Untitled Texas Attorney General Opinion

OFFICE OF THE ATTORNEY GENERAL OF TEXAS AUSTIN Honorable Cleorge ?I. She?,perd Comptroller of Yubllc &mounts Austin, Texas Dear Sir: n meawning or a pipe 1iM oprr- tmeotlon rlth the produatlon 0r (01 Whether ln- aloe attaob.8 or doolelon ln de oaae of Ool-Fox Bruoe Hart et al, 144 S. V. 2nd to intangible values, nearositates @y requerting en opinion on the paints set forth below x *Company f3 dpsratea a private pipe line in oonnarotlon with 1tB oil praduaiap; buslaeer. In addition it gathers for other produoers In the ma8 field, on whioh a gatherfnp: ohargo is made, agalnet the other producers of ilve oenta Per barrel,.or they am &owed ta iriake a ilve oent j Honorable George H. Sheppard, Page Q proilt when the oil is delivered to a aommon acrrier pipe llne. Without th@ gathering spetem the Dommonoarrler pips llno would have aharged Site oentr per barrel ior thi6 serviae. yCompany D operates a gathering eyetern, in oonmotlon with lta refinery, but it 8011~1 part of the oil to a aoaaon aarrler pipe llnr. Thlr servlae would have oort fltr aentr per barrel, &oald the o0nmo.n oarrler gathered the 011, as in the oase of Goapmy C. %ompany E operates a pipe line under leaa8 rgreement. The proprrtle~~ are owned by a retin- 817, but the operating ooapany is lnoorporatstl as an 011 pipe line Ooapakly. Or they may bur 011 in the field and eel1 it to the rsflnery and/ or other reilnerirr and oom8on oam%ors, with no oontraat to roll, but the reloo are made without any pro-determlnrd profit. The pipa line and/ or markotlng aompany nar make more or lrrr than the gathering oharge. The loaclr egr**ment mY rtlpulate, (a) that all ad valorem taxer are to br paid by the owner (reflaery) or (b) that all ad valorem taxer ara to ba borae by thr lrra~ oompuly . Alro it may rtfpulate, (s) that the rental be paid on a qlat rate pe=wnth or annum, or (d) that the rental be bared on a per barrel rate, for Wumple the rats would be three osntr par barrel on all oil gathered. *The main quertlonr involved may be ataamar- Ised as followr: “1. What Ir gross inaom0, a6 appliOd to a pipe fine with no publlshod trrlfS@t I8 ail trading profits an 5.naoae In the oeao of Com- panlee C end Dt Ape aavlnga on their own 011 to be oonsiderod in arriving at their total grow lnoomet *2. 11 them any yard-at&ok to be ~sr6 In m0aeurIng or alas~ifyi~ a pipe line oper- ated In oonneotlon wxth the reilnlng or prb’- RonorabU Worge B. Sheppard, PM- 3 duot Ion of arude ail0 “3. Doee an lntanglble veluo, as found, lttaoh itself to the pQalaa1 prepert~ea, or to the buaineaa of transporting oil br plpe lIne7 It aa7 be presumed that QompanrE will hsve offioe furniture and other propmrtr that wI11 be used in their narketlng and pipe 1Ine buelneas however the 1ntaagIble valur would ordinarl~y be apportloned to the counties through whlah the plpa llnem are altuatad. *Arttale 6019 rOa48, In part a8 iollowar “‘Xt la declare4 that the operatloa of common oarrlcr pipe lines la a bualneaa in whloh the publlo 16 intsreetrd and Is aubJeot to regulation by law. The buaineaa or a, or of mrahaslna ml relllnp; orude=I M in 06 aestion with e-oh bualneae q ef the’alaaa eubJect to thle law to transport the wudo petroleum SO bought or sold, sat11 not be oondwted, unleso such pipe llnr 80 urea la a oommon oarrler wlthln the purvlrw of thla law. . . .8 (Underaomlag ours) “On the pnrumptloa that Co-lea D md E arm ‘Omlng, operating or nanaging’ a pip* lIn0 that oomee within the above statute, or that they are ‘Doing buaIneas a? the same oharaoter ln this Btate’l la their ravanue to be predlQete6 on a tariff, where one la ratabliahad and pub- lished by a oammon oarrler pipe llnet Or Is thalr lnoama to be oonaldi8red the eame as that 011 trading profit iron buying, tranaportlng and aelllng ollt Prom a praotlaal standpoint, It w ara conflne4 to oil trading profltia thara wIl1 be no lntanglble value. On the other hand, ii tarlftr lro eet up on all 011 tramported, a hp pothetloal, or earning aapaalt~ o? the prop8rty as dlatlngulahe4 from the actual errninga, la the baa1 e of an intangible value. *ilntll tha Qol-Tax eare was beoibed the pip@ line industry had taken the praottoal oonatx%otIon %aorablo Qeorge 8. Sheppard, Pago 4 of that part of Art1010 0018 reading aa follrluer 'The pr0tl6lon6 Of thir law 6hall not apply to those pips lines whloh am llmlted in their u6e t0 the W8116, 6t6tiOnE, plant6 6n4 lVfin6l’i86 Of the Owner. . . . * to mean the pipe line6 of the produoere of ail from the wella to the lea68, or rettlbag tank6; 6nd the lines from the lea68 tank6 to the trunk liner 66 being a part o? a gathering 6JIt6pL. AS60 Chore linca running from refinery t6nk farm6 to 6tlll6, and/or loading radk6 Or WhRI’V66, 6trtlOns bto., withln the 26- 'finery grOI.ind6 m6 being p. p6rt of the refinery lqulpment~ rhile those pips lines that brought ,oil to th6 tank farm6 were a part of tranrpor- tatlon equipment. The Judge, in the above oa68, widently did not oonsider the oonrtruotion br th6 industry, In arriving at hi6 dsoialen. *Seotlon 4 of Arttole 6019 read8 a6 follw6~ *Owning, operating or 6un6glng or partlolpatlng In Wnerahip, operation or WUgWWnt, m , oontraot of pufohare, mrment to bw or ether agreement or arrangement of *any inh what6oever, ally pipe line or plpe liner, or part of engr pipe IlaO, for tranrportatloa fr0m 6ny o$.XflsZd or pla06 of prodtaatlon with- la thir 8tate~ f&'any di6trlbItiAg, rqflnlng or aarketlag oentrr or reehipplng point thWeDf, within thlr State, or 0-e petmleua bought of other68 A160 in this 0oanrotloa Artlele '7lO6 6ho&itd b6 Haa, srpeoitil~ that part reading a6 fO11OW6 t “‘EaOh bpaoroarsteU. . . . 011 pipe line oompany, and 6ll oommon oarrler pipe line eoc panlee. . ; . 6nfc6p: 8 Ln th6~mrD~f &. . . ln a&ditrZn to the ad raGrem tuer on tangible propertler whlah are or lag be IS- pooed upon them rerpeotlvely, by la+: ahall 'By an annual tax ta the State. . . 011thric it%- tangible 6669t6 and prO@Ortf, and lOOa t&X86 thereon to the eowties la whloh it6 bo6iR866 la carried an.f The undersoored uor46 a6y bcr applied to Gompanr E. *It rholauld Be pointed out her6 that non6 of the68 oompaaie6 i!mvr deeland th8#681+66 t0 Iionorable George 8. ahrppard, Page 6 be Qommoaoarrler pipe llne6, nor have thej af- tempted to exerolae the prIvllege6 und6r Arti- cles 6020, 6022 0r 6043. However, they do ill8 all report6 with the Comptroller of Pub110 Ao- count6 and with th6 Hallroad aoui66ion Of mXa6, that are require& of aouon puroharerr and trane- porter6 of ortad8 petroleum. They are elthar Delaw6re oorperations, or they 6~6 inOOrpOrct&d under Artlol86 1496, 1496, 1497 end 1833. nShoul4 thL6 not be enough information aeo- errary for you to deoid6 the68 quertiens 1 rhall be glad to go into more detail, persoaall~.* You have verbally amplified the foregoing rtate- ment la ommeotlon rlth *Cemgany D* by PdvIsiag ue that, a6 la th6 oa6Q of l OempanP C', part of the oil handled wa6 either purcbaeed from or transported for ether produoer6 :a tha fleld red-6 not confined to the produst~+ of raid lo o mp 6 D.. ny In anowering your fIr6t quertlon we point out that under prlnelpltr hereafter disoaseed, we hold t&t Oomprales *Cd, 'IV and *g*, above tle6orIbeQ, are engagrd, La pub in bU6lne6686 of euoh ilature a6 to bring Qaoh of them'ti&n the apppllostlen of Article 7106, ~vl,tml Civil Btatutes, provldlag for the 666e*ament, for taxation of the lntanglble values of eaah *oil pipe line Qompanyi “common earrler pipe line aompanyw or *other LndlviduL oompany, oorporotIon or 66sociatlan doing buhinera of the 66me charaat6r In thi6 State.* tiewater, It dare not follow from this oonalu6ion that cl1 ero6e lncoae reaelved by each of theet oomp6nIe6, iron every 6ource, o6n be properly oon- sidered by the 8tate Pax %Arb In asmpatlng the lntanglble v61UQS e? th6 bnef?AQ6ses 8nmeratea in the 6t&Ute, under the establl6hed prlnoiple of *oapltaliratIon of net eamlngr*, b6CaU6e 6uoh oompanIe6, pcrrtioukrly companies nC* and l D*, are also engaged in the groduofng ml refining bu6lne68, re- 6peotIvely, and such bu6inerse6 are not within raid Aot. It i.6 our 6n6wer to your flret quertlon thct the Board m6y oon- alder at3 groe6 Income for these pku730666, only such Inoome as AOOPub6, 4Ireotly or lndireatly, from the buriness of transporting orude ell for others for hire or for profit. '&IN, If oruda 011 is tranoported by the aempanIe6 in que6- tion for other produoer6, from the point of produetlon to c 1. Honorable George H. Sheppard, Page 6 reflnerl8e owned by others, or to oonneoting pipe line oar- rime, for a oharge or consideration of iire. oents per barrel, tautahgrooa lnoome, along with other Inoome traoeable to the buslnerr a? transporting oil for hire, would be prop- erly oonrldered by the Board In determining Intangible Value under lstabli8hed formulae, whether rush Inoome is deelnatsd am aarrylng, gathering or rerrloe oharge or tarI?f. formal publloation o? a tari?? under regulation8 o? the Railroad CommIseIon (Artlole 6649, Xevleed 01~11 Statutea) la no oondltlon prerequlslte to bringing the oompanIe6 here within the Intendment o? the Aot taxing Intanglblec But I? (Iaeh o? the deeorlbed oompanler purohaee euoh orude oil outright iron produoerr and traneport laem through their gathering rpetem or pipe 1Ine ryetern to an- other refinery or to a oonnoo8ing pipe line, where it ke cold ?or a profit, then, under the oaae of Reagan County Purohaelng Company v. State, ll0 8. W. (2d) 794, tha Board may oonrlder In aeseeelng intangible valuea, only auoh por- tion of the total oonrideration or greee Inoome reoelved by euoh aoqmlee as repreaent6.a IaIr, Just and reaaonabla oharge for the oarrlaga or traaeportattioa o? euah oil. ‘Ihe balanaa, I? any, over and above ruoh traaeportatlon ohargO6, would be ooneldered a8 trading pro?Ite or Inoome iror the purohare and sale o? orudr 011, and would not be lnoome derived from the bualneee off traneportlng oil?or hire. Gor- poratione ahartered under Chapter 15, Title 32, XevIeed Civil Statutea, suoh ar these are lndloated to be, are au- thorired to pursue bath burlneeser; I.e., tranrport orude 011 by pips llne for hire and buy and rell orude oil. Upon thle point of oxoludIag trading profltr In aeeesring Intangible value6 o? luoh aompanlee, the trial oourt, in the oaee a? Reagan County PurahaaLng Company v. State, aupra, found I I, Said value wan aeseseod and fixed by the && Tax Board by a prooeas o? *capital+ icing* what it underetood od belleved to be the entire net revenue OS the dmietiant for the year 1934, taking into ooneideration earnIng6 o? said defendant from all o? its a~tlvitlee, that is to say, earnings from the purohdlse and sale of oil, am well as eerninga that might b* Honorable Qsorge 8. Sh@ppard, Page 7 properly attributed to the traneportatlon o? oIl$ the oo@Mistlons o? said Board being baaed upon a groes earning of 20 oents per barrel from eeoh and every barrel a? 011 bought, transported aM mold by the said purohaelng oompany during the oelendar year 1934.@. The trial Judge oonoluded that the leeeeament was lxaseslve beoauee the State Tax Board toof Into ooa- eldsratlon the proiltr earned by the oorpazby ?rom the buel- Bass of buying and selling 011, mad uRd8rtook to drtermlnr what part o? the net earnlnge o? said Oompeay warn attrlbu- table to traneportation of oil, eo am to SIX thsrefrom the total taxable value of Its ollgbpe line bueIneee b> the approved method known as *oapItalitation o? net inoow*. Upon this point the flndlngs of the oourt are as rollo3re i (I*(7) I find that only one-fourth (l/4) of the gross earnings of ths defendant on 011 bought, transportad and mold by it during the ysar 1954, Is properly lttrlbutsble to end sbeuld ba allooatod to~grors eernInge 66 from pipe line transportation Instead of t& entire 20 oante per barrel used by the raid Tnx Boa&. While, 66 round above, no trnneportatlon or tarltr ohargoe era made or published by the defendant, f find am a faot that 5 oents par barrel would be and oon- ltitutss a fair and reaeoAable aharge for,the transportation of euoh 011 if it had been trane- ported for others for hire, and that 5 ornts warn the traneportatlon rate detormIned nnd ueed by the deiendant em the basis !?or ooewatat~lon of the Federal Exolee Tax on the traneportatlon o? 011 by plpa line under Federal etatutes exietlng at the tlms said Intangible aeseeement wee made. On the basis of a gross earning of I) omts psr barral ?or all 011 transportsd durl the year 1954, and applying thereto the iormu“p a adopted and ueed by the Sate Tax Board for determInIng the intangible value of the de?endant for the taxable year 1955 I find that 60 par oant o? ths intangible vahae of the defsndant, ettrlbu- table to its pips line eystam and operations - -- 288 Honorable tiorge H. Sheppard, Page Q ae of the year 1936, is $769,408.00. . . .* Although, in the absence of a aroma-aeslgnment of error by ths State, the Court of Civil Appeal6 pointed out that It was unneoeessry to determine the queetlon, nevsr- thelees, said oourt r~fueed to dletorb the aIsaretIon of the t&Al oourt In revlewlng and adjudging the oorreot aeseee- ment whloh ehould have been msds by the State Tu Board In thle asee. Under the esme reasoning, we do not believe that the Board oan properly consider, In oomputlng lntanglbls vnluee of the companies involved here, the worth or value at their pipe lines In the earinga effeoted by them (1) In traneportlng oil produced by them or purchaesd from other6 to the refinery owned by them (Company D) or, (2) trane- porting oil produoad by thsa co a oonneotiig ooamon oarrlrr truak line (Ooapany C). Under the holding oi Col-Tar Fte- ?InIng Co. v. Hut, 3.44 6. Y. (26) QOQ, euoh ,u60 of a plpa line to traneport crude oil would be as a *private pipe line’, Inoldental to the refining buelnees or to the 011 produalng bueIneee, and the value of euol? pipe lInse, when aerd In the refining or produolng bualneee, to dIepenee with the hiring of oommon o*rrIer pips lines, cannot be ooneldsred am Inoome Uerlved froa the buelness of tranebortlnu 011 for hire wlth- In the meaning a? Artiole 7105, Revlsod Clvll Btatutes: as Interpreted by said oase. In thle oonnsotlon, however, we point out that the State Tax Board, in lseesslng these desorlbed ooapanlee for intangible valuee, may consider the eamlng oapsolty of the property as d~stlngulshed from the actual aarnlnge. Under the ~oapItallsatlon of net lnoomsm method of valuatIoa, de- olared by the court to be partloularly ldeptabla to pipe line oompanlee and vsrlous other pub110 utility oompanlet?, the earnings are merely treated am a guide to the aapltal value, beoause the tax 10 not levied upon the earning6 a6 euoh. Therefore, in any partloular oase, the go158 reoeipts to be ooneldered for suoh purposr are not neosssarIly the aotual rsoeipte but auah as would be reoelved Andor a reaeon- ably loonomloal and prudent management; and the rxpanroe to be deducted, In order to determIne the net inoome, are not nsoeeearlly the sxpenees which were in fact inourred, but honorable Oeorgs H. Sheppard, Page 9 suoh expenses as would be Incurred under a reasonably eo- onomlo and prudent management. 26 R. C. L. 367; State v. Nevada Cent. R. Oo., et al, 61 Pao. 99. By your eeoond question you ark I? there Is any *yard-•tlok to be ueed In meaeurlng or olaealfylng a pipe line operate4 in oonneotlon with the reflnlng or produotloa or orude Oil.” This l yardstick* ham been de?InItely laid down by the dcoleion of the Court of Clvll Appeals in the case of Col-Tex Refining Co. v. Bruos Hart, et al, supra, and the pertinent statutes. Art1010 5018, RevIeed CIvIl Statutes, aitcr giving iour broad de?lnItIons o? a uoumon oarrlsr pipe line Eospany, provides that%he provleIone of thle law ehall not apply to thoce pipe llnee vhloh are llslted In their use to the wells, stat lone, plant6 and rsflneriee of the owner and which are not a part of the pip0 line trane- portatlon eysten of an7 common oarrler as above de?lned.* In Chapter 15, Title 38, Revised Clvll Statutes, governing the oi-aatlon and operation of oorporstlone ror the storing, traneportlng, buying and selling of 011, gas, malt brine and other mineral eolutIons, etc., we find Artlole 1505, pr4vldIngi ‘Hothing in thIe chapter ehall preolude the ownership or operation by any oorporetlon, of private pipe lines In end about its r4?In- wlee, fleldm or etatlons, even though much corporation6 say be engaged In the producing buslnees. a It waB held in the oase s? Col-Tax Reflnlng C0mp.w v. Hart, et al supra, that a refining ooapany, oting and uelng a pipe line exoluelvely for the purpose a? tramporting 011 bought by the oospany from other produasrs to the re- ?Iner~r owned by It, was not an *Inoorporated oI,l pipe line oompany*, a *common carrier pil pipe line oompanyR or ‘doing bueinese a? the same oharaoter* within the tOr4s of Artl- ole 7105, Revised Civil Statutes, and henoe was not subJeot to the tax on Intangibles thereby assseead. hip h0lain.g warnupon the theory ana oonetruotlon that the IntangIble tax . etatute was Intended to embraoe only such property or faoll- lties am produoed for the owner within ana a? It64lf And apart from any other busInsss of the owner, a tanglbie revenue Bonorable Qeorge H. Sheppard, Paoe 10 or lnoome, and henoe oarryln;y rystem OS pipe lines owned by reflnlng company for use in transporting 011 Iron pro- duetlon to such rerlnery, did not hnve a tangible value to uhioh the lntanglble tax measure attached. But we are not willing to extend thlr decision to cover and exennt pertsom, rlrms or oorporatlons uelng pipe liner for the tranoportatlon oi ormde 011 IOr hire, even though euoh pipe line ryetem ia called a gathering ayrtem and la also used in oonneotion wlth the rtrflnlnc or produo- lng buelneer or suoh person, firm or oorporation. In other worde, to trlng the owner, leseea or operator of such gathe.r- lng or pipe llne system within the prlnolple announoed by the Col-Tex oare, it must be used exolueiveu (1) to tranr- port oil produaed. by luch owner or operator, and not bought of others, to a connecting oommon oarrler to it or further traneporation by It, or, PE.~"t~'~ili~;O~;~:ll produood or purohaeea by such owner, operator, or leaeee to a refinery owned and operated by the same person, rirm or oor- poratlon ror prooeselng. 11, on the other hand, such pipe line or gathering I8 urea, Jn addition ly#tem to the vuroores ret out above (1) for the purpore or traneporting, for hire, oharge, tailif, or other consideration, arude oil for other produoere from the plaoe of produotlon to a oonneotlng ?lpe line for sale or further tranaportatlon, or to a rerlnery owned and oper- ated by another person, rlrm or corporation for prooeaalng, or (2) for the purpose of transporting 011 purchased by the owner, operator or lessee of euoh pipe line or gathering syotem, from others, to a oonneotlng pipe line oompanf ior sale or further transportation or to the rrflnery of an- other pereon ilrm or oorporation for sale then in eaoh of these situations, exemplified by the oompa&es deaorlbed in your letter, it is our opinion that you may lawrully a8sess an lntawible vnlue, for taxation purposes, by oapltalizlng the profit or lnoome whloh aocrues from suoh trrznsoortatfon, subJeot to the above dlsoussed.llmitations. By your third questton you ask if ‘an intangible value, as found, attaohee Itself to the physIoa1 properties, or to the birelnese of transporting 011 by pipe line”, pointing Bonorable Qeorge Ii. Sheppard, Page 11 out that *Company En would have offioe furniture and other property use6 in thrlr marketing and pipe line bu8lne8s but lntanglble value would ordlnarlly be apportioned to the counties through whloh the pipe line8 were eltuatea. AL though an intangible tmlur could not exi8t in any given care without the pre8enoe o? tangible or phyaloal properties noed in or devoted to the buslnere out of whloh the lntm- glble value lrlme8, lnoludlng ofrloe furniture and equip- ment in the instant oa8e, if neoerrarlly inoldent to the proper oonduot or the business of engaging in the tran8por- tatLon by pipe line of orude 011 for hire, neverthelers, it 18 our opinion that 8uoh intangible value need not by the Baaed bp apportioned and oertlrled to the oounty or oountler uhere suoh offioe furniture, and equipment or other tangible property ir rltuatea, but the praotloe, long fol- lowed by the %oerd, of apportioning luoh intangible falue8, on a allaage value, to laoh of the oountieo through uhloh the plpe line run8, Is proper, and may be oontinue& In the ease of Reagan County Puroharlng Company v. St&e, ll0 S. W. tza) 1196, the court ralai *Intangible raluea ordlnerlly rertalt from the profit of a business a8 aotuallj oonduoted. They Inhere to it a8 a 'going oonoern,' in nany oa8e8 tar exceeding the tangible valuem to whleh they adhere.* Thu8, although intangible value oannot exlet, for purpore8 or taxation, wlthout the exlatenoe or tan@- ble or phyclloal propertleo to whlah euoh intangible value8 adhere and out~oi which they grow, it i8 not teehnloally accurate to nay that intangible value attaohes ltrelf to euoh phyetoal or tangible properties, 80 as to hate a situ8 ror taxation in the oountlea where ruch pro-3ertles are lo- oated, beoause the intangible value aought to be assearea for ad valorem taxer under Artlole 7108, Rerl8sa Civil Stat- utes, 1s the over-all value of the buslner8 oonduoted a8 a *going concerng, which buslnera ha8 a valuation in exoe86 of the valuation of the physloal or tsnglble property urrad in such buclneee. Honorable George H. LUleppard,Page 12 Artlole 7111, Revised Civil Statutes, provide8 that the Board *shall apportion the sum Or the said total taxable valuee within this State to the oountlee in whioh auoh ln- dlvldti oompany, oorporatlon or arsoolatlon doe8 business, In proportion to the amount of business done ln and the re- oelptr derived fro* eaoh 8Uoh oompany, exoept, that In ease oi a railroad oompany, the apportionment to eaoh oount~ shall be In proportion to the line or llnsr 0r rush lndlrldual, ooma4 * corporation or association therein." Said artlole further provides that the Board may oonrlder lrldenoe upon the question oi apportionment, and may oertlfy an4 apportion 8Uoh lntanglble values aooordlng 80 any method of oaloulation whioh It bellevee to be best oaloulated "to bring about a Jurt, fair, equitable and law- ful lp P o r tlo nment*. Adverting to bhir rtatutorr authorltf Oonferred upon the Board, the Court of 01~11 Appeale In the oaee of Texas Pipe Line Oouip~ V. AndarsOn, 100 9. W. tea) 764, upheld the nlleage barie Of apportloment of the kn- tangtble valuer of a ooamon aarrler pipe llne company aa a method lpwored by the oourts and calculated to reach a Just ma fair result. Trustlag the foregoing ruiif answers Your InquirJr, we are Your8 very truly ATTORNEY GENERAL ASSi.&nt