BP America Production Co. v. Dept. of Rev.

Decision Date31 May 2005
Docket NumberNo. 03-191.,03-191.
Citation112 P.3d 596,2005 WY 60
PartiesBP AMERICA PRODUCTION COMPANY; Chevron U.S.A., Inc.; and Anadarko E & P Company, LP, Appellants (Petitioners), v. DEPARTMENT OF REVENUE, STATE OF WYOMING; and Board of County Commissioners for Uinta County, Wyoming, Appellees (Respondents).
CourtWyoming Supreme Court

Representing Appellant BP America Production Company: Robert A. Swiech, John L. Bordes, Jr., and Nicole Crighton of Oreck, Bradley, Crighton, Adams & Chase, Boulder, Colorado.

Representing Appellant Chevron U.S.A., Inc.: William J. Thomson II and Randall B. Reed of Dray, Thomson & Dyekman, P.C., Cheyenne, Wyoming.

Representing Appellant Anadarko E & P Company, LP: Lawrence J. Wolfe and Walter F. Eggers, III, of Holland & Hart, LLP, Cheyenne, Wyoming; Russell W. Miller, Assistant General Counsel of Anadarko Petroleum Corp., Houston, Texas. Argument by Mr. Wolfe.

Representing Appellee Wyoming Department of Revenue: Patrick J. Crank, Wyoming Attorney General; Michael L. Hubbard, Deputy Attorney General; Karl D. Anderson, Senior Assistant Attorney General; Martin L. Hardsocg, Senior Assistant Attorney General, Cheyenne, Wyoming. Argument by Mr. Hardsocg.

Representing Appellee Board of County Commissioners of Uinta County: Bruce A. Salzburg of Freudenthal, Salzburg & Bonds, P.C., Cheyenne, Wyoming.

Before HILL, C.J., and GOLDEN, LEHMAN,1 KITE, and VOIGT, JJ.

GOLDEN, Justice.

[¶ 1] BP America Production Company, Chevron USA, Inc., and Anadarko E & P Co. LP ("Taxpayers") appeal a State Board of Equalization (the Board) decision upholding the Department of Revenue's (the Department) decision to use the comparable value method for determining the fair market value of their year 2000 natural gas production from the Whitney Canyon Field. See Wyo. Stat. Ann. § 39-14-203(b)(vi)(B) (LexisNexis 2003).2 Taxpayers primarily contend that the Department cannot use the comparable value method in the absence of rules defining what Taxpayers allege to be ambiguous terms in the statute (§ 39-14-203(b)(vi)(B)). Taxpayers also contend that, under the particular facts and circumstances of their Whitney Canyon production, there are no comparable processing fee agreements, again prohibiting the Department from using the comparable value method.

[¶ 2] During the hearing before the Board, the Board allowed Uinta County to intervene in the administrative proceedings. After a full hearing, the Board upheld the Department's use of the comparable value method for Taxpayers' production. Taxpayers then appealed the Board's decision to the district court. The district court certified the appeal to this Court pursuant to W.R.A.P. 12.09(b). This Court accepted certification and hereby affirms the order of the Board. On the issue regarding intervention of Uinta County, however, we reverse on the authority of Amoco Production Co. v. Wyoming Dept. of Revenue, et al., 2004 WY 89, ¶¶ 9-27, 94 P.3d 430, ¶¶ 9-27 (Wyo.2004).

ISSUES

[¶ 3] Taxpayers state these issues:

A. Did the Department and Board incorrectly interpret and apply the comparable value statute, Wyo. Stat. Ann. § 39-14-203(b)(vi)(B)?
1. Should the Board have prevented the Department from using the comparable value method in the absence of rules defining the terms of the comparable value statute?
2. Did the Board erroneously construe the statutory terms "other parties," "like quantity," and "taking into consideration the quality, terms and conditions"?
B. Did the Department's actions and the Board's justifications for those actions violate the Appellants' rights to substantive and procedural due process?
C. Has the Department treated the Appellants differently from similarly situated taxpayers, thereby violating these Appellants' Equal Protection rights?
D. Did the Board err when it allowed Uinta County to intervene in this case?

The Department responds with these issues:

1. Did the State Board of Equalization correctly affirm the Department of Revenue's selection of the comparable value method, pursuant to Wyo. Stat. § 39-14-203(b)(vi)(B), as the method which most accurately reflected the taxable fair market value of Appellants' 2000 Whitney Canyon production?
2. Did the State Board of Equalization correctly affirm the Department of Revenue's application of a comparable value processing fee of 25% of the product paid in-kind, the maximum fee paid by any producer regardless of any circumstance, to value Appellants' 2000 Whitney Canyon production?
3. Did the State Board correctly determine that Appellants failed to carry their burden of proof when they failed to offer any evidence that their application of proportionate profits, pursuant to Wyo. Stat. § 39-14-203(b)(vi)(D), reflected the most accurate fair market value for taxation purposes, as required by Wyo. Stat. § 39-14-203(b)(viii)?
4. Did the State Board of Equalization correctly affirm the Department's rejection of Appellants' application of proportionate profits, pursuant to Wyo. Stat. § 39-14-203(b)(vi)(D), which resulted in processing deductions far in excess of the actual costs to process and which bore no relationship to actual processing costs?
5. Did the State Board of Equalization correctly determine that Appellants' due process rights were not violated?

Uinta County, permitted intervention by the State Board of Equalization and also by the district court, states its issue to be whether the Board erred when it permitted that intervention in the contested case pending before that Board.

FACTS

[¶ 4] Taxpayers own working interests in sour natural gas production from wells in the Whitney Canyon Field. Taxpayers also are joint owners in the Whitney Canyon Processing Plant (the Plant), along with one other entity that is also a producer in the Whitney Canyon Field (the Plant Owners). The Plant was built by these four owners to process their Whitney Canyon sour natural gas production prior to its sale. The Plant Owners are governed by a construction and operating agreement (the C & O Agreement). Attached to the C & O Agreement is a processing agreement entered into separately by each of the four producers who also are the Plant Owners. The processing agreement provides that the Plant charges a processing fee of 25% of each individual producer's production volume in kind. In turn, the joint Plant Owners agree to receive that fee paid in-kind to the Plant in proportion to each Plant Owner's ownership interest in the Plant, and to separately market the production received in-kind.

[¶ 5] The Wyoming Legislature has charged the Wyoming Department of Revenue with the task of determining the fair market value for natural gas production for severance tax purposes. Wyo. Stat. Ann. § 39-14-202(a)(i) (LexisNexis 2003). The Wyoming Legislature has provided the Department with specific guidance on how it should determine the fair market value of natural gas production. See generally Wyo. Stat. Ann. § 39-14-203 (LexisNexis 2003). Pertinent to this appeal, the legislature has directed the Department to value natural gas production that is not sold at or prior to the point of valuation by bona-fide arms-length sale pursuant to one of four methods: 1) comparable sales; 2) comparable value; 3) netback; and 4) proportionate profits. § 39-14-203(b)(vi).

[¶ 6] In exercising its statutory authority to determine the fair market value for Taxpayers' gas production, the Department identified and instructed Taxpayers to apply the comparable value method to value their year 2000 through 2002 natural gas production. The legislature describes the comparable value method in this language:

Comparable value—The fair market value is the arms-length sales price less processing and transportation fees charged to other parties for minerals of like quantity, taking into consideration the quality, terms and conditions under which the minerals are being processed or transported[.]

§ 39-14-203(b)(vi)(B). As applied to the instant case, the object of the comparable value method is to determine a processing fee (no transportation fee is at issue). Once determined, that fee is subtracted by the Department from the value of the actual sale of processed gas, thereby arriving at a fair market value for the gas after production is complete but before processing. It is fair to say that in using this method, the Department is to make reasonable inferences based on reliable information about processing fees paid by other taxpayers in similar situations.

[¶ 7] In applying the comparable value method to the production of Taxpayers, the Department treated the processing agreements between the Whitney Canyon producers, including Taxpayers, and the Plant as four separate agreements. The Department obtained two other processing agreements in addition to the processing agreements between the Plant and the Taxpayers, which contain terms and conditions incorporating some variations from Taxpayers' processing agreements. All the processing agreements, however, provide that the processing fee is not to exceed 25%, in kind, of product volume processed. The Department accepted the 25% processing fee contained in the agreements as adequate comparables and used the 25% fee in the comparable value method to determine the fair market value of each Taxpayer's gas production.3 Taxpayers objected, claiming the processing agreements between themselves as producers and themselves as Plant Owners could not be used as separate comparables since they were all between the same entities. Specifically, Taxpayers challenged the Department's construction and application of the specific statutory language that Taxpayers as producers qualify as "other parties" with regard to processing agreements with the Plant. Taxpayers also argued that the processing fee agreements do not pertain to gas of "like quantity," and that the quality, terms and conditions of the processing fee agreements are not comparable. The Department maintained its decision to...

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