State, ex rel. Stephan v. Martin, 53477

• Decision Date: 27 February 1982
• Docket Number: No. 53477,53477
• Citation: 230 Kan. 747,641 P.2d 1011
• Court: Kansas Supreme Court
• Parties: STATE of Kansas, ex rel., Robert T. STEPHAN, Attorney General, Petitioner, v. Philip W. MARTIN, Director of Property Valuation, Kansas Department of Revenue, Respondent.

Page 1011

641 P.2d 1011

230 Kan. 747

STATE of Kansas, ex rel., Robert T. STEPHAN, Attorney General, Petitioner, v. Philip W. MARTIN, Director of Property Valuation, Kansas Department of Revenue, Respondent.

No. 53477.

Supreme Court of Kansas.

Feb. 27, 1982.

Syllabus by the Court

1. In a proper case an original action in quo warranto is an appropriate procedure to question the constitutionality of a statute.

2. We start with the proposition that the constitutionality of a statute is presumed; that all doubts must be resolved in favor of its validity, and before the statute may be stricken, it must clearly appear the statute violates the Constitution. It is the court's duty to uphold the statute under attack, if possible, rather than defeat it. If there is any reasonable way a statute may be construed constitutionally permissible, that should be done. Following Board of Greenwood County Comm'rs v. Nadel, 228 Kan. 469, Syl. P 1, 618 P.2d 778 (1980).

3. A liberal construction of statutes in order to effectuate their purpose is the established policy of this court. The function of liberal construction is called into use where there is ambiguity in the language of the statute or, in other words, where there are one or more interpretations which may fairly be made. Where clarification is required, judicial interpretation is made that will give life to the statute rather than the one which will nullify it. Errors plainly clerical in character, mere inadvertences of terminology, and other similar inaccuracies or deficiencies will be disregarded or corrected where the intention of the legislature is plain and unmistakable. Following Russell v. Cogswell, 151 Kan. 793, 101 P.2d 361 (1940).

4. The words "and" and "or" are frequently misused. The courts will construe "and" to mean "or" and vice versa when necessary to reflect the true meaning and intent of a statute.

5. The legislature may prescribe the manner in which certain property shall be appraised for taxation in order to arrive at fair market value.

6. In an action in quo warranto seeking to oust the Director of Property Valuation from utilizing the provisions of K.S.A.1981 Supp. 79-331 on the grounds that the statute is unconstitutional, it is held : Based upon the limited stipulation of facts and record before this court, we cannot find that K.S.A.1981 Supp. 79-331 is unconstitutional as violating either Article 2, Section 14, or Article 11, Section 1, of the Kansas Constitution and the petition for a writ of quo warranto is denied.

Rodney J. Bieker, Asst. Atty. Gen., argued the cause and Robert T. Stephan, Atty. Gen., and Dan Biles, Asst. Atty. Gen., were with him on the brief for petitioner.

Carol B. Bonebrake, of the Dept. of Revenue, Legal Services, Topeka, argued the cause and was on the brief for respondent.

HOLMES, Justice:

This is an original action in quo warranto filed in this court on the petition of the Attorney General of Kansas, to oust the Director of Property Valuation from valuing and assessing oil and gas leases and properties in accordance with K.S.A.1981 Supp. 79-331 as enacted by the 1979 Legislature. The Attorney General contends the statute, as amended in 1979, is unconstitutional.

This action was brought by the State on the relation of the Attorney General pursuant to Article 3, Section 3 of the Kansas Constitution and K.S.A. 60-1202. This court has recognized on several occasions that in a proper case an original action in quo warranto is an appropriate procedure to question the constitutionality of a statute. See State ex rel. Tomasic v. Kansas City, Kansas Port Authority, 230 Kan. 404, 636 P.2d 760 (1981); State ex rel. Stephan v. Carlin, 229 Kan. 665, 630 P.2d 709 (1981); State ex rel. Frizzell v. Dwyer, 204 Kan. 3, 460 P.2d 507 (1969). The matter has been submitted to this court on an agreed statement of facts and we find the respondent's attack upon the standing of the attorney general to bring this action to be without merit. The court has determined that it will take jurisdiction of the controversy.

K.S.A. 79-331 (Weeks 1977) provided:

"In determining the value of oil and gas wells or properties the assessor shall take into consideration 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 wells, the number of wells being operated, and such other facts as may be known by the assessor to affect the value of the property.

"Whenever a county board of equalization or the state board of equalization shall make a change in any of the factors or figures used in determining the eight-eighths (8/8ths) valuation of the production for any oil or gas well or lease, such change shall apply to the working interest, royalty interest, overriding royalty interest and production payments."

The first paragraph of the foregoing statute was first enacted in 1917 and the second paragraph was enacted in 1969. In 1979 the Legislature amended the statute by adding subsections (b) and (c) effective January 1, 1980, and as enrolled and signed by the Governor it reads:

"(a) Except as otherwise provided in subsection (b) of this section ... (the balance of this subsection is identical to the statute quoted above.)

"(b) The valuation of the working interest and royalty interest, except valuation of equipment, of any original base lease or property producing oil or gas for the first time in economic quantities on and after July 1 of the calendar year preceding the year in which such property is first assessed shall be determined for the year in which such property is first assessed by determining the quantity of oil or gas such property would have produced during the entire year preceding the year in which such property is first assessed upon the basis of the actual production in such year and by multiplying the income and expenses that would have been attributable to such property at such production level, excluding equipment valuation thereof, if it had actually produced said entire year preceding the year in which such property is first assessed by sixty percent (60%).

"(c) The provisions of subsection (b) of this section shall not apply in the case of any production from any direct offset well or any subsequent well on the same lease." L.1979, ch. 310. (Emphasis added.)

The 1979 amendments were adopted by the legislature in an attempt to address a problem of ad valorem tax valuation which is peculiar to the oil and gas industry. It has long been recognized that when a new well is completed it will ordinarily produce at a far greater rate than will be customary for that particular well after only a few weeks or months have elapsed. This initial excessive production is referred to as "flush production" and, if used as one of the factors for determining value, is misleading and often results in excessive valuation and assessment for the initial year of taxation. Prior to the amendments, local assessors often failed or refused to take into consideration the "flush production" feature of new wells and for wells completed late in the year would merely annualize the initial "flush production" and arrive at a greatly inflated production factor resulting in excessive valuation and assessment along with other consequences detrimental not only to the oil and gas producers and royalty owners but to the public at large. The problems as testified to before the legislature and as summarized in the parties' stipulation of facts were:

"A. Legislation was needed to correct the assessment practices in the State of Kansas which resulted in an over-assessment of production when wells were completed in the latter part of each year.

"B. The over-assessment resulted from the failure or refusal of certain county appraisers to make an adequate adjustment for 'flush production' and the rapid declines which necessarily followed.

"C. Kansas producers and operators often would elect not to complete wells prior to the end of the calendar year in order to avoid over-assessment on the resulting production.

"D. The decision not to complete a well prior to the end of the calendar year often had unpleasant federal income tax consequences for the operator or producer.

"E. Legislation would be beneficial to all concerned in that wells would be put into production at an earlier time thereby adding valuation to the ad valorem tax base while giving some recognition to the over-assessment problem resulting from 'flush production.' "

Additional stipulations include:

"6. While most production in Kansas follows a constant percentage decline with time (i.e., a plot of the logarithm of production versus time forms a straight line), the initial production and its decline will differ greatly from that constant percentage decline.

"7. The failure to make an allowance or adjustment for sharp declines and/or flush production results in an over-valuation of the mineral reserve, if all other factors concerning the value of the lease are properly applied.

"12. Apparently in response to the foregoing testimony, the Legislature, in 1979, amended K.S.A. 79-331 to require minimal recognition of the flush production factor, and the resulting over-assessment problem, thus encouraging producers and operators to put wells into production at an earlier time, thereby adding valuation to the ad valorem tax base of the producing counties, and entitling the producers and operators to the income from the early production and receipt of favorable federal income tax consequences.

"13. The adjustment factor provided for in K.S.A.1980 Supp. 79-331(b) does not exceed the actual flush production declines experienced by the Industry, ...

"15. ... the adjustment of 40% accorded K.S.A.1980 Supp. 79-331(b) does not approach the actual adjustment which would have been appropriate.

"16. ...