The opinion of the court was delivered by: GOURLEY
This is an action by the Republic Oil Refining Company, a Texas Corporation, against Stanley Granger, Collector of Internal Revenue for the Western District of Pennsylvania, to recover for excise taxes assessed and collected under the provisions of Section 3460 of the Internal Revenue Code of 1941, c. 412, 55 Stat. 687, Secs. 502 and 521(a)(22), and by the Revenue Act of 1942, c. 619, 56 Stat. 616, 26 U.S.C.A. § 3460(a) and (b).
The Internal Revenue Code, as it applies to the instant case, provides:
'Transportation Of Oil By Pipe Line
'(a) Computation and payment. There shall be imposed upon all transportation of crude petroleum and liquid products thereof by pipe line-
'(1) A tax equivalent to 4 1/2 per centum of the amount paid for such transportation, to be paid by the person furnishing such transportation.
'(2) In case no charge for transportation is made, either by reason of ownership of the commodity transported or for any other reason, a tax equivalent to 4 1/2 per centum of the fair charge for such transportation, to be paid by the person furnishing such transportation.
'(3) If (other than in the case of an arm's length transaction) the payment for transportation is less than the fair charge therefor, a tax equivalent to 4 1/2 per centum of such fair charge, to be paid by the person furnishing such transportation.
'(b) Fair charge defined. For the purposes of this section, the fair charge for transportation shall be computed-
'(1) from actual bona fide rates or tariffs, or
'(2) if no such rates or tariffs exist, then on the basis of the actual bona fide rates or tariffs of other pipe lines for like services, as determined by the Commissioner, or
'(3) if no such rates or tariffs exist, then on the basis of a reasonable charge for such transportation, as determined by the Commissioner. 53 Stat. 421, as amended June 29, 1939, 10 p.m. E.S.T., c. 247, Title 1, § 1 53 Stat. 862.'
Exemption provisions were added to the Internal Revenue Code: 'Exempt transportation. For the purposes of this section, the term 'transportation' shall not include any movement through lines of pipe within the premises of a refinery, a bulk plant, a terminal, or a gasoline plant, if such movement is not a continuation of a taxable transportation. The crossing of right-of-way, streets, highways, railroads, levees, or narrow bodies of water, in connection with such a movement, shall not of itself constitute such movement as being 'transportation'.' 26 U.S.C.A. § 3460(c).
The old regulations issued in conjunction with Sec. 731 of the Internal Revenue Act were substantially modified and now appear as Treasury Regulations 42, Secs. 130.20 through 130.26, promulgated under the Internal Revenue Code:
'Sec. 130.20. Effective Period. The tax on the transportation of crude petroleum and liquid products thereof by pipe line was imposed originally by Title V of the Revenue Act of 1932. The applicable provisions of the Revenue Act of 1932 were superseded, effective March 1, 1939, by provisions of the Internal Revenue Code. The rate of tax was increased from 4 per cent to 4 1/2 per cent by section 1650(a), as added by section 210 of the Revenue Act of 1940, effective for a period of five years beginning July 1, 1940. The tax at such increased rate was made permanent by amendment of section 3460(a) by section 502 of the Revenue Act of 1941.
'Sec. 130.21. Scope of Tax. Section 3460, as amended by section 502 of the Revenue Act of 1941, imposes a tax on all transportation of crude petroleum and liquid products thereof by pipe line.
'Sec. 130.22 Gathering, Trunk line, and Loading services.
'Trunk line service includes movements of the specified products from the end of gathering lines, or from unloading points such as loading racks or loading wharves, through main or trunk pipe lines to a point of delivery.
'Loading service includes the loading of the specified products into tank cars or tank vessels over loading racks or loading wharves, where such service is performed as part of, or in connection with, transportation service.
'Sec. 130.23. Liability for Tax. The tax is payable by the person furnishing the transportation service.
'Sec. 130.24. Rate and Computation of Tax. The tax is imposed at the rate of 4- 1/2 per cent of the amount paid under actual bona fide rates or tariffs for transportation of crude petroleum and liquid products thereof by pipe line.
'Where no charge is made for the transportation of crude petroleum and liquid products thereof by pipe line by reason of the ownership of the commodity so transported, or for any other reason, the tax, at the rate of 4- 1/2 per cent, shall be computed on the basis of a fair charge for such transportation, as determined by the Commissioner.
'In cases of other than arm's-length transactions, where the payment for transportation of crude petroleum and liquid products thereof by pipe line is less than the fair charge for such transportation, the tax at the rate of 4- 1/2 per cent shall be computed on the basis of a fair charge for such transportation, as determined by the Commissioner.
'Sec. 130.25. Fair Charge. Where no actual bona fide rates or tariffs have been published to cover any particular pipe-line transportation movement of crude petroleum or liquid products thereof, the Commissioner will determine what constitutes a fair charge for the purpose of this tax in respect of the particular movement under consideration, on the basis of the ordinary or customary charge for like or similar service.
'Where no ordinary or customary charge for like or similar service exists there should be submitted to the Commissioner for his guidance and assistance in determining a fair charge, (a) a full statement of the facts surrounding the particular movement; (b) a full description of the pipe-line system; and (c) a map or diagram showing in detail the particular area or field and the pipe-line facilities used, including tanks at the point of origin, along the line and at destination, loading and unloading facilities, and any other facilities used in connection with such system.
'Sec. 130.26 (as added byT.D. 5190, 1942-2 Cum.Bull. 237). Exempt Transportation. The tax does not apply to the movement on and after November 1, 1942, of crude petroleum or liquid products thereof through lines of pipe within the premises of a refinery, a bulk plant, a terminal, or a gasoline plant, if such movement is not a continuation of a taxable transportation. For purposes of this exemption, a movement is regarded as being carried on within the premises of a refinery, bulk plant, terminal, or gasoline plant even though in connection with such a movement the pipe line through which the petroleum or liquid products thereof are carried incidentally traverse rights-of-way, streets, highways, railroads, levees or narrow bodies of water (such as creeks, canals, etc.).'
Although the parties do not agree upon the nature of the particular movements involved, and on which the tax is based, the basic facts are not in dispute.
Republic's claim is to recover $ 24,778.03 paid to the defendant as assessed excise taxes on the transportation of oil by pipe line for the period May 1, 1942, through January 31, 1946, in connection with movements of crude petroleum and liquid products thereof propelled by taxpayer's pumps to and from vessels at wharves or docks and taxpayer's refinery premises at Texas City, Texas.
During the taxable periods involved, prior thereto and since, Republic was and is a Texas Corporation, doing business in that state, particularly at Texas City, Texas, but with principal offices at Pittsburgh, Pennsylvania.
As a part of its business it owned and operated a refinery and two adjacent tank farms some distance from docks and wharves owned and operated by Texas City Terminal Railway Company.
The Taxpayer's business at Texas City including dealing in and processing crude petroleum and liquid products thereof. Such products moved by pipe line to and from vessels at the docks on Galveston Bay at Texas City, to and from pumps situated on Taxpayer's two tank farms near its refinery proper. The tanks on the two tank farms were used for storage and also in the processing and refining of oil. All the movements here involved were propelled by taxpayer's pumps which moved the products from vessels into taxpayer's tank farm tanks and, in reverse movements, forced products from taxpayer's tank farm tanks into the vessels.
The taxpayer's pumps were four in number and were situated at points varying from approximately 2500 feet to 4000 feet from the docks. The taxpayer's pipe lines also transversed the two loading and receiving docks used, distances of 500 feet on one and 900 feet on the other. Though the pipe lines across the docks were operated by the taxpayer, nevertheless the Texas City Terminal Railway Company charged the taxpayer for loading and unloading there in accordance with the pursuant to its published tariff.
Other movements occurred within the boundaries of the refinery properties which were not taxed and are not important in this controversy as they are conceded to have taken place wholly within the refinery premises.
I. Whether movements of crude petroleum and the liquid products thereof by pipe line between points on plaintiff's refinery property to and from vessels at docks (distances approximating 2,500 to 4,000 feet) are exempt from tax-
(a) as being movements wholly within the premises of a refinery,
(b) as being strictly a part of the refining process as to 20 per cent of such products which are blended in the pipes.
(c) as being strictly a part of the refining process as to 20 per cent of such products which are blended in the pipes.
II. Whether plaintiff's claims for refund apprised the Commissioner of facts sufficient to support a recovery on the theory that blending in the pipes is a refinery operation extending the refinery boundaries or premises through plaintiff's rights-of-way to distant wharves.
III. Whether in the event the plaintiff has overpaid the tax it can recover interest from the date plaintiff's check therefor was received by the defendant Collector, or the date the check was deposited by him.
1. That the described movements are not taxable because under the law of Texas, the easements appurtenant on which the lines are laid are part and parcel of plaintiff's properties; that the movements took place entirely within its own refinery premises and, therefore, are exempt under Section 3460(c).
2. That the described movements are not taxable because they accomplished merely a loading or unloading of oil and refined products, and, therefore, are exempt under Treasury Regulation 42.
The defendant contends that the incidence and payment of the tax was correct unless all the movements of crude petroleum and liquid products here involved were completed entirely 'within the premises of a refinery' as that term is used in Section 3460(c) of the Internal Revenue Code, and the applicable Treasury Regulations, supra.
(a) being movements wholly without the premises of a refinery, or did said movements constitute transportation under the Act?
The test appears to be simple and practical. The difficulty lies in its application to each particular set of circumstances as they arise from the actual production, transportation and refining of petroleum products.
The question when production and refining ceases and transportation commences is one which necessarily will vary in almost every case.
It must, therefore, be determined- Where the movements of crude oil from and to the barges, and to and about the refinery a part of the production process or part of a loading process, or where the movements similar to those activities which a pipe line carrier would ordinarily undertake and perform?
There are many court cases which consider the tax on the transportation of oil by pipe line but none considers the application of the exemption claimed here.
When Congress wrote this new subsection, 3460(c), into the Code by the 1942 Revenue Act, it did not define the term 'premises.' Neither the record of the Congressional Committee hearings nor the Committee reports contain any discussion which might disclose just what the Congress intended.
The term 'premises' furthermore has not been judicially defined as it applies to the exemption of 3460(c) so that our problem becomes one of first impression.
In view of this most interesting and important involvement, the Court will be somewhat extensive in disposing of the question.
Under these circumstances the definition of the term 'premises' is dependent upon the local law- the law of Texas- as it is well settled that the local rule will be followed whenever the application of a Federal revenue statute is dependent upon fact which can be interpreted only in accordance with state rules of property. Magruder v. Supplee, 316 U.S. 394, 62 S. Ct. 1162, 86 L. Ed. 1555; Stuart v. Helvering, 317 U.S. 154, 63 S. Ct. 140, 87 L. Ed. 154; Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 60 S. Ct. 628, 84 L. Ed. 876.
It is essential, therefore, to determine the law of Texas, as contained in the statutes or as defined by the decisions of the Court of that State, and of such statutes and decisions this Court has judicial notice.
In order to appreciate the nature of Republic's property interest in the land area concerned, reference to the history of its acquisition is essential.
In 1904 a concern which was the predecessor of the Texas City Terminal Railway Company, hereinafter called Terminal (the grantor and/or lessor of all of Republic Refinery premises) acquired twelve hundred acres of land, which now comprises the entire industrial area of Texas City. The industrial development of Texas City began that same year when deep water was brought in the area by the dredging of a ship channel. As shown by the appended blueprint, however, there were and are only three slips, or docks, so that the developers could not permit heavy industry to occupy the shoreline, and thus shut off plants in the rear areas from use of water transportation. Accordingly, from the beginning, both Terminal and its predecessor adopted the invariable practice of reserving the right to grant easements appurtenant leading to the water front across any granted or leased property. Consequently, when Terminal leased or conveyed lands away from the docks, it could, at the same time, grant easements to the docks across its intervening land, thereby preserving the correlative rights of all the industries in the area.
Plaintiff first went into possession of the properties on which it established its refinery under a thirty-year lease, dated April 1, 1931, from Terminal. The area covered by this document is often described as the 'main' refinery tract and includes the North and West Tank Farms. The lease also granted easements appurtenant to this tract over Terminal's property as follows: 'Lessor leases to lessee on easement of right of way over property between the leased property and an oil dock at shipside, for a pipe line or lines, with the right to erect such appliances on the dock as shall be necessary for the conduct of lessee's business, together with an easement of right-of-way over ...