The CHAIRMAN. Do you use that arbitrary formula in determining the taxable value of every oil well? Mr. GREENIDGE. Oh, no. That is only for the analytical appraisal. The CHAIRMAN. Do you take into consideration the quantity of oil actually produced? Mr. GREENIDGE. Yes, sir. The CHAIRMAN. And the value of it? Mr. GREENIDGE. Yes, sir. The CHAIRMAN. You have to do that? Mr. GREENIDGE. Yes. That is the important thing. The CHAIRMAN. Yes. Mr. GREENIDGE. That is why we raised that question at the last estate of the recoverable oil. The CHAIRMAN. When you use this formula, and when you get the actual value, of what use is this formula to you in arriving at the basis of taxation in regard to an oil well? Mr. GREENIDGE. It sets up a value of the present worth of oil, estimated in the ground, for the purpose of figuring the depletion unit. It is nothing more or less than the application of a banking principle. Senator ERNST. On this curve which you have been talking about of 240,000 barrels the first year, you have filed a statement, which I will read: The first year, 240,000 barrels; the second year, 120,000 barrels; the third year, 60,000 barrels; the fourth year, 36,000 barrels; the fifth year, 20,000 barrels; the sixth year, 12,000 barrels; the seventh year, 6,000 barrels; the eighth year, 3,000 barrels; the ninth year, 2,000 barrels, and the tenth year, 1,000 barrels. Is that correct? Mr. GREENIDGE. Yes, sir. Senator COUZENS. Is that your experience in actual practice, or is that a hypothetical case? Mr. GREENIDGE. It is a hypothetical case. Senator COUZENS. And it does not follow the practice? Mr. GREENIDGE. It does not follow exactly the practice, because each well has a different curve, or each area has a different curve, should better say. I Senator COUZENS. That is not a standard, then, of what might be experienced? Mr. GREENIDGE. You could not call it a standard exactly, but it is a good indicator. Senator ERNST. Then, you change your figures in accordance with the character of the oil well, do you not? Mr. GREENIDGE. Oh, yes. For instance, in the Ranger field in Texas the production the first year would be more nearly 90 per cent, while with this well the production is approximately 48 per cent in the first year. Senator ERNST. That is what I wanted to get. Mr. GREENIDGE. Some wells drop off much more rapidly than others. Senator COUZENS. Now, in this particular hypothetical case which you have presented, what is the credit for each of those years on a 5 per cent basis? Mr. GREENIDGE. The depletion unit for this well will be approximately 90 cents. I do not suppose you are interested in the exact figures. It was 90 cents per barrel. Now, in the first year, the depletion that would be allowed to the taxpayer would be its production that year, 240,000 barrels, multiplied by 90 cents. Doctor ADAMS. What year are you referring to there? Mr. GREENIDGE. The first year's production. He would be allowed $216,000 depletion. Senator COUZENS. Right at this point, in order that we may get it clearly in our minds, assume that you were using a 10 per cent basis. What would be the depletion and credit for that year? Mr. GREENIDGE. The depletion unit first would be 82 cents—I am only carrying it to cents-and that would be 240,000 times 82, or $196,800. Senator COUZENS. Against how much on the 5 per cent basis? Senator COUZENS. So that when the department fixes a percentage basis of 5 per cent, the oil operator, the taxpayer, in the 5 per cent case, would receive a depletion allowance of $216,000, and if you insisted on 10 per cent he would receive a depletion credit of only $196,000? Mr. GREENIDGE. Yes, sir. Senator COUZENS. So that there is quite a large advantage to have the department allow a 5 per cent basis, instead of a 10 per cent basis; is not that correct? Mr. GREENIDGE. Other things being equal. Doctor ADAMS. Your illustration applied to the first year? Mr. GREENIDGE. Yes. We were just talking about the first year. The CHAIRMAN. Well, would the same proportion of advantage apply all the way through for the various years? Mr. GREENIDGE. Practically; yes, sir. The CHAIRMAN. How do you determine whether to use the 5 per cent basis or a 10 per cent basis? Mr. GREENIDGE. Depending on the circumstances surrounding the valuation of the property, the amount of risk, and the various factors that enter into the valuation. There are instances in which we do not use any discount factor whatever. Where the taxpayer presents a reasonable valuation, there is no discount factor applied. A great many taxpayers do not apply a discount factor at all." The CHAIRMAN. In the Gulf Oil Corporation case that you have been talking about, you applied that factor? Mr. GREENIDGE. Yes. The CHAIRMAN. What was there peculiar in that case that caused you to apply that basis and not to apply it in other cases? Mr. GREENIDGE. Their decline curves-I am speaking now from what I have heard from engineers who worked on the case before they left the department-were so conservatively constructed that the 5 per cent or 10 per cent, or any other discount factor, was not a material point in the case. Senator ERNST. So that, after all, each case has to a greater or less extent to stand on its own bottom? Mr. GREENIDGE. It has to. The law so specifies, Senator. Mr. GREENIDGE. That is why I have prepared two sets of figures showing the 1,000,000-barrel estimate and the 500,000-barrel estimate, because the 1,000,000-barrel estimate shows a returnable cap ital sum of $903,000 and the 500,000-barrel estimate only shows a capital return of $451,000, or just one-half. Senator COUZENS. Is the Gypsy Oil Co. a subsidiary of the Gulf Oil Corporation, do you know? Mr. GREENIDGE. Yes, sir. I file this chart simply as illustrative. The CHAIRMAN. Yes; surely. Mr. GREENIDGE. We purposely took no special case. Doctor ADAMS. Did you apply the 5 and 10 per cent factors to these particular reserves in any year, particularly in 1916 and 1917? Mr. GREENIDGE. In all years they were applied; yes, sir. Doctor ADAMS. Did you apply both, so that you could measure the extent of the difference? Mr. GREENIDGE. No; I have not. You are referring now to the Gulf Oil Corporation case? Doctor ADAMS. What difference would it make for 1916 and 1917 if a 10 per cent basis or the 5 per cent basis were used? Mr. GREENIDGE. In 1916 it would have made an immaterial difference because of the 2 per cent tax. The CHAIRMAN. Did the Gulf Oil Corporation have an amortization claim? Mr. GREENIDGE. Yes, sir. The CHAIRMAN. What became of that? Mr. GREENIDGE. That was disallowed. They made it as a claim, but it was not substantiated by the data that the department calls for to be submitted in connection with the allowance of such a claim. That claim amounted to $1,198,590.89. The CHAIRMAN. Was there any portion of it that was allowed? Mr. NASH. May I ask Mr. Greenidge a question there? Mr. NASH. Could that claim have been substantiated, in your judgment, if the case had not been expedited? Mr. GREENIDGE. Yes. I do not think my judgment needs to be taken on that, either. It is a fact. It could have been. Mr. NASH. Well, if it could have been substantiated, why did they not submit it? Was there anything said about it when they filed it? Mr. GREENIDGE. To my knowledge, I could not answer that, but I understand it was in order to get the matter settled up and out of the way. Senator COUZENS. Before Mr. Mellon became the Secretary of the Treasury? Mr. GREENIDGE. Yes. The CHAIRMAN. Yes; that is what I understood. Mr. NASH. What relation did the amount of amortization bear to the difference that was made in that tax as a result of this depletion. charge? Mr. GREENIDGE. I would have to refer to that. Senator COUZENS. Have you the record of that amortization charge here? Mr. GREENIDGE. Yes, sir. I have the total figure. I have not the claim before me, but the total figure is $1,198,590.89. Senator COUZENS. You mean that is the amount of the allowance claimed? Mr. GREENIDGE. Claimed. Senator COUZENS. What effect would that allowance have had upon the tax had the amortization not been allowed? Mr. GREENIDGE. It would have meant a material reduction. I do not know according to what surtax brackets the Gulf Oil taxes were finally figured, but I presume they were high. I could not say offhand what per cent. Mr. NASH. What I want to bring out is this, and I will put my question in this way: Would the amount recoverable, the amount that could have been recovered, had this amortization been pressed, been greater or less than the amount of credit that the company received as a result of the deduction on the depletion of leaseholds? Mr. GREENIDGE. To be conservative about it, I had better say it would have been approximately the same, because the leasehold depletion was $1,690,000, and this is $1,198,000. Senator COUZENS. That only covers one year of the depletion. Senator COUZENS. There were two years allowed on depletion. Mr. GREENIDGE. Oh, yes, sir; and there are subsequent years also. Senator CoUZENS. So that it could not be said that the failure to press the amortization charge offset the depletion credit? Mr. GREENIDGE. I could not say entirely or more or less. Senator COUZENS. I mean for over the two-year period, the twoyear period of allowance, your depletion credit on leaseholds was much more than the amortization claim for 1916. Mr. GREENIDGE. Yes. Doctor ADAMS. For what years would the amortization credit be applied? Mr. GREENIDGE. In 1918. Doctor ADAMS. In 1918? Mr. GREENIDGE. And subsequent years. Senator COUZENS. Is there anything else, Mr. Hartson, that we asked you to get? Mr. HARTSON. I do not recollect, Senator, that you asked for anything further about the Gulf matter. I have here a list of those things about which you did inquire. Senator COUZENS. Is there anything else that this witness can testify to? Mr. HARTSON. I think not. Mr. GREENIDGE. Senator King asked that a problem be worked out for him, and it is ready if the committee wishes it, or shall we wait until the Senator is present? The CHAIRMAN. What was the problem? Mr. GREENIDGE. On a well that came in with 5,000 barrels per day, he wanted to know what the taxes would be on it. The CHAIRMAN. I think you might put that in the record, because the Senator might not be here to-day. Mr. GREENIDGE. All right, sir. Here is another curve, Senators. You see how much more rapidly the fall off of that well is. That is the average curve of the Santa Fe Springs, Calif. You see how very rapid the fall off is. Senator King asked that the initial production of the well be taken at 5,000 barrels, and its first year's production would be 465,000 barrels, approximately-not in excess of a million barrels, as the Senator thought. It has been worked out allowing $40,000 for drilling ex pense and a thousand dollars as the cost of the property. It shows the tax on that well, if the taxpayer had no other income, would have been $25,744, or he would have paid approximately 30.8 per cent of his net income in tax. He also asked that it be computed without depletion, which we have done, and it shows that his tax would have been 45 per cent of the net income, instead of 30.8 per cent. These papers will go into the record, as I understand it. (The statement showing the computation above referred to is as follows:) Computation of tax without benefit of depletion and assuming there is no other income: Senator COUZENS. I hardly think that that quite answers the question that Senator King had in mind, because you point out that, under a certain statement of fact, the percentage of income he would have paid would have been some 30 per cent and a fraction. Mr. GREENIDGE. Yes, sir. Senator CoUZENS. And then, under another statement of fact, it would have been 45 per cent? Mr. GREENIDGE. Yes, sir. Senator COUZENS. But that statement does not show the relation of the income to the investment. In other words, he complained, as I recall it, that these depletion charges and credits are so large that they leave an enormous profit as related to the investment. Mr. GREENIDGE. Well, we included the depletion charge, Senator, in the first computation. Perhaps I do not understand your question, Senator. Senator COUZENS. I mean, in the case that Senator King referred to, the hypothetical case Mr. GREENIDGE. Yes. Senator COUZENS. Where there was $41,000 invested Mr. GREENIDGE. Yes, sir. Senator COUZENS. And this discovery was made, as you have stated, of 5,000 barrels per day Mr. GREENIDGE. Yes, sir; 5,000 barrels per day. Senator CouZENS. How much would his income have been that year? Mr. GREENIDGE. $203,437.50. |