Opinion
No. 6,510.
Submitted November 14, 1929.
Decided January 9, 1930.
Oil and Gas — Net Proceeds Taxes — Payment Under Protest — One not Liable for Tax on What He Does not Own — Interest on Amount Recovered not Allowable — Statutes and Statutory Construction — Constitutionality of Statute — Rule. Oil and Gas — Leases — Net Proceeds Taxes — Operator of Well Liable Only for Amount Due on Proceeds Owned by Him Exclusive of Amount Paid to Owner of Land and Lessee Under Operating Agreement. 1. Where an oil-well operator under an operating agreement with the lessee of the land was to receive seventy-five per cent of the oil and gas found by him in said land, the owner of the land and the lessee each to receive twelve and one-half per cent, the operator was the owner of only seventy-five per cent of the oil and gas produced and as such liable only for that amount of net proceeds tax, the other twenty-five per cent, owned by the owner of the premises and the lessee, being properly chargeable to them. Same — Statutes — One Paying Taxes Under Protest not Entitled to Interest on Amount Recovered. 2. Section 2271, Revised Codes 1921, provides that where a taxpayer has judgment in his action to recover taxes paid under protest he shall be entitled to interest thereon. Chapter 142, Laws of 1925, amendatory of that section, provides that the successful plaintiff shall have judgment without interest. The general repealing clause declares that all Acts and parts of Acts in conflict with the amendatory Act are repealed. Held, that the provision for interest in section 2271 and the one in Chapter 142 for no interest are so repugnant to each other that they cannot be reconciled, and therefore the latter Act is controlling in this respect. Same — Payment of Taxes Under Protest — Contention That Under Chapter 142, Laws 1925, Interest on Amount Recovered Still Recoverable Held not Maintainable. 3. Held, that the contention of successful plaintiff, in an action to recover taxes paid under protest, that under section 2271 above, he is still entitled to interest on the judgment in his favor and that the provision of Chapter 142, Laws of 1925, in providing that his recovery shall he "with costs of suit without interest" means that the interest thus mentioned applies only to the costs, may not be sustained. Statutes — Constitutionality — Defective Title of Act — Failure to Argue Point in Brief — Statute Presumed Valid Until Invalidity Shown Beyond Reasonable Doubt. 4. Where a statute is attacked as unconstitutional on appeal on the ground that it embraces a subject not expressed in its title, but counsel in his brief fails to present argument in support of the contention, the supreme court will proceed upon the presumption that the Act is constitutional until its invalidity is shown beyond a reasonable doubt.
Constitutional Law, 12 0. 3., sec. 222, p. 795, n. 32. Taxation, 37 Cyc., p. 792, a. 79, p. 1190, a, 19.
Appeal from District Court, Toole County; John J. Greene, Judge.
ACTION by the Fulton Oil Company against Toole County, to recover net proceeds taxes paid under protest. Judgment for plaintiff, and defendant appeals. Affirmed.
Mr. R. L. Clinton and Mr. Walter B. Knaack, for Appellant, submitted an original and a reply brief; Mr. Clinton argued the cause orally.
The question for determination by this court is, whether or not the twenty-five per cent of oil produced from the Byrne lease, twelve and one-half per cent of which was paid to the land owner, Mr. Byrne, and twelve per cent to the Kalispell-Kevin Oil Company, should be taxed to the respondent, who is the operator, or should be lost as a matter of public revenue.
This court has had before it for consideration, the net proceeds tax of oil produced in the Kevin-Sunburst Field in Toole county, for the year 1925, in Homestake Exploration Corporation v. Schoregge, 81 Mont. 604, 611, 264 P. 388, and inasmuch as the facts in the two cases are substantially the same, the rule of law to be applied to the two cases should be substantially the same. It would be difficult for counsel for appellant to undertake to write an independent brief without merely enumerating the holdings of this court, together with its decision as set forth in the Homestake Case, but we will attempt to go a little farther in order to have the court understand that we are not depending entirely upon the Homestake Case, but at the time of the argument of the Homestake Case, one of the counsel for respondent in this case did not entirely agree with the counsel for appellant in the Homestake Case, as to the ownership of the personal property. We still respectfully contend that where there is an option in a lease which gives the lessee the right and power to sell all the oil produced from the lease and pay to the lessor his share without consulting the land owner, that the ownership of the personal property vests in the lessee, and not in the land owner. We adhere to the position that in Northern Pacific Ry. Co. v. Musselshell County, 74 Mont. 81, 238 P. 872, this court announced the correct rule of law. The only criticism that we have is that when an oil operator can dispose of all the oil at his pleasure, without consulting the land owner as to whom he sells it to, or at what price he sells it and pay the lessor his proportion, he possesses the cardinal points of ownership. We think that it is the same as "the tenant on the land is the owner of the crop," and we can furnish many decisions to this effect, though we feel sure that this court is aware of these decisions. Where the tenant has the option to pay, or deliver a share he owns the whole crop, and the land owner owns nothing until the grain is segregated, and we believe that should be sound law in oil and gas cases.
We believe further that where a lessee produces either crops or oil, and has the option to pay a percentage of the crops or oil produced, it merely becomes rental in the eyes of the law, and vests in the lessee the entire title to the crops or oil produced. Therefore, if we are at all correct in this position, the ruling in Northern Pacific Ry. Co. v. Musselshell County, supra, is still good law.
Mr. Louis P. Donovan, for Respondent, submitted a brief, and argued the cause orally.
Counsel for plaintiff do not correctly state the question involved when they say that the question is whether or not the twenty-five per cent gross production obtained from the premises in question "should be lost as a matter of public revenue". The question is not whether the twenty-five per cent "should be lost as a matter of public revenue," but whether plaintiff, under the operating agreements in question, is the owner of the twenty-five per cent gross production in question. If the operator was not the owner of the twenty-five per cent gross production here involved, it is not chargeable therewith in calculating its net proceeds tax. ( Homestake Exploration Corp. v. Schoregge, 81 Mont. 604, 611, 264 P. 388.) In such case, the twenty-five per cent gross production tax would not be "lost as a matter of public revenue," but should be assessed against the owner thereof and the tax collected from such owner. ( Homestake Exploration Corp. v. Schoregge, supra; Byrne v. Fulton Oil Co., 85 Mont. 329, 278 P. 514.)
The plaintiff was not the owner of the Byrne lease. An examination of the operating agreements in question shows that they do not convey or purport to convey the leasehold interest of which the Kalispell-Kevin Oil Company was the owner when the operating agreements were entered into. The agreements contain no operative words of conveyance purporting to transfer the leasehold interest. No word such as, "grant," "assign," "convey," "let," "lease," or "demise," or other operative word of conveyance is anywhere used in the agreements. The agreements did not, therefore, have the effect of conveying the leasehold interest created by the lease from Byrne v. Thompson, nor of creating any new subleasehold estate. ( Hochsprung v. Stevenson, 82 Mont. 222, 266 P. 406.) The operating agreements are merely contracts of employment, by the terms of which the operator takes his compensation for his services in a portion of the mineral product to be produced. ( Hudepohl v. Liberty Hill Con. Min. Water Co., 80 Cal. 553, 22 P. 339; see, also, Clark v. Wall, 32 Mont. 219, 79 P. 1052.)
The operating contracts here under consideration are analogous to the cropping contracts under which the cropper cultivates farm land and harvests the crop, taking as his compensation a portion of the crop raised. This is the view of the Department of the Interior which has always held that an operating agreement does not constitute an assignment of an oil and gas prospecting permit or an oil and gas lease. ( Associated Oil Co., 51 Land Dec. 241, 308; see, also, 8 Cal. Jur. 706; 40 C.J., p. 1126.)
Respondent respectfully submits that the language of the operating agreements shows that the operator at no time had title to more than seventy-five per cent of the oil produced from the premises in question, and therefore the attempt of the state board of equalization to assess to respondent the twenty-five per cent of the oil produced, which it did not own, was an illegal assessment, and the tax levied against respondent based on such assessment was to that extent illegal and improper. ( Homestake Exploration Co. v. Schoregge, supra.)
HONORABLE WILLIAM L. FORD, District Judge, sitting in place of MR. JUSTICE GALEN, absent on account of illness, delivered the opinion of the court.
The above-entitled cause was submitted to the trial court on an agreed statement of facts, in which it is disclosed that on the seventh day of May, 1920, W. H. Byrne leased to Thor A. Thompson all the oil, gas, hydrocarbons and other minerals in and under the lands therein described, and in said lease the following granting clause appears: "* * * Has leased and let and by these presents does grant, lease and let unto the said Thor A. Thompson and assigns * * *" — the lessee agreeing to yield and pay to the lessor the one-eighth part or share of all the oil, etc., which he may obtain, which lease was afterwards assigned to the Kalispell-Kevin Oil Company, and said company on January 30, 1925, entered into what is termed by the parties "an operating agreement," covering a portion of said land, with one W. H. Essex. The agreement, after reciting the fact that the company was the owner and holder of the Byrne lease and was desirous of having the land prospected and drilled for oil and gas, contains the following provision:
"Now therefore, it is hereby mutually understood and agreed by and between the parties hereto that the said trust in consideration of the said party of the second part putting on a drill on the above described lands with a rig of equipment capable of drilling such oil and gas wells to the Madison Lime, unless oil or gas in paying quantities shall be found prior thereto, said drilling operations to be started on or before the first day of May, A. D. 1925, the party of the second part shall receive therefor seventy-five per cent (75%) of all oil or gas found in or under said premises, it being understood and agreed that the said W. H. Byrne, his heirs, executors, administrators or assigns, shall receive twelve and one-half per cent (12 1/2%) of all said oil and gas produced and saved, delivered free of costs to the said W. H. Byrne, his heirs or assigns, in a pipe line or tank, and that the said trust shall receive twelve and one-half per cent (12 1/2%) of all oil or gas in, or under said premises. All of said oil or gas to be delivered free of costs to the said trust, its successor or assigns, in a pipe line or tank, and
"It is further agreed and understood, that as a further consideration for said seventy-five per cent (75%) of all the oil and gas, the said W. H. Essex, the said party of the second part, his heirs, administrators or assigns is to pay to said trust the sum of one hundred ($100) per acre for the oil or gas discovered on said above-described lands."
It appears that on the sixth day of April, 1925, the Kalispell-Kevin Oil Company entered into what the parties term an operating agreement, covering the balance of the land contained in the Byrne lease, with one William B. Rice, which contained substantially the same terms as the agreement with W. H. Essex; that the Fulton Oil Company succeeded to the rights of Essex and Rice under said operating agreements, and operated the lands under the agreements for the year 1925. During that year the gross value of all products obtained therefrom was $319,629.17; and the money expended for necessary labor, machinery, and supplies needed and used in the mining operations and development in the extraction of the oil was $107,441.38. Upon submission of the report to the state board of equalization, the plaintiff was assessed with the entire gross value of the products above, less the expenses for labor, machinery and supplies above, and the tax computed on such valuation, and plaintiff paid one-half, the first installment (Laws 1925, Chap. 142), of the tax levied on the assessed valuation of twenty-five per cent of the gross valuation of the products obtained, under protest, on May 31, 1927, and instituted this action for the recovery of the same. The court entered judgment in favor of the plaintiff for the sum of $1,970.90, being the amount of the tax paid under protest, but refused to allow interest thereon. Defendant appealed from the judgment, and the plaintiff, on its part, assigns as error the failure of the court to allow interest on the amount of the tax recovered.
The question submitted for decision is whether or not, in the calculation of plaintiff's net proceeds tax, plaintiff should be charged with the entire production from the premises covered by the two operating agreements, or only seventy-five per cent thereof.
The question here involved was fully discussed in the very able opinion of Mr. Justice Galen in the case of Homestake Exploration Corp. v. Schoregge, 81 Mont. 604, 264 P. 388, and we see no good reason for changing our views as therein expressed, and it remains for us to apply the rule announced in that decision to the facts involved in this case.
It can readily be seen from the operating agreements above set forth that the plaintiff did not obtain title to the oil or gas in place; nor did the agreements operate as assignments of an interest in the lease. Plaintiff is merely given seventy-five per cent of the oil and gas it produces; nor can it be said under any construction of the agreements that the twelve and one-half per cent of the oil and gas delivered to W. H. Byrne, the land owner, and the twelve and one-half per cent of the oil and gas delivered to the Kalispell-Kevin Oil Company was rental for said land, for the reason that, under the terms of the agreement, the plaintiff did not rent the land but had the mere right to go upon the land covered by the Byrne lease for the purpose of prospecting and developing the same in accordance with the agreements. The Kalispell-Kevin Oil Company reserved to itself twenty-five per cent of all oil and gas, etc., produced, out of which it was obligated to pay to W. H. Byrne, lessor, under the terms of the lease one-eighth of all oil and gas produced. The plaintiff therefore was the owner of only seventy-five per cent of the oil and gas produced and legally assessable for that amount only. ( Homestake Exploration Corp. v. Schoregge, supra, and cases therein cited.) The remaining twenty-five per cent of such oil should have been assessed to the owner thereof. (Id.; Byrne v. Fulton Oil Co., 85 Mont. 329, 278 P. 514)
Section 2271 of the Revised Codes of 1921 provides: "In case it be determined in such action that said tax or license, or any portion thereof so paid under protest, was unlawfully collected, judgment for recovery thereof and lawful interest thereon, together with cost of action, shall be entered in favor of the plaintiff." The Nineteenth Legislative Assembly amended section 2269, Revised Codes of 1921, by Chapter 142 of the Laws of 1925, which said amendment provides: "If such action is finally determined adversely to such county or municipality, or the treasurer thereof, then the treasurer shall, upon receiving a certified copy of the final judgment in said action, refund the amount of such license or tax, with costs of suit without interest, to the person in whose favor such judgment is rendered provided, that if such action was commenced for the purpose of recovering the first installment, or any portion thereof, of any such license or tax, and any subsequent installment thereof, has been paid under protest, as herein provided, then the county treasurer shall, at the time of refunding the amount of such first installment required by such judgment also refund such portion of any subsequent installment as the person holding such judgment is entitled to recover, without interest." The title of Chapter 142 is as follows: "An Act to Amend Sections 2269 and 2270 Revised Codes of Montana 1921, Relating to Payment of Taxes Under Protest" — and said Act is followed with this repealing clause: "All Acts and parts of Acts in conflict herewith are hereby repealed." (Sec. 2.)
Counsel for plaintiff contends that the portion of Chapter 142 above set forth does not have the effect of repealing section 2271, providing for the recovery of interest; and, if it has such effect, the Act in that respect is unconstitutional under section 23, Article V of the Constitution, in that it embraces a subject not expressed in the title of the Act.
The recovery of interest, as provided by section 2271, and the repayment by the treasurer of the tax without interest, as provided by Chapter 142, are so repugnant, that the two Acts cannot be reconciled, and consequently Chapter 142 repeals section 2271. ( State ex rel. Esgar v. District Court, 56 Mont. 464, 185 P. 157; Wilkinson v. La Combe, 59 Mont. 518, 197 P. 836.) And we do not agree with counsel that the interest mentioned in Chapter 142 applies only to the costs. Counsel cites no ease, nor does he argue in his brief the contention that Chapter 142 is unconstitutional; consequently we will rest with the presumption that the Act is valid until its unconstitutionality is shown beyond a reasonable doubt. ( Martien v. Porter, 68 Mont. 450, 219 P. 817.)
The judgment is affirmed.
MR. CHIEF JUSTICE CALLAWAY and ASSOCIATE JUSTICES MATTHEWS, FORD and ANGSTMAN concur.