Samson Hydrocarbons Co. v. Oklahoma Tax Com'n

• Decision Date: 14 July 1998
• Docket Number: No. 89,989,89,989
• Citation: 1998 OK 82,976 P.2d 532
• Parties: SAMSON HYDROCARBONS COMPANY, (formerly Grace Petroleum Corporation), Appellant, v. OKLAHOMA TAX COMMISSION, Appellee.
• Court: Oklahoma Supreme Court

Page 532

976 P.2d 532

1998 OK 82

SAMSON HYDROCARBONS COMPANY, (formerly Grace Petroleum Corporation), Appellant, v. OKLAHOMA TAX COMMISSION, Appellee.

No. 89,989.

Supreme Court of Oklahoma.

July 14, 1998.

Appeal from the Oklahoma Tax Commission.

¶0 Grace Petroleum Corporation, a natural gas producer and the predecessor in interest of appellant Samson, entered into numerous gas purchase contracts with El Paso Natural Gas Company covering properties in four states, including Oklahoma. The Oklahoma contracts required El Paso to make take-or-pay deficiency payments to Grace if El Paso failed to purchase and receive certain minimum quantities of gas. Grace calculated that El Paso owed over $16 million for take-or-pay deficiencies for the period 1982 through September 1988 and made written claims against El Paso for such deficiencies plus interest. The interest was computed at approximately $2.75 million for Oklahoma properties. On October 18, 1988, the parties entered into a settlement agreement whereby El Paso paid Grace four million dollars. The settlement resulted in the cancellation of the contracts and the release by each party of all claims or causes of action which had been or could have been asserted for any period prior to October 1, 1988. The agreement also provided that Grace must pay any taxes due on the settlement payment. Of the four million dollars, Grace allocated $2,693,495 to take or pay claims on Oklahoma wells. Grace recorded that amount as interest income and reported it as such for income tax purposes. Following an audit of both companies, the Business Tax Division of the Oklahoma Tax Commission issued a proposed assessment to El Paso for gross production and gas excise taxes on the $2.69 million figure. El Paso filed a protest and Grace intervened. An Administrative Law Judge concluded that the proceeds were nontaxable interest income. The Tax Commission rejected the ALJ's recommendation and held the proceeds were subject to taxation under 68 O.S. § 1009(g) and § 1102. Grace appealed. This Court granted appellant's motion to retain.

ORDER OF THE OKLAHOMA TAX COMMISSION REVERSED.

Timothy M. Larason & John F. Fischer, Andrews, Davis, Legg, Bixler, Milsten & Price, Oklahoma City, Oklahoma, for Appellant.

Thomas E. Kemp, Jr., General Counsel & Robert B. Struble, Deputy General Counsel, Oklahoma Tax Commission, Oklahoma City, Oklahoma, for Appellee.

OPINION

WATT, J.:

I. SUMMARY OF FACTS AND PROCEDURAL HISTORY

¶1 Grace Petroleum Corporation, a natural gas producer and the predecessor in interest of appellant Samson Hydrocarbons Company, was a party to numerous gas purchase agreements with El Paso Natural Gas Company. The contracts covered oil and gas wells located in Oklahoma, New Mexico, Texas and Utah. The Oklahoma contracts required El Paso to take and pay for, or pay for if not purchased, certain minimum quantities of natural gas each year. ¹ The payments for gas not taken under such take-or-pay contracts are commonly referred to as "take-or-pay deficiency payments." The deficiency payments at issue here--typically referred to as "recoupable, refundable" payments--were subject to recoupment in the form of future gas deliveries to El Paso or, if not recouped, cash refunds to El Paso. At some time prior to 1988, El Paso allegedly ceased making its deficiency payments under the contracts. Grace then made written claims against El Paso for the deficiency amounts plus interest. For the period from 1982 through September of 1988, Grace calculated the deficiency amounts on the Oklahoma properties at just over $16 million and the interest thereon at approximately $2.75 million.

¶2 On October 18, 1988, the parties entered into a settlement agreement whereby El Paso paid Grace a one-time nonrecoupable, nonrefundable payment of four million dollars. The settlement resulted in the cancellation of the gas purchase contracts and the release by each party of all claims or causes of action, with certain enumerated exceptions, which either party asserted or could have asserted for any period prior to October 1, 1988. Richard Metz, Grace's vice-president, testified that the company wanted the El Paso contracts terminated because El Paso was taking too little gas, which caused problems with adjoining wells draining gas from under Grace wells. According to Metz and Mark Haywood, another member of Grace's negotiating team, the interest to be earned on the $16 million accrued deficiencies was the only economic advantage Grace would receive from the deficiency payments because any deficiency payments would have been subject to recoupment or refund by El Paso. Metz and Grace's comptroller, James Tyler, stated that the settlement was essentially the same as if El Paso had paid Grace the deficiency amount plus interest and then Grace had refunded the deficiency amount in order to cancel the contracts. A major item bargained for, according to Metz, was the time value of the deficiency payments that had not been made. The settlement agreement also called for Grace to hold El Paso harmless from all suits, actions and expenses arising from or out of any claim by any taxing authority.

¶3 Of the four million dollars in settlement proceeds, Grace allocated $2,693,495 to take-or-pay claims on Oklahoma wells. Grace recorded that amount on its books as interest income and reported that amount as interest income for tax purposes. Following an audit of both companies, the Business Tax Division of the Oklahoma Tax Commission issued a proposed assessment to El Paso for gross production taxes and gas excise taxes on the settlement amount allocated to Oklahoma take or pay claims. El Paso filed a protest and Grace intervened. After a hearing, an Administrative Law Judge for the Commission concluded that the $2.69 million figure was nontaxable interest and recommended that the protest be sustained. The Business Tax Division objected and requested oral argument before the Tax Commission en banc. The Commission rejected the ALJ's recommendation and held the settlement amount was taxable. Grace appealed and this Court retained the case for disposition on the merits.

II. ISSUE

¶4 The issue in this case is whether the payment allocated by Grace as interest income is subject to gross production tax under 68 O.S. Supp.1987 § 1009(g) and gas excise tax under 68 O.S.1981 § 1102. We hold that it is not and reverse the order of the Tax Commission.

III. DISCUSSION

A. STANDARD OF REVIEW

¶5 In Dugger v. State ex rel. Okla. Tax Comm'n, 1992 OK 105, p 9, 834 P.2d 964, 968, this Court held:

The appellate courts will review the entire record made before an administrative agency acting in its adjudicatory capacity to determine whether the findings and conclusions set forth in the agency order are supported by substantial evidence. An adjudicatory order will be affirmed on appeal if the record contains substantial evidence in support of the facts upon which the decision is based and the order is otherwise free of error.

(footnotes omitted). For the reasons stated below, we find that the Commission's order is not supported by substantial evidence.

B. SECTION 1009(g), SECTION 1102 AND THE RULES OF STATUTORY CONSTRUCTION

¶6 In Oklahoma, a tax of 7% is levied on the gross value of the production of natural gas. 68 O.S.1991 § 1001(b). Regarding "take-or-pay" settlements, 68 O.S. Supp.1987 § 1009(g) states:

Pursuant to the provisions of a gas purchase contract or agreement, if the first purchaser makes payments to the producer as a result of the failure or refusal of said purchaser to take gas, said payments, for purposes of this article, are hereby deemed to be part of the gross value of gas taken according to said contract or agreement. The gross production tax shall be calculated upon the gross value, including said payments, in accordance with the provisions of this article. Gas on which the gross production tax has been paid in this manner when taken by said purchaser shall be reported as gas on which said tax has been paid. If said gas, which corresponds to such payments, is not taken but payments therefor are retained by the producer, then said payments are hereby deemed to be a premium on gas which was taken under said contract or agreement. ²

Gas excise taxes under 68 O.S.1981 § 1102 are collected "in the same manner as is provided by law for the collection of gross production tax[es] ... and apply in all cases where the gross production tax ... applies...." ³ Thus, the question of whether gas excise taxes are due hinges entirely upon whether gross production taxes are due under § 1009(g).

¶7 The fundamental rule of statutory construction is to ascertain and, if possible, give effect to the intention and purpose of the Legislature as expressed in a statute. Wal-Mart Stores, Inc. v. Switch, 1994 OK 59, p 5, 878 P.2d 357, 359. In the absence of a contrary definition, words in a statute "are to be given the same meaning as that attributed to them by ordinary and common definitions." Anson Corp. v. Hill, 1992 OK 138, p 10, 841 P.2d 583, 585. See also 25 O.S.1991 § 1. We employ the presumption "that every provision of our statutes has been intended for some useful purpose and should be given effect." Hunt v. Washington Fire & Marine Ins. Co., 1963 OK 112, p 11, 381 P.2d 844, 847.

¶8 It is also firmly established that tax statutes must be strictly construed against the state. Strelecki v. Okla. Tax Comm'n, 1993 OK 122, p 20, 872 P.2d 910, 920; Wilson v. State ex rel. Okla. Tax Comm'n, 1979 OK 62, p 5, 594 P.2d 1210, 1212. Any ambiguity or doubt as to a tax statute's meaning must be resolved in favor of the taxpayer. Strelecki, 1993 OK 122, p 20, 872 P.2d at 920; Wilson, 1979 OK 62, p 5, 594 P.2d at 1212; Globe Life & Accident Ins. Co. v. Okla. Tax Comm'n, 1996 OK 39, p 10, 913 P.2d 1322, 1327. "[C]ourts cannot enlarge the taxing act's ambit to make its provisions applicable to cases not clearly within the Legislature's contemplation...