Elenbaas v. Department of Treasury

Decision Date04 August 1998
Docket NumberDocket No. 197467
Citation585 N.W.2d 305,231 Mich.App. 801
PartiesJack ELENBAAS and Eleanor Elenbaas, Plaintiff-Appellees, v. DEPARTMENT OF TREASURY, Defendant-Appellant. . Released
CourtCourt of Appeal of Michigan — District of US

Before HOOD, P.J., and MARKMAN and TALBOT, JJ.

ORDER

Elenbaas v. Dep't of Treasury, Docket No. 197467. The Court orders that a special panel shall be convened pursuant to MCR 7.215(H) to resolve the conflict between this case and Cook v. Dep't of Treasury, 229 Mich.App. 653, 583 N.W.2d 696 (1998).

The Court further orders that the opinion in this case released August 4, 1998, is hereby vacated.

The appellant may file a supplemental brief within 28 days of the Clerk's certification of this order. Appellee may file a supplemental brief within 21 days of service of appellant's brief. Nine copies must be filed with the Clerk of the Court.

HOOD, Presiding Judge.

Judgment was entered in favor of plaintiffs on their complaint that alleged that defendant improperly denied or reduced the claimed income tax refunds for 1990, 1991, 1992, and 1993. Defendant appeals by leave granted. 1 We affirm in part, reverse in part, and remand.

After this Court's ruling in Bauer v. Dep't of Treasury, 203 Mich.App. 97, 512 N.W.2d 42 (1993), plaintiffs filed amended income tax returns for 1990, 1991, 1992, and 1993, seeking refunds for income taxes paid on their gross receipts from oil and gas production. In Bauer, this Court determined that § 15 of the severance tax act, M.C.L. § 205.315; M.S.A. § 7.365, allows an individual who pays the severance tax on royalties received from oil and gas leases to be exempt from paying income tax on those royalties. Bauer, supra at 99, 512 N.W.2d 42. This Court held that § 15 was clear and unambiguous and that, when it applies, the severance tax is to be paid in lieu of all other taxes. Id. at 100, 512 N.W.2d 42. No exception is made for the income tax. Id. at 101, 512 N.W.2d 42. Because plaintiffs had paid both the severance tax and the income tax on the gross receipts from their oil and gas production in those years, they filed amended income tax returns. Plaintiffs calculated the amount of their claimed refunds by subtracting the amount of their gross receipts from oil and gas production, which receipts had been taxed pursuant to the severance tax act, from the total taxable income on the returns for each year. They then recalculated the amount of income tax owed.

Defendant failed to issue the full amount of the refunds claimed for 1990, 1991, and 1992 and failed to issue any refund for 1993. It determined that the amount of gross receipts should not have been deducted from the total taxable income, but rather the amount of net income derived from oil and gas production for each year should be subtracted. This resulted in less of a refund for 1990, 1991, and 1992. In 1993, plaintiffs did not enjoy net income from their oil and gas production, but rather had a net loss. Defendant determined that the net loss should be added to their total taxable income for 1993 and thus, plaintiffs owed additional taxes for that year. The Court of Claims determined that plaintiffs were entitled to the full refunds claimed, which refunds were calculated by subtracting the gross receipts from oil and gas production from their total taxable income.

Defendant first argues that Bauer was incorrectly decided and that income tax should be paid in addition to the severance tax on receipts from oil and gas production. Pursuant to MCR 7.215(H)(1), we are bound to follow Bauer. Moreover, we agree with the reasoning and result in Bauer.

The severance tax act imposed a specific tax, not a property tax, on producers engaged in the business of severing oil and gas interests from real property. M.C.L. § 205.301; M.S.A. § 7.351; Lawnichak v. Dep't of Treasury, 214 Mich.App. 618, 623, 543 N.W.2d 359 (1995). "Producers" are defined under the severance tax act to include persons entitled to royalties under oil and gas leases. M.C.L. § 205.312(2); M.S.A. § 7.362(2). Section 15 of the severance tax act specifically provides that the severance tax is to be paid "in lieu of all other taxes":

The severance tax herein provided for shall be in lieu of all other taxes, state or local, upon the oil or gas, the property rights attached thereto or inherent therein, or the values created thereby; upon all leases or the rights to develop and operate any lands of this state for oil or gas, the values created thereby and the property rights attached to or inherent therein: Provided, however, Nothing herein contained shall in anywise exempt the machinery, appliances, pipe lines, tanks and other equipment used in the development or operation of said leases, or used to transmit or transport the said oil or gas: And provided further, That nothing herein contained shall in anywise relieve any corporation or association from the payment of any franchise or privilege taxes required by the provisions of the state corporation laws [M.C.L. § 205.315; M.S.A. § 7.365].

In Bauer, supra at 100, 512 N.W.2d 42, this Court held that the language of § 15, that the severance tax is to be paid in lieu of all other taxes, was clear and unambiguous and that royalty payments subject to the severance tax were exempt from being taxed pursuant to the Income Tax Act (ITA). In Cowen v. Dep't of Treasury, 204 Mich.App. 428, 516 N.W.2d 511 (1994), a different panel of this Court again addressed whether § 15 relieved a producer of oil and gas interests from paying a tax in addition to the severance tax, that tax being the single business tax. The majority of the Cowen panel followed Bauer only because it was compelled to do so by Administrative Order No.1990-6, as extended by Administrative Order No.1994-3. 2 The majority found that the language was not clear and unambiguous because of the clauses modifying that phrase:

[W]e would conclude that the statement "in lieu of all other taxes," is not clear and unambiguous because it is modified by the clauses that follow the statement. We read § 15 as providing that the severance tax is in lieu of all other taxes (1) upon the oil and gas, the property rights attached thereto, or the values created thereby and (2) upon the leases or rights to develop lands for oil or gas, the values created thereby and the property rights attached thereto. In this case, the relevant question is whether the single business tax is a tax upon the "values created" by the oil and gas. We find the term "values created" to be unclear and susceptible to more than one interpretation. The Tax Tribunal construed the statute and determined that the exemption applied only to ad valorem property taxes. [Cowen, supra at 434, 516 N.W.2d 511.]

The Cowen majority failed to further elaborate on its position because construction or interpretation of the phrase would have been inappropriate in light of the Bauer decision. Id.

Bauer was decided by this Court in December 1993, and the Legislature has not acted to amend § 15 to clarify whether the severance tax was truly meant to be paid by producers of oil and gas interests "in lieu of all other taxes," including income tax and the single business tax. This silence by the Legislature following the Bauer decision suggests that the Legislature has consented to its holding that the severance tax is in lieu of all other taxes. 3 See Glancy v. Roseville, 216 Mich.App. 390, 394-395, 549 N.W.2d 78 (1996), aff'd. 457 Mich. 580, 577 N.W.2d 897 (1998).

We reaffirm that the Bauer Court correctly interpreted the language of § 15. If the plain and ordinary meaning of statutory language is clear, judicial construction is normally neither necessary nor permitted. Lorencz v. Ford Motor Co., 439 Mich. 370, 376, 483 N.W.2d 844 (1992). The phrase "[t]he severance tax herein provided for shall be in lieu of all other taxes, state or local" is clear and unambiguous. The word "all" usually denotes an unqualified classification, leaving no room for exceptions. See Skotak v. Vic Tanny Int'l, Inc., 203 Mich.App. 616, 619, 513 N.W.2d 428 (1994), where this Court interpreted the word "all" within the context of a contract dispute. Moreover, the clauses modifying the phrase at issue are neither unclear nor ambiguous.

In Cowen, supra at 434, 516 N.W.2d 511, the Court correctly pointed out that § 15 provides exemptions from "all other taxes" (1) upon the oil and gas, the property rights attached thereto, or the values created thereby and (2) upon the leases or rights to develop land for oil or gas, the values created thereby, and the property rights attached thereto. According to the language of the second phrase, leaseholds are not subject to any other taxes, which necessarily includes property tax that would otherwise normally be paid. Construing § 15 as only exempting ad valorem property taxes, as the Tax Tribunal argued in Cowen, however, would amount to ignoring the first phrase. The oil and gas itself, property rights attached to the oil and gas, and the values created by the oil and gas are also not subject to any other taxes according to that phrase. It is not just the leaseholds, which are subject to property taxes, that are exempt from all other taxes.

Receipts and royalty interests are "property rights" that are attached to the oil and gas itself. In Mobil Oil Corp. v. Dep't of Treasury, 422 Mich. 473, 479-480, 373 N.W.2d 730 (1985), the Supreme Court discussed the nature of oil and gas transactions. The operator-lessee is entitled to enter onto the surface of the property to explore for oil and gas. Id. The landowner-lessor is paid a sum of money by the operator-lessee for the right to explore the land. The property owner is also entitled to a royalty, either in kind or money, on all of the oil or gas that is extracted. Id. Thus, the property owner has a property interest, by way of the royalty interest, in all of the oil or...

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  • Elenbaas v. Department of Treasury
    • United States
    • Court of Appeal of Michigan — District of US
    • July 27, 1999
    ...this special panel was convened to resolve a conflict between this Court's prior, vacated opinion in Elenbaas v. Dep't of Treasury, 231 Mich.App. 801, 585 N.W.2d 305 (1998), and this Court's earlier decision in Cook v. Dep't of Treasury, 229 Mich.App. 653, 583 N.W.2d 696 (1998). In accordan......

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