STATE, DEPT. OF REVENUE v. Amoco Production Co.

• Decision Date: 31 May 2000
• Docket Number: No. 98-65.,98-65.
• Citation: 7 P.3d 35
• Parties: The STATE of Wyoming DEPARTMENT OF REVENUE, Appellant (Petitioner), v. AMOCO PRODUCTION COMPANY and Amoco Rocmount, Appellees (Respondents).
• Court: Wyoming Supreme Court

7 P.3d 35

The STATE of Wyoming DEPARTMENT OF REVENUE, Appellant (Petitioner), v. AMOCO PRODUCTION COMPANY and Amoco Rocmount, Appellees (Respondents).

No. 98-65.

Supreme Court of Wyoming.

May 31, 2000.

Rehearing Denied June 29, 2000.

Representing Appellant: William U. Hill, Attorney General; and Vicci M. Colgan, Senior Assistant Attorney General, Cheyenne, Wyoming.

Representing Appellees: Algirdas M. Liepas of Wiederspahn, Liepas & Reese, P.C., Cheyenne, Wyoming; and John L. Bordes, Jr., Denver, Colorado.

Before LEHMAN, C.J., and THOMAS, MACY, GOLDEN, and TAYLOR,¹ JJ.

TAYLOR, Justice, Retired.

The Department of Revenue appeals from the State Board of Equalization's (the Board) determination of tax and interest owed by Amoco Production Company. The Department of Revenue contends the Board abused its discretion in rejecting the Department of Revenue's application of the net-back method, and acted contrary to law in allowing the offset of credits for overpayment. Finding that the Board erred only as to the issue of offsetting credits, we affirm in part and reverse in part.

I. ISSUES

Appellant, the Department of Revenue (the Department), presents the following issues for review:

1. Whether, when a mineral taxpayer sells its products and the purchaser "charges" a fee for its marketing and sales services, the fee is properly included in the gross sales price of the mineral, especially where the transaction is between related parties?

2. Whether the offsetting credit provision of Wyo. Stat. § 39-2-214(e) is properly applied to a mineral tax audit which commenced before the effective date of that statute?

3. Whether, when a mineral taxpayer makes a payment of delinquent taxes less than the taxpayer's liability, the payment is properly applied to the accrued interest on the debt, in the absence of any statute or agreement to do so?

Appellees, Amoco Production Company and Amoco Rocmount (collectively Amoco), phrase the issues as follows:

1. Did the Board of Equalization properly determine the true and correct taxable value for the natural gas liquids and sulfur production reported by Amoco?

2. Did the Board of Equalization act properly by taking into account overpayments during the audit period and applying them against underpayments?

3. Do the Department's arguments regarding standing alter the result that the Department is seeking an advisory opinion on whether taxing authorities may apply Amoco's payments in a way contrary to Amoco's designations concerning those payments?

4. Did the Board of Equalization act properly when it applied Amoco's partial payment to only the underlying tax liability and did not allow the Intervenor to apply that payment in violation of Amoco's designation regarding that payment?

II. FACTS

Amoco is a corporation owning oil and gas interests in Uinta County. Beginning in 1986, the Department commenced an audit of Amoco's production from the Whitney Canyon, and later, initiated audits of the Painter Complex, Ryckman Creek, and Anschutz Ranch East properties. The audits addressed the production of natural gas liquids and sulfur during the years 1983 through 1988. The State Department of Audit, established in 1989, completed the audits, and in 1994, the Department issued five separate assessment notices to Amoco for additional severance taxes. The assessments also notified Amoco of additional taxable value for ad valorem taxes due to Uinta County. The additional taxable value was certified in five separate notices in February of 1994.

Amoco timely appealed the valuation to the Board, which consolidated the cases for a contested case hearing. Uinta County successfully moved to intervene in the case, questioning whether it was required to apply Amoco's partial payment of ad valorem tax to the principal, as designated by Amoco, or whether it may apply the payment to accrued interest. On February 28, 1997, the Board issued preliminary findings of fact and conclusions of law, and directed the parties to either agree to numerical calculations or to submit their own calculations in order to reach a final determination of tax liability. After the parties were unable to reach an agreement, the Board received separate calculations from the parties before issuing its Supplemental and Final Findings of Fact Conclusions of Law Order.

The portion of the Board's determinations relevant to this appeal include its finding that the Department incorrectly included a "market fee" in the gross sales price of Amoco's production. The Department also takes issue with the Board's determination that Amoco may offset the overpayments against underpayment over the years in question in order to calculate the interest and penalty due. Finally, the Department contends it has standing to challenge the Board's conclusion that Uinta County must apply Amoco's non-protested, partial ad valorem tax payment to the principal due. Further facts will be set forth as necessary in the discussion of these issues.

Certification to this Court occurred after two petitions for review were consolidated in the District Court for the Third Judicial District. By order dated March 19, 1998, this Court dismissed the appeal filed by Uinta County, as Uinta County is not entitled to judicial review pursuant to Wyo. Stat. Ann. §§ 39-1-306 and 39-1-101(a)(xi) (Michie Repl.1985). See Basin Elec. Power Co-op., Inc. v. Department of Revenue, State of Wyo., 970 P.2d 841, 848 (Wyo.1998).

III. STANDARD OF REVIEW

Our standard of review for an agency decision in a contested case is fully set forth in Basin Elec. Power Co-op., Inc.,970 P.2d at 850-51 (footnote omitted):

When faced with contested issues of fact, we examine the entire record to determine if the agency's findings are supported by substantial evidence. * * * If so, we do not substitute our judgment for that of the agency and must uphold the factual findings on appeal. * * * Substantial evidence is more than a scintilla of evidence; it is relevant evidence which a reasonable mind might accept in support of the conclusions of the agency. * * *

If a conclusion of law is in accord with the law, it is affirmed. * * * We consider three distinct possibilities when reviewing agency determinations of questions of law. * * * If the agency has correctly applied its findings of fact to the correct rule of law, the agency's conclusions are affirmed. * * * However, if the agency applied its findings of fact to the wrong rule of law or if the agency incorrectly applied its findings of fact to the correct rule of law, we must correct the error and reverse. * * *

When an agency's determinations contain elements of law and fact, we do not treat them with the deference we reserve for findings of basic fact. * * * When reviewing an "ultimate fact," we separate the factual and legal aspects of the finding to determine whether the correct rule of law has been properly applied to the facts. * * * We do not defer to the agency's ultimate factual finding if there is an error in either stating or applying the law. * * *

"In examining the propriety of the valuation method, `our task is not to determine which of various appraisal methods is best or most accurately estimates [fair market value]; rather, it is to determine whether substantial evidence exists to support usage of the [chosen] method of appraisal.'" Amoco Prod. Co. v. State Bd. of Equalization, 899 P.2d 855, 858 (Wyo.1995) (quoting Holly Sugar Corp. v. State Bd. of Equalization, 839 P.2d 959, 963 (Wyo.1992)). However, the disagreement between the parties here does not concern the Department's choice of appraisal methods. The controversy concerns the proper application of those methods to the facts, which is an issue of ultimate fact, requiring de novo review.

IV. DISCUSSION

A. VALUATION

During the tax years in question, Amoco sold its production to Amoco Oil (the Purchaser), a sister subsidiary of the Amoco Corporation. Because there was no significant market for the product in Wyoming, the Purchaser paid Amoco the market value in out-of-state locations, minus transportation fees and a marketing fee. The marketing fee represented the Purchaser's costs relative to the sale of the product in remote locations, including administrative costs, working capital, and other costs associated with the means of transporting the product for final sale.

For the production years at issue here, 1983-1988, the statutes pertaining to mineral valuation provided:

(d) In the event the product as defined in subsection (b) of this section is not sold at the mine or mining claim by bona fide arms-length sale, or if the product of the mine is used without sale, the department shall determine the fair cash market value by application of recognized appraisal techniques.

Wyo. Stat. Ann. § 39-2-202(d) (Michie 1977). The Department determined that because the contracts for sale were between related parties, the sale between Amoco and the Purchaser was not a bona fide arms-length sale. The Department, applying a net-back method, calculated Amoco's production by using the price paid by a third party to the Purchaser, and then deducting transportation and processing fees from that price. Because the market fees actually charged to Amoco by the Purchaser did not fall within transportation and processing deductions allowed by the Department, the Department concluded that Amoco's failure to include the amount of the market fee in its gross sale price resulted in under-reporting the value of its production. Amoco objected, contending that the contract between Amoco and the Purchaser was a bona fide arms-length transaction, and thus accurately represented the fair market value of the product.

After a hearing on the matter, the Board agreed that the transactions between Amoco and the Purchaser were not bona fide arms-length sales, but found the Department failed to consider comparative sales between unrelated parties to make a reasonable estimate of fair market value of...