Motion Amicus Curaie — Burnet v. Harmel

FILE COPY

In THE

Supreme Court of the United States

October Term, 1931

rom 26

DAVID BURNET,

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

VS.

HENRY HARMEL

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES CIRCUIT COURT

OF APPEALS FOR THE FIFTH CIRCUIT.

Motion of Walter E. Barton for Leave to File Brief

as Amicus Curiae in Opposition, and Brief

of Amicus Curiae in Opposition.

4 WALTER E. BARTON,

Investment Building,

Washington, D. C.

Counsel for W. T. Waggoner and

Ella Waggoner, as Amicus Curiae.

HAYWORTH PRINTING COMPANY . WASHINGTON D C

INDEX TO BRIEF

Reasons for Denying Writ ..........

Conclusion “he!

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CITATIONS

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Alexander v. , 46 F. (2d) 235

Berg v. oner, 38 F. (2d) 641

Burk- Waggoner Oil Arsn. v. Hopkins, 269 U. S. 110

Burkett v. Commissioner, 31 F. (2d) 667

a v. Harrelson, 282 U. S. 55

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. Commissioner, 9 B. T. A. 610

Osborn v. Arkansas Ter. Oi] & Gas Co., 103 Ark. 175

Pocahontas Coal Co. v. auaietienee, 55 F. (2d) 626

Reynolds v. Commissioner, 10 B.

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In THE

Supreme Court of the Bnited States

October Term, 1931

No. 824

DAVID BURNET,

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

vs.

HENRY HARMEL

ON PETITION FOR A “VRIT OF CERTIORARI

TO THE UNITED STATES CIRCUIT COURT

OF APPEALS FOR THE FIFTH CIRCUIT.

Motion for Leave to File Brief as Amicus Curiae

in Opposition.

May it please the Court:

The undersigned, as counsel for W. 7. Waggoner

and Ella Waggoner, respectfully moves this Honorable

Court for leave to file the accompanying brief in this

case as amicus curiae in opposition.

WALTER E. BARTON,

Investment Building,

Washington, D. C.

Counsel for W. T. Waggoner and

Ella Waggoner, as Amicus Curiae.

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_— ~~

In THE

Supreme Court of the United States

October Term, 1931

No. 824

DAVID BURNET,

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

vs.

HENRY HARMEL

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES CIRCUIT COURT

OF APPEALS FOR THE FIFTH CIRCUIT.

Brief of Walter E. Barton as Amicus Curiae

in Opposition.

PRELIMINARY

W. T. Waggoner and Ella Waggoner filed appeals

from the Commissioner of Internal Revenue to the

United States Board of Tax Appeals, raising the ques-

tion of whether cash considerations received by them

in 1922 for the execution of certain instruments, com-

monly known as ‘‘oil and gas leases,’’ on lands ;»wned

by them in Texas, which, under the law of ‘exas,

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a

actually conveyed title to the oil and gas in place to

the lessee, were taxable as capital gain within the pur-

view of Section 206 of the Revenue Act of 1921. The

Board of Tax Appeals held that such cash considera-

tions were taxable as capital gain and not as ordinary

income. (W. 7. Waggoner et al., 24 B. T. A. 657.) In

deciding thus, the Board of Tax Appeals followed Fer-

guson v. Commissioner, 45 Fed. (2d) 573, and reversed

its own previous decisions in Ferguson v. Commis-

stoner, 20 B. T. A. 130, and Harmel v. Commissioner,

19 B. T. A. 376. Since the Board decided the Wag-

goner case, the Circuit Court of Appeals for the Fifth

Cireuit reversed the Board in the Harmel case, which

judgment this Court is now requested by the petitioner

herein to review. (R. 35.)

The same question that is raised in the instant case

is presented in W. 7. Waggoner et al. v. Commissioner,

supra, and the decision of this court in the former will

determine the issue in the latter.

JURISDICTION

The jurisdiction of this Court is invoked under See-

tion 240 (a) of the Judicial Code as amended by the

Act of February 13, 1925.

STATEMENT

The taxpayer is an individual residing at Megargel,

Texas. In the year 1924 the taxpayer was, and had

been for many years, the owner in fee simple of certain

lands. In October, 1924, he executed two instruments,

commonly known as ‘‘oil and gas leases,”’ covering said

land, on the basis of stipulated royalties and a cash

consideration of $57,000.00. (R. 15.) This cash con-

sideration was returned by taxpayer as gain from

the sale of capital assets under Section 208, Revenue

Act of 1924. The Commissioner of Internal Revenue

2

treated it as income taxable at the ordinary rates.

(R. 9.) The Board of 'Tax Appeals held with the Com-

missioner (R. 18), and the Cireuit Court of Appeals

for the Fifth Cireuit reversed the Board. (R. 35.)

The two oil leases referred to above are set out in

full in the record. (R. 25-34.)

QUESTION PRESENTED

Whether a cash consideration received by the owner

of lands situated in Texas, for the execution of an in-

strument commonly known as an ‘“‘oil and gas lease,”’

which, under the law of Texas, actually conveys title

to the oil and gas in place to the lessee, is taxable as

capital gain under Section 208 of the Revenue Act of

1924?

The findings of the Board of Tax Appeals were that

the taxpayer received ‘‘stipulated royalties and a cash

consideration of $57,000.00."" (R. 15.) The opinion

of the Board (R. 16) and the opinion of the Cireuit

Court of Appeals for the Fifth Cireuit (R. 35) refer

to the $57,000.00 received as ‘‘cash consideration’”’ and

not as ‘‘advance royalties.’’

STaTuTe INVOLVED

The statute involved is Section 208 of the Revenue

Act of 1924, which is printed in full in petitioner’s

petition beginning on page 2.

REASONS FOR DENYING THE WRIT

1. Congress did not qualify the word ‘‘sale,’’ and,

hence, it was used in its ordinary sense. (U.S. v. Mer-

riam, 263 U. 8. 179.) If the instruments given by the

taxpayer passed title to the oil and gas in place to the

lessee, a sale was consummated, as this is the essence

of asale. (23 R. C. L. 1186; 55 C. J. 36.)

2. It is the settled law of the State of Texas that

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such instruments convey title to the oil and gas in place

to the lessee. (Group No. 1 Oil Corp. v. Bass, 283 U.

S. 279; Theisin v. Robison, 117 Tex. 489, 502, 8 S. W.

(2d) 646; Texas Co. v. Daugherty, 107 Tex. 226, 176 S.

W. 717; Stephens Co. v. Mid-Kansas Oil & Gas Co.,

113 Tex. 160, 254 S. W. 290, cf. W. T. Waggoner Est.

v. Wichita Co., 273 U. 8.113.) Hence a sale was con-

summated by the taxpayer on the execution and deliv-

ery of the instruments in question.

3. The federal courts will follow state laws with re-

spect to the title to property. (25 C.J. 839; 27 R.C. L.

51; 28 U. S. C. A., annotation 143; Guffey v. Smith,

237 U.S. 112, 115; Poe v. Seaborn, 282 U. S. 101; U.S.

v. Robbins, 269 U. S. 315; U. S. v. Malcolm, 282 U. 8.

792; Crooks v. Harrelson, 282 U.S. 55; U. S. v. Cam-

bridge Loam & Bldg. Co., 278 U. S. 55.)

In Group No. i Oil Corp. v. Bass, 283 U. S. 279,

this Court held that under the decisions of the highest

court of Texas, instruments, such as the ones involved

in the instant case, conveyed title to the oil and gas in

place to the lessee, and that such decisions were bind-

ing upon Federal Courts as a rule of local law defining

property rights. This was the contention of the gov-

ernment in that case (Government’s brief, p. 5); but

now this Court is asked to disregard the law of Texas

regarding vested property rights.

4. A number of cases are cited by petitioner to sup-

port his position, but in our opinion they do not do so.

In Work v. Mosier, 261 U. S. 352, the question was

whether under the Act of Congress of June 28, 1906,

cash bonuses received on the execution of oil and gas

leases of Osage Indian lands should be classed as capi-

tal or income. If capital, the bonuses were to be held

by the Secretary of the Interior; and if income, they

were to be paid over to the Indians. This Court held

4

that the question of whether bonuses were to be in-

cluded in royalties was a matter of statutory construc-

tion, and that in view of the entire statute involved,

bonuses were more aptly described as income than as

capital. Not only were the lands situated in Oklahoma,

where the law of the state is that oil and gas leases do

not convey title to oil and gas in place to the lessee

(Rich v. Doneghey, 71 Okla. 204, 177 Pac. 86) ; but the

Act of June 28, 1906, specifically provided that title to

the oil and gas in place should not vest in the Indians

for twenty-five years, and that the oil and gas in place

could not be sold.

In Strattons’ Independence v. Howbert, 231 U. S.

399, this Court held that mining corporations extract-

ing ores from their own premises were subject to the

Excise Tax Act of 1909; that the proceeds from the

sale of such ores were income; and that the difference

between the selling price of the ores and the cost of

removing the same was not deductible as depreciation

under said Act. In Von Baumbach v. Sargent Land

Co., 242 U. S. 503, it was held that royalties received by

a corporation lessor of Minnesota lands represented in-

come under the Excise Tax Act of 1909 and not the

conversion of investment from ore into money, follow-

ing Strattons’ Independence v. Howbert, supra, and

that the taxpayer was not permitted to deduct the value

of the extracted ore in place as depreciation. In U. S.

v. Biwabitk Mining Co., 247 U. S. 116, it was held that

the proceeds of iron ore mined by a corporate lessee of

Minnesota lands were income under the Excise Tax

Act of 1909, and that the taxpayer could not deduct as

capital invested the fair market value of the ore in

place as of January 1, 1909. It was held that under

Minnesota law a lessee was not a purchaser of the ore

in place, and that the Court had pointed out this fact

in Von Baumbach v. Sargent Land Co., supra. In

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ras

Stanton v. Baltic Mining Co., 240 U. S. 103, 114, this

Court rejected the taxpayer’s contention that the Reve-

nue Act of 1913 was unconstitutional as an wnappor-

tioned direct tax when applied to mining corporations

because the 5 per cent allowance for depletion was in-

adequate. It was not held by the Court below in the

instant case that the cash considerations did not repre-

sent income, but merely that the source of the cash con-

siderations was from the sale of the oil aid gas in

place.

The decision below is not in conflict with Burkett v.

Commissioner, 31 Fed. (2d) 667; Berg v. Commis-

sioner, 33 Fed. (2d) 641; Murphy v. Commissioner, 9

B. T. A. 610; Reynolds v. Commissioner, 10 B. T. A.

651; all of which involved oil and gas leases of lands

situated in Arkansas, nor with Alexander v. King, 46

Fed. (2d) 235, which involved an oil and gas lease in

Oklahoma, where the law of the respective states is that

such an instrument does not pass title to the oil and

gas in place to the lessee. (Osborn v. Arkansas Ter.

Oil & Gas Co., 103 Ark. 175; Rich v. Doneghey, 71

Okla. 204, 177 Pac. 86, 89.) In deciding Alexander v.

King, supra, the Circuit Court of Appeals for the

Eighth Circuit not only held that it was necessary to

look to the Oklahoma law to see whether title to the oil

and gas had passed to the lessee, but clearly distin-

guished its decision from Ferguson v. Commissioner,

supra, by pointing out the difference between the laws

of Texas and Oklahoma on this question.

The statutes involved in the cases of U. S. v. Cam-

bridge Loan & Bldg. Co., 278 U. S. 55, and Crooks v.

Harrelson, 282 U. S. 55, did not indicate that Congress

intended that local state laws should govern the classi-

fication. The terms used were general, and this Court

held that the respective state laws were determinative

of the questions. In Burk Waggoner Oil Assn. v. Hop-

6

kins, 269 U. S. 110, this Court held that the term ‘‘asso-

ciation’ as used in the Act comprehended partnerships

similar to the one involved in that case, and that the

local law of the state was without legal significance as

bearing upon the power of Congress to determine how

and at what rate the income of a joint enterprise should

be taxed. In the instant case the term ‘“‘sale’’ is not

defined in the Act, and the only question presented is

one of construction and not one of power. In Weiss v.

Wemer, 279 U. S. 333, the question was whether a

lessee of a long term lease acquired after March 1, 1913,

could take a deduction for depreciation of buildings,

where he did not pay anything for the lease except an

annual rental and did not pay for the buildings on the

leased premises. This Court held that he could not,

and that it was immaterial that under the Ohio law,

where the properties were located, such a lease was

treated in many respects as a conveyance of the fee.

There was no capital invested, and, hence, no allowable

deduction.

In Rosenberger v. McCaughn, 25 Fed. (2d) 699, the

lessor of Pennsylvania lands gave a lease long prior to

March 1, 1913, reserving monthly rentals. The Court

recognized that under the Pennsylvania law the lease

conveyed title to the coal in place to the lessee, and held

that a part of the payment represented capital and a

part income, but inasmuch as the taxpayer merely con-

tended that the entire payments were capital and not

income, the findings of the Commissioner of Internal

Revenue were not disturbed. In Pocahontas Coal Co.

v. Commissioner, 55 Fed. (2d) 626, coal leases of West

Virginia lands made prior to March 1,1913, were in-

volved. The Court recognized that under the West

Virginia law such leases conveyed title to the coal in

place to the lessee, but rejected the taxpayer’s conten-

tion that the entire royalties received from 1920 to 1926

7

represented capital. No alternative contention was

made that the present worth of the royalties on March

1, 1913, represented capital, but merely that the de-

pletion allowance was inadequate. These cases would

be applicable to the instant case if the taxpayer had

made the leases in question prior to March 1, 1913, with

cash consideration deferred until 1924, and then con-

tended that the entire cash consideration was capital

in the year in which received.

5. The only case cited by petitioner, which in our

opinion is in conflict with the decision of the Circuit

Court of Appeals for the Fifth Circuit in the instant

case, is Hirscht v. U. S., 67 Ct. Cl. 687. The Court of

Claims held that Texas law did not govern in determin-

ing whether a sale of the oil and gas in place had been

made, citing Steedman v. U. S., 63 Ct. Cl. 226. The

latter case involved the identical question as Crooks v.

Harrelson, supra, and was overruled by this Court in

the latter case. Furthermore, since the Hirschi case

was decided, this Court, in Group No. 1 Oil Corp. v.

Bass, 283 U.S. 279, sustained the Cireuit Court of Ap-

peals for the Fifth Circuit (41 Fed. (2d) 483), and held

that under the law of Texas an instrument similar to

the ones involved herein conveyed title to the oil and

gas in place to the lessee, and that the law of that state

was controlling as to the source of the income of the

lessee. That decision necessarily settled the rule that

the granting of an instrument, customarily known as

an ‘‘oil and gas lease,’’ in Texas constitutes a sale of

the oil and gas in place to the lessee, and that the Texas

law is binding upon Federal Courts in connection with

Federal income tax questions. (Guffey v. Smith, 237

U.S. 101.)

CONCLUSION

The decision of the Circuit Court of Appeals for the

Fifth Circuit was correct and the case does not present

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questions justifying the consideration of this Court on

writ of certiorari.

Respectfully submitted,

WaLter E. Barton,

Investment Building,

Washington, D. C.

Counsel for W. T. Waggoner and

Ella Waggoner, as Amicus Curiae.

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