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HELVERING V. BANKLINE OIL CO., 303 U. S. 362 (1938)

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U.S. Supreme Court

Helvering v. Bankline Oil Co., 303 U.S. 362 (1938)

Helvering v. Bankline Oil Co.

No. 387

Argued February 9, 1938

Decided March 7, 1938*

303 U.S. 362


1. The deduction for depletion in the taxation of profits from oil and gas wells is allowed as an act of grace, in recognition of the fact that mineral deposits are wasting assets, and is intended as compensation to the owner for the part used up in production. P. 303 U. S. 366. chanroblesvirtualawlibrary

Page 303 U. S. 363

2. Making the deduction arbitrary -- a percent of gross income from the property -- was for convenience, and did not alter the fundamental theory of the depletion allowance. P. 303 U. S. 367.

3. The allowance of a percent "of the gross income from the property," i.e. income from oil and gas, is made to the recipients of the gross income by reason of their capital investment in the oil and gas in place. Id.

4. A mere processor who derives an economic advantage through contracts with producers of oil or gas but who has no capital investment in the mineral deposit has not such an "economic interest" in the oil or gas in place that he may have an allowance for their depletion. Id.

5. The Revenue Acts of 1926 and 1928 provide that, in computing net income, there shall, in the case of oil and gas wells, be an allowance for depletion of "27 1/2 percentum of the gross income from the property during the taxable year." The taxpayer, a corporation, derived income from the sale of gasoline which it extracted from "wet" (natural) gas obtained under contracts with producers. The contract in each case required the taxpayer to lay a pipeline from the well to its plant, connecting the pipe with the casing-head or gas trap at the mouth of the well; it required the producer to deliver into the pipeline at the casing-head or trap, the gas produced at the well, and required the taxpayer to extract the gasoline from the gas so delivered and to pay the producer a specified share of the gross proceeds of its sale or a specified share of the gasoline. Held, that the taxpayer was not entitled to an allowance for depletion, since it had no interest in the wells or in the "wet" gas in place, and took no part in the production of it. Pp. 303 U. S. 364-367.

The taxpayer had the right to have the gas delivered, but did not produce it and could not compel its production. The pipelines and equipment, which it provided, facilitated the delivery of the gas produced, but the agreement for their installation granted no interest in the gas in place. Nor was such an interest created by the provision for payment for the gas delivered, whether the payment was made in money out of the proceeds of the gasoline extracted or by delivery of the agreed portion of the gasoline. Whether or not the "wet" gas had a market value and, if it had, whether that value was greater than the amount paid for it, is in no sense determinative. The taxpayer was still a processor, paying for what it received at the well's mouth. chanroblesvirtualawlibrary

Page 303 U. S. 364

6. Where a State leases its land to a private party for extraction of oil and gas, reserving a royalty, a federal tax on the lessee's profits from the operation is not invalid as an unconstitutional burden on a state instrumentality. Burnet v. Jergins Trust, 288 U. S. 508. P. 303 U. S. 369.

See Helvering v. Mountain Producers Corp., post, p. 303 U. S. 376.

90 F.2d 899 reversed in part, affirmed in part.

Certiorari, 302 U.S. 675, on two petitions, directed to different rulings made in the court below upon review of decisions of the board of Tax Appeals, 33 B.T.A. 910.

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