Phillips Pipe Line Co. v. United States

delivered the opinion of the court:

Is natural gasoline a liquid product of crude petroleum? That is the single issue in this case.

*472The Revenue Act of 19321 imposes a tax upon “all transportation of crude petroleum and the liquid products thereof by pipe line.”

The plaintiff paid taxes in the sum of $264;784.38 under the act on natural or casinghead gasoline which had been transported by pipe line.

A refund of these taxes is sought on the ground that they were illegally collected. It is claimed that this type of gasoline is not a product of crude petroleum, but is a product of natural gas instead, and that it therefore does not fall within the terms of the revenue act.

The evidence reveals a decided conflict among experts, text writers, and laymen.

No one has been down in the earth to see how oil and gas are made. No one knows the natural chemistry by which their constituent elements are changed from rags to riches. It is done in a hidden laboratory and is one of nature’s miracles. The issue in this case therefore cannot be determined with mathematical precision. However, from analy-ses, wide experience, and voluminous handling logical deductions may be drawn.

Oil and gas are usually found in close proximity. Frequently they are found in the same well.

It is conceded that straight-run gasoline, usually used as a motor fuel, is made from crude petroleum and is a product thereof. Natural gasoline has substantially the same ingredients as straight-run gasoline, though in different proportions, the former having a larger percentage of the volatile elements, the latter a greater percentage of the stable elements. By present-day methods of stabilization natural gasoline can be made to have very similar characteristics to those of straight-run gasoline.

All types of gas and gasoline as well as petroleum itself are of the so-called hydrocarbon family. The chief ingredients of all of them are carbon and hydrogen. The relative percentages of each of these two elements contained in the •commodity largely determine whether it is a light or a heavy gas or a liquid. The gaseous or liquid state varies with differing conditions of temperature and pressure.

*473Natural gas may be “wet” or “dry.” Wet gas is so-called because it contains gasoline in considerable amounts. Dry gas contains lesser amounts, and some natural gasses in this classification contain virtually no gasoline. Natural gas is called “rich” or “lean” depending on the degree to which the gas is saturated with gasoline vapor.

Wet gas almost always comes from a well that produces both oil and gas. Dry gas usually comes from a well that produces gas only.

When natural gasoline is extracted from wet gas the residual gas is less wet after the extraction. It appears to be comparable to mist in the air. While artificial changes in temperature and pressure cause natural gasoline to have either a gaseous or liquid form, it is transported and marketed as a liquid.

Natural gasoline was first found in appreciable quantities when it dripped as a liquid from the wet gas that was being conveyed by pipe from a well to a nearby engine where the gas was being used as a fuel. The accumulating liquids in the gas line interfered with gas transmission. Sometimes flowage was stopped altogether because water in the line tended to form plugs, especially in cold weather.

To avoid this difficulty a trap, compartment, or separator was attached to the pipe line into which the liquid gasoline dripped, thus permitting the gas to flow across at the top of the enlarged compartment. The natural gasoline could then be drawn off at the bottom through a vent or valve.

It was soon found that in some fields the gasoline was sufficient to be of value and other methods of extraction were developed, including the processes of absorption by oil, absorption by charcoal, compression, and refrigeration.

Absorption through oil is now the principal method. The usual plan is to force the wet gas through oil in what is known as a bubble tower, the oil absorbing the gasoline while the gas is passing through. The oil is then heated to the point at which the gasoline again becomes a vapor. The vapor is then cooled and condenses into a liquid gasoline.

There are many chemical names for the different types of gas and liquid hydrocarbons. Crude petroleum contains all of them in greater or less degree.

*474In the following chart we have indicated some of them:

As we go from top to bottom on the chart we pass from the gas to a liquid' state under normal temperature and pressure. The first two are predominantly gases. The third and fourth are on the dividing line. The lower ones are liquids. The principal difference is that the carbon and hydrogen content per molecule increase as we go down the line, the carbon content increasing a little more rapidly than the hydrogen. The entire list may be made liquids or gases or solids by extreme variations in temperature and pressure.

We have discussed these properties because the question of whether natural gasoline is normally a liquid or a gas is one phase of the issue in the case.

Straight-run gasoline and natural gasoline have practically the same ingredients, the difference being fhat straight-run has a larger percentage of the heavier hydrocarbons and the natural gasoline has a larger percentage of the lighter hydrocarbons.

Natural gasoline is turned into a regular motor fuel either by blending with heavier gasoline or by eliminating some of the lighter or more volatile elements by heating and other stabilization methods. This done, there is essentially no difference in the two products. Nothing need necessarily be added to natural gasoline in order to make it a motor fuel, only the more volatile elements eliminated or stabilized.

It is insisted that in the oil trade reference to crude petroleum is to petroleum after it has been made ready for pipeline transmission. If the term “crude petroleum,” however, were limited to oil after it has settled in the tanks *475and afte'r certain, ingredients have been removed either by settling, evaporation, escape, or other natural or artificial processes, there would be no term applicable to petroleum-in its natural state with all its original ingredients. The more limited term is sometimes used in commercial transactions. This, however, is a matter of trade convenience. The general public understanding is in’ the broader sense. Even the trade uses the term in both senses.

There is disagreement among experts, in the trade, among textbook writers and in the courts as to the exact relationship between oil and gas. In the light of this division of opinion it is proper to examine the legislative history of the section under which the tax in question was levied and collected.

The provisions of the Revenue Acts of 19171 and 19182 provided a tax on the transportation of “oil by pipe line.” These pipe-line tax provisions were later repealed.

The Act of 1982, as originally introduced, again taxed the transportation of “oil by pipe line.” The language was changed in the Senate committee to provide a tax on the transportation by pipe line of “crude petroleum and the liquid products thereof.” In this form it was finally enacted. In the Committee Report it was explained that the change in wording would make the “transportation of gasoline as well as crude oil taxable.”

The Conference Report, prepared by a Conference group representing both the House and Senate, stated that the change in wording would make the tax applicable to “crude petroleum and its liquid products instead1 of to oil only.”

The substitution of the words “crude petroleum” and the liquid products thereof for the term “oil,” accompanied by the stated reasons for the change leaves little doubt of the intention of the lawmakers.

Two United States district courts in well-reasoned opinions have reached the conclusion that it was the intention of the Congress to include natural gasoline within the taxable provisions.3

*476Manifestly it was the intention of Congress to tax pipeline transportation. Natural gasoline is transported in liquid form in the same pipe line that is used in transporting straight-run gasoline that concededly is subject to the tax. Most of the natural gasoline, after blending with heavier gasoline, or after elimination of the more volatile properties, is used for the same purpose as straight-run gasoline. It would require a technical rather than a natural construction to exclude natural gasoline from the taxable provisions of the revenue act.

We find as a fact that as used in the Revenue Act of 1932 natural gasoline should be treated as a liquid product of crude petroleum and therefore subject to the tax.

The plaintiff is not entitled to recover and the petition is dismissed.

It is so ordered.