Wyoming Dept. of Revenue v. Guthrie

Decision Date14 July 2005
Docket NumberNo. 04-178.,04-178.
Citation2005 WY 79,115 P.3d 1086
PartiesWYOMING DEPARTMENT OF REVENUE, Appellant (Respondent), v. Michael T. GUTHRIE, d/b/a MTG Operating Company, Appellee (Petitioner).
CourtWyoming Supreme Court

Representing Appellant: Patrick J. Crank, Wyoming Attorney General; Michael L. Hubbard, Deputy Attorney General; Martin L. Hardsocg, Senior Assistant Attorney General. Argument by Mr. Hardsocg.

Representing Appellee: Randall T. Cox, Gillette, Wyoming.

Before HILL, C.J., and GOLDEN, KITE, VOIGT, and BURKE, JJ.

GOLDEN, Justice.

[¶ 1] The Department of Revenue (the Department) disallowed a deduction taken by Michael T. Guthrie, d/b/a MTG Operating Company (MTG) for the price of its coal bed methane production used by the purchaser of the gas production to fuel related compression activities. Although it is undisputed that MTG did not get paid for the gas the purchaser reported was used for fuel, the Department disallowed the fuel use deduction stating that upon audit MTG failed to verify, in a manner acceptable to the Department, the volume of gas used for fuel. MTG appealed to the State Board of Equalization (the Board), which affirmed the decision of the Department. MTG then appealed to the district court, which reversed the decision of the Board and ordered the Department to allow the fuel use deduction as presented by MTG. The Department hereby appeals the order of the district court. After a full review of the facts and the record, this Court determines that MTG failed to produce sufficient evidence to support the fuel use deduction it claimed. The decision of the district court is reversed.

ISSUES

[¶ 2] The Department presents the following issues for our review:

1. Was the State Board of Equalization's Decision and Order, affirming the Department of Revenue's audit assessment, supported by substantial evidence?

2. Did the District Court, in reviewing the evidentiary findings of the State Board, improperly substitute a different burden of proof for the burden of proof applied by the State Board of Equalization?

3. Did the District Court improperly substitute its review and evaluation of the evidence for the State Board of Equalization's evaluation of the evidence and evidentiary findings?

4. Did the District Court err in concluding that MTG Operating was not required to verify its taxable value as determined by the State Board of Equalization?

5. Did the District Court err in concluding that the State Board of Equalization abused its discretion and exceeded its statutory authority?

MTG presents these issues:

Did the District Court correctly conclude that the Board of Equalization ignored the great weight of the evidence and acted arbitrarily and capriciously in its decision?

Did the Board of Equalization and the Department of Revenue commit legal errors by disregarding the statutes which govern valuation of gas sold through arm's-length contracts?

Did the Board of Equalization and the Department of Revenue improperly substitute their opinions of value for the statutory definition of taxable value of gas?

Did the Board of Equalization's decision, set aside by the District Court, unlawfully impair contracts entered into by the taxpayer with its investors and purchaser?

FACTS

[¶ 3] MTG produced coal bed methane in Wyoming. MTG sold the gas production at issue to Western Gas Resources (Purchaser) pursuant to a bona fide arm's-length transaction. The terms of this transaction were reduced to writing in three gas purchase contracts. Purchaser created the monthly gas purchase statements (invoices) and paid MTG for the volume of gas delivered, minus certain deductions taken by Purchaser. MTG accepted the price on the invoices as full payment for its production. MTG reported and paid ad valorem and severance taxes upon the full amount of revenues it received from Purchaser.

[¶ 4] The Department of Audit conducted an audit of MTG's 1997 through 1999 production. The auditor discovered that subsumed in MTG's reported taxable value of gas production was a "fuel use adjustment." Essentially, the fuel use adjustment, provided for under the terms of the gas purchase contracts, dictated that MTG would not receive payment for the quantity of its gas production delivered to Purchaser that Purchaser used for compression activities. It is undisputed that Purchaser did reduce its payment to MTG by an amount allegedly relating to gas used for fuel.

[¶ 5] The auditor requested information on how the fuel use adjustment was calculated. MTG responded that it did not know how the fuel use adjustment was calculated and referred the auditor to Purchaser for further information. The auditor did not contact Purchaser but rather again requested the information from MTG. The MTG contact responded to this further request by stating: "I do not have any information about fuel [use] deductions and I do not do any calculations for such." The auditor looked to the gas purchase contracts and the invoices for guidance, but concluded they did not contain adequate information by which the auditor could verify the fuel use adjustment. The auditor attempted to gather information from MTG by which the fuel use adjustment could be verified several more times. MTG never responded to the satisfaction of the auditor. Ultimately, the auditor disallowed the deduction, citing MTG's failure to produce verification for it.

[¶ 6] MTG appealed to the Board. At the hearing, MTG offered testimony that the volume of fuel used for compression could be determined by applying a back calculation using the difference between the contract price and the monthly gas purchase statement prices. MTG also presented some evidence that the actual fuel use allowance taken by Purchaser was within local industry standards.

[¶ 7] The Board refused to accept the back calculation offered by MTG as verification of the fuel use adjustment. The Board found that the gas purchase contracts required volumetric information for determining the purchase price of the gas production. The Board also found that MTG failed to produce evidence of the actual amount of gas used as fuel. Because of the lack of volumetric information verifying the actual amount of fuel used for compression, the Board affirmed the Department's decision to disallow the fuel use deduction claimed by MTG.

[¶ 8] MTG appealed the Board's decision to the district court. The district court found that the evidence presented by MTG at the hearing was sufficient to adequately verify the fuel use adjustment. The district court therefore reversed the Board's decision and ordered that the deduction for fuel use be allowed. The Department of Revenue brings this appeal, claiming the Board decision was correct and the district court improperly substituted its judgment for that of the Board.

DISCUSSION
Standard of Review

[¶ 9] Before this Court for review is a district court order reversing the action of an administrative agency. When reviewing an agency action, the scope of district court review is limited to those matters specified in Wyo. Stat. Ann. § 16-3-114(c)(ii) (LexisNexis 2005), which provides in pertinent part:

(c) To the extent necessary to make a decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action. In making the following determinations, the court shall review the whole record or those parts of it cited by a party and due account shall be taken of the rule of prejudicial error. The reviewing court shall:

* * * *

(ii) Hold unlawful and set aside agency action, findings and conclusions found to be:

(A) Arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law;

(B) Contrary to constitutional right, power, privilege or immunity;

(C) In excess of statutory jurisdiction, authority or limitations or lacking statutory right;

(D) Without observance of procedure required by law; or

(E) Unsupported by substantial evidence in a case reviewed on the record of an agency hearing provided by statute.

W.R.A.P. 12.09. It was incumbent upon MTG to present sufficient argument to the district court that the Board's decision should be reversed. Taylor v. Wyoming Bd. of Medicine, 930 P.2d 973, 974 (Wyo.1997) ("Consistently, it has been stated that the party contesting the administrative agency decision has the burden of proving that the agency's decision was reached in violation of one or more of the standards set forth in Wyo. Stat. § 16-3-114(c).").

[¶ 10] The basic rules for this Court's review of a district court decision reviewing an agency action have been well-summarized by the Supreme Court of Kansas:

This court, on appeal from the district court in such cases, is reviewing the propriety of the decision of an inferior appellate tribunal. The legislature has not defined the limits or responsibility of this court on appeal. However, its responsibility is apparent. It must review the record for the purpose of determining whether the district court observed the requirements and restrictions placed upon it by statute. (Thompson v. Commerce Comm., 1 Ill.2d 350, 115 N.E.2d 622.)

The statute providing for proceedings on appeal from an order of the Commission is a directive to the district court as to the nature and extent of its review, and on appeal to the Supreme Court it must determine whether the district court has properly determined the matters to which its powers and duties extend. (Birmingham Electric Co. v. Alabama Pub. Serv. Comm., 254 Ala. 140, 47 So.2d 455.)

If the findings of the district court are challenged on the basis that it did not give proper consideration to the presumption in favor of the Commission's findings, or if the district court substitutes its judgment for that of the Commission where the matter is in the realm of fair debate, this court...

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