CONSTITUTIONALITY

Being an attorney, I have naturally thought about the constitutionality of the Windfall Profits Tax but have not researched it as yet. While I personally think that it is absolutely unconstitutional, and that a suit should be filed in order to sustain this position, nevertheless, if one will take time to understand that nature of a royalty, it becomes readily apparent that the tax is confiscatory, that it is not an excise tax as permitted by the Constitution of the United States, and that it is an inequitable taking of property without due process of law. This is why I went to the trouble to explain the nature of the royalty at the outset of this statement.

I hope that the Committee and the Congress will distinguish between the royalty owner who has lost control, and cannot pass on the tax, and the producers who are in control of the production, and can pass on the tax, and in fact who had better pass on the tax or they will go broke. (This distinction is not intended to impugn the argument that the entire Windfall Profits Tax is unconstitutional as a discriminatory direct tax on the property of the taxpayer.)

I must assume that the Congress thought that the law was constitutional when it was passed. I certainly do not fault people who disagree with me, because the experiences of an attorney are primarily in the area of disagreement, and I certainly respect the opinions of those who disagree. However, I do not believe the Congress understood the nature of a royalty, and it occurs to me that the taking of a portion of the landowner's real estate (as defined and conceived under the English common law and the civil law, which govern real estate laws and the concepts of a property in this country generally), must necessarily, under our original, and hopefully present, concepts of constitutionality, be unconstitutional. The taking of his oil is no different from the taking of his topsoil; from the taking of a hundred feet for a road; from the taking of his trees; from the taking of a part of his house; from the digging up of his lawn; from drilling a well on his property and taking his water; from siphoning water out of his pond; or from moving in and pitching a tent in nis sideyard and living there. Another analogy may be the taking of the crop (although under the common law it is designated as a "usufruct" or "fruit of the tree" so to speak). The taking, off the top (without reference to any expenses, effort or labor, or mortgages on the farm, or any other factors affecting the land, the operation and the landowner) of two-thirds of the farmer's crop of peanuts may be the appropriate example. (Even Leviticus does not require but 10 percent of gross production.) If it is to be argued that the taking of oil is not the actual taking of land itself, but merely the "income" or "usufruct" from the land, then there is absolutely no reason why anything produced from the land cannot be confiscated by the Federal Government in any percentage. What about those producing shrimp, lobster, lettuce, cotton, apples, oranges, grapes, timber, coal, collards, milk, beef, pork, automobiles, widgits? Any of these can be taken if the constitutionality of this law is upheld on the strength of the fact that oil is merely income from the property and this is a "profits" tax.

The mere need of revenue cannot justify this law. The law is manifestly inequitable, unfair and confiscatory. In short, it just ain't right.

CONCLUSION

It is respectfully submitted that S. 2521 should be referred to the full Senate with recommendation to pass, and that the Senate should pass it.

Respectfully submitted.

R. LAMAR MOORE.

BRADEN CORP.,

Mrs. NORMA STANGLE,

Russell, Kans.

Caney, Kans., May 12, 1980.

Four good reasons why the so called "Windfall Profits Bill" should not have been enacted and should be rescinded.

1. Stymies production of domestic crude oil.

2. Delays and often prevents producers from exploring for and developing domestic production.

3. Causes great resistance on the part of land owners to lease additional land for prospecting and development.

4. We already have graduated income tax laws which collect any excess profits, should there be any. Therefore the "windfall" is not necessary and will cause the collapse of many small producers that are not making near as much as the new tax will take from them before any and all other obligations are met by the producers.

Sincerely,

Enclosure.

Re Windfall Tax, May 23, 1980.
Senator ROBERT DOLE.

GEORGE D. BRADY, President, Braden Corp.

MAY 12, 1980.

We are unable to make it to your meeting, but wanted to get our two cents in on the Windfall Tax.

It's hurting us little folks, that's trying to make a few wells make a go of it, with electric so high, the upkeep and labor so high, it's not a paying job, after the government gets their share.

We would like to see the independent owners exempted. Sure hope you can help us out.

Yours,

A. R. PALMER, Palmer Drilling Co.

MAY 12, 1980.

Mr. ROBERT DOLE,

U.S. Senator, Kansas,

Washington, D.C.

DEAR SIR: This small note is in regard to the "Windfall Profit Tax" that we are having rammed down our throats. I am just new in the oil business but it does not take long to see through this mess.

I have worked with what I consider "old land owners" that would not let anyone on their land to drill oil. But with my reputation in this area. I have been very successful with working with these farmers. Now, with this tax, nobody wants to drill (land owners) and pay this "un-real" tax. It is about time that the small man is heard in America.

Please do your best to help us out.
Sincerely,

GEORGE E. JACKSON,
Caney, Kans.

To: Robert Dole.

From: D. Joan Stangle.

NEWTON, KANS., May 21, 1980.

For many years I have been a small business owner in Kansas; as you well know small business is already carrying an inequitable share of the tax load. In order to have some retirement income, I invested in oil. Now, I am being taxed on the monies that I hoped to have for retirement years on the same tax base of huge profit taking oil companies. It is a totally unfair tax. Again, it looks as if the government is trying to rid our country of the small independent business who provides jobs, pay taxes and educate their children with their income. Many small investors are looking ahead to retirement years not the huge profits of big oil. It would be poor business to think that government supporting us in retirement years is more economical but it seems to be the current philosophy of the United States government. I appreciate your concern for the small independent and royalty owners.

D. JOAN STANGLE.

SENATOR DOLE: We're very small oil investors and producers. This windfall profit tax could really finish us. Please don't let the government do this to us. Sincerely,

HARLEY BOWERS.

Re Senate bill No. 2521.

OSRO COBB, ATTORNEY at Law, Little Rock, Ark.

MEMORANDUM FOR COMMITTEE ON FINANCE

THE DILEMMA OF THE LAND AND MINERAL OWNERS UNDER THE WINDFALL
PROFITS TAX

For the sake of emphasis, this presentation is divided into five topics as follows: I. The composite impact of the windfall profits tax on the industry as a whole. This discussion is divided into three subsections: (a) the Major Companies. (b) the Independents, and (c) the Land and Mineral Owners.

(a) The Major Companies.-So far as the general public ever knew or had any reason to know, the major oil companies with their alleged "obscene" profits were the primary if not the sole target of the whole campaign for a windfall profits tax on crude oil. At no time in the discussions in the Press or on Television was there the slightest indication that the land and mineral owners, who simply cannot be classified as "obscene profiteers," would be the ones to be hit much harder under the law than the major companies. The facts are:

(1) In the first place the major companies purchase all of the oil imported into the United States, representing approximately one-half of our total consumption, and all of this oil handled by the major companies is currently free of any windfall profits tax whatever.

(2) The major companies are reputed to buy much more domestic crude oil than they produce, and here again on all of that portion of domestic oil purchased by the major companies they pay no windfall tax whatever.

(3) This leaves the major companies with a mere one-fourth of their total crude oil volume processed for sale in the United States subject to any windfall profits tax. No other segment of the industry is so favored.

(4) Furthermore, on 20-gravity crude oil, which represents a high percentage of the production from the prolific oil field in Smackover, Arkansas, the major companies, Gulf, Phillips, Monsanto, and Kerr-McGee, pay their windfall profits tax at a preferred rate of 50 percent whereas the land and mineral owners have imposed upon them a windfall tax of 70 percent (40 percent more than the major companies).

(5) The major companies have no difficulty in recouping their windfall profits tax or any other taxes by increasing the cost of petroleum products, such as gasoline, etc., to cover same. The independent producers and land and mineral owners have no such means of recouping the windfall profits tax levied against them.

(6) The Administration appears to have been sanctioning immediate raises in domestic prices for gasoline and petroleum production by the major companies as of the date of announced increases in the cost of foreign oil. This gives the major companies a windfall on all of their inventories and oil stocks in transit, which runs into enormous sums of benefits for them. No such benefit can possibly accrue to the independent producers and the mineral owners.

(7) The burden upon the independent producers and mineral owners of the United States in comparison to that of the major companies is inordinate and shocking, and will seriously curtail domestic production unless promptly and equitably modified in the public interest.

(b) The Independents.-There are many thousands of small (21⁄2 to 5 bbls.) wells in the United States that were being operated by independents when the windfall profits tax was enacted. It appears that the Congress was not aware that the costs of production of these small wells have risen in the last three years by as much as 500 percent on such indispensable items as contract well service, chemicals to treat oil, etc. These are the wells that provide the backbone of supply for many of our domestic refineries. These wells are now in great danger of economic strangulation because of the heavy tax, and may become a thing of the past-a real energy tragedy for our nation. Once these small wells are abandoned and cemented off, and tank batteries, etc., removed, there is little likelihood that the production could ever be restored. Such a loss will be irreparable.

The independent operators have a great history of devoting their full energy to production and exploration for domestic oil. It has been the independent op

erators who have been credited with finding at least 80 percent of all the domestic oil in this country.

A possible net profit in crude oil operations must be maintained in the United States as an incentive to preserve the present marginal production and expand crude oil production at low recovery levels so as not to waste this resource.

(c) The Land and Mineral Owners.-These unfortunate victims of the excesses of the windfall profits tax servitude imposed upon them are shocked and outraged, and they should be. Their interests were never considered in the discussions about the windfall profits tax, and the harsh treatment they have received under the tax reflects their lack of any representation or hearing as to their vital interests throughout the many months leading up to the passage of the law.

In all the history of the oil industry in the United States the mineral owners have received the same treatment in pricing, in taxes, etc., as that of their producers. This is the tenor of all oil and gas lease provisions and the expressed intent of statutory laws enacted for the protection of mineral owners in many of the oil-producing States, notably Arkansas. Under no circumstance did the land and mineral owners expect to find themselves subjected to a tax 40 percent higher than that imposed upon the major companies and 133 percent more than the major companies as to heavy oil (16 gravity and under).

The oil moving to market is completely comingled and undivided in any manner. It is like a landlord and a tenant sharing in a bale of cotton and the proceeds therefrom. It is unprecedented and possibly offensive to the provisions of the Constitution of the United States to impose a higher tax on one ownership of an undivided property than that imposed against the other owner or owners of undivided interests in the same item. See Exhibit 1, attached (Letter dated May 10, 1980, to President Carter). It is my understanding that the whole windfall profits tax may be invalidated should the Courts sustain this view.

II. The false idea that the mineral owners have a free ride in oil production without any risk.

The mineral owners own all of the oil in the ground and until it is brought to the surface by the producer. In many cases their risk from a financial standpoint may exceed that of the operators due to the hazards incurred in production. We quote from a brief filed with the Department of Energy on January 19, 1978, on behalf of Gulf Oil Co., Phillips Petroleum Co., Monsanto Co., and Kerr-McGee, all major companies, as follows (page 8):

64

.. no one really knows in advance just how successful any secondary recovery program may turn out in actual operations. In some cases in Arkansas most, if not all, of the commercial production has been lost in such efforts to the great damage of the owners of the oil in place, i.e., the royalty owners. The royalty owners here took substantial risks when they combined their lands into this unit to attempt the experimental and uncertain secondary recovery. It is by no means certain if the project is abandoned that the underground pay zone may be left in condition whereby production could be resumed by conventional means. Certainly the working interest owners here took great risk in investing millions of dollars in the unit in the hope that they could come up with the engineering and technology to cope with the problems in production as they arose and in the hope that the project would ultimately be made a successful one for all parties concerned, including the national interest. This is a case where the working interest owners and the royalty owners both took risks and stood to make gains in proportion, of course to their percentage of ownership of unit production moving to refineries."

I am a mineral owner in a secondary recovery unit in south Arkansas which was faced with abandonment as uneconomic in 1977. This unit area had been subjected to injection of steam under high pressures. The lands had provided excellent stripper production before they were consolidated into the unit. Had the unit been abandoned, it is quite possible that the great pressures on the pay zones could have so compressed the soft oil sand and so bridged same that normal stripper production could never have been restored. In short, the operators could have abandoned the property and stopped their losses, but the land and mineral owner would be irreparably damaged as to future production. There are many other great risks that the land and mineral owners are subjected to when they lease property for all exploration. They give the operator the sole right to proceed as he may see fit, to drill and complete wells in the pay zones of his choice, or to abandon any well which the operator believes to be uneconomic. Some operators do not possess the ability and expertise to thoroughly

explore the potential of an oil well, and abandonment virtually condemns the property as to further exploration where good oil production could be held. The real casualty is the land and mineral owner.

Some operators refuse to complete a well which does not promise to produce more than a certain minimum amount of oil, and here again the land and mineral owner is the loser. In short, the land and mineral owner, putting up 8/8ths of the oil for a small th payment from the proceeds, is in reality a partner in the production, taking the risks that are certainly commensurate with his expected revenues. See Exhibit No. 2 to this Memorandum, attached (copy of my Mail-O-Gram of November 28, 1979, to all Members of the United States Senate).

Finally, no fair or reasonable basis exists for imposing a windfall profits tax upon the land and mineral owner at a greater percentage than that imposed upon his produced or operator.

III. The imposition of the huge windfall profits tax upon the mineral owners of small stripper wells is counter-productive and demonstrably against the national interest.

The land and mineral owners will not be able to change existing lease agreements, but their attitude in leasing for expanded domestic production in the future is quite another thing. I am personally interested in a few tracts in Arkansas which are thought to have production potential. I will enter into no more leases on these unexplored lands without a full 4th royalty reservation in the total production. Other mineral owners are taking the same position. In fact the major companies who own minerals for farmouts have been insisting upon a full 14th o.r.i. in Arkansas for the past several years.

This additional royalty reservation may substantially curtail domestic drilling programs as many operators may not find it profitable to attempt operations with such a royalty load and the windfall profits tax. Since there can be no production except under conditions acceptable to the land and mineral owner, this limitation could unwittingly impose a substantial curtailment in expanding production of domestic crude oil.

IV. The amazing indifference of the Congress to any facts relating to the cooperative relationship between the mineral owners and the producers and the valid rights and positions of the mineral owners.

When it was revealed to the Senate by the Conference Report that the land and mineral owners were being virtually "shot down" by the provisions of the Windfall Profits Tax Act, many Members of the Senate grasped the situation and sought to refer the bill to the Finance Committee to provide an opportunity to go into the true facts so that the Congress could act more intelligently thereon. Unfortunately, the Administration forces were able to defeat a formal motion for this purpose by a vote of 61-35 on the day of the passage of the bill. The land and mineral owners were lulled into a feeling of complete security during the months of public discussion of the measure under the belief that they were not the target for such treatment, and they had no one to appear to represent them as they anticipated no such action.

It appears to the land and mineral owners that they have been the victims of a real subterfuge to tax them without even permitting them an opportunity to be heard. This is unprecedented as policy in the United States, and the quicker the Congress recognizes this oversight and corrects the mistake the better for all concerned.

V. The Political Impact.

The land and mineral owners of the United States are the type of citizens who take the trouble to vote. It is estmiated that there are now in excess of four million mineral owners receiving royalty from domestic oil production. These royalty owners have an average of four or five adult family members or relatives who also share in these benefits. The average royalty owner is 60 years of age or older, and his total royalties have not amounted to as much as $100 a month. Cutting same virtually in half is a cruel economic blow to him even if otherwise justified. To put these people in the class of alleged "obscene" major company profiteers and worse, tax-wise, is revolting to all sense of fairness and reason. Unless the Congress promptly takes steps to remedy the situation, there will be at least 20 million of the angriest voters in the United States who will definitely participate in the fall elections. They have been mistreated. They deserve relief. I attach as Exhibit 3 a copy of my letter of April 25 to Governor Reagan who will be the Republican Nominee for President.