In re River Rock Energy Co.

Decision Date06 August 2021
Docket NumberNo. 120,387,120,387
Citation492 P.3d 1157
CourtKansas Supreme Court
Parties In the MATTER OF the Appeal of RIVER ROCK ENERGY COMPANY for the Year 2016 in Labette, Neosho, and Wilson Counties.

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.

The opinion of the court was delivered by Biles, J.:

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) ("[T]he valuing of producing oil leases in compliance with K.S.A. 79-331, setting out eight factors, which must be considered as well as any other factors known by the assessor to affect the valuation of the property, is an extremely difficult operation.").

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, 464 P.3d 344. 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) (protesting payment of taxes).

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) ("The county appraiser shall review the appraisal of the taxpayer's property with the taxpayer ... and may change the valuation of the taxpayer's property, if in the county appraiser's opinion a change in the valuation of the taxpayer's property is required to assure that the taxpayer's property is valued according to law."). Unsatisfied, River Rock continued with its objections.

BOTA proceedings

River Rock filed payment-under-protest applications for all 2,150 Kansas properties with BOTA, but paid filing fees only for 205. Of those, two settled. River Rock moved to consolidate all appeals and abate the outstanding unpaid fees. BOTA agreed to consolidation, but it denied the filing fee abatement. BOTA considered "perfected" only those protest appeals with paid filing fees. This left 203 appeals for adjudication across three counties: Labette, Neosho, and Wilson. The remaining wells were "in limbo" as the Court of Appeals panel later characterized it. River Rock , 58 Kan. App. 2d at 100, 464 P.3d 344.

BOTA permitted David N. Harper, Director of the Property Valuation Division for the Kansas Department of Revenue, to intervene to defend the Guide. All parties submitted written testimony and exhibits and agreed to waive witness cross-examination. They also filed suggested findings of fact and conclusions of law along with supporting briefs.

Lynn L. Kent, PVD's Oil and Gas Personal Property Section Manager, testified for the division. She described the Guide's development and methodologies, and explained the theoretical basis for the working interest minimum lease value:

"The appraisal opinion reflected in the 2016 Guide regarding ‘Working Interest Minimum Lease Value’ is an opinion that a working interest in a producing oil or gas lease has value and is not worthless. It is an appraisal opinion that the working interest has a minimal market value, in addition to the remaining equipment, if the lease is producing.
"Restated, in context, the Guide reflects an appraisal opinion for 2016 that the expense allowance should not exceed more than 90% of the working interest's gross reserve value for producing gas properties . Although it is termed ‘working interest minimum lease value,’ it is really one of three considerations of expenses in the working interest value calculation." (Emphases added.)

Kent also testified the Guide's working interest minimum lease value, when added to the remaining equipment value, does not violate "any applicable Uniform Standards of Professional Appraisal Practice (USPAP) provision" if the lease is producing. See K.S.A. 79-505(a)(1) (requiring "all appraisals be performed in accordance with generally accepted appraisal standards as evidenced by the appraisal standards promulgated by the appraisal standards board of the appraisal foundation").

The counties provided testimony from their respective county appraisers. Each testified: (1) they were ultimately responsible for the valuations given on the subject wells; (2) they followed the policies, procedures, and guidelines from PVD; (3) the taxpayer provided no property-specific information or analysis to allow the county to perform a more detailed alternative evaluation; (4) they did not deviate from the Guide in appraising the subject properties, even though the Guide authorizes individual deviations; and (5) there was no just cause to deviate from the Guide's working interest minimum lease value provisions for these wells.

River Rock provided its evidence through three witnesses: Jay Jimerson, president of River Rock and Cardinal; Michael Begland, a petroleum engineer; and James Allen, vice president of operations for River Rock and Cardinal. River Rock's principal thrust was that the Guide methodologies did not consider all costs of operations when using the minimum lease value method....

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