What business did the Humble Oil and Refining Company conduct during that period? Was it involved in foreign operations or was it restricted to domestic op- erations? A. The operations of Humble Oil and Refining were strictly domestic operations of the United States Petroleum operation in the United States. Q. How long did you serve in that capacity? A. Until 1963. Q. And then what position did you take? A. I became the assistant to the Chairman of the Board of the Standard Oil Company of New Jersey. Q. What were your duties there? A. My duties there were to assist the chairman in the matters he had to consider at Board meetings, (and) execu- tive committee meetings. I analyzed and evaluated mat- ters that required his attention. I assisted him by pro- viding (liaison) on communications, links between him and other members of the organization and other representa- tives of the subsidiary companies. Q. When did you become a director of the Humble Oil and Refining Company? A. In 1965. Q. How long did you serve as director? A. I served as director until January 1st, 1973. Q. And that was when Humble was merged into the Exxon Corporation, the present corporation? A. 184 A, Yes. Q. How long did you continue as the assistant to the Chairman of the Board of Standard Oil of New J ersey? A. It was alittle over a year. Q. What was your next position? A. Director of Humble Oil and Refining Company in 1965. Q. And what position did you assume next? A. I was a director of the company and later became a vice-president. Q. What were your duties as vice-president? A. I was responsible primarily for the financial activi- ties of the company which embraced the general supervi- sion of the comptroller’s department, the treasurer’s de- partment, the tax department, and later the land manage- ment department. I was also responsible for certain in- surance activities and later I became associated with real estate activities. Q. And what was your next position? A. Well, I became a senior vice-president of the Exxon Company, U. 8S. A., on January Ist, 1973. That was the time—on that date—the Humble Oil and Refining Company of Delaware was merged into the Exxon Corporation. The Exxon Corporation had previously been the Standard Oil Company of New Jersey. After the merger of Humble | Oil into the Exxon Corporation at the beginning of 1973, the operations and activities of the former Humble Oil and Refining Company were resumed and carried on in almost an identical manner as of the Exxon Corporation, U. S. Bin, as a division of the Exxon Corporation. Q. And your present position with the company ? A. At present I am Senior Vice-President of the Exxon Company, U.S. A., and a member of its management com- mittee. The management committee was created as a sub- stitute for the former Board of Directors. A. 185 Q. On your current position maybe you could sketch your major responsibilities. A. In my present position? Q. Right. A. I am—my general responsibility is for the financial activities of the company. I am executive contact for the comptroller department, the treasurer’s department, the tax department and the land management department. In addition I am the shareholder contact with two subsidiary companies, one a wholly-owned subsidiary engaged in land development activities, and the other a wholly-owned sub- sidiary engaged in insurance activities. Q. In the aggregate how much time do you have in oil and gas industry in years? A. Over 28 years. Q. Would you describe professional societies and organ- izations that you belong to? A. Iam a member of the American Institute of Certi- fied Public Accountants and a member of its Board of Di- rectors. | am a member of the Accounting Research As- sociation which is the research arm of the American In- stitute. I am a member of the Texas Society of Certified Public Accountants. I am a member of the Financial Executives Institutes. I am a Trustee of the Financial Executive Research Foundation which is the research arm of Financial Executive Institutes. I am a member and a director of the Texas Manufacturing Association. I am also a member of a number of civic and cultural organiza- tions, and I should mention that I am a member of the American Petroleum Institute. Q. Have you served as a member of the Accounting Principles Board? A. Yes, I have. Q. For how long? A. A little over—about seven years. A. 186 Q. Could you briefly describe for me any books or articles you have written on the subject germane to the issues in this case? A. I really haven’t written any books or articles really germane to this case. Q. How about to oil and gas accounting? A. I really haven’t—I have had some—lI believe one article published in this area, but not particularly involved in this case. Q. Would you just mention the names of the publica- tions in which you have articles published just as part of your background? A. Well, I have an article published in the Journal of Accountancy, (and) the Financial Executive Institute pub- lication. I was a contributing author to the financial of- ficer’s handbook. Q. Did you mention the Journal of Accountancy? A. ‘Yes. Q. Have you held any academic positions over the years? A. Well, at the University of Oklahoma I was an ac- counting laboratory instructor and when I was taking graduate work at the Northwestern University I (held) a teaching fellowship. Q. I would like you to describe the corporate organiza- . tional structure of Humble Oil and Refining Company for the years 1960 through 1968. (Exhibit Number 20 marked for identification) Q. I show you what as been marked Exhibit 20 and ask you to identify that, please. A. This is an exhibit entitled ‘‘Humble Oil and Refin- ing Company Corporate Organizational Structure of 1960- 1968.’’ It contains a brief outline of the organizational structure. Q. Was this prepared at your direction? A. Yes, it was. oe A. 187 Q. Does it set forth (the) organizational structure dur- ing this period? A. Yes, it does. Mr. Ragatz: I would like to move the admission of this exhibit. Mr. Timken: Any objection? Mr. Shapiro: No objection. Mr. Timken: Exhibit 20 is received. By Mr. Ragatz: Q. I would like you to describe, first of all, the cor- porate management functions shown on the exhibit. A. Well, as you can see, or as the exhibit demon- strates, the basic organizational structure of Humble was in three parts. The corporate management was the prin- cipal, the highest order of management in the company and represented the executive management (of the) com- pany. It was composed of the Board of Directors, the Ex- ecutive Committee, the Chairman of the Board, who was also the chief executive officer, the president and the direc- tors in charge who were members of the Board of Direc- tors. Q. Would you describe the Board of Directors briefly, please? A. The Board of Directors was composed of eight mem- bers. It had the responsibility for the overall direction and operation of the company, responsible for the broad policies of the company. It elected the officers and declared the dividends, reviewed the overall goals and objectives of the company. Q. How did the Executive Committee operate? A. The Executive Committee—the Board of Directors has delegated to the Executive Committee all the powers of the Board with the exception of certain powers such as the election of officers, the declaration of dividends and other matters which we restricted to the Board. (That is) from a legal point of view. A. 188 Q. The Executive Committee operated in absence of the Board and on these matters? A. Yes. Q. And how did the Chairman of the Board fit into the organization? What were his responsibilities? A. The Chairman of the Board was, of course, the Chairman of the Board and he was the chief executive officer of the company. As such he had the responsibility for implementing the policies and decisions of the Board of Directors. He was also, of course, the company’s prin- cipal spokesman with the public at large. (Recess) Mr. Timken: We will go back on the record. By Mr. Ragatz: Q. Would you describe the responsibilities of the Presi- dent? A. The President in the absence of the Chairman of the Board acted as Chairman of the Board. He was also responsible for the overall administration of the com- pany’s activities, and in the absence of the chief officer he acted for him. Q. How were the directors in charge designated? How was that designated? How was that carried out? A. The directors in charge were first of course members of the full-time Board of Directors, but in addition they were the executive officers of—having general responsi- bilities for specified operating departments or coordina- tion and service department. Q. Let’s move to the coordination and services, man- agement level, and would you describe that? A. Well, the next segment of the organization structure is referred to by us as the Coordination and Services Man- agement, and this is composed of corporate staff depart- ments. The responsibility of this management group, is, of course, to provide the overall specialized corporate serv- Ee ne ee A. 189 ices that are needed by the corporation overall. Their de- partment advised the corporate officers and the Board of Directors, they advised the operation’s management, and also they advised as needed the management of the other service—other staff departments. Q. Well, let’s take the various staff departments that compose the Cordination and Services Management. Would you describe the Corporate Planning Department? A. The Corporate Planning Department was responsi- ble for the long range planning of the company. It was responsible for assisting and developing the overall com- pany strategies, and advised the Board in a manner to try to maximize the overall company operations, the effec- tiveness of the operations. Q. How did the Secretary’s Department operate? A. The Secretary’s Department provided a secretary for the Board of Directors and a secretary for the Execu- tive Committee. The Department maintained the official corporate records, the charter and by-laws, and they pro- vided and maintained the minutes of the meeting of the Board of Directors, and the Executive Committee, and they also were responsible for the area of executive compensa- tion, executive development and training, and general ad- vice in the corporate affairs of the company. Q. How about the Supply Department? A, The Supply Department was responsible primarily for the purchase and sale of raw crude and raw materials and acted as a coordinating group between the refining and other operation functions, so as to obtain an optimum short range operating program. Q. Now this is not an operating department as such, though, was it A. It was not an operating department, no. It was a— we did not consider this a profit center. Q. Would you describe the Treasury Department? A. 190 A. The Treasurer’s Department was headed by the Treasurer of the company, who had responsibility for all of the financial resources of the company, responsibile for the development of financial policy and procedures, and maintained banking relations, developed plans for the ap- propriate financing of the company’s activities, and pro- vided an analyses of the financing aspects of the proposed investments. Q. And the Comptroller’s Department? A. The Comptroller’s Department was headed by the Comptroller and the Comptroller was responsible for the overall maintenance of the company’s accounting systems and in charge of the books of account of the company. It involved procedures and plans related to the appropriate systems of capital budgeting throughout the company pro- viding appropriate systems for financial reporting, ap- propriate systems for financial forecasting, and they were responsible also for operating the computing—some of the computing centers of the company, maintaining a systems staff, and finally maintaining an overall system of internal control and responsibility for the internal audit staff. Q. But these functions did not include the accounting for each operational function, I take it? A. As I will explain later, the operation functions have separate accounting offices. The comptroller had responsi- bility for an accounting office that maintained the corporate records, the consolidated financial reports. Q. And this is the department that you headed up for a period of time? A. I did in the early 60’s, yes. Q. Would you describe the Tax Department? A. The Tax Department was headed by the general tax counsel, the Department is responsible for providing tax counsel and tax advice to all departments of the company, and have responsibility for the determination of the ap- A. 191 propriate tax liability of the company to the various gov- ernmental authorities. Q. And again this was the overall company tax liability, not the responsibilities of each operational function? A. The Tax Department was responsible for the tax administration to the company, but some of the operation departments did have personnel in their organization to carry out the routines of some of the tax reporting re- quirements is all, some of the routine reports that are required. Q. Now the Law Department? A. The Law Department was headed by the general counsel of the company, and the Department provided legal counsel for the Board of Directors, the officers of the company, and the other management groups within the company. Q. The Public Relations Department? A. The Public Relations Department had the respon- sibility for promoting an understanding of the company’s character and its goals and its performances with the gen- eral public. They were responsible for the maintaining and communication and information service to the public, to governmental authorities, the media and other outside parties. Q. This is not the advertising function? A. No, the advertising function was performed in the Marketing Department. Q. Describe the Government Relations Department. A. The Government Relations Department was _ re- sponsible for coordinating the company’s government re- lations activities, and was responsible for liaison with the government officers at the federal level and in the State of Texas. Q. The Employee Relations Department? A. 192 A. The Employee Relations Department was primarily responsible for providing a competent and able work force within the company. They were responsible for de- veloping plans and procedures for salaried administra- tion and training, employee development, employment, the details of plans for employee benefits, and advice on labor relation matters. Q. Hach operating function had its own personnel people and its own labor relations? A. Yes, they did. Q. Describe the General Services Department? A. The General Services Department was responsible for providing the corporation with office facilities and all of the office services such as printing and reproduc- tion and janitorial services, the very varied services that are required for the everyday routines and operation of the corporation. Q. Medical Department? A. The Medical Department was concerned with the in- dustrial hygiene of the company and advised the company on the health of the employees and provided assistance and advice to employees on a professional basis. Q. The Aviation Department? A. The Aviation Department was responsible for oper- ating the company’s aircraft and its fixed base facilities. for aircraft. Q. Now looking again at Exhibit 20, would you identity which of the functions of the Coordination and Services Department you have just described have been under your jurisdiction and for how long? A. Well, the Treasury, Comptroller’s, and Tax in the Coordination and Services group, and the land manage- ment activities in the Operations Management group, and these have been under my—among my responsibilities since I first became a director of the former Humble Oil A. 193 and Refining Company in 1965. The Land Management Department was added two or three years later. Q. Now before describing the specific operating de- partments, would you give us a little background on the organizational setup of the operating management, the functional operating departments of the company? A. The operations management of the company was re- sponsible for directing the operating activities of the in- dividual functional segments of the company. Each func- tional segment was organized into a separate department which operated independently of each other operating seg- ment and was organized in a way so that it could perform pretty much on a stand-alone basis as a separate, single function company. The operating departments were headed by either a vice-president, which was true in the major operating department, and headed by a general manager in the de- partments that were not in the operating department that were not quite as large. Q. In terms of financial management, how were these operating department set up? A. Each operating department is responsible for its own performance, both operationally and financially. It has been the philosophy of the company’s management for a long-standing period that each department is evaluated separately and independently of each other department from a profitability standpoint and operational standpoint and overall performance. Q. Is what you are referring to now what the company calls the policy of functional profitability independence? A. Yes, that’s correct. Q. And is what you referred to a few minutes ago about each function having to stand alone as against other functions and as against competitors known as the func- tional stand-alone policy? A. 194 A. Yes. Q. Would you describe how this policy is intended to have the individual functions put where they could com- pete with other functional departments or other indepen- dents in the industry in that particular activity? A. Well, its been the view of our management, ex- ecutive management, that by having each department in- dependently responsible for its function performance is one of the most effective management tools that we can use in measuring the performance of the departments and to improving their operations. Under this plan each de- partment is in competition with each other and which re- sults, of course, in competition for the available funds for investment in the business activities of each of these oper- ating functions. Q. In effect are each of these functions also in compe- tition with the other members of the industry operating in the same function? A. Yes. There are companies with any industry which perform only one function or one segment of the petroleum business. Some perform more than one, but I will de- scribe later which operating functions of the Humble Com- pany were in competition with these other companies. Q. Would you describe the exploration and production function? A. The exploration and production function really is composed of three departments; exploration, production and natural gas. The Exploration Department is headed by a vice-president and he has responsibility for the profit- able acquisition of reserves, of crude oil and gas. To do this, of course, means the providing the technical super- vision of geological and geophysical activities that are involved in the activity of exploring for oil and gas reserves. J ’ | : ee A. 195 Also he has responsibility for land acquisitions, mineral fee acquisitions and providing the company with both short-term and long-term operating plans for the Ex- ploration Department Q. As distinguished from the Production Department, the Exploration Department doesn’t do anything except locate the— A. They carry on the exploratory effort needed to find potential oil and gas reserves and then they are respon- sible for drilling the wildeat exploratory wells to deter- mine whether or not the reserves do in fact exist. And if that turns out to be the case, why then the properties are turned over to the Production Department for fur- ther development. Q. Now describe the activity of the Production De- partment. A. The Production Department again is headed by a vice-president. And this department was responsible for the profitable operation of all of the companies producing oil and gas propetries including the operation of the natural gas plants and the related facilities. This involved, of course, maintaining a technical staff, providing engineering service, petroleum engineering ad- vice and counsel, the development of drilling programs, the development of operational programs, and, again, was responsible for its proper performance in the producing of oil and gas. Q. Now describe the Natural Gas Department. A. The Natural Gas Department was headed by a [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_0996%3A02. Public record. Not legal advice.