BEFORE THE STATE BOARD OF EQUALIZATION

FOR THE STATE OF WYOMING

IN THE MATTER OF THE APPEAL OF )

MARIGOLD LAND COMPANY FROM A )                                           Docket No. 2001-106

PRODUCTION TAX AUDIT ASSESSMENT )

BY THE DEPARTMENT OF REVENUE )

(Caballo Rojo Mine, Production )

Years 1995-1996) )

___________________________________________________________________________________________________________________________

FINDINGS OF FACT

CONCLUSIONS OF LAW

DECISION AND ORDER

____________________________________________________________________________________________________________________________

APPEARANCES

Lawrence J. Wolfe and Walter F. Eggers, III, of Holland & Hart LLP, for Petitioner, Marigold Land Company (Petitioner).

Karl D. Anderson, Senior Assistant Attorney General and William F. Russell, Assistant Attorney General, for Respondent, Department of Revenue (Department).

DIGEST

Pursuant to notice duly given to all parties in interest, this matter came before the State Board of Equalization (Board) for hearing on the 11^th day of March, 2002, at 10:03 a.m. in Hearing Room 1699, Herschler Building, 122 West 25^th Street, Cheyenne, Wyoming and was heard by Edmund J. Schmidt, Chairman, Roberta A. Coates, Vice-Chairman and Board Member Sylvia Lee Hackl. This appeal arises from an audit and a decision of the Department assessing Petitioner additional value and severance taxes on coal mined from the Caballo Rojo mine during 1995-1996 in Campbell County, Wyoming. The additional value is as a result of the Department assigning mine development costs as indirect costs in the proportionate profit formula instead of direct costs.

ALL STATUTORY CITATIONS USED IN THIS DECISION AND ORDER REFERENCE TITLE 39, PRIOR TO RECODIFICATION WHICH WAS EFFECTIVE MARCH 6, 1998,

JURISDICTION

Upon application of any person adversely affected, the Board is mandated to review final decisions of the Department concerning state-assessed property and hold hearings after due notice pursuant to the Wyoming Administrative Procedure Act and prescribed rules and regulations. For state-assessed properties, pursuant to Wyoming Statute 39-2-201(d)(i), the "person assessed" may file objections with the Board within 30 days of the postmark of the Department notification. Petitioner timely filed its appeal.

DISCUSSION

The Department of Audit (DOA) engaged an audit of Petitioner's coal mine located in Campbell County, Wyoming. This audit was for mineral production for the years 1995 through 1996. On April 27, 2001, the Department issued a deficiency assessment based on the audit, which was appealed by Petitioner on May 25, 2001.

Petitioner argues that the audit findings were erroneous because mine development costs were not included as direct costs in the proportionate profits formula to value the coal production; that the capitalized interest portion of the mine development costs should have been allocated to the various components of the proportionate profit ratio; and the Petitioner did not know the value reported would be rejected by the Department so no interest should be due on the back taxes.

The Department argues the mine development costs are indirect costs and therefore do not belong in the proportionate profits formula; the capitalized interest does not belong in the proportionate profits formula; and the Petitioner knew the costs were an issue when it purchased the mine in 1991, and therefore interest should be assessed.

The Department appraised Petitioner's coal production using the proportionate profits method for 1995 through 1996. Wyo. Stat. 39-2-208(d)(iv).

FINDINGS OF FACT

1. Petitioner timely filed its appeal of the Department's audit assessment for Caballo Rojo, Inc.'s 1995-1996 coal production. [Stipulated Updated Summary of Uncontroverted Facts; Transcript Vol. I, p. 36].

2. The coal mine is owned by Caballo Rojo, Inc. which is owned by Marigold Land Company, whose parent company is Drummond Corporation. [Transcript Vol. II, p. 310].

3. Petitioner purchased the stock of Mobil Coal Producing Inc. on November 24, 1991, from Mobil Oil Corporation. [Transcript Vol. I, p. 66; Exhibit 113].

4. The corporate name of Mobil Coal Producing Inc. was subsequently changed to Caballo Rojo, Inc. Caballo Rojo, Inc. is the same corporate entity as Mobil Coal Producing Inc. [Stipulated Updated Summary of Uncontroverted Facts; Transcript Vol. I, p. 36].

5. Coal in Wyoming is valued at the mouth of the mine for taxation purposes. However, if there is no arm's length sale until the tipple, as in this case, coal is valued using a formula referred to as the proportionate profits formula. Coal was valued in this case using the proportionate profits formula. [Transcript Vol. II, p. 311].

6. The proportionate profit formula is: Total Sales Revenue - (exempt and nonexempt royalties + production taxes) X direct cost ratio + (nonexempt royalties + production taxes) = taxable value. Wyo. Stat. 39-2-209(d)(ii). The direct cost ratio is the direct cost of mining divided by the cost of production plus the cost of processing plus the cost of transportation. The cost of mining is included in the numerator and denominator of the formula so if all other variables are constant but the direct cost of mining increases, the value increases. [Transcript Vol. II, p. 220]. The direct costs of producing and transporting are only included in the denominator so if they are increased the value is decreased. If a cost is an indirect cost it does not affect the formula. If a cost, now considered an indirect cost was formerly considered a direct cost of mining, the value would decrease. If an indirect cost is now considered a direct cost of producing or transportation, the value would increase. In this case, if the costs of production and transportation were now determined to be indirect costs the value of Petitioner's coal would increase. [Transcript Vol. II, p. 312].

7. On September 15, 1999, the DOA developed a plan to audit Petitioner's coal production for 1995 and 1996 production years. [Exhibit 111].

8. During an audit process the auditor obtains the source documents to verify the accuracy of the reports the taxpayer submits to the Department. The source documents include invoices, invoice summaries, sales contracts, loan documents, monthly severance tax reports, annual gross products reports and Notice of Valuations from the Department. [Transcript Vol. II, p. 354].

9. If a taxpayer is unable to produce the supporting documents for costs, then the cost is disallowed by the auditor. [Transcript Vol. II, p. 355].

10. The Petitioner was unable to produce any supporting documents for any mine development costs. [Transcript Vol. II, p. 327].

11. As a result of the Petitioners lack of supporting documentation the auditor disallowed the mine development costs and treated them as indirect costs. [Transcript Vol. II, pp. 312, 365, 370; Exhibits 520, 501].

12. The DOA's preliminary audit letter dated December 12, 2000, did not allow the capitalized interest portion of the mine development costs of the Petitioner to be included in the proportionate profits formula because: 1) the interest was not identified as a cost of a specific asset of the mine, and the asset the interest may have been associated with may have been retired or sold; 2) the indirect cost definition in Wyoming Statute 39-2-209(d)(iv)(c) would not allow these costs; 3) the costs were not current; and 4) the cost could not be associated with a particular function. [Exhibit 502]. The DOA's final issue letter classified all mine development costs as indirect costs because Mobil had incurred them and not Petitioner. [Exhibit 501].

13. The Department accepted the findings of the DOA and sent an audit assessment letter to Petitioner on April 27, 2001. The Petitioner was assessed $62,936.10 in additional state severance tax and Campbell County was notified of an increase in ad-valorem taxable value of $899,087. The Petitioner was also assessed interest from the dates of the issuance of the Notices of Valuation. [Transcript Vol. II, pp. 294-296; Exhibit 500].

Mine Development Costs

14. The construction and development of the mine started in March 1981. Construction was completed and production began in November, 1982. [Transcript Vol. I, p. 73].

15. The initial investment in the mine was listed by Mobil as $124.7 million. The initial costs outline listed various assets of the mine. It separately listed the mine development cost. [Transcript Vol. I, p. 73; Exhibits 124, 524].

16. The major mine development costs to bring the mine into production were categorized as follows:

[Exhibit 100 B]

The portion of the costs in dispute are the mine development costs. [Transcript Vol. I, p. 74; Exhibit 124, p. 524].

17. The mine development costs were listed in the sales document provided to Petitioner from Mobil. The costs had been depreciated by $6,192,180.24 when Petitioner purchased the stock. [Exhibit 114, p. 472, Exhibit 116, p. 475].

18. The mine development costs disclosed to Petitioner by Mobil were as follows:

Over forty percent of the mine development costs is capitalized interest. [Transcript Vol. I, pp. 44, 69- 70; Exhibit 100 B].

19. Mine development costs were pre-production work and site preparation for all facilities including the rail spur. The mine development costs were costs over and above the cost of the physical depreciable assets. [Transcript Vol. I, pp. 69, 74].

20. The expense categories listed preliminary engineering, the county road relocation, the water well, the temporary facilities, the monitoring permits, the construction worker housing and the site preparation. The expenses were for unknown reasons, according to Petitioner's witness, Scott Owen Stanfield, controller for cash accounting for Drummond Corporation. [Transcript Vol. II, pp. 348-350]. These expenses were not specifically attributable or associated with the cost of physical depreciable assets. [Transcript Vol. II, p. 346].

21. Mr. Stanfield thought the haul road might be a mining cost, but he did not know the purpose of the haul road. [Transcript Vol. II, p. 349].

22. Petitioner amortized the mine development cost by the unit-of-production method. The unit-of-production method is a depreciation technique that systematically amortizes or writes off fixed asset costs. This method records the reduction of costs as the remaining reserves are mined on a monthly basis. Under the unit-of-production method the total cost of the mine depreciation is divided by the total estimated reserve of coal to determine a cost per unit produced. The amount of units produced is multiplied by the cost per unit to arrive at an estimate to amortize. [Transcript Vol. I, pp. 42, 94-96, 150-151, Vol. III, p. 420; Exhibits 116 and 122, p. 496].

23. Generally Accepted Accounting Principles (GAAP) Guide 1995 accepts the unit-of-production depreciation method as does the Miller GAAP guide. However, the cost of the asset to depreciate can only include those costs that add to the utility of the asset. [Transcript Vol. I, p. 156; Exhibit 123, pp. 502, 507-508].

24. Petitioner increased its estimate of recoverable tons of coal in 1986. Therefore, the cost per unit decreased, affecting the amortization of mine development costs. [Transcript Vol. I, p. 156; Exhibit 123].

25. Petitioner did not amortize or depreciate all of its equipment on a unit-of-production basis. Some of the equipment was depreciated on a straight life expectancy basis. [Transcript Vol. III, p. 420].

26. Petitioner allocated the mine development costs between direct mining costs at 16.61%, direct processing cost at 63.6%, 2.3% were allocated to direct transportation costs and the remainder were assigned to indirect costs of mining. Petitioner determined these allocation percentages by categorizing the assets purchased prior to production and assigning them to production, mining, transportation or other functions. Then Petitioner compared the value of the assets in each category to the total cost of the project and determined the percentages to apply to the total direct mining costs. [Transcript Vol. I, pp. 43, 99-103, Vol. II, pp. 335-336, 345-346; Exhibit 100 D, pp. 50- 55, Exhibit 107, p. 371].

27. Mr. Stanfield agreed the assignment of the assets to a category was an arbitrary selection. [Transcript Vol. II, p. 242]. An auditor cannot accept an arbitrary means of allocation and will assign the cost to the indirect mining costs if the allocation is arbitrary. [Transcript Vol. II, pp. 335-336].

28. When reporting the annual value of the coal, Petitioner first determined the total amount of mining development costs to be amortized on the unit-of-production method for each year, then the total amount is allocated using the percentage formula explained in paragraph 26 and finally using the proportionate profits formula to calculate the value of the coal. [Transcript Vol. I, p. 42].

29. The DOA has audited coal production from this mine on two prior occasions. The DOA audited production years 1985-1989 in 1991. In both the preliminary and final audit letters for the first audit, the DOA assigned the mine development costs to direct mining costs. Petitioner appealed the audit and it was settled on grounds not presented at this hearing. [Transcript Vol. I, pp. 118-119; Exhibits 100 C, 100 E, 109, pp. 384-385]. As a result of the 1990-1994 audit, the haul road cost was included in the transportation direct costs, the truck and shovel were considered direct costs of mining, and other mine development costs (except capitalized interest) such as site preparation, salaries, and labor burden were allocated using Petitioner's allocation percentages. Capitalized interest was treated as an indirect cost. [Transcript Vol. I, pp. 128- 139, Vol. II, pp. 218, 276; Exhibit 109 p. 378, Exhibit 100 L].

30. The DOA questioned the mine development costs during the 1995-1996 audit and requested back-up information. Petitioner responded only with documents that listed the allocation decision and settlement agreements. The DOA requested detailed information about the capitalized interest cost but Petitioner did not provide more information. [Transcript Vol. I, p. 140; Exhibit 101, p. 169, Exhibits 515, 517, 518, 519 and 520].

31. Petitioner did not present back-up information at the hearing so the Board will assume Petitioner does not have back-up information for the mine development costs. The value of production is determined on an annual basis because there may be a change of facts or circumstances. The Department changed its position about how to categorize mine development costs between the 1985-1989 audit, the 1990-1994 audit and the 1995-1996 audit. The first audit treated mine development costs as direct mining expenses which would result in the largest tax liability. The second audit, the 1990-1994 treated various costs in different categories except it treated capitalized interest as an indirect costs which resulted in a lower tax liability than the Department's current position but a higher liability than reported by the Petitioner for the tax years at issue and the current audit which treats mine development costs as indirect costs of mining. The auditor for the Department stated he changed his position because, "My naivete and gullibility could only be measured on the logarithmic scale." He changed his position from the 1990-1994 audit because the costs could not be attributed to a specific asset. [Transcript Vol. II, pp. 276, 282, 288-289].

32. The DOA, and subsequently the Department, treated all mine development costs as indirect costs in the proportionate profits formula to determine the value of the coal in the 1995-1996 audit. [Transcript Vol. II, p. 288].

33. The DOA has not conducted any other audits where there was a mine development cost issue and Petitioner is the only taxpayer that reports mine development costs. [Transcript Vol. II, pp. 260, 291, 293].

Capitalized Interest

34. Included in the mine development costs was a sub-category called capitalized interest. The amount of capitalized interest was listed at $10,833,000.00. Over forty percent of the mine development costs was capitalized interest. [Transcript Vol. I, pp. 42, 87 and Vol. II p. 322; Exhibit 100 B].

35. Capitalized interest is the amount of interest that may occur during the time it takes to place an asset in production. It is the amount of interest accrued during the development stage of an asset but does not collect after production. The interest stopped accruing when the mine started producing coal in November, 1982. [Transcript Vol. I, pp. 42, 155].

36. The interest that accrued in this case may be related to the entire amount expended to develop the mine, $124.7 million. Petitioner assumed the money for the mine development was from Mobil Oil Corporation, the parent of Mobil Coal Resources, Inc. There was no supporting documentation independent of the ledgers to support the capitalized interest entry on the ledgers. [Transcript Vol. I, pp. 79-80, 181].

37. The capitalized interest was captured as a lump sum which means it was not assigned to specific assets within the mine. The entire interest amount was for the whole mine. Petitioner did not identify the interest cost of each asset and capitalize interest for all the dependent parts. [Transcript Vol. I, pp. 88, 146, 153, 158].

38. Petitioner amortized the capitalized interest over the life of the mine on a unit-of-production basis as it did with all the other mine development costs. [Transcript Vol. I, pp. 150-151].

39. Petitioner had no loan document, note or back-up documentation for the capitalized interest because the prior owner "booked" (had an entry in the record of accounts) the cost and Petitioner's knowledge is limited to the documents provided on the purchase of the mine which are summary documents. [Transcript Vol. I, p. 149].

40. Petitioner had no details of the interest costs and did not know what interest rate was used. [Transcript Vol. I, pp. 154, 184].

41. The audit supervisor for the Department, Mr. Craig Grenvik, testified that the Department never received any backup information supporting Petitioner's capitalized interest charge and that, based on his experience as an auditor, a taxpayer would normally be required to produce documentation to support a $10.8 million charge. [Transcript Vol. II, p. 327].

42. When making entries on their ledgers companies use certain widely recognized standards. One set of those standards is the Statement of Financial Accounting Standards. The Statement of Financial Accounting Standards for capitalized interest is FASB 34. [Transcript Vol. I, p. 144, Vol. II, p. 190; Exhibits 121, 529].

43. The objective for capitalizing interest is to obtain a measure of acquisition cost that more closely reflects the enterprise's total investment in the asset and to charge a cost that relates to the acquisition of a resource that will benefit future periods against the revenues of the periods benefitted. [Exhibit 121, p. 484 7].

44. Petitioner consulted with three major national accounting firms, Coopers and Lybrand, Arthur Andersen & Co., and Ernest & Young, about treatment of the capitalized interest. All accounting firms advised Petitioner to attribute the interest to a specific asset and amortize the interest over the depreciable life of the specific asset. [Transcript, Vol. II, pp. 196-199; Exhibit 110].

45. FASB 34 does not allow capitalized interest unless it can be assigned to a specific asset (not an entire mine). Because of FASB 34 the Department assigned the capitalized interest as an indirect cost. [Transcript Vol. II, pp. 289-290, 323-325, 373]. It is incorrect to amortize over the life of the mine because specific assets with capitalized interest would not last the life of the mine. [Transcript Vol. II, p. 326].

46. FASB 34 restricts the interest rate to be used. Paragraph 13 demands the interest rate be the rate of the company's borrowing, or if there is not a borrowing for the specific asset, the interest rate should be a combination of all the company's borrowing. [Exhibit 121, p. 485, 13, 14]. FASB 34 paragraph 15 restricts the amount of interest to the total amount of interest of the company. Paragraph 20 demands the interest accrual stop when the asset associated with the interest is depreciated. [Exhibit 121, p. 485, 13, 14, Exhibit 123, p. 503, 510-512]. No evidence was presented to determine if there was compliance with FASB 34. There was no evidence as to the rate of interest so it is unknown if the rate satisfied Paragraph 13, also there was no evidence to determine if Paragraphs 15 and 20 had been met.

47. Without documentation, the Department found the capitalized interest was an indirect cost because it was a hypothetical cost, could not be attributed to a specific asset, and it did not occur in the current period. [Transcript, Vol. II, p. 328].

48. Petitioner did not request a ruling from the Department as to how to treat capitalized interest. [Transcript, Vol. II, p. 291].

Interest on Tax

49. In Wyoming, taxpayers report all of the information to the Department so the value can be set. Information sent to the Department is verified later by an audit. [Transcript, Vol. II, pp. 305-306].

50. The treatment of mine development costs has been an issue for this mine since the first audit was performed in 1991. At that time, the DOA was treating the mine development costs as a direct cost of mining which would have created an increased tax liability. In fact, the Stock Purchase Agreement Petitioner executed when it purchased the mine, listed the additional severance tax and ad-valorem tax as a result of the audit as a contingent liability. [Exhibits 113, 470].

51. Even though there was an additional tax liability possible at the time of purchase, Petitioner did not ask for more documentation for mine development costs. [Transcript, Vol. III, p. 397].

52. The advertising circular, Exhibit 124, discloses tax issues and demonstrates the Petitioner knew the Department had not sanctioned the allocation of mine development costs in the proportionate profits formula when they filed their tax reports. In fact, at that time the Department had treated the mine development costs as direct mining costs in the audit completed in 1992. An assignment of a cost to direct mining cost results in the largest taxable value. The Department was kinder to the Petitioner in the 1990-1994 audit allowing allocation. That audit was completed three years after the tax reports for this case were due. [Exhibits 100 C, 100 E, 100 K, 100 L, 109, 124].

53. The preliminary audit letter for this audit dated December 12, 2000, classified mine development costs as indirect mining costs. The rationale for the assignment to indirect costs was three-fold. The first reason was because the interest could not be explained and the interest was assigned to the entire mine instead of each asset and therefore the capitalized interest violated FASB 34. The second reason was that these costs fit the definition of "indirect costs" under Wyoming Statute 39-2-209(d)(iv). The third justification was that the Board's decision in In the Matter of the Appeal of Exxon Coal U.S.A., Inc., Docket No. 93-107, 1994 WL 569436, (October 6, 1994), did not allow costs that were not "current" and had to be allocated. [Transcript Vol. II, pp. 228-229, Vol. III, p. 412; Exhibit 102 pp. 385-386].

54. Petitioner responded to the preliminary audit classifying mine development costs as indirect costs by arguing that "there are no costs more directly related to the operation of the mine and its facilities than the initial development costs without which the mine, including facilities, would not exist." [Exhibit 103, p. 254].

55. The final audit letter continued to treat mine development costs as indirect costs and reasoned, "Marigold Land Company purchased the mine from Mobil. Mobil incurred the costs of developing the mine, not Marigold Land Company. Therefore, the DOA is treating the mine development costs as an indirect cost." [Exhibit 104, p. 320].

56. The Department assessed the Petitioner for the payment of back taxes and interest based on the final audit findings. [Exhibit 105].

57. Petitioner did not request a valuation determination or a statutory interpretation from the Department during the controversy. [Transcript Vol. II, pp. 297].

58. Any discussion above or Conclusion of Law below which includes a finding of fact may also be considered a Finding of Fact and, therefore, is incorporated herein by this reference.

CONCLUSIONS OF LAW

59. Petitioner's notice of appeal was timely filed and the Board has jurisdiction to determine this matter.

60. Petitioner has the burden of going forward and the ultimate burden of persuasion. Rules, Wyoming State Board of Equalization, Chapter 2, 19, Teton Valley Ranch v. State Board of Equalization, 735 P.2d 107 (Wyo. 1987); Hillard v. Big Horn Coal Co., 549 P.2d 293 (Wyo. 1976).

61. The Board starts with the presumption that the Department's decision is valid, accurate, and correct. This presumption lasts until overturned by credible evidence. In the absence of evidence to the contrary, the Board presumes that Department officials charged with establishing value exercised honest judgment in accordance with the applicable statutes, rules, regulations, and other directives. Chicago Burlington & Quincy Railroad Co. v. Bruch, 400 P.2d 494, 498-499 (Wyo. 1965).

62. The applicable constitutional provisions which are determinative in this matter provide, in relevant part:

Wyo. Constitution Art. 15 3. Taxation of mines and mining claims.

All mines and mining claims from which gold, silver and other precious metals, soda, saline, coal, mineral oil or other valuable deposit, is or may be produced shall be taxed in addition to the surface improvements, and in lieu of taxes on the lands, on the gross product thereof, as may be prescribed by law; provided, that the product of all mines shall be taxed in proportion to the value thereof.

Wyo. Constitution Art. 15 11: Uniformity of assessment required.

(a) All property, except as in this constitution otherwise provided, shall be uniformly valued at its full value as defined by the legislature, in three classes as follows:

(i) Gross production of minerals and mine products in lieu of taxes on the land where produced;

* * *

(f) All taxation shall be equal and uniform within each class of property. The legislature shall prescribe such regulations as shall secure a just valuation for taxation of all property, real and personal.

63. A party challenging an assessment has the initial burden to present credible evidence to overcome the presumption. A mere difference of opinion as to value is not sufficient. Teton Valley Ranch v. State Board of Equalization, 735 P.2d 107 (Wyo. 1987); Hillard v. Big Horn Coal Company, 549 P. 293 (Wyo. 1976); Weaver v. State Board of Equalization, 511 P.2d 97 (Wyo. 1973); CF&I Steel Corporation v. State Board of Equalization, 492 P.2d 529 (Wyo. 1972); Chicago Burlington & Quincy Railroad v. Bruch, 400 P.2d 494 (Wyo. 1965); J. Ray McDermott & Co. v. Hudson, 370 P.2d 363 (Wyo. 1962); Certain-Teed Products Corporation v. Comly, 87 P.2d 21 (Wyo. 1939).

64. The treatment of mine development costs has been a long-running matter of dispute between the Department and Petitioner. All prior assessments of Petitioner were resolved by settlement agreements between the parties. These settlements resolved all aspects of the prior production years in whole. Although prior settlement agreements may have treated mine development costs differently, they do not bind the Board and the outcome of the instant case and they have no precedential value. The Department may have discovered new information and now understands the Petitioner wants to allocate all expenses based on the arbitrary percentages instead of actual functions.

65. All taxable property shall be annually valued at its fair market value. Wyo. Stat. 39-2-102. Coal shall be annually valued at fair market value. Wyo. Stat. 39-2-209(c).

66. The plain language of Wyoming Constitution, Article 15, 11(a), requires property be valued at "full value" and the Legislature is given the power to prescribe regulations to determine a "just valuation."

67. The Wyoming Supreme Court has consistently held that "only a rational method [of appraisal], equally applied to all property which results in essential fairness" is appropriate. Basin Electric Power Corp. v. Department of Revenue, 970 P.2d 841, 852 (Wyo. 1988) citing Holly Sugar Corp. v. State Board of Equalization, 839 P.2d 959, 964 (Wyo. 1982).

68. "Uniformity of assessment requires only that the method of appraisal be consistently applied," but in all cases the constitutional mandate is to achieve full and just valuation of the property to be taxed. Appeal of Monolith Portland Midwest Co., Inc., 574 P.2d 575, 761 (Wyo. 1978).

69. Petitioner and the Department used the proportionate profits methodology to value Petitioner's production of coal.

70. The proportionate profits formula set forth in Wyoming Statute 39-2-209 states in part:

(D) For coal sold away from the mouth of the mine pursuant to a bona fide arms-length sale, the department shall calculate the fair cash market value of coal by multiplying the sales value of extracted coal, less transportation to market provided by a third party to the extent included in the sales value, all royalties, ad valorem production taxes, severance taxes, black lung excise taxes and abandoned mine lands fees, by the ratio of direct mining costs to total direct costs. Nonexempt royalties, ad valorem production taxes, severance taxes, black lung excise taxes and abandoned mine lands fees shall then be added to determine fair market value. For purposes of this subsection:

(ii) Direct mining costs include mining labor including mine foremen and supervisory personnel whose primary responsibility is extraction of coal, supplies used for mining, mining equipment, depreciation, fuel, power and other utilities used for mining, maintenance of mining equipment depreciation, coal transportation from the point of severance to the mouth of the mine, and any other direct costs incurred prior to the mouth of the mine that are specifically attributable to the mining operation;

(iii) Total direct costs include direct mining costs determined under paragraph (ii) of this subsection plus mineral processing labor including plant foremen and supervisory personnel whose primary responsibility is processing coal, supplies used for processing, processing plant and equipment depreciation, fuel, power and other utilities used for processing, maintenance of processing equipment, coal transportation from the mouth of the mine to the point of shipment, coal transportation to market to the extent included in the price and provided by the producer, and any other direct costs incurred that are specifically attributable to the mining, processing or transportation of coal up to the point of loading for shipment to market;

(iv) Indirect costs, royalties, ad valorem production taxes, severance taxes, black lung excise taxes and abandoned mine lands fees shall not be included in the computation of the ratio set forth in this subsection. Indirect costs include but are not limited to allocations of corporate overhead, data processing costs, accounting, legal and clerical costs, and other general and administrative costs which cannot be specifically attributed to an operational function without allocation.

71. Under the proportionate profit calculation, a ratio of direct mining costs to total direct costs is used to determine the value of the mineral subject to state tax. Direct costs are a component of the proportionate profits/direct cost ratio, while indirect costs are not included. Wyoming Statute 39-2-209(d).

Mine Development Costs Are Indirect Costs

72. Petitioner treated the entirety of its mine development costs as a single separate asset and depreciated the cost as a lump sum over the life of the Caballo Rojo mine. Petitioner formulated a method to allocate the mine development costs to the various proportionate profit function centers (mining, processing, transportation and other) and then reported those allocated expenses as direct costs (direct mining, direct processing, direct transportation) to the Department on its tax returns. [Transcript Vol. I, pp. 43, 99-103, Vol. II, pp. 335-336, 345-346; Exhibit 100 D, pp. 50- 55, Exhibit 107, p. 371].

73. Petitioner claims the mine development costs were incurred in developing the mine and as a result are direct costs. The costs were categorized as preliminary engineering, county road relocation, water well, temporary facilities, monitoring permits, construction worker housing, capitalized interest, haul road, truck and shovel erection, site preparation, salaries, labor burden and "all other under $200,000." [Transcript Vol. I, pp. 44, 69-70; Exhibit 100 B]. However, Petitioner could not explain how each of these expenses specifically related to the mine operation. For instance, the county road relocation could have been related to moving a road to the mine or moving the road for transportation from the mine, but the Petitioner did not know the reason.

74. When mine development costs are not explicitly listed as direct mining costs or total direct costs in Wyoming Statute 39-2-209(d)(ii), (iii), it must be determined whether they fall within the catch-all phrases "any other direct costs. . . specifically attributable to the mining operation," or "any other direct costs. . . specifically attributable to the mining, processing or transportation of coal. . ." Such general words, following an enumeration of words with specific meanings, should be construed to apply to the same general kind or class as those specifically listed. Powder River Coal Co. v. Wyoming State Board of Equalization, 2002 WY 5 19, 38 P. 3d 423, 429.

75. Direct costs are costs associated with the "actual act of mining." Powder River Coal Co. v. Wyoming State Board of Equalization, 2002 WY 5 22, 38 P.3d 423, 430. Mine development costs are not associated with the actual act of mining but are preparing to mine. They are not of the same general kind or class of costs enumerated as direct costs in the statute. Powder River Coal Co. v. Wyoming State Board of Equalization, 2002 WY 5 22, 38 P.3d 423, 430; In the Matter of the Appeal of Exxon Coal U.S.A., Inc., Docket No. 93-107, 1994 WL 569436 (October 6, 1994).

76. Since mine development costs could not be specifically attributed to an operational function without allocation, Petitioner developed an "arbitrary" method for allocating those costs to the operational functions for the sole purpose of including mine development costs in the direct cost ratio of the proportionate profits formula. Petitioner, for the purposes of reporting its Wyoming taxable value to the Department, allocated all of its listed mine development costs to "mining, processing, transportation, and other." In devising its allocation scheme, the Petitioner created a schedule of all of its mine development costs and provided it to the DOA and the Department of Revenue. [Transcript Vol. I, pp. 43, 99-103, Vol. II, pp. 335-336, 345-346; Exhibit 100 D, pp. 50-55, Exhibit 107, p. 371]. The site preparation, salaries, labor, burden and all the other costs are not specifically attributable to the assets listed on the schedule used to prepare the allocation percentages. [Transcript Vol. II p. 337].

77. The category of "truck and shovel erection" may be related to direct mining costs but Petitioner wants the expense to be allocated between direct mining costs, direct processing costs and direct transportation costs. The "haul road" might be a transportation expense but Petitioner could not make that showing, so Petitioner wants the full cost to be allocated using the arbitrary method.

78. Petitioner has a clear duty to properly report its costs to the Department and to also maintain and provide proper documentation of such costs upon audit. This includes the duty to maintain the necessary documentation to verify mine development costs and capitalized interest. The Wyoming legislature has in fact codified this duty. Wyoming Statute 39-6-304(o) provides that:

Audits provided by this article shall commence within five (5) years of the reporting period and taxpayers shall keep accurate books and records of all production subject to taxes imposed by this article and determinations of taxable value as prescribed by W.S. 39-2-202 for a period of five (5) years and make them available to department examiners for audit purposes. If the examination discloses evidence of gross negligence by the taxpayer in reporting and paying the tax, the department may examine all pertinent records for any reporting period without regard to the limitations set forth in paragraphs (o) and (p) of this section. [Emphasis added]

79. Petitioner has failed to produce source documents to support the mine development costs other than the ledger entries and advertising disclosure by the original company, Mobil Coal Producing Company. Petitioner had ample opportunity to obtain source documents from Mobil when it purchased the coal mine with the full knowledge the expenses were in dispute. By not providing supporting documentation, Petitioner has failed to carry its burden of going forward and the ultimate burden of persuasion.

80. Direct costs are costs associated with the "actual act of mining." Powder River Coal Co. v. Wyoming State Board of Equalization, 2002 WY 5 22, 38 P.3d 423, 430. Mine development costs are not associated with the actual act of mining, and they are not of the same general kind or class of costs enumerated as direct costs in the statute. Wyo. Stat. 39-2-209(d)(ii), (iii).

81. Petitioner argues that mine development costs are direct costs because, but for the incurring of these costs, there would be no mine to produce coal. [Transcript Vol. I p. 172]. However, the "but for" argument "ignores the fact that many undeniably indirect costs are necessary before mining can occur. . ." Powder River Coal Co. v. Wyoming State Board of Equalization, 2002 WY 5 19, 38 P.3d 423, 429.

82. There was testimony that not only were mine development costs allocated but they were allocated on an arbitrary basis. Mr. Grenvick, of the Department testified:

These costs . . . were allocated based upon costs of assets to which these costs had no direct bearing. So while it very well may be that there was a certain percentage of processing assets that were purchased by the mine, it doesn't necessarily mean that the preliminary engineering, county road relocation, water well or the temporary facilities had anything to do with those assets.

[Transcript Vol. II p. 338].

83. Based on the nature of the mine development costs and the statutory definitions of direct and indirect costs, the mine development costs at issue fall squarely within the category of general and administrative costs which cannot be specifically attributed to an operational function without allocation and must therefore be indirect costs.

84. The allocation method Petitioner used to assign mine development costs to specific direct costs in the proportionate profit formula is not reasonable because the costs are not related to the asset costs used to develop the allocation.

85. The Wyoming Supreme Court held that only actual costs can be used in a formula to determine the value of mine products pursuant to Wyoming Statute 39-2-202. State ex rel. State Board of Equalization v. Monolith Portland Midwest Co., 574 P.2d 757 (Wyo.1978) and Amoco Production Company v. Wyoming State Board of Equalization, 12 P.3d 668 (Wyo. 2000).

86. The Department is precluded from including hypothetical costs to determine value, therefore, Petitioner's allocation is arbitrary and hypothetical and cannot be used in the proportionate profit formula.

87. We are not at this time determining if mine development costs can never be used in the proportionate profits formula, but we note no other taxpayer has requested such costs. If one taxpayer were allowed to use the costs the result would be a lack of uniformity and a violation of Article 15 11 (f) of the Wyoming Constitution.

Capitalized Interest Portion of Mine Development Costs Are Not to Be Included in the Direct Cost Ratio

88. Even if general mine development costs could be apportioned in the proportionate profit formula, the capitalized interest portion cannot. There is no documentation the interest cost was ever incurred and it is therefore hypothetical. The entry does not comply with generally accepted accounting principles.

89. Petitioner failed to produce any source documentation for its $10.8 million dollar charge for capitalized interest. In fact, Petitioner admitted there were no documents that evidenced the original transaction. Without such verification, the Department properly denied the classification. [Transcript Vol. II pp. 189, 365-370].

90. By failing to provide supporting documentation, Petitioner has failed to carry its burden of going forward and the ultimate burden of persuasion. Petitioner's claims are not supported by substantial evidence.

91. The absence of documentation suggests Petitioner's capitalized interest is a hypothetical cost which is precluded from use in the proportionate profits formula for determining fair market value. State ex rel. State Board of Equalization v. Monolith Portland Midwest Co., 574 P. 2d 757 (Wyo. 1978); Amoco Production Company v. Wyoming State Board of Equalization, 12 P.3d 668 (Wyo. 2000).

92. If hypothetical costs were allowed in the valuation of a taxpayer's mineral production, many abuses could potentially occur. Either the taxpayer or the Department could artificially inflate or deflate theoretical costs in order to improperly manipulate the outcome of the proportionate profits formula. State ex rel. State Board of Equalization v. Monolith Portland Midwest Co., 574 P. 2d 757 (Wyo. 1978); Amoco Production Company v. Wyoming State Board of Equalization, 12 P.3d 668 (Wyo. 2000).

93. Petitioner failed to assign the interest to each asset that caused the interest to be accrued. This is a fatal flaw under general accounting standard FASB 34.

94. The language of FASB 34 states:

The historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use. If an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is part of the historical cost of acquiring the asset.

[Exhibit 529, p. 149].

The three major accounting firms consulted by the Petitioner all advised the interest can only be used for "the specific asset," "the separate component" and "each asset." [Exhibit 110, pp. 392-393, 396]. In accordance with generally accepted accounting principles, if interest costs are incurred in connection with the construction and development of a mine, those costs should be allocated to the specific, individual assets acquired during the development period and depreciated as part of the historical cost of each asset over its useful life. Rather than allocating capitalized interest to specific assets, including the interest as part of the historical cost of each asset, and depreciating the interest over the useful life of each asset, Petitioner improperly combined the interest with other mine development costs and depreciated it as a lump sum over the life of the mine. Therefore, Petitioner failed to follow generally accepted accounting principles.

95. Paragraph 13 of FASB 34 demands the interest rate is to be the interest rate of the company's borrowing or if there is not a borrowing for the specific asset the rate is to be a combination of all the company's borrowing. [Exhibit 121, p. 485, 13, 14]. Paragraph 15 restricts the amount of interest to the total amount of interest of the company. No evidence was presented to determine if there was compliance with FASB 34. There was no evidence as to the rate of interest so it is unknown if the rate satisfied Paragraph 13, also there was no evidence to determine if the requirements of Paragraph 15 had been met.

96. Even if generally accepted accounting standards had been met, the capitalized interest allocation is an indirect cost under Wyoming Statute 39-2-209(d)(iv) and Powder River Coal Co. v. Wyoming State Board of Equalization, 2002 WY 5 22, 38 P.3d 423, 430.

97. Because the interest costs could not be specifically attributed to an operational function, Petitioner developed a system to allocate capitalized interest, and other mine development costs, to operational functions. Interest that has to be allocated is clearly an indirect cost. Wyo. Stat. 39-2-209(d)(iv) and Powder River Coal Co. v. Wyoming State Board of Equalization, 2002 WY 5 22, 38 P.3d 423, 430.

Interest on Tax Affirmed

98. "Taxes are delinquent pursuant to W.S. 39-3-101(b) and W.S. 30-6-307(c) when a taxpayer or his agent knew or reasonably should have known that the total tax liability was not paid when due." Wyo. Stat. 39-2-214 (f). (emphasis added).

99. Petitioner failed to pay taxes when due therefore if the taxpayer "knew or reasonably should have known" the taxes were due, then interest is due according to Wyoming Statute 30-6-307(c).

100. The evidence supports the Department's position that the Petitioner knew or reasonably should have known the additional tax was due.

101. Petitioner knew the treatment of the mine development costs was an issue when it purchased the company's stock in 1991. In fact, the stock purchase agreement lists the additional tax, due in part to the mine development costs, as a contingent liability. [Exhibit 113].

102. The method Petitioner used to report the mine development costs in 1995 and 1996 resulted in the smallest valuation possible and thus the Petitioner paid the least taxes. Each approach to value adopted by the Department resulted in a higher value than the Petitioner reported and is herein advocating. The 1985-1989 audit treated mine development costs as direct mining expenses which would result in the largest tax liability. The 1990-1994 audit treated various costs in different categories, except it treated capitalized interest as an indirect cost which resulted in a lower tax liability than the Department's current position but a higher liability than reported by the Petitioner for the tax years at issue. The current audit treats mine development costs as indirect costs of mining. Thus, at no time did the Petitioner have reason to believe its tax liability would be as reported.

103. As evidenced by the preliminary and final issue letters for the 1985-1989 and 1990-1994 audits, the Department consistently treated the Caballo Rojo mine development costs as direct mining costs until at least October 20, 1997. [Transcript Vo. I, pp. 112, 117-119; Exhibits 110 C, 100 E, 109, 126].

104. At the time payments were due in 1996 and 1997, Petitioner knew and understood the Department's position was that mine development costs were direct mining costs. This resulted in a higher tax than the Department's current position that mine development costs are indirect mining costs. [Transcript Vol. III, pp. 411-412, 436].

105. If Petitioner was uncertain about how to account for mine development costs, it could have requested an interpretation from the Department.

A taxpayer may request and the department shall provide written interpretations of these statutes and rules . . . A taxpayer may act in reliance upon a written interpretation through the end of the calendar year in which the interpretation was issued, or until revoked by the department, whichever occurs last if the pertinent facts and circumstances were substantially correct and fully disclosed.

Wyo. Stat. 39-6-304(j).

106. Petitioner never asked the Department for an interpretation of statutes or rules concerning the proper treatment of mine development costs. [Transcript Vol. II, pp. 296-297].

107. Petitioner could have requested a value determination from the Department.

The taxpayer may request a value determination from the department and propose a value determination method which may be used until the department issues a value determination. The taxpayer shall submit all available data relevant to its proposal and any additional information the department deems necessary. After the department issues its determination, the taxpayer shall make adjustments based upon the value established or request a hearing by the board.

Wyoming Statute 39-2-201(g).

108. Petitioner did not ask the Department for such a value determination. [Transcript Vol. II, pp. 296-297].

109. Petitioner chose not to pay its 1995 or 1996 tax under protest. Had it done so, interest would have stopped accruing at that time. [Transcript Vo. II, p. 297, Vol. III, p. 427].

110. In Moncrief v. Wyo. State Board of Equalization, 856 P.2d 440, 446 (Wyo. 1993), the court held that the taxpayer has the duty to ensure the value of its mineral production is fully and accurately reported. If the taxpayer does not pay the full amount when due, the tax is delinquent at that time, not at the later date when the deficiency is discovered. See also: Kunard v. Enron Oil & Gas Company, 869 P.2d 132, 135 (Wyo. 1994).

111. In Kunard, the Wyoming Supreme Court noted that Wyoming Statute 39-2-201(b) required taxpayers to file their tax returns under oath. The court went on to outline the public policy considerations for imposing delinquent tax and assessing interest.

If, as suggested by [Taxpayers], all taxpayers could intentionally undervalue the minerals and make an inaccurate payment on the undervaluation for severance tax purposes without fear of paying interest upon discovery, there would be no reason for the taxpayer to make the correct payment. In fact, from an economic standpoint, taxpayers would be foolish to make an accurate payment when they could make the correct payment in the future without any adjustment for the time value of the money. It is clearly a bonus to the taxpayers to be allowed to pay 1981 taxes with 1990 dollars.

Kunard v. Enron Oil & Gas Company at 134, citing Moncrief, 856 P.2d at 445.

112. Because Petitioner knew in 1995 and 1996 that the Department considered mine development costs to be direct mining costs; because Petitioner, in spite of that knowledge, allocated a majority of mine development costs to direct processing costs and direct transportation costs; because Petitioner did not ask the Department for an interpretation of the statutes and rules or a valuation governing mine development costs; and because Petitioner did not pay its 1995 and 1996 taxes under protest, the Board concludes interest was properly assessed.

113. Petitioner does have additional tax liability because it classified expenses (which could not be verified) as a part of the deduction formula. Therefore, interest and penalty should accrue from the date the taxes should have been paid until paid.

ORDER

IT IS THEREFORE HEREBY ORDERED:

the decision of the Department of Revenue is AFFIRMED.

THIS SPACE INTENTIONALLY LEFT BLANK

Pursuant to Wyoming Statute 16-3-114 and Rule 12, Wyoming Rules of Appellate Procedure, any person aggrieved or adversely affected in fact by this decision may seek judicial review in the appropriate district court by filing a petition of review within thirty (30) days of the date of this decision.

DATED this 8^th day of August, 2002.

STATE BOARD OF EQUALIZATION

Edmund J. Schmidt, Chairman

Roberta A. Coates, Vice-Chairman

Sylvia Lee Hackl, Member

ATTEST:

Wendy Soto, Executive Secretary