For syllabus, see Fulton Oil Co. v. Toole County, ante, p. 367. The question for determination is whether or not the twenty per cent of the oil produced from the government lease, which was to be paid, five per cent to the government, seven and one-half per cent to Mr. Moore, and seven and one-half per cent to Mr. Beardslee, should be taxed to the respondent operator, or should be lost as a matter of public revenue.
In the government lease the following granting clause, in the opinion of counsel for appellant, determines the question involved in this case: "The lessor, in consideration of rents and royalties to be paid, and the covenants to be observed as herein set forth, does hereby grant and lease to the lessee, the exclusive right and privilege to drill for, mine, extract, remove and dispose of all the oil and gas deposits in or under the following described tract of land situated partly in the Kevin-Sunburst Oil Field, Montana," which brings appellant and respondent clearly within the ruling of Homestake ExplorationCorporation v. Schoregge, 81 Mont. 604, 264 P. 388. As the government reserves no oil, and Moore and *Page 402 Beardslee reserve only overriding royalty, they would be bound by the covenants in the government lease, as to ownership. They certainly cannot reserve more than was granted by the paramount owner.
The government, having disposed of all of the oil, and reserved to itself no property rights in the oil or gas, but the right to payment, this covenant in the government lease would control the ownership of the oil in the royalty reserved by the parties, amounting to twenty per cent of the oil and gas produced.
In view of the decision in the above cited case, we do not believe that further citation is necessary to fully determine the issues in this case to be in favor of the appellant. Plaintiff acquired no title to one-fifth of the oil produced and any tax thereon could not properly be levied against or collected from plaintiff. Unlike the lease considered in the first cause of action in Homestake Exploration Co. v.Schoregge, cited by appellant, the government lease does not purport to grant to the lessee all of the oil produced. On the contrary, the granting clause contained in the government lease merely grants to the lessee "the exclusive right and privilege to drill for, mine, extract, remove and dispose of all the oil and gas." A granting clause of this character does not vest in the lessee title to the royalty oil. (W.T. Wagner Estate v.Wichita County, 3 F.2d 962; Clark v. Slick Oil Co.,88 Okla. 55, 211 P. 496; Denker v. Kay County Gas Co.,114 Okla. 135, 244 P. 42; Russell v. Producers' Oil Co., 146 La. 481,83 So. 773.)
But the provision of the government lease is not material in this case, because the plaintiff herein was not the lessee, nor the assignee of the leasehold during the year in question, as shown by the agreed statement of facts.
During the entire year 1925 plaintiff operated the premises pursuant to its operating agreement with Beardslee, and its *Page 403 right to the oil produced during that year must be determined by the terms of that contract. An examination of that contract will show that it contains no operative words of conveyance purporting to transfer the leasehold interest. On the contrary, the agreement contains an express provision that the leasehold interest is to be assigned at a future date and obviously, the instrument was not deemed a transfer of either lease or permit, as otherwise the lease would have been issued by the government of the United States directly to the plaintiff instead of to Moore. The word "grant," is not used in this agreement, except to confer upon the operating company "the exclusive right to enter upon said lands or any part thereof for the purpose of extracting, removing and marketing oil and gas and their products." The agreement does not purport to vest in the operating company the title to the oil in the ground, nor when produced except as to eighty per cent thereof. It purports merely to be a contract of employment and expressly provides: "That he [Beardslee] will, and does hereby employ and engage the company, its successors and assigns, to prospect upon, develop and operate the hereinafter described lands for oil and gas."
This is an operating agreement in the nature of a contract of employment as distinguished from a lease or assignment of lease. (Hudepohl v. Liberty Hill Con. Min. Water Co., 80 Cal. 553,22 P. 39.) It is so construed by the Department of the Interior (Associated Oil Co., 51 Land Dec. 241, 308), and is analogous to the cropping contract frequently employed in farming operations. (8 Cal. Jur. 706; 40 C.J. 1126; Cook-Reynolds Co. v. Wilson, 67 Mont. 147, 214 P. 1104; 17 C.J. 382, 383.)
The language of the operating agreement between Beardslee and respondent shows that the respondent at no time had title to more than eighty 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 per cent of the oil produced which it did not own was an illegal assessment, and the tax levied against respondent based *Page 404 on such assessment was to that extent illegal and improper. (Homestake Exploration Co. v. Schoregge, supra; Byrne v.Fulton Oil Co., 85 Mont. 329, 278 P. 514.) This action was instituted by Queen City Oil Company, as plaintiff, to recover from Toole county a portion of the net proceeds tax assessed to plaintiff in the year 1926, on account of oil produced during the year 1925. The cause was submitted to the trial court upon an agreed statement of facts, wherein it is disclosed that on July 6, 1921, the United States government issued an oil and gas prospecting permit to John N. Moore, covering 1,743.99 acres of land in Toole county, and on December 29, 1921, John N. Moore entered into an operating agreement with one Arby Beardslee covering all of said land. On January 8, 1923, Beardslee entered into an operating agreement with the plaintiff covering 1,079.77 acres of the land, by the terms of which it was agreed:
"That he will and does hereby employ and engage the company, its successors and assigns, to prospect upon, develop and operate the hereinafter described lands for oil and gas, giving and granting hereby unto the company the exclusive rights to enter upon said lands or any part thereof for the purpose of extracting, removing and marketing oil and gas and their products. The company covenants and agrees to pay, set over and deliver to the party of the first part seven and one-half (7 1/2) per cent of all oil and gas produced and saved from the above described premises and in addition thereto to set over and deliver to the permittee seven and one-half (7 1/2) per cent of all oil and gas produced and saved from the preferential acreage embraced in the above described premises, that is, the acreage upon which the royalties to be paid to the United States government are not in excess of five per cent. * * * The company covenants and agrees to pay, set over and deliver to the United States the whole *Page 405 amount of rents and royalties in oil and gas which may be reserved by or required to be paid to the United States under the terms of said permit, or such leases or any extensions or renewals thereof, in so far as the lands above described may be affected, and all other oil and gas produced from said premises shall be the sole property of the company."
A lease was issued by the United States government to Moore July 1, 1924. The granting clause of the lease is as follows: "The lessor does hereby grant and lease to the lessee the exclusive right and privilege to drill for, mine, extract, remove and dispose of all the oil and gas deposits in and under the following described tract of land:"
The plaintiff operated the premises during the calendar year 1925 under and pursuant to the operating agreement between it and Beardslee, for oil and gas, and the gross value of all products therefrom during the year ending December 31, 1925, was $367,230.58, of which gross yield and value the plaintiff retained for its own use and benefit eighty per cent pursuant to said agreements hereinbefore mentioned; and the money expended for necessary labor, machinery and supplies needed and used in the mining operations and development by plaintiff in the extraction of said oil, was $184,567.37. The plaintiff was assessed with the gross value of the products above, less the expense for labor, machinery and supplies, and the tax computed on such valuation, and plaintiff paid one-half (the first installment) of the tax levied on the assessed valuation of twenty per cent of the gross valuation of the products obtained, under protest, and brought this action for the recovery of the same.
The court entered judgment for the amount of such 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 questions involved in this case are the same as those in the case of Fulton Oil Co. v. Toole County, ante, p. 367, *Page 406 283 P. 769; and, upon the authority of that case, the judgment herein is affirmed.
MR. CHIEF JUSTICE CALLAWAY and ASSOCIATE JUSTICES MATTHEWS, FORD and ANGSTMAN concur.