Conocophillips Co. & Subsidiaries v. State, Department of Revenue, 040412 AKTAX, 3AN-10-12854 CI
|Docket Nº:||3AN-10-12854 CI|
|Opinion Judge:||Hon. Patrick J. McKay Judge of the Superior Court|
|Party Name:||CONOCOPHILLIPS COMPANY AND SUBSIDIARIES, f/k/a PHILLIPS PETROLEUM COMPANY, Appellants, v. STATE OF ALASKA DEPARTMENT OF REVENUE, Appellee.|
|Case Date:||April 04, 2012|
|Court:||Superior Court of Alaska|
DECISION ON APPEAL
ConocoPhillips and its subsidiaries ("ConocoPhillips") appeal a Decision on Summary Adjudication from the Office Of Administrative Hearings. ConocoPhillips challenges the Notice of Assessment and Demand for Payment ("Notice") of additional oil and gas corporation income tax for the 2000 and 2001 tax years ("Years at Issue") from the State of Alaska, Department of Revenue ("Department"). The challenge specifically relates to the computation of depreciation on the assets of two limited liability companies in which ConocoPhillips or one of its affiliates holds an interest.1
I. FACTS AND PROCEEDINGS
ConocoPhillips is a multinational integrated energy company, incorporated in Delaware and headquartered in Oklahoma for the Years at Issue. ConocoPhillips is engaged in business in Alaska. [R. 217, 222]. Because of its activities in Alaska, ConocoPhillips filed the Alaska Oil and Gas Corporation Net Income Tax returns on a worldwide combined basis for the Years at Issue. [R. 222]. ConocoPhillips included in taxable income the partnership distributions from two limited liability companies in which it or one of its affiliates held an interest. These two entities—taxed as partnerships—are Duke Energy Field Service, LLC ("DEFS") and Chevron Phillips Chemical Company LLC ("CPCC"). [R. 222].
DEFS is a joint venture engaged in gas gathering and processing. The two parties that formed DEFS are Duke Energy Field Services Corporation—an unrelated third-party, not obligated to file Alaska income tax returns—and an affiliate of ConocoPhillips. DEFS is headquartered in Colorado, with no depreciable assets in Alaska. [R. 217, 220]. DEFS adopted—pursuant to the terms of the limited liability agreement—the maximum allowable accelerated depreciation method with the shortest permissible life allowed under the Internal Revenue Code ("IRC"). [R. 221]. The distributions the ConocoPhillips affiliate received from DEFS where computed consistent with the accelerated depreciation method just mentioned and were included in Alaska taxable income without recomputation of that accelerated depreciation. [R. 332-336].
The other entity at issue—CPCC—is a chemical and plastics manufacturing joint venture formed by Chevron Corporation and ConocoPhillips.2 ConocoPhillips and Chevron Corporation each own 50% of CPCC. [R. 218]. CPCC is headquartered in Texas, is a separate and distinct entity from ConocoPhillips, and has no facilities or assets in Alaska. [R. 218]. The limited liability company agreement ("CPCC Agreement") provided that all items of income, gain, loss, deduction, credits and tax preferences for state and local income tax purposes shall be allocated consistent with the allocation of those items for federal tax purposes. [R. 219]. The CPCC distributions received by ConocoPhillips were computed consistent with the terms of the CPCC Agreement and thus included deductions that utilized accelerated depreciation. [R. 281-7].
For the Years at Issue, ConocoPhillips and its affiliates received a distributive share of the income, deductions, and credits of DEFS and CPCC. [R. 222]. In computing Alaska worldwide taxable income, ConocoPhillips included the partnership distributions received from DEFS and CPCC in its income. [R. 222]. The amount stated in taxable income was the amount included in federal taxable income for the Years at Issue. [R. 222]. The controversy arises because the Alaska statute at issue in this case—AS 43.20.072(b)—prohibits the use of accelerated depreciation. Under federal standards, corporations are at liberty to use accelerated depreciation methods. But pursuant to the depreciation computation requirements lain out in AS 43.20.072(b)(4) ("Alaska Depreciation"), an oil and gas company must recompute the depreciation on its assets consistent with 26 U.S.C.167 as that section read on June 30, 1981. 3 Prior to June 30, 1981, Section 167 did not allow for the use of accelerated methods of depreciation.
ConocoPhillips computed depreciation on its corporate assets consistent with Alaska Depreciation. But it did not recompute the DEFS and CPCC partnership distributions to reflect Alaska Depreciation on the partnership assets. [R. 222]. ConocoPhillips' failure to restate its partnership distributions from DEFS and CPCC to reflect Alaska Depreciation gives rise to the matter before the Court.
The Department audited the corporate oil and gas income tax returns filed by ConocoPhillips for the Years at Issue and determined that ConocoPhillips should have recomputed the depreciation on the partnership's assets consistent with Alaska Depreciation. [R. 222-3]. In October 2005, the Department issued the Notice proposing to assess tax of $22, 365, 910. [R. 223]. ConocoPhillips requested an Informal Conference and paid the Department $14, 406, 459—representing the tax and interest due on the uncontested audit adjustments. [R. 224]. Shortly thereafter the Department issued the Informal Conference Decision ("ICD"), which upheld the Notice. [R. 224]. ConocoPhillips filed an appeal in March 2008 with the Office Of Administrative Hearings. [R. 225].
In addition to ConocoPhillips itself, this case also concerns Kenai LNG Corporation ("Kenai LNG"). ConocoPhillips owns in excess of 50% but less than 80% of Kenai LNG. Therefore, Kenai LNG is required to file its own corporate income tax returns, rather than be included in the ConocoPhillips worldwide combined income tax returns. [R. 225]. But Kenai LNG must file its returns utilizing the ConocoPhillips worldwide income and apportionment factors. [R. 225]. The Department also audited Kenai LNG's returns for the Years at Issue and adjusted the returns consistent with the ConocoPhillips audit adjustments. [R. 225]. The Department similarly issued a Notice of Assessment and Demand for Payment in October 2005 proposing to assess tax in the amount of $68, 458 plus interest. [R. 225]. Kenai LNG requested an Informal Conference. [R. 226]. The Department issued its ICD in February 2008 reducing the tax due for 2000 to $38, 480 and determined a refund in the amount of $29, 891 for 2001. The result is net tax of $8, 589. [R. 226]. Kenai LNG filed a Notice of Appeal shortly thereafter. The Office Of Administrative Hearings issued an order in April 2008 consolidating the Kenai LNG matter with the ConocoPhillips matter. [R. 226].
The Office Of Administrative Hearings issued its Decision on Summary Adjudication and Order ("Decision") on the above matters in September 2010. [R. 25-39]. The Decision affirmed in part the ICD conclusion that the DEFS and CPCC partnership assets must be depreciated using Alaska Depreciation. [R. 25, 34]. But the Decision also held that the Department erred in (1) totally reversing the federal depreciation associated with the partnership assets; (2) the failure to apply IRC § 704; and (3) the failure to use the Alaska basis of the partnership assets to compute the depreciation allowance. [R. 25, 34]. This matter was remanded to the Department to recalculate the depreciation allowance consistent with the Office Of Administrative Hearings' findings. ConocoPhillips now appeals the findings made in the Decision and the subsequent Order Denying Reconsideration.
II. ISSUE PRESENTED
1. Whether the ALJ applied the correct standard of review to the Department's Informal Conference Decision.
2. Whether an oil and gas corporation that receives income from an investment in a limited liability company—which is treated as a partnership—must re-state that income based on the Alaska Depreciation schedule rather than the accelerated federal depreciation schedule.
III. LEGAL STANDARD
There are four standards of review for administrative appeals. The substantial evidence test is used for questions of fact. The reasonable basis test is used for questions of law involving agency expertise. The substitution of judgment test is used for question of law where no expertise is involved. The reasonable and not arbitrary test is used for review of administrative regulations.4
Here, the Court is confronted solely with a question of law—statutory interpretation5— and both parties agree that it does not involve agency expertise. Therefore, the substitution of judgment test is appropriate. The Supreme Court of Alaska has held that in applying its independent judgment to questions of statutory interpretation, it adopts "the rule of law that is most persuasive in light of precedent, reason, and policy."6 Moreover, when reviewing statutory interpretation, the Supreme Court of Alaska applies a sliding scale in which "[t]he plainer the...
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