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February 13, 1942

or of any of the gas wells. Strange v. Hicks, 78 Okla. 1, 188 Pac. 347 (1920). In the single case found brought for the cancelation of an area under lease on which there was a shut-in gas well, at one time a producing well, there is the flat holding that there can be no cancelation of the lease by the lessor so long as any part of the development under the lease is producing in paying quantities, because the lease must be treated as a unit. Pearson v. Black, 120 S. W. (2d) 1075 (Tex. Civ. App. 1938). This holding was made in spite of the fact that the area sought to be canceled was under a separate assignment and the entire lease embraced the large area of over 10,000 acres.

However, any question of partial cancelation is answered sufficiently by the express language of the lease which provides in effect for forfeiture of the gas rights to unprofitable wells unless gas producing privileges are retained by the lessee through the payment of a $100 annual rental. This provision, contained in the terms relating to payment for gas wells, recited at the outset of this opinion, reads as follows:

* Failure on the part of the lessee to use a gas producing well, which cannot profitably be utilized at the rate herein prescribed, shall not work a forfeiture of this lease so far as the same relates to mining oil, but if the lessee desires to retain gas producing privileges, the lessee shall pay a rental of one hundred dollars per annum, in advance, calculated from date of discovery of gas, on each gas producing well, gas from which is not marketed or not utilized otherwise than for operations under this lease.

This provision evidently applies throughout the life of the lease, whether during the definite term or the indefinite extension thereof which depends upon production in paying quantities. My conclusion, therefore, is that since the payment of the $300 annual royalty on gas well No. 1 operated to keep the entire lease in effect the lessee was permitted under the lease to pay only $100 annual rental on gas well No. 2 for the purpose of preventing forfeiture of the well and retaining gas producing privileges.

In summary, the answers reached in this opinion to the three questions raised by you are (1) that the lease may be considered as continued in force since production ceased in March 1930 by reason of the existence of wells capable of producing gas, but shut in because of market conditions, and by reason of payment by the lessee of an annual royalty since that date of $300 on gas well No. 1; (2) that the annual payment due for well No. 1 is the $300 annual royalty paid by the lessee; and (3) that the annual payment due for well No. 2 is the $100 annual rental which the lessee has paid for that well.

Approved:

OSCAR L. CHAPMAN,

Assistant Secretary.

LIABILITY OF NON-GOVERNMENT AGENCIES FOR STATE SALES OR USE TAXES ON EQUIPMENT USED UNDER COOPERATIVE RESEARCH AGREEMENT WITH INTERIOR DEPARTMENT

Opinion, February 17, 1942

COOPERATIVE AGREEMENT SALES OR USE TAXES—INSTRUMENTALITIES OF FEDERAL GOVERNMENT-BURDEN ON FEDERAL GOVERNMENT.

A non-Government agency engaged in research under a cooperative agreement with the Bureau of Mines is not an instrumentality of the Federal Government, so as to exempt it from nondiscriminatory sales or use taxes imposed by a State. Such taxes are not a direct burden on the Federal Government even though the cost of a purchase is borne by the Government. MARGOLD, Solicitor:

My opinion has been requested concerning the applicability of State sales or use taxes to nonprofit sales on equipment used for research in which the Bureau of Mines is interested. The question arises in connection with a cooperative research program extending over seven or eight years, which the Bureau of Mines has conducted in conjunction with the American Society of Mechanical Engineers with respect to the effect of boiler water upon the cracking of boiler steel.

The American Society of Mechanical Engineers, acting through the Joint Research Committee on Boiler Feed Water Studies in a cooperative agreement with the United States Department of the Interior, acting through the Bureau of Mines, agreed to pay, among other things, for the costs of materials, supplies, and special apparatus not available in the Bureau. Among the purchases made by the Society is certain equipment to be attached to boilers. This equipment is sold by the American Society of Mechanical Engineers to individual clients and firms throughout the country, either directly, or through consulting firms. The payments received by the Society are placed in a fund to be used for further research. The Society, the consulting firms, and the individual purchasers involved all sustain financial losses upon these transactions, but have expressed their willingness to continue the work in order to help the research program.

After the testing units are purchased by the Society, they are sent to the Bureau of Mines for checking before they are installed in the various plants. These plants report the results of their tests to the Bureau of Mines, and return the worn-out equipment for further investigation and study. The Bureau thus has physical custody of the equipment both before installation and after its removal, although the primary liability for all expenses is that of the Society.

The question presented is whether sales or use taxes may be levied with respect to this equipment, which is sold at a financial loss and in accordance with a cooperative agreement with a branch of the Federal Government.

February 17, 1942

No general principle of law exists which exempts nonprofit sales of equipment from taxation. Nor is the American Society of Mechanical Engineers, by virtue of the contract, so integral a part of a Government agency that taxing it either as vendor or vendee would be taxing the Federal Government or burdening its operations.

The leading case upon the subject is James v. Dravo Contracting Co., 302 U. S. 134 (1937), in which it was decided that a contractor constructing locks and dams for the Federal Government is not an instrumentality of the Federal Government, and that a nondiscriminatory State tax upon its gross receipts under the contract with the Federal Government is not unconstitutional as a tax on the contract or as a direct burden upon the Federal Government. Upon the latter point the Court says, on page 160:

But if it be assumed that the gross receipts tax may increase the cost to the Government, the fact would not invalidate the tax. With respect to that effect, a tax on the contractor's gross receipts would not differ from a tax on the contractor's property and equipment necessarily used in the performance of the contract. Concededly, such a tax may validly be laid. Property taxes are naturally, as in this case, reckoned as a part of the expense of doing the work. Two cases directly dealing with sales and use taxes were decided by the Supreme Court on November 10, 1941: State of Alabama v. King & Boozer et al., 314 U. S. 1, 62 Sup. Ct. 43, and Curry v. United States of America et al., 314 U. S. 14, 62 Sup. Ct. 48, holding that contractors building army camps for the United States under cost-plusfixed-fee contracts were liable for Alabama sales and use taxes, even though the economic burden of the Government was materially increased thereby. Although the connection with the Government was more direct than that between the American Society of Mechanical Engineers and the Bureau of Mines, the Court decided that the contractors were not acting in the capacity of agents for the Government. As said in the King & Boozer case:

The contractors were thus purchasers of the lumber within the meaning of the taxing statute, and as such were subject to the tax. They were not relieved of the liability to pay the tax either because the contractors in a loose and general sense were acting for the Government in purchasing the lumber or, as the Alabama Supreme Court seems to have thought, because the economic burden of the tax imposed upon, the purchaser would be shifted to the Government by reason of its contract to reimburse the contractors.

But however extensively the Government may have reserved the right to restrict or control the action of the contractors in other respects, neither the reservation nor the exercise of that power gave to the contractors the status of agents of the Government to enter into contracts or to pledge its credit. See United States v. Algoma Lumber Co., 305 U. S. 415, 421. 59 S. Ct. 267, 270, 83 L. Ed. 260; United States v. Driscoll, 96 U. S. 421, 24 L. Ed. 847. It can hardly be said that the contractors were not free to obligate themselves for the purchase of

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material ordered. The contract contemplated that they should do so and that the Government should reimburse them for their expenditures. [State of Alabama v. King & Boozer, 314 U. S. 1, 62 Sup. Ct. 43, 47.]

In both cases, the fact that the added cost of the sales taxes was borne by the Government did not prevent the imposition of such taxes. In the situation before me, the effect, if any at all, upon the Bureau of Mines is entirely problematical.

Therefore, no general exemption from sales taxes exists with respect to this test equipment because of any connection with the Federal Government. It is even more clear that if the American Society of Mechanical Engineers, engaged in cooperative research with the Bureau of Mines, is not exempt as vendor, the purchasers, engaged in commercial operations throughout the country, are not exempt as vendees.

There may, however, be grounds for exemptions in the individual States, depending upon State laws such as those of Michigan, which exempt casual sales or sales in interstate commerce. But such a determination, involving as it does the question whether a private organization comes within the exemptions or exceptions of an individual state under a particular set of circumstances, is beyond the scope of this opinion.

Approved:

OSCAR L. CHAPMAN,

Assistant Secretary.

POLLY IBATUAN

Opinion, February 17, 1942

CLAIMS AGAINST UNITED STATES PROPERTY DAMAGE NEGLIGENCE.

Failure to clean grille in irrigation ditch siphon held to constitute negligence making Government liable for damage resulting from overflow on private property.

CLAIMS AGAINST UNITED STATES-PROPERTY DAMAGE-NEGLIGENCE-ACT OF FEBBUARY 20, 1929 (45 Stat. 1252).

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A claim for damage to land flooded by irrigation ditch as result of negligence of Indian Service employees may not be paid directly under act of February 20, 1929, authorizing the Secretary of the Interior to "pay damages caused to owners of lands or other private property reason of the operations of the United States * struction, operation, or maintenance of irrigation works," since this provision has been uniformly held to cover only damage resulting from direct, nonnegligent acts of the Government.

CLAIMS AGAINST UNITED STATES-PROPERTY DAMAGE NEGLIGENCE-MEASURE OF DAMAGES OBLIGATION TO MINIMIZE.

A claimant, whose land was subject to intermittent overflow from irrigation ditch, was obligated to make reasonable efforts to minimize the resulting

February 17, 1942

damage, and since he could have prevented recurrent losses by the improvement of a roadway his recovery is to be measured by the reasonable expense which thereby would have been incurred, rather than by the entire damage sustained.

CLAIMS AGAINST UNITED STATES-PROPERTY DAMAGE-NEGLIGENCE-MEASURE OF DAMAGES-LOSS OF PROFITS.

Recovery for loss of profits alleged to have resulted from negligence cannot be allowed where the anticipated profits are vague and speculative and the business in question has not been operated for a sufficient period of time to give it permanency and recognition.

GRAHAM, Assistant Solicitor:

Polly Ibatuan, of Wapato, Washington, has filed a claim in the amount of $8,747.50 against the United States for compensation for damages he alleges to have sustained as the result of the overflow from an irrigation canal of the Wapato irrigation project, operated by the Bureau of Indian Affairs. The claim is submitted for consideration under the act of February 20, 1929 (45 Stat. 1252, 25 U. S. C. sec 388), with the request that, in the event recovery is denied under this act, it be considered in the reduced amount of $1,000 under the act of December 28, 1922 (42 Stat. 1066, 31 U. S. C sec. 215).

The claimant and the Government appear to agree substantially on the facts upon which this claim is based. Polly Ibatuan operated a fruit and vegetable farm in the vicinity of Wapato, Washington. On August 3, 1939, he entered into a 5-year lease for a certain small tract of land located some 12 miles south of Yakima, Washington, and adjacent to a paved highway running between Wapato and Donald, Washington. The Government operates an irrigation project in this locality and one of its lateral canals, designated as the A-1 Extension, borders the above tract of land. The claimant, in accordance with the terms of his lease, constructed a warehouse on this property, presumably shortly after the lease was entered into, a short distance from both the irrigation ditch and the highway. The building was to serve the two-fold purpose of providing general storage facilities and a place of business from which the claimant could sell his produce to so-called "shopping buyers", who purchased fruits and vegetables for resale in surrounding cities.

The irrigation ditch above mentioned is siphoned under the highway at this point, and there is an iron grille installed at the entrance to the siphon for the purpose of removing weeds and other debris which might clog the passage. The grille is located on the same side of the road as the claimant's warehouse. It appears that during certain times of the year, principally in the late summer months, the grille would fill with green moss and weeds, stopping the normal flow of water and causing an overflow onto the adjacent lands, including those on which the warehouse stood and the roadway which connected this building

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