Amerada Hess Corp. v. Conrad, 11351

• Decision Date: 30 June 1987
• Docket Number: No. 11351,11351
• Citation: 410 N.W.2d 124
• Parties: AMERADA HESS CORPORATION, a foreign corporation, Plaintiff, Appellant, and Cross-Appellee, v. Kent CONRAD, Tax Commissioner of the State of North Dakota, Defendant, Appellee, and Cross-Appellant. Civ.
• Court: North Dakota Supreme Court

Page 124

410 N.W.2d 124

AMERADA HESS CORPORATION, a foreign corporation, Plaintiff Appellant, and Cross-Appellee, v. Kent CONRAD, Tax Commissioner of the State of North Dakota Defendant, Appellee, and Cross-Appellant.

Civ. No. 11351.

Supreme Court of North Dakota.

June 30, 1987.

Thompson & Knight, Dallas, Tex., and Fleck, Mather, Strutz & Mayer, Bismarck, and David Castro, Amerada Hess Corp., Tulsa, Okl., for plaintiff, appellant, and cross-appellee; Jane Fleck Romanov (argued).

Tobyn J. Anderson, Asst. Atty. Gen., North Dakota State Tax Dept., Bismarck, for defendant, appellee, and cross-appellant.

LEVINE, Justice.

Amerada Hess Corporation (Amerada) appeals from a declaratory judgment addressing various questions arising from the North Dakota Tax Commissioner's (Commissioner) assessment of additional oil and gas gross production taxes, penalties, and interest against Amerada. The Commissioner has filed a cross-appeal from a part of the judgment. We affirm in part and reverse in part.

On June 4, 1985, the Commissioner issued to Amerada a Notice of Determination assessing additional gross production taxes, penalties, and interest in the total amount of $10,931,468, covering a ten-year period from January 1975 through December 1984. Amerada filed an administrative complaint objecting to the assessment and filed a declaratory judgment action in district court. In connection with the district court action, Amerada sought and obtained a writ of prohibition restraining the Commissioner from pursuing the administrative action until Amerada's claim for declaratory relief had been resolved. ¹ Amerada asserted that the Commissioner was estopped by his conduct from assessing additional taxes, penalties, and interest; that the Commissioner was barred by the six-year statute of limitations in Sec. 28-01-16(2), N.D.C.C., from making any assessment for the period before January 1, 1979; that the Commissioner had misinterpreted the meaning of "gross value at the well" under Sec. 57-51-02, N.D.C.C.; and that the Commissioner erroneously denied it a tax exemption under Sec. 57-51-05(3), N.D.C.C., for residue gas used as a lease fuel.

Through two decisions rendered on motions for partial summary judgment, the court determined that the Commissioner was not estopped under the circumstances of this case but held that the six-year statute of limitations is applicable to an assessment for additional taxes, penalties, and interest under Chapter 57-51, N.D.C.C. The court also ruled that residue gas is ineligible for the tax exemption. The court further ruled that the term "gross value at the well" as used in Sec. 57-51-02, N.D.C.C., means "the fair market value of the gas at the time of production," and that although the "selling price of gas normally fixes its fair market value, ... in cases where the selling price does not reflect fair market value, the Tax Commissioner may require the tax to be paid upon the price prevailing at the time of production." The court also stated that "where there is no price prevailing at the time of production, the Tax Commissioner may use any method of valuing gas that is reasonably calculated to arrive at the fair market value," and that "questions of the fair market value of gas and the price prevailing at the time of production are administrative questions to be resolved initially in the administrative process." These appeals followed.

I. GROSS VALUE AT THE WELL

Some background is helpful at this point. The gas subject to the assessment in this case is produced by Amerada and has been processed at the Tioga Gas Processing Plant in Williams County since 1955. Under a March 4, 1953, construction agreement between Amerada and Signal Oil and Gas Company (Signal), Signal agreed to build the plant essentially to process gas produced by Amerada from the area surrounding the facility. Although Signal owned and operated the plant, the agreement provided that Amerada would receive 50 percent of the net income from the plant after Signal recovered its costs of construction. On January 1, 1961, Signal conveyed a 50 percent interest in the plant to Amerada, and Signal later sold its remaining 50 percent interest in the plant to Aminoil, U.S.A., Inc.

In determining the value of the gas, Amerada has based its calculations on the pricing terms and provisions contained in its January 1, 1961, gas processing contract with Signal. ² The Commissioner based his assessment on the fair market value of the gas at the time of production and used the "work-back" method ³ to arrive at his calculations. The issue is which of these methods of valuing gas is authorized by our gross production tax laws under the circumstances presented.

In Rocky Mountain Oil & Gas Ass'n v. Conrad, 405 N.W.2d 279, 281 (N.D.1987), we stated:

"Our standard of review of a judgment declaratory in nature is the same as in any other case. NDCC Sec. 32-23-07; American Hardware Mutual Ins. Co. v. Dairyland Ins. Co., 304 N.W.2d 687, 689 (N.D.1981). The interpretation of a statute is a question of law, fully reviewable by this Court. Ladish Malting Co. v. Stutsman County, 351 N.W.2d 712, 718 (N.D.1984). In determining the meaning of statutes, the primary objective is to ascertain the intent of the Legislature. Ladish Malting Co., supra. The legislative intent must first be sought from the language of the statute; however, if a tax statute is ambiguous so that the legislative intention with respect to the meaning of the statute is doubtful, the doubt must be resolved in favor of the taxpayer. Ladish Malting Co., supra."

The relevant statutory provisions at issue are Secs. 57-51-02 and 57-51-05(4), N.D.C.C.:

"57-51-02. Gross production tax. A tax of five percentum of the gross value at the well is hereby levied upon all oil and gas produced within the state of North Dakota, less the value of any part thereof, the ownership or right to which is exempt from taxation. The tax hereby levied shall attach to and is hereby levied upon the whole production, including what is commonly known as the royalty interest."

"57-51-05. Payment of tax on quarterly basis--When tax due--When delinquent--Payment by purchaser--By producer--How casinghead gas taxed.

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"4. In case oil or gas is sold under circumstances where the sale price does not represent the cash price thereof prevailing for oil or gas of like kind, character or quality in the field from which such product is produced, the commissioner may require the said tax to be paid upon the basis of the prevailing price then being paid at the time of production thereof in said field for oil, or gas of like kind, quality, and character."

The parties agree that the phrase "gross value at the well" as used in Sec. 57-51-02, N.D.C.C., means the fair market value of the gas. The parties' disagreement is over the method for determining the fair market value of the gas when it is sold pursuant to a long-term purchase contract. Relying upon Apache Gas Products Corp. v. Oklahoma Tax Comm'n, 509 P.2d 109 (Okla.1973), Amerada asserts that where the contract price reflects the highest price obtainable for gas of like kind, quality and character in the field at the time the contract was entered into, the contract price exclusively establishes the fair market value of the gas for gross production tax purposes.

In Apache, the Oklahoma Supreme Court interpreted the provisions of the Oklahoma gross production tax law, Okla.Stat.Ann. tit. 68, Sec. 1009, from which our law was modeled. See Federal Land Bank of St. Paul v. State, 274 N.W.2d 580, 582 (N.D.1979). The court determined that the wording of Oklahoma's statutory counterpart to Sec. 57-51-05(4), N.D.C.C.,

"... when interpreted in the light of the realities of the natural gas industry (such as necessity for long term contracts, necessary time lag between initial, and later, sales under such contracts, and inevitable effect of increased demand, during such contract periods, upon current or prevailing gas prices generally) can only mean that the Commission 'may require' the tax to be paid on the basis of prevailing price in the field at the time of production ONLY in cases where the prices (already) paid are less than the prices that prevailed in the field at the time said sale prices were contracted for." Apache, supra, 509 P.2d at 113 [Emphasis in original].

The court thus concluded that the gross production tax should be measured by "the gross proceeds realized by each producer from his individual sales contracts, except where the conditions under which a particular contract was entered into were such as not to reflect arm's length bargaining...." Apache, supra, 509 P.2d at 116.

In situations where a North Dakota statute is derived from a statute in another jurisdiction, judicial interpretations of the foreign statute may be persuasive authority in interpreting our statute, but they are not binding on this court. Loken v. Magrum, 380 N.W.2d 336, 339 (N.D.1986). In this instance we find Apache unpersuasive and decline to follow it. ⁴

Having reviewed the provisions of Chapter 57-51, N.D.C.C., we believe that the Legislature intended to levy the gross production tax on the current fair market value of the gas produced regardless of whether the gas is sold pursuant to a long-term purchase contract. Cf. Teavee Oil & Gas, Inc. v. Hardesty, 297 S.E.2d 898, 900-901 (W.Va.1982). Section 57-51-02, N.D.C.C., the statute which actually imposes the gross production tax, provides that the tax is levied on the gross value at the well of all oil and gas produced in the state. The tax is levied on all oil and gas produced regardless of whether the gas or oil is sold to a purchaser. See Sec. 57-51-05(2), N.D.C.C. The tax is due and payable shortly after production, see Sec. 57-51-05(1), N.D.C.C., and the person paying the tax is required to report "[t]he prevailing market price of oil or gas sold at time of production; ..." Sec. 57-51-06(1)(e), N.D.C.C.

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