In re Appeal of River Rock Energy Co.
| Decision Date | 06 August 2021 |
| Docket Number | 120,387 |
| Parties | In the Matter of the Appeal of River Rock Energy Company for the Year 2016 in Labette, Neosho, and Wilson Counties. |
| Court | Kansas Supreme Court |
SYLLABUS BY THE COURT
1. Article 11, § 1 of the Kansas Constitution requires the Legislature to "provide for a uniform and equal basis of valuation and rate of taxation of all property subject to taxation."
2. In Kansas, oil and gas leases are assessed and taxed as personal property for ad valorem taxation.
3 K.S.A. 79-1439(a) specifies that personal property subject to general ad valorem taxation must be appraised uniformly and equally at its fair market value as defined in K.S.A 79-503a.
4. Under K.S.A. 79-503a, the appraisal process used in the valuation of all tangible personal property for ad valorem tax purposes must conform to generally accepted appraisal procedures that are consistent with the definition of fair market value, unless otherwise specified by law.
5. Under K.S.A. 79-331(a), when determining the value of oil and gas leases or properties, the appraiser must consider the age of the wells; the quality of oil or gas being produced therefrom; the nearness of the wells to market; the cost of operation; the character, extent, and permanency of the market; the probable life of the wells; the quantity of oil or gas produced from the lease or property; the number of wells being operated; and such other facts as may be known by the appraiser to affect the value of the lease or property.
6. Ad valorem taxation of oil and gas leases differs from that of most other personal property in that the assessment is based on the present worth of the lease's future production. The determination of the fair market value of a lease necessarily requires consideration of the expected future income potential, including the age and probable life of producing wells thereon.
7 K.S.A. 79-1456 requires a county appraiser, when establishing values for various types of personal property, to conform to the values for such property shown in the personal property appraisal guides prescribed or furnished by the Director of Property Valuation. But the county appraiser may deviate from the values shown in such guides on an individual piece of personal property for just cause shown and in a manner consistent with achieving fair market value. In this context "just cause" means a legally sufficient reason to deviate from the guide value for a particular property to more accurately reflect its fair market value.
8. For valuation purposes, the continued existence of an oil and gas lease on January 1 in a given tax year is an acknowledgment by the lessee that the lease has some marketplace value to that lessee. Otherwise, the lease would have been abandoned. And even if this is not always the case, a lessee who believes some exceptional circumstances exist remains free to present the county appraiser with those circumstances to consider deviation under K.S.A. 79-1456(b).
9. Under K.S.A. 77-613(b), a petition for judicial review of a final order of an agency action must be filed within 30 days of service of that order.
10. The notice provisions in K.S.A. 77-613(e) require strict compliance.
Review of the judgment of the Court of Appeals in 58 Kan.App.2d 98, 464 P.3d 344 (2020).
Appeal from the Kansas Board of Tax Appeals. Opinion filed August 6, 2021. Judgment of the Court of Appeals affirming in part and reversing in part the Board of Tax Appeals and remanding the case with directions is affirmed in part and reversed in part. Decision of the Board of Tax Appeals is affirmed in part and reversed in part, and the case is remanded with directions.
Keith A. Brock, of Anderson & Byrd, LLP, of Ottawa, argued the cause and was on the briefs for appellant River Rock Energy Company.
Shelley M. Woodard, of the Legal Services Bureau, Kansas Department of Revenue, argued the cause and Jay D. Befort, deputy general counsel, and William E. Waters, of the same office, were with her on the briefs for appellee Kansas Department of Revenue.
Trevor C. Wohlford, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Topeka, argued the cause and was on the briefs for appellees Labette, Neosho, and Wilson Counties.
Jay Hall, general counsel, Kansas Association of Counties, was on the brief for amicus curiae Kansas Association of Counties.
For tax purposes, state law requires oil and gas properties to be appraised uniformly and equally at fair market value. Toward that end, the law mandates county appraisers adhere to the Kansas Oil and Gas Appraisal Guide developed by the Kansas Department of Revenue's Property Valuation Division unless just cause is shown for deviation. This court long ago acknowledged the complexities this entails. See, e.g., Cities Service Oil Co. v. Murphy, 202 Kan. 282, 288, 447 P.2d 791 (1968) ().
Here, River Rock Energy Co. advances a multi-jurisdictional dispute over valuations given for the 2016 tax year to its working interests in 203 gas wells and related equipment. It claims the division's Guide produced inflated values for their producing gas leases by capping operating expense allowances to arrive at what is known as a "working interest minimum lease value"-an appraisal methodology used in Kansas for more than 50 years to account for the market values of working interests in marginally producing properties. See Board of Ness County Commr's v. Bankoff Oil Co., 265 Kan. 525, 541, 960 P.2d 1279 (1998) ("Ad valorem taxation of oil and gas leases differs from that of most other personal property in that the assessment is based on the present worth of the lease's future production.").
In deciding River Rock's challenge, the Board of Tax Appeals and a Court of Appeals panel disagreed about applying the Guide's working interest minimum lease values for these wells. See In re Tax Appeal of River Rock, 58 Kan.App.2d 98, 464 P.3d 344 (2020). BOTA held River Rock "failed to provide evidence establishing just cause to deviate from the Guide's provisions." The panel, on the other hand, held the Guide overvalued River Rock's wells and "reflects an intent to produce a desired result-always using the higher value, increasing the assessed value and the resulting ad valorem tax levied." 58 Kan.App.2d at 106. On review, we agree with BOTA when it upheld the county appraisers' application of the Guide.
As to the remaining issues, we affirm BOTA's decision to use the Guide's values for well-site equipment on River Rock's leases. We also affirm the Court of Appeals decision that it had jurisdiction to entertain River Rock's challenge to BOTA's order refusing to abate filing fees for this multi-property protest appeal. We remand the case to BOTA for further proceedings consistent with the panel's directions on the fee abatement issue, although we acknowledge this may be of little practical benefit to River Rock given our rulings on the merits.
River Rock, a subsidiary of Cardinal River Energy Co., acquired through an expedited bankruptcy sale a collection of producing gas wells, leases, and related assets and equipment located across eight different taxing districts in southeast Kansas and northeast Oklahoma. This included 2, 150 well properties in Montgomery, Labette, Neosho, and Wilson Counties. River Rock's president testified the bid price for all the assets was $3, 100, 000. The record reflects $1 716, 847 of that amount was allocated to the Kansas well properties.
Before the sale, the respective county appraisers had separately appraised the working interests and equipment in the 2, 150 well properties for tax year 2016 at $13, 522, 670 in accordance with statutory timelines. Of those, 2, 094 working interests were valued using the minimum lease value methodology specified in the Guide's 2016 edition. After its acquisition, River Rock filed county-level payments under protest for all 2, 150 properties to contest the valuations. See generally K.S.A. 79-2005(a) ().
With the counties, River Rock claimed the valuations using the Guide's minimum lease values were invalid estimates of fair market value. It asserted its $1.7 million bankruptcy-sale purchase price conclusively established fair market value, even though the sale occurred months after the statutorily designated January 1 valuation date. It supplied each county with documents from the bankruptcy sale including its credit-bid allocation for each well property and written summaries about the bankruptcy's circumstances. But it submitted no other property-specific information about additional allowable operating expenses or other analytical data to allow the counties to individually reconsider a particular well's valuation. See K.S.A. 79-1456(b) ("The county appraiser may deviate from the values shown in such guides on an individual piece of personal property for just cause shown and in a manner consistent with achieving fair market value.").
Ultimately each county appraiser independently upheld using the Guide after concluding River Rock offered insufficient evidence to assign a credible alternative value for any specific property. Each appraiser disregarded River Rock's bankruptcy purchase-price allocation after concluding it was not a valid indication of fair market value. See K.S.A. 79-2005(a) (...
To continue reading
Request your trial