BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
SUBLETTE COUNTY BOARD OF COUNTY ) Docket No. 97-3
COMMISSIONERS )
)
and )
)
IN THE MATTER OF THE ALLEGATIONS BY )
THE BOARD OF COUNTY COMMISSIONERS, )
SUBLETTE COUNTY, WYOMING, OF ILLEGAL, )
IMPROPER AND UNEQUAL ASSESSMENT OF )
MINERAL PRODUCTION OWNED AND/OR )
EXTRACTED AND SOLD BY EXXON ) Docket No. 97-10
COMPANY U.S.A. FROM CERTAIN GAS WELLS )
PRODUCING FROM THE MADISON FORMATION )
LOCATED IN THE LABARGE WELLFIELD )
IN SUBLETTE COUNTY, WYOMING )
FOR PRODUCTION YEARS 1991, 1992, 1993, )
1994 AND 1995. )
___________________________________________________________________________________________________________________________
EXAMINATION REPORT
___________________________________________________________________________________________________________________________
THIS MATTER having come before the State Board of
Equalization (SBOE) pursuant to a request by the Sublette County Board of County
Commissioners for the SBOE to examine in accordance with Wyo. Stat. 39-1-304
(a)(xiv) and Chapter 4, SBOE Rules and Regulations, an agreement between Exxon
Company U.S.A., Sublette County, the SBOE, Sublette County Board of County
Commissioners, the Sublette County Assessor, the Sublette County Treasurer and
the Department of Revenue (DOR) setting forth the valuation methodology for the
gas produced in the LaBarge Wellfield. This matter was considered by Roberta
Coates and Ron Arnold, Chairman Ed Schmidt having recused himself on his own
motion from participating in these proceedings. The SBOE having reviewed the
entire file including all briefs, exhibits and confidential information states
the following:
1. The SBOE is mandated to:
(xiv) "Carefully examine into all cases wherein it is alleged property
subject to taxation...has been...improperly, or unequally assessed,... and cause
to be instituted proceedings which will remedy improper or negligent
administration of the tax laws of the State;" WYO. STAT. 39-1-304(a).
2. This matter arose out of a request by the Sublette County Commissioners
that the SBOE examine the agreement entered into between Exxon, Sublette County,
Sublette County Board of County Commissioners, the Sublette County Assessor, the
Sublette County Treasurer, the SBOE and the DOR in 1989 wherein Exxon agreed to
pay a certain dollar amount for its tax obligation for tax years 1986, 1987 and
1988 and all parties agreed to use as a comparable value until August 31, 1991,
the so-called Howell and Yates agreements. Consequently, the SBOE commenced an
examination. The SBOE does find it has jurisdiction to conduct such an
examination both statutorily and pursuant to the Wyoming Supreme Court's
decision in Exxon Corporation v. Board of County Commissioners, Sublette
County, 987 P.2d 158 (Wyo. 1999).
3. In 1988, as a result of the passage of Chapter 93 of the 1988 Wyoming
Session Laws which enacted Wyo. Stat. 39-1-401 and 402, Exxon filed a civil
action in the First Judicial District Court in Laramie County challenging the
constitutionality of these newly enacted laws. These laws purported to limit the
deductions that Exxon could take in calculating the value of natural gas and
associated minerals for ad valorem and severance tax purposes. Exxon paid its
taxes under protest until the civil action was concluded. In order to avoid
further costs of litigation and the uncertainties that litigation brings, the
parties entered into a settlement agreement which resolved all issues including
the valuation methodology which would be binding on all parties, including every
Sublette County governmental unit. This valuation methodology had to be used
through August 31, 1991. After that date, the decision as to what valuation
methodology would be used was negotiable, with DOR ultimately having the final
say. The DOR exercised its discretion to continue with the agreed upon valuation
methodology for production years 1991, 1992, 1993, 1994 and 1995. Neither Exxon
nor Sublette County raised any objection to its use during the years in
question.
4. The Sublette County Commissioners believed that the Howell and Yates
agreements were no longer producing a fair cash market value and requested that
the SBOE examine these agreements and the DOR's use of these agreements in
valuing the gas produced from the LaBarge Wellfield for production years 1991
through 1995. Consequently, on January 23, 1997, the Sublette County
Commissioners filed a Petition For Board Examination with the SBOE. This
petition was challenged by both Exxon and the DOR by filing a declaratory
judgment action in the First Judicial District Court in Laramie County. Many
issues were raised by the parties including timeliness on the part of Sublette
County. Ultimately, the issues were resolved in favor of Sublette County by the
foregoing decision rendered by the Wyoming Supreme Court. In essence, the
Supreme Court held that there were no time limits per se which precluded the
SBOE from conducting an examination into the allegations made by Sublette
County. Exxon Corporation v. Board of County Commissioners, Sublette County,
987 P.2d 158 (Wyo. 1999).
5. Thus, the SBOE has proceeded to examine the allegations of Sublette
County. However, the parties have disagreed on the proper proceedings to be used
in this examination. The Sublette County Commissioners argue that the proceeding
must be a contested case proceeding while both Exxon and the DOR argue that the
SBOE should hold a regulatory type proceeding when conducting an examination and
therefore, a contested case proceeding is neither proper nor mandated.
6. The SBOE was more persuaded by the arguments presented by the DOR and
Exxon and conducted a regulatory proceeding. The Wyoming Supreme Court has given
some guidance to the SBOE in the decision rendered in Antelope Valley
Improvement and Service District of Gillette v. State Board of Equalization et
al., Slip Opinion, April Term No. 98-352 where the Court was clear in
restating its earlier position in Exxon, 987 P.2d at 163 when it once again held
that "subsection (a) to be a part of the Board's adjudicatory function, i.e.,
that subsection gives the Board the power to hear appeals. Subsection (a)(xiv)
(Section 14), on the other hand, is more closely aligned with the Board's
regulatory function." The SBOE believes that the Wyoming Supreme Court in two
cases differentiated between a contested case proceeding and a regulatory
proceeding, such as a Section 14 examination. Clearly, there is a great
difference between these two types of proceedings. In the contested case
proceeding the SBOE is the adjudicator and cannot participate as a party on
appeal. That is not the case when the SBOE performs its regulatory function.
7. In order to conduct a thorough examination, the SBOE requested assistance
from both the Departments of Revenue and Audit. These Departments were requested
to gather additional information from Exxon in order to calculate valuations
using different methodologies. The SBOE requested that the Departments value the
gas produced for the production years in question using both the netback and the
proportionate profits methods, two of the four methodologies that are provided
for in Wyo. Stat. 39-2-208 and methods that have been historically recognized by
the Wyoming Supreme Court in numerous decisions.
8. The SBOE understood that the netback method was not statutorily allowed
because Wyo. Stat. 39-2-208 (d)(iii) does not allow its use when the gas to be
valued is also processed by the producer of the natural gas, as is the case
here, but wanted a baseline comparison. The Departments not only complied with
the SBOE's request but they expanded the request by calculating additional
values by assuming different factual scenarios. These calculations were
presented to the SBOE and to all parties in a simplistic, understandable format.
9. It should be mentioned that the work performed by the Departments was a
monumental undertaking because neither Department had the necessary information
the SBOE requested. Because the information necessary to use the Comparable
Value Methodology is different from the information necessary to use either the
netback or the proportionate profits methods, additional information had to be
obtained from Exxon. This exercise did require a lot of man hours and traveling
out of state to obtain the necessary information. Exxon was also cooperative in
this endeavor which cooperation aided in the expedited work product of the
Departments.
10. The Departments presented to the SBOE four different valuation options
for the years in question using the proportionate profits valuation method and
four valuation options using the netback valuation method. The SBOE was also
given the valuations derived from the use of the Howell and Yates agreements.
Except for one of the scenarios presented, all other valuation methodology
options produced lower values than those issued by the DOR using the methodology
set forth by the 1989 settlement agreement.
11. The one scenario which purportedly reflected a higher value sets forth
factual situations which are hypothetical and may be highly contested by the
taxpayer. In other words this scenario is speculative and has not been tested in
law or factually so as to be reliable at this time. Nevertheless, the higher
value scenario calculated by the DOR is not materially higher than that amount
obtained from the methodology currently being used by DOR and Exxon and agreed
to by all parties.
12. The SBOE has thoroughly reviewed the 1989 settlement agreement and finds
that all parties, including Sublette County and its elected officials, agreed
that the method of calculation would be made by first determining the total
gross revenue of CH4, CO2, S, N2, state helium sales and federal helium sales
and then determining the post-production cost deduction (.65 x [a +(0.9167 x [b
+ c] ) ]. Once the total revenues are determined and the post-production cost
deduction is calculated, the gross value is found by subtracting the
post-production cost deduction from the total gross revenue. The taxable value
is then calculated by subtracting from the gross value the exempt royalty paid,
the federal helium paid, the overriding royalty paid and the payments to working
interest owners. It should be noted that the 65 percent multiplier in the
post-production cost deduction formula did increase to seventy-five percent
after 1991. This method is referred to as the settlement methodology.
13. In its January 23, 1997, Petition For Examination, the Sublette County
Board of Commissioners allege that the use of this formula and the settlement
agreement results in illegal, improper and unequal assessment of LaBarge
production. The SBOE has carefully looked into each one of these alleged
problems with the settlement agreement and concludes that the settlement
agreement was validly entered into by the State of Wyoming which had the
authority to settle the civil action filed by Exxon. The method agreed upon, and
approved by the First Judicial District Court, is not illegal but is the
comparable value methodology which is authorized by Wyo. Stat. 39-2-208 (d)(ii).
We cannot find that the settlement agreement in any way is improper in arriving
at a fair cash market value nor can we find that use of the agreement results in
unequal assessment.
14. The settlement agreement was fair to all parties, including all Sublette
County governmental units, and produced a value which exceeded values generated
by most other recognized valuation methodologies. Sublette County alleges that
the settlement methodology should not be used because it potentially allows
deductions which are not authorized by Wyo. Stat. 39-2-208 (d)(iv),
proportionate profits methodology. We have considered this argument and do not
find that this settlement, which was sanctioned by court order and which is a
valuation methodology authorized by the Wyoming legislature in Wyo. Stat.
39-2-208 (d)(ii), is contrary to case law or statutory authority. By their very
nature, valuation methodologies should differ in the way fair market value is
determined. Many methodologies necessarily include different deductions. The
bottom line is that the settlement agreement did produce a fair cash market
value, even if the deductions are different from those allowed in the
proportionate profit method.
15. Sublette County alleges the sale prices, amount of deductions and volumes
reported to DOR for taxation were incorrect. We believe a more appropriate
procedure to challenge those reports are through an appeal of the assessments.
As acknowledged by the DOR during these proceedings, the properties and years in
question are currently under audit by the DOA. We recognize that Sublette County
has contested most of the production years that we examined and believe the sale
prices, amount of deductions and volumes will be fully litigated in those
proceedings. Therefore we decline to examine the reported numbers in this
examination and expect parties to fully litigate that issue in the contested
case proceedings.
16. Finally, we conclude that the DOR correctly interpreted the settlement
agreement and properly administered it for all production years in question. It
is not the SBOE's right nor statutory mission to second guess the DOR's
valuation methodologies. Presumably, anyone could conjure up a methodology which
would always produce the highest value. However, we do not believe that the
highest value is what is statutorily mandated. We believe that the DOR only has
to find a fair cash market value. Amoco Production Company v. Wyo. State Bd.
of Equalization, 2000 WL 359196(Wyo.).
REGULATORY FINDINGS
WHEREFORE IT IS HEREBY FOUND:
A. The valuation methodology used by the DOR did not result in improper,
illegal or unequal assessments for production years 1991 through 1995.
B. The methodology used reflects fair market value of Exxon's production of
gas and associated minerals at the LaBarge Wellfield.
C. The Howell and Yates agreements were entered into by Exxon and Howell and
Yates after extensive litigation which convinces the SBOE of the arms length
nature of these agreements and the nonexistence of collusion.
D, We find no need to continue with this regulatory examination and recognize
that the parties may litigate Exxon's reported numbers in other contested cases.
E. The settlement agreement and resulting valuation methodology is binding on
all parties for 1991 through 1995. However, the assigned valuation is subject to
review both from audit and from Sublette County's appeals of the notices of
valuation changes issued by the DOR but only as to the correctness of the
reported values, volumes and amount of deductions, and the proper application of
the valuation method outlined in the settlement agreement.
Pursuant to Wyo. Stat. 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 for review within 30 days of the date of this decision.
Dated this 28th day of June, 2000.
STATE BOARD OF EQUALIZATION
Roberta A. Coates, Vice-Chairman
Ron Arnold, Member
ATTEST:
Kathleen A. Lewis, Executive Secretary