Were affixed oil-field fixtures taxable when transferred with leases that continued as long as oil, gas, or other hydrocarbons were produced?

Plain-English summary

An oil lease continued for its stated term and as long afterward as oil, gas, casing-head gas, or other hydrocarbons were produced. Tax counsel treated that production-based continuation as an indeterminate duration under the cited case.

The Board's stated policy was to treat casing, tubing, derricks, pipe, valves, fittings, and other affixed appurtenances as nontaxable when transferred with an indeterminate lease, even though the lessee could or had to remove them when the lease ended.

The existing audit had taxed pumps, motors, engines, and other oil-field machinery because the taxpayer had not supplied enough information to separate fixed-term leases from indeterminate ones or identify which property was on each lease.

To resolve the petition, tax counsel proposed sending the matter back to audit staff to remove affixed items located on indeterminate leases after verifying the evidence. A preliminary hearing remained the alternative, so the letter did not establish a final adjustment.

Common questions

Did an eventual removal obligation make the fixtures taxable?

No. Under the stated policy, affixed fixtures transferred with an indeterminate lease remained nontaxable despite removal at lease termination.

Why had the audit taxed oil-field machinery?

The necessary lease-duration and property-location information had not been available.

Was the tax determination actually reduced by this letter?

Not yet. The letter proposed a verified audit adjustment and asked whether the parties agreed to that procedure.

Citations and references

• Dabney v. Edwards, 5 Cal. 2d 1 (as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/150-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/150-0300.pdf

Original ruling text

STATE OF CALIFORNIA

150.0300

STATE BOARD OF EQUALIZATION

November 8, 1968

Gentlemen:

We have reviewed the “B” lease dated January 22, 1948 enclosed with Mr. “L”’s letter of June 30, 1966 to Mr. E. H. Stetson, Tax Counsel. As suggested, we believe the words “and so long thereafter as oil or gas, or casing head gas, or other hydrocarbon substances, or either or any of them, is produced therefrom” in the habendum clause brings the lease within the holding of Dabney v. Edwards, 5 Cal. 2d 1. Our stated policy has been to regard the transfer of casing, tubing, derricks, pipe, valves, fittings and other appurtenances attached or affixed so as to constitute fixtures as nontaxable, if transferred with a lease of indeterminate duration, although the lessee is permitted or required to remove the fixtures upon termination of the lease. It is my understanding that the auditors making the audit of “P” were aware of our position. However, the file indicates that the audit was made in Texas and that the auditors requested the taxpayer to present information with respect to which leases were for an indeterminate period and which leases were for a fixed term of years. This information apparently was not available; nor, was information relating to which property might be located on any given lease. For this reason, the audit staff included as taxable the sale of pumps, motors, engines and other oil field machinery and equipment attached to the leased land. In order to resolve this petition, we propose to refer it to the audit staff with directions to delete items included in the determination which are affixed to property under indeterminate leases. In order to do this, it may be necessary to review some of the leases. This procedure would obviate the necessity of holding a preliminary hearing an, if it meets with your approval, the matter could be resolved in this manner. In the alternate, we could reschedule the matter for a preliminary hearing, at which time, of course, evidence to support your position would have to be submitted.

-2-

November 8, 1968
150.0300

We are making the same proposal to “S” with respect to the property purchased by it. Please advise if the proposal that the matter be referred to the audit staff of adjustment consistent with our position expressed herein meets with your approval. Inasmuch as the matter has been under petition for some time, we are anxious to bring it to a conclusion. If you have any questions regarding the matter, or desire further clarification of our position, please advice. Very truly yours,

Jack D. Paulson
Tax Counsel

JDP:ab

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