SCOTT BEAMER et al., Plaintiffs and Respondents, v. FRANCHISE TAX BOARD, Defendant and Appellant.
S.F. No. 23591
Supreme Court of California
May 10, 1977
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Evelle J. Younger, Attorney General, Ernest P. Goodman, Assistant Attorney General, Edward P. Hollingshead and Charles C. Kobayashi, Deputy Attorneys General, for Defendant and Appellant.
Aiken, Kramer & Cummings and John A. Harkavy for Plaintiffs and Respondents.
OPINION
MOSK, J.—We consider here the deductibility under
The facts are brief and undisputed. Taxpayers, residents of this state, each own an interest in an oil and gas field located in the State of Texas and receive royalty income from the oil and gas produced. Texas has enacted what it denominates an “occupation tax” on the business of producing natural gas and crude petroleum; the amount of each tax is a specified percentage of the “market value” of the oil and gas “as and when produced,” and it is levied on all producers and purchasers of oil and gas in Texas. It is the deductibility of these taxes under
For the years in question, 1970 through 1972, taxpayers reported the royalty payments they received as income on their California personal income tax returns and claimed deductions under
I
The initial issue for our determination is whether taxes on or measured by income are made deductible by the language of subdivision (a) of
The basis for taxpayers’ contention is their belief that the latter category, unlike the four which precede it, is not conditioned by the opening caveat of subdivision (a), which declares that “Except as otherwise provided in this section and
While subdivision (a) is not a model of statutory clarity, we cannot read it as taxpayers suggest. Rather, for the reasons stated below, we believe subdivision (a) enumerates five categories of deductible taxes, all of which are modified by the provisions of subdivision (c) and by
To begin with, even were we to accept the view that the fifth category is entirely unaffected by the opening caveat, it would not lead to the conclusion that taxpayers desire. To hold the fifth category severable from the opening caveat would merely create an independent clause in subdivision (a); it would in no way give precedence to that clause over the explicit language of subdivision (c) directing that certain types of taxes, including those on or measured by income or profits, are not
To determine the proper meaning of the section, we must of course read it as a whole. When we do so, it appears to us that subdivision (a) creates four specific categories of deductible taxes and one category which can probably best be described as a “catchall,” but that all five are modified by the opening caveat and therefore limited by the provisions contained in subdivision (c). We are primarily led to this conclusion by the following reasoning: the caveat would be surplusage unless there were a potential conflict between subdivisions (a) and (c); the only such conflict which appears on the face of the statute is between the fifth category and the income tax clauses of subdivision (c) (i.e., subd. (c)(1), (2), (3));3 accordingly, the caveat must apply to the fifth category of subdivision (a).4
We are confirmed in our reading of the statute by an analysis of its legislative history. As discussed below, such an analysis appears to shed light on the Legislature‘s intent, which is, as always, our touchstone for the proper construction of a statute. The importance of discerning the Legislature‘s purpose is not diminished when a tax statute is at issue.
We first note that when enacted in 1943, former section 17305, the predecessor to
The revision of
The House provided the following technical explanation for the insertion of this language: “The last sentence of section 164(a) allows as a deduction State and local, and foreign, taxes not otherwise described in section 164(a) which are paid or accrued within the taxable year in carrying on a trade or business or in carrying on an activity described in
That our Legislature was closely following the revisions to the federal statute when, in 1964, it rewrote
Finally, we observe that while the Legislature clearly modelled
Therefore, we conclude that the language constituting what we have termed the fifth category of deductible taxes was added to subdivision (a) solely for the purpose of making it clear, when the format of the statute was changed, that those taxes previously deductible as business expenses or as being incurred in production of income would remain so. The Legislature did not intend by this language to alter any existing provisions prohibiting the deduction of certain types of taxes, specifically taxes on or measured by income or profits. For these reasons taxpayers’ first argument must be rejected.
II
We must now determine whether the Texas Gas Production Tax (Tex. Tax-Gen., art. 3.01 et seq. (Vernon)) and Texas Oil Production Tax (Tex. Tax-Gen., art. 4.01 et seq. (Vernon)) (hereinafter “the Texas
To review the factual setting, taxpayers, as successors in interest to the previous owners who entered an oil and gas lease with a drilling company in 1934, receive royalty income from Exxon Corporation, the current operator of the field of which taxpayers’ land is a part. Texas imposes what it designates an “occupation” tax on the “producers” of gas and oil. Royalty owners such as the taxpayers before us are within the term “producers” as defined for each tax, and therefore are liable for the occupation tax on their share of what is produced. The tax is collected for the state by the purchaser, who deducts the amount of the tax from the purchase price of the minerals. Here, Exxon purchases for cash the oil and gas which is taxpayers’ share under the lease. The amount of both the tax on producers of gas and the tax on producers of oil is a specific percentage of market value of gas or oil, as the case may be, “as and when produced.” Market value for gas is stated to be “the value thereof at the mouth of the well” (Tex. Tax-Gen., art. 3.02) while the market value of oil is defined as “actual market value” (Tex. Tax-Gen., art. 4.02).
In ascertaining whether the Texas taxes are on or measured by income, at the threshold we reject as without significance the fact both taxes are denominated “occupation” taxes; our task is to determine their true nature and not to be guided by labels. We note that the Texas Supreme Court similarly disregarded these labels when it examined the nature of the Texas taxes in Humble Oil & Refining Company v. Calvert (Tex. 1972) 478 S.W.2d 926, 930, a case we discuss below.
We can also easily determine that the Texas taxes are not taxes on income. Liability for them arises at the wellhead as a tax on producers,
We now reach the more difficult question of how the Texas taxes are measured. As stated, the statutory measure of the gas tax is market value “at the mouth of the well.” The statute further provides that when gas is sold for cash only, as taxpayers do here with both oil and gas, the tax is to be computed on producer‘s gross cash receipts. In addition, Texas courts have consistently defined the term “market value” in the series of Texas oil and gas occupation tax statutes to be the price for which the producer sells the oil or gas. (Mobil Oil Corporation v. Calvert (Tex. 1970) 451 S.W.2d 889, 892; W. R. Davis, Inc. v. State (1944) 142 Tex. 637 [180 S.W.2d 429, 432], Calvert v. Union Producing Company (Tex.Civ.App. 1966) 402 S.W.2d 221, 225; Calvert v. Union Producing Co. (Tex.Civ.App. 1953) 258 S.W.2d 176, 179.)
This, then, is the heart of the controversy: the board reasons that because the measure of the tax is, as to these taxpayers, the proceeds from the sales to Exxon which are also the amount of their royalty income, the occupation taxes are in effect “measured by” that income; taxpayers argue, however, that the proceeds from the sales to Exxon constitute gross receipts, and that under general tax law gross receipts from the production of oil and gas are not the same as the gross income from such production.
Taxpayers rely primarily on two sources. First they point to identical tax regulations defining gross income: relevant regulations of both the Franchise Tax Board (Cal. Admin. Code, tit. 18, reg. 17071(c)) and the Internal Revenue Service (Treas. Reg. § 1.61-3(a)(1960)) provide in part that “In a manufacturing, merchandising, or mining business, ‘gross income’ means the total sales, less the cost of goods sold. . . .” (Italics added.) Taxpayers then cite Revenue Ruling 60-344 of the Internal Revenue Service, which states that “in the case of oil and gas producing
The board makes two arguments to the contrary. First, it declares the revenue ruling to be inapplicable as relating solely to the computation of the gross income of a personal holding company, a technical concept in federal tax law. While the ruling primarily addresses this question, we are not persuaded that the exclusion of lifting costs in computing gross income is limited to the personal holding company context. We note by its opening paragraph that the revenue ruling purports to speak as well to the issue of the relation between lifting costs and the determination of gross income from oil and gas production generally.7 We also note, as is shown in the ruling, that the definition of gross income for purposes of the personal holding company computation requires reference to the general definition of gross income contained in
As further confirmation, Mertens embraces our reading of the scope of this ruling and Treasury Regulation section 1.61-3(a). He states: “The terms ‘gross income’ and ‘gross receipts’ are not synonymous. ‘Gross receipts’ is a broader term, including within it receipts which may constitute capital as well as income, and, as shown above, returns of capital may not be taxes.” He then cites Revenue Ruling 60-344 and Treasury Regulation section 1.61-3(a) for the proposition that “it is recognized that the cost of goods sold is to be excluded from gross receipts in arriving at gross income.” (1 Mertens, Law of Federal Income Taxation (1974) § 5.10, p. 36, fn. 18.1.)
The board also maintains the statement that lifting costs in the oil and gas industry are synonymous with operating costs supports its position
The board‘s second major contention is that the term “gross income” includes any economic benefit received by a taxpayer. The board appears to argue that the reduction to possession of the oil and gas by taxpayers constituted gross income under that definition. Support for this assertion is said to be Commissioner v. Glenshaw Glass Co. (1955) 348 U.S. 426 [99 L.Ed. 483, 75 S.Ct. 473], in which the United States Supreme Court stated that the term “gross income” was to be given a liberal construction consistent with the intent of Congress in using this language to exert in this field the full measure of its taxing authority. (Id., at pp. 429-430 [99 L.Ed. at p. 489].) The view of the case, however, is taken somewhat out of context. It dealt with the taxability of treble damages received by the taxpayers, which the court characterized as “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” (Italics added; id., at p. 431 [99 L.Ed. at p. 490].)
Realization is a term of art in tax law identifying the moment when the receipt of money or property is income for tax purposes. While the types of events constituting realization have been expanded over the years, the requirement that there be such an event before income arises
The board relies heavily on Humble Oil & Refining Company v. Calvert (Tex. 1972) supra, 478 S.W.2d 926, to support its contention that the Texas taxes are measured by income; arguably, the case also supports the assertion that the reduction of minerals to possession constitutes realization. The Texas Supreme Court determined that the present Texas oil and gas occupation taxes were “income taxes” for purposes of the federal Buck Act (
For several reasons we do not find the case persuasive on either point. First, as the Texas court noted, it was “dealing with a particular statutory definition of an ‘income tax’ in a particular context, and not any sort of common understanding of an ‘income tax.’ ” (Id., at p. 929.) By contrast, we believe that in subdivision (c) of
Applying this analysis to the Texas taxes; we conclude they are not measured by gross income. Rather, their measure appears to be the total gross receipts from the sales of the minerals produced; they are
We conclude that the Texas occupation taxes are not “on or according to or measured by income or profits” and, therefore, that their deduction is not prohibited by subdivision (c)(2) of
The judgment is affirmed.
Tobriner, Acting C. J., Clark, J., Richardson, J., Sullivan, J.,* and Taylor, J.,† concurred.
SIMS, J.†—I concur with part II of the opinion and the decision that the judgment must be affirmed.
I am of the conviction that the Legislature intended that state and local, and foreign, taxes not described in the first four numbered categories of subdivision (a) of
*Retired Associate Justice of the Supreme Court sitting under assignment by the Chairman of the Judicial Council.
†Assigned by the Chairman of the Judicial Council.
Notes
“(a) Except as otherwise provided in this section and
“(1) State and local, and foreign, real property taxes, less any amounts received from the state pursuant to the authorization contained in Section 1d of Article XIII of the Constitution;
“(2) State and local personal property taxes;
“(3) State and local general sales taxes;
“(4) State and local taxes on the sale of gasoline, diesel fuel, and other motor fuels; and
In addition, there shall be allowed as a deduction state and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
“(c) No deduction shall be allowed for the following taxes:
“(1) Taxes paid or accrued to the state under this part [i.e., personal income tax];
“(2) Taxes on or according to or measured by income or profits paid or accrued within the taxable year imposed by the authority of:
“(A) The government of the United States or any foreign country;
“(B) Any state, territory, county, city and county, school district, municipality, or other taxing subdivision of any state or territory; . . .”
We omit subdivision (b) which is definitional and procedural and also the balance of subdivision (c), neither of which relates to the issues before us.
We fail to see, however, how this regulation overrides Treasury Regulation section 1.61-3(a). As the above-italicized language suggests, the defined term, “gross income from the property,” appears to be relevant only for the purpose of computing the depletion allowance and not to be a general definition of gross income from oil and gas properties.