Hibernia Energy LLC v. Hegar
| Decision Date | 21 April 2023 |
| Docket Number | 03-21-00527-CV |
| Parties | Hibernia Energy LLC; and Ryan, LLC, as Assignee Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas Cross Appellants, Appellants, v. Glenn Hegar, Comptroller of Public Accounts of The State of Texas, and Ken Paxton, Attorney General of The State of Texas Hibernia Energy LLC; and Ryan, LLC, as Assignee Cross Appellees, Appellees, |
| Court | Texas Court of Appeals |
FROM THE 261ST DISTRICT COURT OF TRAVIS COUNTY NO D-1-GN-20-002649, THE HONORABLE AMY CLARK MEACHUM, JUDGE PRESIDING
Before Justices Baker, Triana, and Theofanis
Hibernia Energy, LLC and Ryan, LLC appeal from the trial court's final judgment denying their claim for a refund of franchise taxes. See Tex. Tax Code § 112.151. Appellants contend that the trial court misconstrued the applicable state and federal tax laws in determining the amount of taxes they owed by including the gains from Hibernia's sale of oil-and-gas-leasehold interests in their "total revenue." See id. § 171.1011(c)(2). On cross-appeal, the Comptroller and Attorney General (collectively, the Comptroller) argue that the trial court erred in denying their plea to the jurisdiction. For the following reasons, we affirm the trial court's final judgment.
Hibernia is a limited liability company that acquired leasehold interests in several oil-and-gas properties shortly after it was formed in 2010. Those interests are central to this dispute. In 2012 and 2014, Hibernia sold its leasehold interests and reported to the Comptroller on its corresponding franchise-tax reports-for tax-report years 2013 and 2015-gains of $95,866,370 and $296,691,853, respectively. The 2013 reported gain was entirely attributable to the sale of some of the interests at issue, and $295,888,093 of the 2015 reported gain was attributable to the sale of the remaining interests. Hibernia arrived at its respective reported gains by subtracting its "simulated cost basis" (i.e., its purchase price, with some adjustments not at issue here) from the gross proceeds received on the sales. Hibernia included these gains in the determination of its total revenue and its corresponding liability for franchise taxes and paid the taxes. See id. §§ 171.002 () .101 (providing for determination of entity's taxable margin, of which total revenue is component), .1011 (providing for determination of entity's total revenue).
Thereafter in late 2015, Hibernia engaged Ryan and authorized it-through a limited power of attorney-to represent it before the Comptroller. Through Ryan, Hibernia filed a request for a total tax refund of $2,749,437.53 for the two tax years at issue (2013 and 2015). See id. § 111.104(b) (providing for filing of "tax refund claim"). As support, Hibernia attached to its refund request (a) amended franchise-tax reports for 2013 and 2015, removing the roughly $391 million in gains from the sale of the leasehold interests that it had previously reported, and (b) a "Statement of Grounds" explaining that it had "overstated" its total revenue by erroneously including the gains from its sale of the leasehold interests when such inclusion is purportedly not required under applicable law.
Through an informal-review process, the Comptroller disagreed with and disallowed Hibernia's proposed adjustments, see id. § 111.1042, and in October 2016 Hibernia requested a formal hearing, see id. § 111.105. After the formal hearing before an administrative law judge (ALJ), the Comptroller issued a March 12, 2020 decision adopting the ALJ's recommendation that Hibernia's requested refund be denied. Hibernia timely filed a motion for rehearing, see id. § 111.105(c), (d), which the Comptroller denied, and then timely filed this suit see id. § 112.151.
Meanwhile, on December 6, 2017, Hibernia and Ryan executed a "Texas Franchise Tax Refund Purchase Agreement" whereby Hibernia sold to Ryan all of its "right, title, and interest in and to" Hibernia's entitlement to "receive certain franchise tax refunds," estimated at $2,749,437.53, "pursuant to [the] refund claims filed by" Hibernia for tax years 2013 and 2015. Contemporaneously with that agreement, Hibernia executed one of the Comptroller's approved forms-Form 00-985, entitled "Assignment of Right to Refund"- wherein Hibernia ("assignor") assigned to Ryan ("assignee") "all rights and interest to the tax refund[s]" at issue, including the "right to file a request for a refund and to receive the refund."
Hibernia filed its Original Petition and Request for Disclosure in the trial court May 13, 2020. Although the petition identified only Hibernia as a plaintiff, Ryan was listed as the party "[r]espectfully submitti[ng]" the petition, as represented by the listed undersigned counsel. On November 5, 2020, Hibernia and Ryan, "as Assignee," filed a First Amended Petition, identifying Ryan as a plaintiff for the first time. This pleading was again "[r]espectfully submitted" by Ryan, through the same undersigned counsel as the original petition. The Comptroller filed a plea to the jurisdiction, in which it argued that Hibernia lacked standing to bring the suit and that Ryan failed to exhaust its administrative remedies and timely file suit.
The trial court denied the plea to the jurisdiction, after which the parties filed cross-motions for summary judgment regarding the merits of appellants' entitlement to a refund. In a final judgment, the trial court granted the Comptroller's motion and denied appellants' motion. The parties each timely perfected appeal-the Comptroller of the denial of its plea to the jurisdiction, and appellants of the final judgment denying their summary-judgment motion and granting the Comptroller's.
The federal income-tax laws and the Texas franchise-tax laws intersect in this case. For federal-income-tax purposes, the Internal Revenue Code (I.R.C.) treats limited liability companies as partnerships unless they file an election to be treated otherwise. See Treas. Reg. § 301.7701-3(b) (). Partnerships are not subject to federal income taxes.[1] See I.R.C. § 701 (). For partnerships, the entity's income is "passed through" to the partners, who then pay federal income taxes based on their allocable shares. See id; United States v. Woods, 571 U.S. 31, 38 (2013). While partnerships do not themselves pay federal income taxes, the entities are required to file informational returns-currently, Form 1065, with attendant schedules-which allocate to partners their proportional shares of gains losses, and other information necessary to calculate and report their individual income-tax liability. See I.R.C. § 6031(a) (); Treas. Reg. § 1.6031(a)-1 ("Return of partnership income"); Woods, 571 U.S. at 38; see also I.R.C. § 701 ().
In contrast, Texas does not tax individuals' income but does tax entities (via the franchise tax) for the privilege of doing business in the state, treating limited liability companies as taxable entities in their own right.[2] See Tex. Tax Code §§ 171.001 (), .0002 (defining "taxable entity" to include limited liability companies). An entity's franchise-tax liability is determined based on amounts "reportable as income" on specific lines of its federal informational tax return. See id. § 171.1011(c)(2). Section 171.1011 requires that "the amounts reportable as income" on the specified Form 1065 lines be summed as a first step in computing total revenue. See id. § 171.1011(c)(2)(A). While Hibernia reported nothing on its federal tax return on the line at issue here-line 11, Schedule K-the Texas statute requires not what an entity "reports" but, rather, the amounts "reportable." See id. (emphasis added). Line 11 is where a partnership must report "any other item of income" not reported elsewhere on the information return. See Department of the Treasury, IRS, 2014 Instructions for Form 1065, at 24, available at https://www.irs.gov/pub/irs-prior/i1065--2014.pdf (last accessed Apr. 14, 2023);[3] see also Treas. Reg. § 1.6031(a)-1(a)(2) ().
Both the federal and state taxation schemes recognize the reality that partnerships and limited liability companies can and do have gains, losses, and income at the entity level. See e.g., 26 U.S.C. § 703(a) (); Tex Tax Code § 171.1011 (). However, because partnerships are not taxed at the federal level but are liable for Texas franchise taxes, the conceptual dispute in this case asks: How is Hibernia's "pass-through" status under federal law properly converted into "taxable entity" status under Texas law? The specific...
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