Brief for the Respondent in Opposition — Humble Oil & Refining Co. v. Calvert

SUBJECT INDEX

Questions Presented ..—.—sc—ac'—a'di.a... : ; ae 2

I. Buck Act, Sections 104-110(c) of Title 4, U.S.C.. 23

II. Sections 351, 352 and 357 of Title 30, U.S.C.,

Mineral Leasing Act for Acquired Lands,

NE LEY ng chao. a aw COUN Sele Veet ews Es 27

TABLE OF AUTHORITIES

CASES: Page

Alexander v. King, 46 F.2d 235 (10th Cir. 1931)

eater ae wo ame wasn bee kd soe nes oo 14

Anderson v. Helvering, 310 U.S. 404 (1940) ........... 5

Commissioner v. LoBue, 351 U.S. 243 (1956) .......... 12

Commissioner v. Wilcox, 327 U.S. 404, 407 (1946) ...... 12

Forbes v. Thomas Gracy Consolidated Virginia Mining

Co., (1877), 94 U.S. 313, (Nevada) ................ 10

Helvering v. Brunn, 309 U.S. 461 (1940) .............. 12

Howard v. Commissioners of the Sinking Fund of the

City of Louisville, 344 U.S. 624 (1953) .............. 6

Humble v. Waggoner, (1964) 376 U.S. 369 ............ 18

Jaffke v. Dunham, 352 U.S. 280, 281 .................. 15

Klies v. Linnane, (1945), 156 P.2d. 183, 117 Mont. 59 ... 10

Langres v. Green, 282 U.S. 351 ...................... 15

Magnolia Petroleum Co. v. Oklahoma Tax Commission,

I ae fs swine nner se res 10

Mid-Northern v. Walker, 268 U.S. 45 (1925) ......... 5, 19

Missouri K. & T. Ry. Co. v. Meyers, 204 F.2d 140

(1913), (Oklahoma)

New Creek Co. v. Lederer, 295 Fed. 433, (3rd Cir.

1924), cert.den. 265 U.S. 581, 44 S.Ct. 456, 68

Old Colony Trust Company v. Commissioner, 279 U.S.

716 (1929)

Palmer v. Barrett, 162 U.S. 399 (1895)

_—

TABLE OF AUTHORITIES—Continued

Page

Stanton v. Baltic Mining Co., 240 U.S. 103 (1916) 13, 14, 15

State v. Humphrey, 159 S.W.2d 162 (Tex.Civ. wes

MU et idk eat te oe. ed al A = F

Stratton’s Independence v. Howbert, 231 U.S. 399

RE Recess wield g cts oer) AT ea =”

Texas Company v. W. A. Cooper, 107 So.2d 676 (1958) 10

United States Smelting, Refining & Mining Co. v

Haynes, 176 P.2d 622 (1947) (Utah) ; . 10

Walling v. General Industries Co., 330 U.S. 545 15

UNITED STATES CONSTITUTION

8 Pe eee 20, 21

UNITED STATES STATUTES

4 U.S.C., §§ 104-110 (The Buck Act) 4,6

4US.C., §§ 105 &110(b) | 10

4US.C.,§§106&110(c) ss 2

4US.C., § 110(c) | 6,9

26 US.C.,§ 613... aad 4,5,8

28 U.S.C., 1257(3) Reis 2 1

30 U.S.C., §§ 181 ees ares 5, 19

| eee eee 5

OS eee Meet 4,19

See ee ae

A Se i. 4,19

ili

TABLE OF AUTHORITIES—Continued

Page

TEXAS STATUTES

20A Vernon’s Texas Civil Statutes

Chapter 3, Title 122A, Taxation-General .___. os

Article 3.01, Title 122A, Taxation-General.....__.. 2

Article 3.02, Title 122A, Taxation-General ..__._. 7s

Chapter 4, Title 122A, Taxation-General ........... 2

Article 4.02, Title 122A, Taxation-General ...._._.. 3

15A Vernon’s Texas Civil Statutes

I Si oe eri CN eg eo. 3)

SSRI Roe an ak os ares nae EAD 16

I rl Og eo at in a ne eee 16

OTHER

House Report No. 550, 80th Cong., 1st Sess. (1947),

Meas Ot MO, PO ws. we cc cc ec ccc ose 19

Income Tax Regulations, § 1.6138 ................... 11

Seligman, Income Tax, 7 Encyclopedia of the Social

Sciences 628-631 (1932) ........................ 13

Semete Report No. 1625 ........................... 6

_ ee

NO. 72-191

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM 1972

HUMBLE OIL & REFINING COMPANY,

- Petitioner

ROBERT S. CALVERT, COMPTROLLER OF

PUBLIC ACCOUNTS, JESSE JAMES, STATE

TREASURER, AND CRAWFORD MARTIN, AT-

TORNEY GENERAL, OFFICIALS OF

THE STATE OF TEXAS,

Respondents

ON PETITION FOR WRIT OF CERTIORARI

TO THE SUPREME COURT OF TEXAS

BRIEF FOR THE RESPONDENTS

IN OPPOSITION

OPINIONS BELOW

The opinion of the Texas Court of Civil Avvreals

for the Third Supreme Judicial District of Texas

(Pet.App. 24-33) is reported at 464 S.W.2d 170. The

opinion of the Texas Supreme Court (Pet.App. 34

44) is reported at 478 S.W.2d 926.

JURISDICTION

The judgment of the Texas Supreme Court was en-

tered on March 29, 1972, and timely Motion for Re-

hearing was denied by said Court on May 10, 1972.

The petition for a Writ of certiorari was filed on Au-

gust 3, 1972. The jurisdiction of this Court is invoked

under 28 U.S.C. 1257(3). Respondents do not con-

cede that jurisdiction exists.

cee aie oooh Wad dre PN

i # :

a REELS Re

QUESTION PRESENTED

The question presented is whether the Texas oil

and gas production business privilege taxes’ arising

from Petitioner’s production business activities car-

ried on within the Corpus Christi Naval Air Station,

a federal enclave over which the State of Texas granted

exclusive jurisdiction, are ‘‘income taxes’’ within the

meaning of the Buck Act’ and thus, may be levied on

the production activities of Petitioner.

STATUTES AND PROVISIONS INVOLVED

The Buck Act provides:

4 U.S.C., § 106:

‘‘(a) No person shall be relieved from liability

for any income tax levied by any State, or by any

duly constituted taxing authority therein, having

jurisdiction to levy such a tax, by reason of his

residing within a Federal area or receiving in-

come from transactions occurring or services per-

formed in such area; and such State or taxing

authority shall have full jurisdiction and power

to levy and collect such tax in any Federal area

within such State to the same extent and with the

same effect as though such area was not a Federal

area.’

4 U.S.C. § 110:

‘‘(¢) The term ‘income tax’ means any tax lev-

ied on, with respect to, or measured by, net income,

gross income, or gross receipts.”’

The Texas statutes provide:

290A Vernon’s Texas Civil Statutes, Taxatior-

General, Article 3.01:

‘Chapter 4 (with respect to oil) and Chapter 3 (with re

spect to gas), Title 122A, Taxation-General, Vernon’s Texas

Civil Statutes.

"4 U.S.C. §§ 104-110 (set forth in Appendix I hereof).

spe

ae

—

‘“‘(1) There is hereby levied an occupation tax on

the business or occupation of producing gas within

this State, computed as follows:

A tax shall be paid by each producer on the

amount of gas produced and saved within this

State equivalent to seven and one-half percent

(744%) of the market value thereof as and when

produced... .”’

20A Vernon’s Texas Civil Statutes, Taxation-

General, Article 3.02: |

‘*(1) The market value of gas produced in this

State shall be the value thereof at the mouth of

the well; however, in case gas is sold for cash only,

the tax shall be computed on the producer’s gross

cash receipts. Payments made by purchasers to

producers for the purpose of reimbursing such

producers for taxes due hereunder shall not be

considered a part of the producer’s gross cash

receipts. In all cases where the whole or a part

of the consideration for the sale of gas is a por-

tion of the products extracted from the producer’s

gas or a portion of the residue gas, or both, the

tax shall be computed on the gross value of all

things of value received by the producer, including

any bonus or premium; ....’’? (emphasis added )

20A Vernon’s Texas Civil Statutes, Taxation-

General, Article 4.02:

‘“*(1) There is hereby levied an occupation tax on

oil produced within this state. ... Provided, how-

ever, that the occupation tax herein levied on oil

shall be four and six-tenths percent (4.6% ) of the

market value of said oil whenever the market

value thereof is in excess of One Dollar ($1) per

barrel of forty-two (42) standard gallons. The

market value of oil, as that term is used herein,

shall be the actual market value thereof plus any

bonus or premiums or other things of value paid

therefor or which such oil will reasonably bring

if produced in accordance with the laws, rules and

ats

— EEE ERNE DER ELT IED PRE ILM AN LIED LION LE IE SN AE ST I, NIE

ET, Ceara Gian Wk ik Wl cata a Ne eid ’

——

regulations of the State of Texas.’’ (emphasis

added)

Sections 351, 352 and 357 of Title 30, U.S.C. (part

of the Mineral Leasing Act for Acquired Lands, 30

U.S.C. § 351, et seg.) are set forth in Appendix II

hereof.

STATEMENT

This litigation concerns the jurisdiction of the State

of Texas to levy its oil and gas production taxes on

Petitioner’s oil and gas production business operations

conducted on the Corpus Christi Naval Air Station,

a federal enclave wherein exclusive jurisdiction has

been granted by the State of Texas, save only the

right to serve process and certain qualifications in the

Deed of Cession concerning duration and the tax ex-

empt status of such lands.

Petitioner has produced oil and gas under a federal

oil and gas lease since May of 1963, and from 1963

until April of 1967 paid the Texas oil and gas produc-

tion business-privilege taxes without protest. Since

1967, said taxes have been paid under protest and this

suit was instituted for their recovery.

The state oil and gas production business-privilege

taxes here in question are income taxes as defined

in the Buck Act and are measured in the same manner

as ‘“‘gross income’’ from such production operations

is measured under 26 U.S.C. § 613 (Internal Revenue

Code) which provides for a percentage depletion based

on ‘‘gross income’’ from the property.

Petitioner calculates income for federal depletion

purposes and income for purposes of the state produc-

tion taxes as to these production operations, in one and

the same manner and has, therefore, reported the same

amounts, to the dollar, as ‘‘value’’ for Texas oil and

iia Moai

gas production business tax purposes and as ‘*eross

income’’ for depletion purposes under 26 U.S.C. § 613.

(See Answer to Request for Admissions, Stipulation

of Facts, p. 5, and Texas Supreme Court Opinion, 478

§.W.2d 926, 931-932; Pet.App. 43.)

Depletion is taken by Petitioner when the crude

minerals are produced and at that time the deduction

is allowed from income." (Statement of Facts, p. 45)

ARGUMENT

The fact that no conflict of decisions exists, and the

very limited circumstances under which the questions

here presented can arise, illustrate that this question

is not one which warrants review by this Court on

Petition for Writ of Certiorari.

Before the Buck Act definition can be in issue, the

land involved must be in an area of exclusive federal

jurisdiction, must have been acquired by the federal

government after 1920 and must be located in a State

that has a selective income or value received measure

in its tax on that business. Also the oil or gas deposits

must be in an already existing field where outside pro-

duction is actually draining the federal mineral de-

posits, for it is the inherent right of the executive

division of government to protect federal property

that authorizes the making of this type of lease. The

ordinary lease would be made under the Mineral Leas-

‘The underlying theory of the deduction is to allow “... a.

tax-free return of the capital consumed in the production of

gross income through severance.” (emphasis added) Ander-

son v. Helvering, 310 U.S. 404 (1940) page 408.

‘If such lands were acquired prior to that time, or if the

land was originally part of the public domain, the Mineral

Leasing Act of 1920, 30 U.S.C. § 181, et seqg., would apply and

30 U.S.C. § 189 consents to taxation of the lessee’s production

business under Mid-Northern v. Walker, 268 U.S. 45( 1925).

—— SLATER ALIS 9ST ORTON RRIRD ORE A

LEER RPTL RMN METI TE: Re

—

ing Act for Acquired Lands which consents to the tax

in issue here.

I

The tar in issue here falls within the Buck Act

definition of income tax and the decision below is

clearly correct.

In Howard v. Commissioners of the Sinking Fund

of the City of Louisville, 344 U.S. 624 (1953), which

involved the Buck Act and State taxation within a

federal enclave in a portion of Louisville, this Court

held that it did not matter that the tax involved was

not an “‘income tax’’ by Kentucky law. Since the tax

there involved was measured by, and levied with re-

spect to, the income from the taxed activity, it was a

Buck Act income tax even though not denominated or

: classified as an income tax under local law, and even

though it reached only certain items of income.

The question here is whether the Texas oil and gas

production taxes are taxes ‘‘with respect to, or mea-

sured by’’ income or receipts from the business-privi-

lege taxed.

The legislative history of the Buck Act’ clearly

demonstrates an intent of Congress tu expand the ap-

plication of the terms ‘‘income tax’’, ‘‘gross income”’,

‘gross receipts’ and ‘‘net income’™ past any set defi-

nition or concept of those terms, and to allow any tax

levied on, with respect to, or measured by income or

receipts from the business taxed. Congressional intent

to get away from a concept of only one type of income

tax is shown in Senate Report No. 1625,’ as follows:

"4 US.C. §§ 104-110

*4 U.S.C. § 110(c)

"S.Rep. No. 1625, 76th Cong., 3d Sess. 5 (1940)

meng eee . 4

GF LOLOL LITE IE TN Te a

a

“[t]his definition [of income tax] ... must of

necessity cover a broad field because of the great

variations to be found between the different State

laws. The intent of your committee in laying down

such a broad definition was to include therein any

State tax (whether known as a corporate fran-

chise tax, or business-privilege tax, or any other

name) if it is to be levied on, with respect to, or

measured by, net income, gross income, or gross

receipts.’’ (emphasis added )

The type of state taxes referred to, especially the

business-privilege taxes, demonstrate beyond any seri-

ous doubt the intent of Congress to include any tax

that was levied on, with respect to, or measured by in-

come or receipts from the business taxed, including

those which do not necessarily result in a sales transac-

tion, but where the gain and benefit is equally enjoyed.

The Texas oil and gas production taxes as measured

on Petitioner’s production operations here involved,

are unmistakably measured by the income and receipts

of these business operations and are taxes related to

such income and receipts.

The Texas Supreme Court in this case, held in 478

S.W. 2d page 931, (Pet.App. 42-43) that:

“The Texas oil production and gas production

taxes attach when these minerals have been pro-

duced and severed from the earth, when they have

been reduced to possession and have come within

the dominion and control of the producer... . The

tax, as applied in this case is levied on and mea-

sured by the value in money or money’s worth of

the minerals, whether they be sold, used, or other-

wise disposed of. The tax attaches upon the re-

ceipt and is measured by the gross value of that

received.” (emphasis added)

‘Petitioner cites State v. Humphrey, 159 S.W.2d 162 (Tex.

iv.App. 1941, no writ) and two opinions of the State Attor-

ney General for the proposition that only severance is re-

=

The gas production business tax statute specifically

states that the measure is the gross cash receipts from

gas sold for cash and the value received from gas sold

for other than cash. Where there is not a sale at the

point where the production business ceases, however,

the value received is used just as it is used to determine

‘gross income’’ from such business activities under 26

U.S.C. § 613. As we have stated, the measures used by

Petitioner to calculate ‘‘gross income”’’ under Section

613, and “‘value’’ both as to gas and oil for purposes of

the State taxes are the same with respect to their pro-

duction business operations here involved.

That the same measure applies as to the oil produe-

tion business is shown by the opinion of the Texas Su-

preme Court in this case.

The gas production business tax statute also specifi-

cally states that the gas must be “‘saved”’ and under the

opinion of the Texas Supreme Court in this case, this

same rule apples with respect to oil production. The

court has construed the taxes, both as to oil and gas

production operations, to attach when the oil and gas

have been reduced to the possession, dominion and con-

trol of the producer. The Texas Supreme Court stated,

478 S.W.2d, at 931 (Pet.App. 43):

“‘ At that point there has been an inflow of wealth,

an accretion to wealth, an economic gain in money

or money’s worth.”’

Where the producer sells his production at the end

of such production operations, gross receipts from that

sale would reflect the true income, receipts, and value

—

reeeived from said operations.’ Where it is not sold at

this point, fair market value reflects the true income

of the production business.

A use or disposition of the production without its

businesses when both engage in the same taxable busi-

ness-privilege of producing oil and gas, and the gain

and benefits are equal to each producer from the in-

Petitioner refers to the fact in its petition that both

the oil and gas production taxes have minimum mea-

sures not involved here which are not related to the

gross income or value received from the production

operations. Such a specific amount per

barrel or m.c.f. (aaillien cubic feet of gas) and are

indeed unrelated to income from the business.” Peti-

tioner does not contend that such measures or any

other special measures are involved here but believes

that their inclusion in the taxing statutes prohibits

those statutes from consideration as an “‘income tax”’

under the Buck Act even though the income related

measure is the only one used with regard to the busi-

ness operations here in question.

Petitioner argues that under the Buck Act, re-

ceipts or income as used in the Section 110(c) defini-

"What the producer sells its mineral products for at this

point is the measure of value used for both the Texas oil and

tion of income tax, means only receipts on income re-

sulting from sales transactions.

The sales tax provisions in 4 U.S.C. §§ 105 and

110(b) already allow taxes on receipts resulting from

sales. (set out in Appendix I). It is true that ‘gross

income”’ and ‘‘gross receipts’’ will include taxes mea-

sured by sales generated receipts or income, but these

terms are not limited to sales receipts, and in fact such

a limitation would completely nullify any meaningful

effect of such terms as defined in the Buck Act. This

clearly is not the effect intended, and the congressional

intent to allow gross income and receipts related tazes

on all business pursuits taxed by the states, including

those that do not necessarily result in a sales transac-

tion, even though there is equally as much benefit,

wealth, gain, and income derived and enjoyed from the

pursuit of that business, is unmistakably shown by the

legislative history.

There is not a better example of this type of business

than the mineral extraction industry, where integra-

tion can do away with the need for sales transactions

in order to derive the benefits and gain from the busi-

ness.

‘Many states have mineral production related taxes which

specify income or proceeds as the measure and in every case

such tax measures are construed as the value of minerals

as the Texas production business taxes are measured and as

“gross income” under 26 U.S.C. § 613, is measured. Klies V.

Linnane, 117 Mont. 59, 156 P.2d 183 (1945); United States

Smelting, Refining & Mining Co. v. Haynes, 176 P.2d 622

(Utah, 1947) ; Forbes v. Thomas Gracy Consolidated Virginia

Mining Company, 94 U.S. 313, (Nevada, 1877); Missouri K.

& T. Ry. Co. v. Meyers, 204 F.2d 140 (Oklahoma, 1913).

Value of Production has also been used to determine income

for taxes other than those levied with respect to the business

itself. Magnolia Petroleum Co. v. Oklahoma Tax Commis-

sion, 121 P.2d 1008 (1941) ; Texas Company v. W. A. Cooper,

107 So.2d 676 (La.Sup. 1958).

—

—

Business-privilege taxes are much more limited in

scope than general income taxes and are not tied to a

sale or exchange since the taxable event is the doing

of business and not the transaction that may or may

not take place in conjunction with the business oper-

ation. Petitioner’s position presumes that sales or ex-

changes are the only taxable event contemplated by the

Buck Act. This simply is not the case.

The measure of selective ‘‘gross income’’ from the

standpoint of a mineral producer’s production activi-

ties, is provided in the federal tax laws, in 26 U.S.C.

§ 613. This measure is used to determine the percent-

age depletion allowance that may be deducted from

the gross income of a producer to allow him a tax-free

return of capital consumed in the production of gross

income through severence.” The capital so consumed

is the minerals in situ produced as income through sev-

erence. The depletion deduction is expressed as a per-

centage of the ‘‘gross income’’ from the property (In-

ternal Revenue Code of 1954, 26 U.S.C. § 613) and

“gross income’’ from the property is defined in the In-

come Tax Regulations, § 1.613, as follows:

“In the case of oil and gas wells, gross income

from the property, as used in Section 613(¢) (1),

means the amount for which the taxpayer sells the

oil or gas in the immediate vicinity of the well. If

the oil or gas is not sold on the premises but is

manufactured or converted into a refined product

prior to sale, or is transported from the premises

prior to sale, the gross income from the property

shall be assumed to be equivalent to the represen-

tative market or field price of the oil or gas before

conversion or transportation.’’

In the case before us, the gross income from the

property with respect to the Corpus Christi Naval Air

“See footnote 3, supra.

_

aT

Station lease reported by Petitioner for federal income

tax depletion purposes is the same, to the dollar, as the

market value of produced oil and gas from those leases

reperted by Petitioner for Texas occupation tax pur-

poses. Said gross income includes the value of all pro-

duetion regardless of the method of its disposition.

This depletion allowance is taken by Petitioner when

the minerals are produced (p. 45, Statement of Facts)

just as the business-privilege taxes are levied when the

minerals are produced and reduced to the producer’s

possession, dominion and control.

As stated by the Texas Supreme Court at 478 S.W.2d

page 930, such taxes are levied on or with respect to in-

come under the federal case law. In Helveringv. Brunn,

309 U.S. 461 (1940), this Court held that a landlord-

taxpayer who had come into possession and full owner-

ship of a building erected upon his land by a lessee who

haé forfeited the lease and caused a reversion to the les-

sor was in receipt of income. The taxpayer had claimed

that the added value to his land ean be considered

‘‘gain’’ only upon the owner’s disposition of the asset.

The opinion held that the gain was realized by the land-

lord-taxpayer in the year of repossession of the leased

premises. In Commissioner v. Wilcoz, 327 U.S. 404, 407

(1946) this Court held that no single criterion had been

found to determine in all situations what is sufficient

gain to support the imposition of an income tax. How-

ever, in Old Colony Trust Company v. Commissioner,

279 U.S. 716 (1929) and in Commissioner v. LoBue,

351 U.S. 243 (1956), this Court held that income com-

prehends an accession to wealth in the form of eco-

nomie benefit, value in money, or money’s worth. Gain

of the use and dominion of a valuable good or thing is

ineome and there is no requirement that it be sold or

converted into cash. Helvering v. Brunn, supra. In

—_— —_

we Ss

ee See

pS EE RE DLE GOO AP. LO I EI AO MTHS eee Le RF 5g

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that case there was a lessor-lessee relationship as dis-

eussed above just as there is a lessee-lessor relationship

im this ease.

As stated by the Texas Supreme Court on 478 S.W.

2d, page 930 (Pet.App. 38-39), income “. . . may be

considered as the money, or money’s worth, which

comes during a definite period. It is to be distinguished

from eapital, which is a fund of wealth at a particular

time. See Seligman, Income Tax, 7 Encyclopedia of the

Soeial Seiences 628-631 (1932). The essence of income

is an inflow constituting an accretion to wealth, identi-

fiable and measurable in money or money’s worth,

though not necessarily in cash.’’ (emphasis added )

It has long been held by this Court that minerals pro-

duced and extracted by a miner do not constitute capt-

ta? but that such production or extraction operations

are income producing activities of a taxpayer. Strat-

ton’s Independence v. Howbert, 231 U.S. 399 (1913) ;

Stanton v. Baltic Mining Co., 240 U.S. 103 (1916). In

the Stratton’s Independence case, this Court held with

respect to an income-measured corporate tax that there

could be no deduction from gross income, allowed for

the value of the minerals in situ. Had these mineral

preducts been considered as capital rather than gross

profits such a deduction would have applied. Later in

the Stanton case, dealing with the federal corporate

excise tax measured by income, this Court reaffirmed

and clarified its holding in the Stratton’s Independence

case and though agreeing that such a tax was on the

product of the mine, stated with respect to the tax-

payer’s argument that it:

“*. . . moreover rests upon the wholly fallacious

assumption that looked at from the point of view

of substance a tax on the product of a mine is

necessarily in its essence and nature in every case

@ direct tax on the property because of its owner-

— pe

a

ship unless adequate allowance be made for the

exhaustion of the ore body to result from working

the mine. We say wholly fallacious assumption

because independently of the Sixteenth Amend-

ment it was settled in Stratton’s Independence v.

Howbert, 231 U.S. 399, that such a tax ts not a tax

upon property as such because of its ownership,

but a true excise levied on the results of the busi-

ness of carrying on mining operations” (pp. 413

et seq.) (emphasis added)

These two cases clearly show that an income mea-

sured tax with respect to the mineral production busi-

ness, is a tax on the product of the mine and was a true

excise on the results of the business of carrying on min-

ing operations. The Texas oil and gas production taxes

are equally measured by the income, or are related to

the income or receipts of the mineral production

business.

In Alexander v. King, 46 F.2d 235 (10th Cir. 1931),

74 A.L.R. 174, the Court of Appeals for the Tenth Cir-

cuit referred to the Stratton’s Independence and Baltic

Mining cases, supra, stating: (page 240)

‘In Stratton’s Independence v. Howbert, 231 U.S.

299, 34 S.Ct. 136, L.Ed. 285, the taxpayer mined

goldbearing ore from beneath its own lands. The

value of the ore recovered, less the cost of recov-

ery, was treated as income under the Cor poration

Tax Act (36 Stat. 11, 112, c.6)....

‘Stanton v. Baltic Mining Co., 240 U.S. 103, 36

S.Ct. 278, 60 L.Ed. 546, involved the Income Tax

Law of 1913. The court approved of the doctrine

of the Stratton case, and held that the proceeds

from mining operations—the value of the ore less

the cost of recovery—was income, and that the tax

was not a property tax because the statutory al-

as PB ons

- tk ie

SER RRN OLLIE TOILE LE. GELSETLE PORES

ES a ee

—

lowance for depreciation might be inadequate.”’

(emphasis added)

For purposes of taxation it has been held both in

England and in this country that the product of a mine

is a proper subject of taxation under income tax laws.

New Creek Co. v. Lederer, 295 Fed. 433, (3rd Cir.

1924), cert.den. 265 U.S. 581, 44 S.Ct. 456, 68 L.Ed.

1190.

Petitioner does not question the fact that the mea-

sure here involved is one of benefits, wealth, and gain

derived from the production operations. A tax on the

product of a.mine or other mineral extraction business,

is a tax on the results of that business” such as Peti-

tioner’s production business activities carried on with-

in the federal enclave.

II

The decisions of the Texas Courts are correct

by reason of the qualifications contained in the

Deed of Cession and by reason of the consent to

tax given in the Mineral Leasing Act for Acquired

Lands

The arguments here presented are additional rea-

sons for denying the Petition for Certiorari under the

authority of Langres v. Green, 282 U.S. 531, 535-539 ;

Walling v. General Industries Co., 330 U.S. 545, 547:

and Jaffke v. Dunham, 352 U.S. 280, 281, which allow

Respondents to urge arguments rejected or not passed

upon by the court below as reasons not to grant the pe-

tition for writ of Certiorari. The Texas Court held that

such lease did not effect a recession of jurisdiction over

the mineral deposits and that court did not reach any

questions concerning the coverage of the mineral leas-

ing laws. That court recognized that these questions,

“Stanton v. Baltic Mining Co., 240 U.S. 103 (1916).

—

—

including the question of reeession, were controlled by

federal law.

We believe that the Texas Court should have held

that under the federal law governing the effect of the

qualifieations and the lease, a partial recession of jur-

isdietion over the mineral deposits sufficient to permit

taxing was effected.

The Deed of Cession contains the following lan-

guage:

‘‘That I, W. Lee O’Daniel, Governor of the State

of Texas, in the name and in behalf of the State of

Texas, do hereby cede exclusive jurisdiction over

the said land, to use, occupy, own, possess and ex-

ercise jurisdiction over same as long as the same

remains the property of the Umited States of

America, ...’’ (emphasis added)

‘“‘This Deed of Cession is made pursuant to Arti-

eles 5242, 5247 and 5248 of the Revised Civil Stat-

utes of Texas, 1925, and in accordance therewith

the United States of America shall be secured in

its possession and enjoyment of all said lands, and

said lands and all improvements thereon shall be

exempt from any taxation under the authority of

the State of Texas, so long as the same are ‘held;

owned, used, and occupied by the United States

of America for any of the purposes expressed in

the foregoing statutes and not otherwise.’ (em-

phasis added)

United States Acceptance Provision:

‘‘Pursuant to the provisions of the aforesaid act,

jurisdietion is hereby accepted on behalf of the

nited States of America in the manner and form

ceded by a certain Deed of Cession from the Gov-

ernor of Texas to the United States of America,

dated December 12, 1940, over certain lands de-

“The purposes enumerated in Articles 5242, 5247, and

5248, do not include the use of the land for mineral production.

a SO

scribed therein which are in the custody of the

Navy Department, to wit, ....”

Even if complete title is not vested in the lessee a

real property interest in the deposits is conveyed equal

to the lessee-Petitioner’s right to extract the oil and

gas and to appropriate same to its own use and bene-

fit." It is only this jurisdiction over the right to produce

and appropriate the oil and gas deposits, conveyed to

Petitioner, that Respondents contend was receded for

taxing purposes.

An interest in real property at least equal to the

right to drill for, extract, and dispose of the mineral

deposits, was conveyed and to the extent of that inter-

est a recession occurred under the terms of the Deed

of Cession.

Petitioner does not argue with the fact that a Deed

of Cession may provide qualifications, but only that

the lease did not effect a recession. In Palmer v. Bar-

rett, 162 U.S. 399 (1895) this Court construed a simi-

lar qualification of a grant of exclusive jurisdiction as

follows, 162 U.S. at 403:

‘‘Looking at that act, we find .. . that it was there-

in expressly provided ‘that the United States may

retain such use and jurisdiction as long as the

premises described shall be used for the purposes

for which jurisdiction is ceded, and no longer .. .’

... The power of the State to impose this condition

is clear.’’

“The Granting Clause of Petitioner’s Protective Oil and

Lease provides: “In consideration of rents and royalties

to be paid, and the conditions and covenants to be observed

as herein set forth, the lessor does hereby omy to the lessee

the exclusive right and privilege to drill for, mine, extract,

remove, and dispose of all the oil and gas deposits owned by

the lessor, except helium gas, in or under the following-

described land situated in... .” The Lease’s duration is for

80 long as oil and gas are produced in paying quantities.

ao 17

& >

A lease of vacant lands adjoining the Naval yard

had been made to the City of Brooklyn for market

purposes and this Court held that said land was

‘clearly not used by the United States and occupied

by it for a naval yard or naval hospital.’’ (162 U.S. at

403) and that, 162 U.S. at 404:

‘¢ the ease then presents the very contingency

contemplated by the act of cession, that is, the ex-

elusion from the jurisdiction of the United States

of such portion of the ceded land not used for the

governmental purposes of the United States there-

- in specified. . . . it is clear that under the circum-

' gtances here existing in view of the reservation

made by the State of New York in the act ceding

jurisdiction, the exclusive authority of the United

States over the land covered by the lease was at

least suspended whilst the lease remained in

force.’ (emphasis added)

In Humble v. Waggoner, 376 U.S. 369 (1964), this

Court referred to the holding of the Palmer case," but

distinguished it on the grounds that in the Waggoner

ease, which concerned an oil and gas lease, the author-

izing statute contained no conditions. Here the Deed

of Cession is a qualified grant of jurisdiction over and

reservation of the right to tax the property. Here the

taxes are on the use of a part of the ‘‘land’’ conveyed

in the Deed of Cession and measured by the value of

the use of said portion of the ‘‘land’’. An interest in

land (whether a full fee-simple title in, or only an ex-

elusive right to use or take a portion of said land) was

conveyed by the lease, such interest no longer remains

in the United States, and jurisdiction is receded to the

extent of such interest, the use of which is here taxed.

It is Respondents’ position that this recession of juris-

diction and right to tax whatever interest was thereby

“376 U.S. at 371, n.3.

a 18 ——

——

conveyed, gives the State the corollary right to tax the

use and benefits arising directly from that interest.

The second reason not reached by the court below is

that the Mineral Leasing Act for Acquired Lands”

provides Congressional consent to levy the Texas pro-

duction taxes, 30 U.S.C. § 357." This Section contains

the same language construed by this Court, with refer-

ence to Section 189 of the Mineral Leasing Act,” in

Mid-Northern Oil Company v. Walker, 268 U.S. 45

(1925), where it was held that:

“*, . . the authority of the state [to levy an annual

license tax measured by the gross value of the oil

produced] exists in virtue of such [ congressional ]

consent. Section 32 (41 Stat. 450) [now 30 U.S.C.

§ 189]... .” 268 U.S. 48. (emphasis added)

An exception of mineral deposits in military lands”

from the Mineral Leasing Act for Acquired Lands was

explained by the legislative history which showed that

such mineral deposits were not suitable for mineral de-

velopment." Here this reasoning does not apply as

these deposits and the lands are being developed for

their minerals and the exception should not apply

when such lands are, in fact, suitable for mineral de-

velopment. The inherent power of the executive de-

"30 U.S.C. § 851, et seq.

“Set out in Appendix II hereof.

"80 U.S.C. § 181, et seq.

“Said exception in Section 352 is set forth in Appendix II

hereof. See also footnote 7, supra,

"The legislative history of the Act shows that the excep-

tion of military lands from its coverage was based on the

eemption, and inserted only because, such lands were not

suitable for mineral development: “The bill would except

om its provisions certain lands which obviously are not

suitable for mineral development such as military lands and

surplus lands subject to early disposal.” H.R. No. 550, 1947,

80th Cong., 1st Sess. ( 1947). (U.S. Code Congressional Serv-

%e, 80th Cong., Ist Sess., p. 1666.)

=» 19

motes Dens yes RETEST Oe

—_—_ POMONA TI TI HF nee :

——

partment to make protective leases should be con-

structed in accord with the congressional scheme of the

mineral leasing acts because otherwise unregulated

mineral development contrary to the primary purpose

of all the federal mineral leasing laws, and in conflict

with the requirement of such congressional authoriza-

tion contained in Article 4, Section 3, Clause 2, of the

United States Constitution is allowed.

The exception in 30 U.S.C. § 352 should not be con-

strued to reach a result obviously and clearly not in-

tended nor contemplated by Congress. The exception

provision can be and should be construed to accomplish

only the purpose for which it was inserted by Congress

by restricting its application to those lands not, in fact,

suitable for mineral development, in conformity with

said congressional intent and purpose.

CONCLUSION

In conclusion we would emphasize the fact that there

is no conflict of decisions between the lower courts and

the question here raised is not of sufficient importance

to warrant review by this Court.

Leases such as Petitioner’s are not a common or

ordinary method of leasing federal mineral deposits

as there must be drainage from such deposits allowing

the exercise of the inherent power to protect such de

posits even though the federal mineral leasing laws do

not apply to such lands. Of course, we have argued

that such laws should apply, and allow the taxes here

in question once the lease is actually made.

If such leases were common or were to become com-

mon, Congress would surely clarify its position with

respect to the coverage of such leases under the min-

eral leasing laws, particularly 30 U.S.C. § 352, and if

the statute does not apply to a lease such as peti-

a

ROPER ELIE IGE OEE LLL ELIF SD I PERLE AE

eee reo se Mla ae : ‘.

tioner’s, Congress would have to provide some author-

ity to make such leases as the United States Constitu-

tion requires in Article 4, Section 3, Clause 2.

The small number of leases of this type negates the

position that the lower court decision would signifi-

cantly diminish, if effect at all, bonus moneys received

by the Federal Government. Likewise, its royalties

would be effected very little, if at all, by the lower

court’s decision. All other producers in the same oil

or gas field wherein this type of lease must exist, pay

the business-privilege taxes.

The fast that no conflict of decisions exists or has

been asserted, and the narrow scope of this question

as shown by the limited circumstances under which it

can arise, illustrate that this question is not one which

warrants review by this Court on Petition for Writ of

Certiorari.

PRAYER

For the reasons shown above, Respondents respect-

fully pray that the Petition for Writ of Certiorari be

denied by this Court.

—_ va

—

Respectfully submitted

CrawForD C. MARTIN

Attorney General of Texas

NoLta WHITE

First Assistant

ALFRED WALKER

Executive Assistant

JoHN R-. Grace

Assistant Attorney General

J. H. BroaDHURST

Assistant Attorney General

WarpLtow LANE

Assistant Attorney General

Attorneys for Respondents

Box 12548, Capitol Station

Austin, Texas 78711

—

APPENDIX I

Buek Act, 4 U.S.C. § 104 et seq. (54 Stat. 1059-1060)

4 U.S.C. § 104 (Originally amended in Section 7 of

Buek Act, 54 Stat., 1060) :

§ 104. Tax on motor fuel sold on military or other

reservation reports to state taxing authority

(a) All taxes levied by any State, Territory, or the

District of Columbia upon, with respect to, or mea-

sured by, sales, purchases, storage, or use of gasoline

or other motor vehicle fuels may be levied, in the same

manner and to the same extent, with respect to such

fuels when sold by or through post exchanges, ship

stores, ship service stores, commissaries, filling sta-

tions, licensed traders, and other similar agencies, lo-

eated on United States military or other reservations,

when such fuels are not for the exclusive use of the

United States. Such taxes, so levied shall be paid to

the proper taxing authorities of the State, Territory,

or the District of Columbia, within whose borders the

reservation affected may be located.

(b) The officer in charge of such reservation shall,

on or before the fifteenth day of each month, submit

a written statement to the proper taxing authorities

of the State, Territory, or the District of Columbia

within whose borders the reservation is located, show-

ing the amount of such motor fuel with respect to

which taxes are payable under subsection (a) for the

preceding month.

(c) As used in this section, the term ‘‘Territory”’

shall include Guam, July 30, 1947, c. 389, § 1, 61 Stat.

641, amended Aug. 1, 1956, e. 827, 70 Stat. 799.

4 U.S.C. § 105 (Section 1 of Buck Act, 54 Stat.,

1059) :

—_—

—

§ 105. State, and so forth, taxation affecting fed-

eral areas; sales or use tax

(a) No person shall be relieved from liability for

payment of, collection of, or accounting for any sales

or use tax levied by any State, or by any duly consti-

tuted taxing authority therein, having jurisdiction to

levy such a tax, on the ground that the sale or use, with

respect to which such tax is levied, occurred in whole

or in part within a Federal area; and such State or

taxing authority shall have full jurisdiction and power

to levy and collect any such tax in any Federal area

within such State to the same extent and with the same

effect as though such area was not a Federal area.

(b) The provisions of subsection (a) shall be appli-

cable only with respect to sales or purchases made, re-

ceipts from sales received, or storage or use occurring,

after December 31, 1940. July 30, 1947, c. 389, § 1, 61

Stat. 641.

4 U.S.C. § 106 (Section 2 of Buck Act, 54 Stat.,

1061) :

§ 106. Same; income tax

(a) No person shall be relieved from liability for

any income tax levied by any State, or by any duly con-

stituted taxing authority therein, having jurisdiction

to levy such a tax, by reason of his residing within a

Federal area or receiving income from transactions

occurring or services performed in such area; and such

State or taxing authority shall have full jurisdiction

and power to levy and collect such tax in any Federal

area within such State to the same extent and with the

same effect as though such area was not a Federal area.

(b) The provisions of subsection (a) shall be appli-

cable only with respect to income or receipts received

a

after December 31, 1940. July 30, 1947, c. 389, § 1, 61

Stat. 641.

4 U.S.C. § 107 (Section 3 of Buck Act, 54 Stat.,

1060) :

§ 107. Same; exception of United States, its in-

strumentalities, and authorized purchases therefrom

(a) The provisions of sections 105 and 106 of this

title shall not be deemed to authorize the levy or collec-

tion of any tax on or from the United States or any

instrumentality thereof, or the levy or collection of any

tax with respect to sale, purchase, storage, or use of

tangible personal property sold by the United States

or any instrumentality thereof to any authorized pur-

chaser.

(b) <A person shall be deemed to be an authorized

purchaser under this section only with respect to pur-

chases which he is permitted to make from commis-

saries, ship’s stores, or voluntary unincorporated or-

ganizations of personnel of any branch of the Armed

Forces of the United States, under regulations prom-

ulgated by the departmental Secretary having juris-

diction over such branch. July 30, 1947, c. 389, § 1, 61

Stat. 641, amended Sept. 3, 1954, c. 1263, § 4, 68 Stat.

1227.

4 U.S.C. § 108 (Section 4 of Buck Act, 54 Stat.,

1060) :

§ 108. Same; jurisdiction of United States over

Federal areas unaffected

The provisions of sections 105 to 110 of this title

shall not for the purposes of any other provision of

law be deemed to deprive the United States of exclu-

sive jurisdiction over any Federal area over which it

would otherwise have exclusive jurisdiction or to limit

— wo

_ —_

the jurisdiction of the United States over any Federal

area. July 30, 1947, c. 389, § 1, 61 Stat. 641.

4 U.S.C. § 109 (Section 5 of Buck Act, 54 Stat,

1060) :

§ 109. Same; exception of Indians

Nothing in sections 105 and 106 of this title shall be

deemed to authorize the levy or collection of any tax

on or from any Indian not otherwise taxed. July 30,

1947, e. 389, § 1, 61 Stat. 641.

4 U.S.C. § 110 (Section 6 of Buck Act, 54 Stat.,

1060) :

§ 110. Same: definitions

As used in sections 105-109 of this title—

+ (a) The term “person”’ shall have the meaning as-

signed to it in section 3797 of title 26.

(b) The term ‘“‘sales or use tax’? means any tax

levied on, with respect to, or measured by, sales, re-

ceipts from sales, purchases, storage, or use of tangible

personal property, except a tax with respect to which

the provisions of section 104 of this title are applicable.

(c) The term “income tax’’ means any tax levied

on, with respect to, or measured by, net income, gross

income, or gross receipts.

(d) The term ‘‘State’’ includes any Territory or

possession of the United States.

(e) The term ‘‘Federal area’’ means any lands or

premises held or acquired by or for the use of the

United States or any department, establishment, or

agency of the United States; and any Federal area, or

any part thereof, which is located within the exterior

boundaries of any State, shall be deemed to be a Fed-

eral area located within such State. July 30, 1947, c.

389, § 1, 61 Stat. 641.

=— =

ben Se

siete te eer:

2 ASRS CU LY PERT LE LF ee? ss

COE Ee a

—_—

APPENDIX II

30 U.S.C. §§ 351, 352 and 357:

30 U.S.C. § 351, in part:

‘*As used in this Chapter ‘United States’ includes

Alaska. ‘Acquired lands’ or ‘lands acquired by the

United States’ include all lands heretofore or here-

after acquired by the United States to which the

‘mineral leasing laws’ have not been extended... .’’

30 U.S.C. § 352, in part:

‘*... all deposits of . . . oil, oil shale, gas, . . . which

are owned or may hereafter be acquired by the

United States (exclusive of such deposits in such

acquired lands as are... (b) set apart for military

or naval purposes,...) may be leased by the

Secretary under the same conditions as contained

in the leasing provisions of the mineral leasing

a

30 U.S.C. § 357, in part:

‘‘Nothing contained in this Chapter shall be con-

strued to affect the rights of the State... to ex-

ercise any right which they may have with respect

to properties covered by lease issued under this

Chapter, including the right to levy and collect

taxes upon improvements, output of mines, or

other rights, property, or assets of any lessee of

the United States.”’

cones 7 ats