People ex rel. Harris v. Parrish Oil Production, Inc.

Decision Date05 August 1993
Docket NumberNo. 5-92-0021,5-92-0021
Citation622 N.E.2d 810,249 Ill.App.3d 664
Parties, 190 Ill.Dec. 780 The PEOPLE of the State of Illinois ex rel. Anita HARRIS, Treasurer and ex-officio Collector of Taxes for Jasper County, Illinois, Plaintiff-Appellant, v. PARRISH OIL PRODUCTION, INC., and St. Pierre Oil Company, Defendants-Appellees.
CourtUnited States Appellate Court of Illinois

Norbert J. Goetten, Director, Stephen E. Norris, Deputy Director, Kendra S. Mitchell, Staff Atty., Special Prosecutor, Office of the State's Attorneys Appellate Prosecutor, Mt. Vernon, for plaintiff-appellant.

Patrick L. Duke, Flora, for defendants-appellees.

Justice MAAGdelivered the opinion of the court:

Plaintiff, the collector of taxes for Jasper County(tax collector), appeals from a judgment of the circuit court of Jasper County, which held the Illinois Department of Revenue Regulation Section 4(Illinois Property Tax Manual(Mar. 1980), sec. IV, p. 40) unconstitutional and vacated the tax sales performed pursuant to the regulation.The only issue raised on appeal is whether the circuit court erred in finding the regulation unconstitutional.

The defendants, Parrish Oil Production, Inc.(Parrish), and St. Pierre Oil Company(St. Pierre), are the operators of numerous gas and oil wells in Jasper County.Parrish and St. Pierre are tenants in common with various individuals.Each tenant in common owns a fractional undivided portion of the working interest of each well.There are more than 30 share holders in each well with some of the fractional shares being as small as .0058399 of the seven-eighths working interest.

Parrish and St. Pierre completed and filed with the tax collector real-property tax returns for oil producers.Attached to each return was a computer-generated list naming all fractional-interest holders, the addresses of the interest holders, and their ownership interest in each well.

Notwithstanding the information provided and contained in tax returns, the tax collector billed Parrish and St. Pierre as the operators of the wells for the property tax on the entire seven-eighths working interest rather than just the fractional undivided share that each owned.This billing was performed pursuant to the requirements of the regulation, but Parrish and St. Pierre paid only the amount attributable to their individual fractional ownership interests.Parrish and St. Pierre refused to pay the property tax on the portions of the working interest in which they had no ownership interest.There is some dispute whether the other fractional owners of the working interest of each lease attempted to pay the property tax on their individual percentages, but in any event, the tax collector did not credit their tax payments.

On September 26, 1990, the tax collector gave notice that an application for judgment and order of sale for delinquent taxes would be made on October 16, 1990, for the entire working interest of the oil-and gas-well leases.Parrish and St. Pierre filed objections on October 9, 1990, to the application for judgment, and a hearing was held on September 13, 1991.

The sole issue considered during the hearing was whether the entire working interest could be sold to satisfy the delinquent unpaid tax obligations.Despite the pending tax objections filed by Parrish and St. Pierre in October 1990, the tax collector sold the entire working interest in each gas- and oil-well lease at a tax sale to satisfy 100% of the property tax due from the entire working interest.

On December 20, 1991, the circuit court sustained the objections filed by Parrish and St. Pierre, declared the regulation unconstitutional, and voided any and all tax sales of defendants' oil- and gas-well leases performed pursuant to the regulation.Although the trial court found the regulatory scheme to be the most efficient means of collecting the real-property tax on the mineral interests in the land and noted that it had been informally and unofficially approved by the Illinois Attorney General, the trial court concluded that the regulation was inconsistent with and violative of the laws of the State of Illinois and the Constitution of the United States.Pursuant to the tax collector's petition, a stay of enforcement of the circuit court's judgment was granted pending this appeal.

On appeal the tax collector argues that the trial court erred in finding the regulation unconstitutional and further argues that Parrish and St. Pierre lacked standing or alternatively should have been estopped from offering any objection, since defendants failed to pay under protest the taxes assessed against them.Defendants assert that the tax collector waived the requirement of payment under protest when it failed to raise the issue at trial.Parrish and St. Pierre also argue that the regulation in question is unconstitutional under the due process and equal protection guarantees of the Federal and Illinois constitutions.We agree.Long ago our founding fathers determined that there should be no taxation without representation, and today we decide that there should be no taxation without notification.

Under a mining lease, the minerals belong to the lessor, who is usually the owner of the surface estate, and the lessee has the right to explore and remove the minerals, upon which the lessor has the reserved royalty or rent.(Murbarger v. Franklin(1960), 18 Ill.2d 344, 347-48, 163 N.E.2d 818, 821.)The term "working interest," as used in connection with an oil and gas lease, refers to that portion of the oil and gas that may be produced from the premises after the royalty is paid to the lessor.(Bates v. Mansfield(1991), 212 Ill.App.3d 69, 73, 156 Ill.Dec. 73, 75, 570 N.E.2d 549, 551.)Hence a "seven-eighths working interest" refers to the fact that the lessor is paid one-eighth of the value of the oil and gas produced as rent or royalty and the remaining seven-eighths is paid to the owners of the working interest.Pursuant to the Oil and Gas Lien Act of 1989, an operator is "a person who is responsible for or assumes the daily supervision and management for operating a leasehold and may be a co-owner of a leasehold interest."Ill.Rev.Stat.1989, ch. 82, par. 501(8).

The powers granted to the Illinois Department of Revenue are found in section 130 of the Revenue Act of 1939 (Revenue Act)(Ill.Rev.Stat.1989, ch. 120, par. 611 et seq.).More specifically, "[t]he Department shall * * * (3)[p]rescribe general rules and regulations not inconsistent with law, for local assessment offices relative to the assessment of property for taxation * * *."Ill.Rev.Stat.1989, ch. 120, par. 611(3).

The Department of Revenue's regulation at issue provides in pertinent part:

"The following regulation shall be observed in listing oil for assessment in Illinois: * * * (2) Where the working interest is owned by more than one person, the entire interest will be assessed to the operator, who can divide the tax bill as he would any other operating expense."Illinois Property Tax Manual(Mar. 1980), sec. IV, p. 40.

This regulation requires that the entire tax levied and assessed against the working interest in an oil or gas leasehold estate be billed to the operator instead of the individual owners of the working interest.The assessment and billing is made in the name of the operator who is obligated for the payment of the entire bill and not just that portion actually owned, if any, by the operator.As an alternative to this regulation, Parrish and St. Pierre propose individual notice and billing to each of the working interest owners.

The guarantee of due process of law extends to every governmental proceeding which may interfere with personal or property rights, whether the process be legislative, judicial, administrative, or executive.Pure Oil Co. v. City of Northlake(1956), 10 Ill.2d 241, 140 N.E.2d 289;People v. Scott(1927), 326 Ill. 327, 157 N.E. 247.

The proposition that a person shall not be deprived of life, liberty, or property without due process of law is as old as any principle of civilized government and is found in the Magna Charta and in substance, if not in form, in nearly all constitutions adopted by the several States.(Munn v. Illinois(1877), 94 U.S. 113, 24 L.Ed. 77.)The due process provisions of the Illinois constitution and the fourteenth amendment to the Federal Constitution have been construed to be similar in both scope and purpose (Barnett v. Cook County(1944), 388 Ill. 251, 57 N.E.2d 873;seeIll. Const.1970, art. I, sec. 2;Ill.Ann.Stat.,1970 Const., Art. I, sec. 2, Constitutional Commentary, at 109(Smith-Hurd 1971)), although not identical.For purposes of our discussion of the issues in this case, we need not address the differences, since our decision is the same under both provisions.Accordingly, we will address them together.

The United States Supreme Court has emphasized that due process of law, at a minimum, prohibits the deprivation of property without providing notice and an opportunity for a hearing appropriate to the nature of the case.(Memphis Light, Gas & Water Division v. Craft(1978), 436 U.S. 1, 98 S.Ct. 1554, 56 L.Ed.2d 30;Mullane v. Central Hanover Bank & Trust Co.(1950), 339 U.S. 306, 70 S.Ct. 652, 94 L.Ed. 865.)The timing and content of the notice and the nature of the hearing will depend on appropriate accommodation of the competing interests involved.Goss v. Lopez(1975), 419 U.S. 565, 95 S.Ct. 729, 42 L.Ed.2d 725.

The procedural safeguards mandated by due process in a particular case vary, depending upon "first the private interest that will be affected by the official action; second, the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Governments' interest, including the function involved and the fiscal and administrative burdens that the additional...

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