Mr. Fay, who has been employed as consulting engineer for this committee, has prepared a report dealing with the general situation, and I wish to call Mr. Fay to discuss his report, but before calling him for that purpose I desire to call the committee's attention to some facts as to the history of this provision. In 1918, when we were at war, it was represented to the Ways and Means Committee of the House of Representatives, and, if I am not mistaken, to the Finance Committee of the Senate, at the time that they were considering the 1918 revenue act, that the country was at that time consuming 60,000 barrels of oil a day in excess of the production, and that the production of the oil required to meet the needs of this country and its allies during the war depended very largely upon stimulating prospectors and stimulating wildcatting, and that the tax laws as then in force had the effect of discouraging the necessary prospecting. I read from page 478 of the hearings before the Ways and Means Committee of the House on the revenue act of 1918, a portion of a brief by the Mid-Continent Oil and Gas Association and Texas Gulf Coast and Louisiana Oil and Gas Association, dated June 28, 1918. The oil and gas supply of the world is kept up by new explorations and new developments. If the supply of this country is to be maintained and sufficient fuel oil, lubricant, and gasoline is to be furnished, these explorations and discoveries must go on and on, must be encouraged, and the entire reward must not be taken away from the wildcatter in case he is sucoessful. In this connection it might be well to call the attention of your committee to the fact that vastly the greater portion of the crude oil in the United States is prospected for and discovered by individuals or small concerns. We wish.further to call attention to the fact that the majority of the men engaged in the business are frequently having desperate struggles for existence, and are dependent very largely upon the luck of a strike for a success, and it is only the hope of the pot of gold at the end of the rainbow" that furnishes this almost unlimited supply of people who are spending their money as prospectors, very few of whom realize such hope. 66 In view of the great hazard of the business and the necessity of extensive wildcatting necessary to keep the supply of crude oil up to the demands of the public, some method should be adopted to encourage the wildcatter and to permit him to be put in a class different from established industries. He should be guaranteed the return of the money risked and expended in discovering and developing new fields without diminishing the invested capital, and because of the great hazard and irregularity of the return from the oil business, and particularly that of prospecting and discovery, he should be permitted to retain a larger share of the profits of such business than is permitted to other industries. On page 376 of the hearings before the Ways and Means Committee of the House, on September 13, 1918, the following is taken from a statement by Mr. John J. Shea, of Tulsa, Okla., representing the Mid-Continent Oil and Gas Association. One of the things we ask relief on is this. Of course, all of you who are informed upon mining business will understand this: The prospector goes out and makes a strike. He may have had 10 years of failure before that. The only thing he can do with that is to sell it to somebody who is able to develop it and run it, and he can sell that at a good price, and he takes that money and goes out prospecting with it again. He can not sell now, because under the present law all of the profits are held to have accrued during the year in which the sale is made, and as the result of that he must give up practically the whole body of his property in taxes. * * * 1 In his brief, filed the same day, Mr. Shea includes under clusions" the following paragraph, at page 392: Con 3. To encourage the prospecting vitally necessary to maintain the Nation's production, oil producers having discovered new deposits of petroleum unknown prior to January 1, 1918, should not be taxed on the income therefrom until all of the costs of discovering and developing such deposits has been returned. 4. In view of the importance and close relationship existing between sales of producing oil and gas properties and the continuance of drilling in search of new production so vitally necessary to the prosecution of the war, the net income derived from such sales, bona fide made, when not more than 50 per cent interest is retained by the seller, should not be subject to a greater tax than 20 per cent. On page 497 of the proceedings, Mr. Orlandus West, Clarksburg, W. Va., representing the Oil and Gas Producers' Association of West Virginia, makes the following statement: As it requires the investment of capital at great risk to determine the value of prospective oil or gas properties, such properties should be valued after oil or gas has been discovered thereon for the purpose of taxation. This would give the prospector an incentive by giving him some benefit or credit for the increased valuation which he might create at the risk of losing his investment. I might go on indefinitely reading extracts from the record of hearings before the Ways and Means Committee at that time, but the purport of all of them is the same as that of those which I have read. At that time the tax, which could run as high as 80 per cent, was claimed to fall too heavily upon the shoulders of the small prospector, who had, perhaps, prospected for oil for 5 or 6 or 8 or 10 years before he made his strike. He therefore had no income during those years during which he made no strikes against which he could offset the losses that he had suffered during those years, and when he did make a strike, 80 per cent of what he got out of it would go to the Government in the shape of taxes. It is manifest that this oil-discovery provision was inserted in the statute to meet a situation existing in 1918, namely, we were at war, the country was not producing what it was consuming, and the representation was made that it was necessary to take care of the little fellow, the little prospector and wildcatter, in order that the prospecting and wildcatting might go on, that new wells be brought in and our oil supply kept up or increased. The CHAIRMAN. Could you read into the record at this point the statute which resulted from those hearings to which you have just made reference? Mr. MANSON. Yes; that will be read into the record at a little later time. I call the committee's attention to the fact that that situation is entirely changed. We will supply the committee with data showing that instead of the country now producing less oil than it is consuming, the fact of the matter is that the trouble is just the other way. The country is producing more than it can consume; so that, instead of there being an emergency requiring the stimulation of wildcatting, the very necessity of conserving our resources at a time we are producing more than we require has exactly the opposite effect. Senator KING. Mr. Manson, as a matter of fact, though, the necessity for stimulation was a little exaggerated. I had something to do with that and helped to draw the statute, together with Senator Gore and one or two others, and I am very familiar with the causes which were alleged as justification for the statute. I thought we went a little too far on the subject. I believed, as many Senators did, that the demand during the war would be so imperative, and the price, of course, would go up accordingly, that we did not need any stimulation. It was just like it was with many of the rare metals. There was a teremendous impetus in production, and there would have been here, because the natural increase in price would have stimulated wildcatting. Mr. MANSON. I have a table here, which I will offer at this point as Exhibit No. 1. This table shows the percentage of discovery value which has gone to the wildcatter and the percentage of discovery value which has gone to others than wildcatters; in other words, which has gone to people who have discovered no new oil deposits. This table also shows the percentage of discovery value which has gone to small operators, and the percentage which has. gone to large operators as distinguished from the small ones. table does not attempt to cover all of the discovery values which have been allowed for depletion purposes. In the first place, 75 cases were examined at random by the oil section. Then, an additional 25 cases were examined. This Senator KING. You say they were examined by the oil section. Do you mean the oil section of your staff? Mr. MANSON. No; this was information gotten out by the employees of the Income Tax Unit. The CHAIRMAN. By the oil section of that unit? Mr. MANSON. Yes, sir; by the oil section of that unit. Then 25 additional cases were examined. The CHAIRMAN. By the same unit? Mr. MANSON. By the same section of that unit. Then 100 additional cases were examined. The results of those three sets of cases are set up here separately, as well as the general results, and they show that as to the total 37.5 per cent of the discovery value allowed has gone to the wildcatter and that 62.5 per cent of the discovery value allowed has gone to others than wildcatters. Senator KING. To such companies as the Mid-Continent? Senator KING. And the Gulf Refinery and other companies? Mr. MANSON. That 36.3 per cent of the discovery value of oil allowed has gone to small operators and 63.7 per cent has gone to large operators. Mr. Fay will discuss the reasons for that result, but I wish to point out the fact at this time, and to emphasize the fact, that but a small percentage of the relief afforded by the statute in the shape of taxes has gone to the fellow for whose benefit the statute was originally enacted into law. Senator KING. Mr. Manson, if it is not taking you out of the chronological order of your discussion, has the statute been, in your opinion, properly interpreted, or has there been such interpretation. placed upon it as that greater advantages have been derived by the oil producer, whether the little fellow or the big fellow, than ought to have been granted to him? Mr. MANSON. I will answer that question. It is right in the proper point in my discussion of this subject. Senator KING. Because, may I say, if the department has properly interpreted it and has properly applied it, even though it has given inordinate profits to the big man or to the little man, there would be no use of our going into it very much, except for the purpose of framing recommendations, if we felt so disposed, to Congress to amend the statute. If we could not find any fault with the administration of it, I would not want to waste any time on it, so far as I am concerned. Mr. MANSON. No; but what I want to do is to call attention at the outset to the fa that about two-thirds of all the loss in taxes to the Government has been suffered, to the advantage of someone who was never contemplated by the statute at the time it was written into the law. The CHAIRMAN. We understand that, but that is not the bureau's fault, is it? Mr. MANSON. I am now coming to that phase of the matter. In interpreting this statute which applies to discoveries, the bureau determined that an area amounting to 160 acres, with a well in the center, became proven by a commercial well. The result of that interpretation is that a field discovered by a wildcatter may be blanketed with discovery values of operators who never discovered anything, and the result is what I have just called the committee's attention to. As to how that is brought about, and as to just what the details of that situation are, they will be brought out fully by Mr. Fay, whom I now desire to call as the committee's witness. Senator KING. I would like to ask you or Mr. Fay, in the discussion, to state whether or not you have found cases of this character, that fields which had been proven absolutely, men have gone and acquired leases or the fee for a nominal amount, say $1,000 or $5,000, and they would bring in a well at a cost of $30,000 to $100,000, and sometimes $125,000, which would be worth all the way from $500,000 to $1,000,000 or $2,000,000, just as soon as it was brought in. They would claim a discovery value, or claim the worth of the property as not what they had paid for it a week or two weeks or a month before, but they would attribute to it a value of a million dollars, or just the value of the well after it was brought in, and would be allowed that in deductions and what not, and would pay no taxes? Mr. MANSON. There are many such cases. In fact, that is the ordinary case. There are more cases where discovery value is allowed to the person who drills in territory which is known to contain oil than there are to wild-catters. For instance, I have another table here which I desire to submit, showing that out of a total of 13,671 cases of allowances of discovery value, only 35 of them were allowed to those who actually discovered new pools. I offer that as Exhibit No. 2. (The statements submitted by Mr. Manson are as follows:) EXHIBIT No. 1 DATA ON DISCOVERY VALUES PREPARED FOR THE SENATE INVESTIGATING COMMITTEE Summary sheet-Detailed work sheet from which these figures were compiled, are on file in the oil and gas section. 1 There is no uniformity in the percentages of value allowed original wildcatter and others. In the Rocky Mountain region (Salt Creek and Cat Creek) the origianl wildcatter received 5 per cent of the total discovery value. In Texas (West Columbia and Burkburnett), the original wildcatters had protected their acreage by leasing in large blocks, and they received 54.9 per cent of the discovery value. (However, see note 3.) 2 The very close uniformity in the percentages allowed small operators as compared with large operators, probably reflects consistent practice in the oil and gas valuation section, and also the unvarying operation of economic laws. (See note 3.) NOTE 3.-The very close approximation of the percentages in columns 1 and 3 (line G) and columns 2 and 4 (line G) probably indicates nothing more than that taking a large number of cases the original wildcatter is generally the small operator. NOTE.-In considering these results it should be borne in mind that a large number of discoveries have been allowed which are not shown by the memoranda in the files; that is, cases in which a discovery value is allowed are enumerated above while the number of discoveries allowed in each case is not stated. STATEMENT OF MR. A. H. FAY, CONSULTING ENGINEER FOR THE COMMITTEE The CHAIRMAN. Mr. Fay, will you give the reporter your full name and address? Mr. FAY. A. H. Fay, 6204 Sixteenth Street, Washington, D. C. Mr. MANSON. Mr. Fay, you are a mining engineer? Mr. FAY. I am. |