Bankline Oil Company v. Commissioner of Internal Revenue

Wet gas, sometimes called casing head gas, from oil wells in the Signal Hill area of Long Beach, California, is at the root of Bankline’s income tax problems on review here for the year 1952. (The problems arise out of an agreement it made with the Signal Oil Company in that year.) When processed, this wet gas produces three products: natural gasoline, propane and dry gas. In the particular gas with which Bankline dealt, in terms of value, more than 80 per cent was in the natural gasoline produced and the remainder was in’ the dry gas and propane.

So far as the facts here are concerned, Bankline was not the original producer. Prior to January 1, 1953, Bankline had entered into eight processing agreements with various well owners. The agreed royalty to the producer was 50 per cent of the natural gasoline and propane. Bankline was entitled to use such of the dry gas as it needed for fuel in the processing, and the proceeds of any dry gas remaining were to be divided equally between Bankline and the producer. The producers had options to be paid their royalty on the natural gasoline and propane in money or in kind.

Four of the contracts were construed by the Supreme Court in…