Commissioner of Internal Revenue v. Southwest Exploration Company

PETITIONER: Commissioner of Internal Revenue
RESPONDENT: Southwest Exploration Company
LOCATION:

DOCKET NO.: 286
DECIDED BY: Warren Court (1955-1956)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

ARGUED: Jan 23, 1956 / Jan 24, 1956
DECIDED: Feb 27, 1956

ADVOCATES:
Hilbert P. Zarky - for the petitioner

Facts of the case

Question

Media for Commissioner of Internal Revenue v. Southwest Exploration Company

Audio Transcription for Oral Argument - January 24, 1956 in Commissioner of Internal Revenue v. Southwest Exploration Company

Audio Transcription for Oral Argument - January 23, 1956 in Commissioner of Internal Revenue v. Southwest Exploration Company

Earl Warren:

No 286, Commissioner -- Commissioner of Internal Revenue versus Southwest Exploration Company.

Hilbert P. Zarky:

If the court please.

Earl Warren:

Mr. Zarky.

Hilbert P. Zarky:

This case and the next succeeding case both present one single income tax question involving the statutory right to depletion.

The question which both cases pose comes out of the following over simplified situation.

The lessee of an oil and gas well is required to drill the well on a slant and in drilling the well it must go through the property of an adjacent landowner.

It obtains the necessary easements and rights of way from the adjacent landowner permitting it to conduct its drilling operations in this manner.

As consideration for those easements, it undertakes to pay to the adjacent landowner, a portion of production from the oil and gas wells measured by a stipulated percentage of its net profits from operations throughout the life of the lease.

Now, the narrow question of the case is -- concerns these net profit payments which the lessee pays to the adjacent landowner.

And the question is who is entitled the reduction for percentage depletion on those income payments?

The taxpayer in this case is the lessee of the well.

The Court of Appeals for the Ninth Circuit affirming the Tax Court held here, not the adjacent landowner would be entitled to the deduction.

The taxpayer in the next succeeding case is the adjacent landowner.

In its suit in the Court of Claims, the Court of Claims held that it, not the lessee was entitled to the deduction.

And so, of the same transaction we had two court decisions which were an out and out conflict.

And on the Government's petition this Court granted certiorari to resolve that conflict.

I said it's a conflict because everyone agrees that it's either the lessee or the adjacent landowner which is entitled to deduction and not both.

Now, in the courts below, the Commissioner who was faced with claims of competing taxpayers to what was the very same deduction was required to take inconsistent positions.

And to protect the revenue, he denied the deduction to both taxpayers.

And in the courts below we argued inconsistently.

In the Ninth Circuit, we argued that the lessee was not entitled to deduction and the Court of Claims we argued the adjacent landowner was not entitled to deduction.

But now, that this Court has made it possible to have a harmonious decision in both cases, the Commissioner is free to abandon his technical inconsistent position that he took in the court below and the Commissioner is free to take a position in this Court which he believes is the position legally sound.

Our position is that it is the adjacent landowner and not the lessee to whom the deduction should be granted.

Felix Frankfurter:

Is it physically indifferent to the Commission or the Government which rule he takes?

Hilbert P. Zarky:

I think it's physically indifferent.

I think, as a matter of fact, we're worse off as with the position we take from the revenue viewpoint in the years --

Felix Frankfurter:

(Inaudible)

Hilbert P. Zarky:

I think we're losing revenue by the position we take in these -- with these particular taxpayers.

Are you following the Court of Claims or the other court?

Hilbert P. Zarky:

We're following the Court of Claims and disagreeing with the Ninth Circuit.