Title: Preferred Energy Properties v. Wyoming State Bd. of Equalization

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Preferred Energy Properties v. Wyoming State Bd. of Equalization1995 WY 23890 P.2d 1110Case Number: 94-42Decided: 02/28/1995Supreme Court of Wyoming

PREFERRED ENERGY PROPERTIES, Appellant (Petitioner),

v.

WYOMING STATE BOARD OF EQUALIZATION, Appellee 
(Respondent).

 

Appeal 
from District Court, Laramie County, Nicholas G. Kalokathis, 
J.

Neil J. Short, Casper, for appellant.

Joseph B. Meyer, Atty. Gen., 
Michael L. Hubbard, and Clinton D. Beaver, Sr. Asst. Attys. Gen. Argument 
presented by Mr. Beaver, for 
appellee.

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

LEHMAN, 
Justice.

[¶1]      Preferred Energy 
Properties (Preferred), an owner of several oil and gas leases, appeals a 
determination of liability for unpaid severance and ad valorem 
taxes.

[¶2]      We 
affirm.

[¶3]      Preferred 
presents three issues:

            
1. Whether the State Board of Equalization erred by imposing severance 
and ad valorem taxes on Appellant even though Appellant was not the operator of 
the subject properties during the taxable periods in 
question.

            
2. Whether the State Board of Equalization erred by imposing severance 
and ad valorem taxes on Appellant even though Appellant did not receive 
production nor production proceeds from the subject properties during the 
taxable periods in question.

            
3. Whether the second order entered by the State Board of Equalization on 
March 15, 1993 * * * is void: A) for failing to make sufficient findings of fact 
in violation of W.S. § 16-3-110; and B) because the W.S.B.O.E. exceeded its 
powers as an administrative agency by interpreting a contract and applying 
contract law.

Appellee Wyoming State Board 
of Equalization (the Board) restates the issues:

            
I. Did the Board of Equalization exceed its jurisdiction by considering 
the terms of Petitioner's Farmout Agreement?

            
II. Was Petitioner a lessee under W.S. 39-3-101(d)?

            
III. Was Petitioner a person owning an interest in the valuable products 
under W.S. 39-6-307(e)?

FACTS

[¶4]      This dispute 
concerns who is liable for past severance and ad valorem taxes due on certain 
oil wells located in Natrona County. Preferred was operated by Walter Guion, as 
guardian for his daughter. In November of 1981, Preferred acquired the subject 
property. Subsequently, a farmout agreement was executed with Penexx Operating 
Company. Under the terms of the agreement, Penexx was to operate the wells and, 
in return, receive the production proceeds. Preferred was to receive any 
proceeds in excess of a certain minimum amount.

[¶5]      A dispute about 
the farmout agreement resulted in litigation between Preferred and Penexx in 
California. In May of 1985, the California court appointed Walter 
Guion/Preferred to "operate field on behalf of operator [Penexx] named in 
farmout agreement in accordance with good oil field practice & will protect 
the property from all liens & encumbrances." Guion was also ordered to 
"deposit balance of all funds received less only operating expenses & 
landowner royalty in interest bearing CD signed by both Preferred & Penexx." 
While acting under the court order, Preferred paid some of the severance taxes 
owing; apparently no other severance or ad valorem taxes were paid during this 
period. The litigation was settled in 1990, and Penexx executed quitclaim deeds 
on the property to Preferred.

[¶6]      In 1990, the 
Department of Revenue issued assessments to Preferred for delinquent taxes on 
the property. Preferred appealed the assessments to the Board, which affirmed 
the assessments and interest on June 3, 1992. Preferred then appealed to the 
district court, which remanded the case back to the Board for further findings. 
The Board made supplemental findings and conclusions but did not modify the 
original order. The district court then certified the case to this 
court.

DISCUSSION

[¶7]      Liability for 
severance taxes is provided for by W.S. 39-6-307(e) 
(1994):

Any person 
extracting valuable products subject to this article and any person owning an 
interest in the valuable products to the extent of their interest ownership are 
liable for the payment of the taxes imposed by this article together with any 
penalties and interest. The tax is a 
lien upon the interest of any owner and the interest of any person extracting 
any valuable deposit from and after the time they are extracted until the taxes 
are paid. The tax lien shall have preference over all liens except any valid 
mortgage or other liens of record filed or recorded prior to the date the tax 
became due.

(Emphasis added.) Preferred 
seizes upon the language "[a]ny person extracting valuable products" to argue 
that it is not liable for the taxes. Preferred contends that at all times Penexx 
was the operator of the wells and thus solely liable for the taxes as the 
"person extracting valuable products." Preferred relies on our decision in BHP 
Petroleum Co., Inc. v. State, 784 P.2d 621 (Wyo. 1989) to support its contention 
that the operator, and only the operator, is liable for the 
tax.

[¶8]      In addition, 
Preferred attempts to defuse the impact of the California court order which made 
it the operator of the field during the litigation. Essentially, Preferred 
claims that it was not really the operator because it was operating "on behalf 
of Penexx" and the order did not give Preferred the authority to pay any 
taxes.1

[¶9]      Initially, we do 
not agree with Preferred's narrow interpretation of W.S. 39-6-307(e) and BHP. 
The statute unambiguously imposes liability for the tax on two groups: any 
person who is extracting the valuable products and any person who owns any 
interest in the valuable products up to the amount of their interest. In BHP we 
concluded that an operator is a "person extracting valuable products" under the 
meaning of that phrase in that statute. BHP, 784 P.2d  at 625. In fact, in BHP we 
found that primary liability for the tax fell on the operator, while the tax was 
a lien on the interest owner until it was paid:

In practical operation, we perceive that a simple 
taxation reporting and collection plan was enunciated by the legislature and 
applied by the Wyoming Department of Revenue and Taxation for taxation of the 
product produced in the unitized field. First, the unit operator is responsible 
for the reporting of the production and payment of the taxes on the entire well 
production, W.S. 39-6-304(a) and 39-6-307(e). Additionally, the tax is a lien on 
the interest owner (of any part of the produced mineral) until the tax is paid. 
W.S. 39-6-304(k); 39-6-307(e). * * * Consequently, we distinguish between the 
initial obligation to report and pay and the ultimate liability of the 
amount[.]

BHP, 784 P.2d  at 627. It is 
undisputed that the tax was not paid by the operator (whether Penexx or 
Preferred); therefore the tax was a lien on the interest owner, and the 
Department of Revenue could turn to it for payment of the tax. As we noted in 
BHP, this does not affect the ability of the ultimate taxpayer from seeking 
reimbursement pursuant to contractual agreements. Id.

[¶10]   The key to this case, then, is 
whether Preferred was "any person owning an interest in the valuable products." 
The Board concluded that Preferred was an owner based on the Farmout Agreement 
with Penexx.

The Department carried its burden of going forward on 
this issue [liability for the severance tax under W.S. 39-6-307(e)] by evidence 
of the leases naming Preferred as lessee. The question then becomes whether 
Preferred carried its burden of proof to show it has either no interest in the 
valuable products, or a lesser interest ownership than assessed by the 
Department. We conclude Preferred did not carry its burden as to either issue. 
By the terms of the farmout agreement, no interest in the property could be 
"earned" by Penexx prior to completion of the well and separate assignment of a 
working interest from Preferred. More importantly, though, the farmout agreement 
does not transfer the right to sell the mineral product from Preferred to 
Penexx, and indeed seems to contemplate receipt by Preferred of proceeds from 
oil sales. Any facts indicating Penexx controlled the oil sales, received the 
receipts, failed to make payment to Preferred, failed to properly report to 
Preferred, or failed to adhere to conditions and covenants of the farmout 
agreement, are contractual disputes relating to performance under the farmout 
agreement, do not affect ownership in the mineral production, and thus are not 
subject to Board adjudication. The State was not a negotiating party to the 
farmout, thus performance thereunder (as opposed to the legal terms thereof), 
should not cause the State to suffer a shifting of tax liability and 
responsibility to pay. The terms of the farmout agreement, while primarily 
conveying certain rights to oil proceeds, do not convey any interest in the 
property or mineral production from Preferred to Penexx.

Preferred attacks the 
Board's conclusion on three grounds. First, Preferred insists that the Board, as 
an agency, has no authority to interpret and adjudicate rights under a contract. 
Therefore, the Board went beyond its authority and jurisdiction in interpreting 
the contract to find an ownership interest in Preferred.

[¶11]   An administrative agency does not 
have the power to settle and adjudicate the rights of parties under a contract. 
Tri-County Electric Ass'n, Inc. v. City of Gillette, 525 P.2d 3, 9 (Wyo. 1974). 
The reasoning behind the rule is that an agency only has such powers as are 
granted to it by the legislature. Hupp v. Employment Sec. Comm'n, 715 P.2d 223, 
225 (Wyo. 1986). Thus, unless an agency has been specifically granted the power 
to settle and adjudicate rights and obligations between parties to a contract, 
it does not have that power.

[¶12]   However, what the Board did in this 
instance was not a settlement or adjudication of the rights under the contract 
between Penexx and Preferred. The Board simply looked at the contract, which was 
offered into evidence by Preferred, to see whether or not it supported the 
proposition that Preferred was an owner under the statute. We hold that an 
administrative agency, while prohibited from settling or adjudicating rights 
under a contract, may use a contract as evidence to support its findings or to 
refute a party's position. See W.S. 16-3-107(c) (1994 Cum.Supp.) (agency can 
require production of any relevant documents). Of course, the agency's 
interpretation of the contract will be subject to judicial review if a party 
claims error. See W.S. 16-3-114 (1990) (providing for judicial review of agency 
actions). Furthermore, the Board's use of the contract to support a finding of 
tax liability on behalf of Preferred would not be res judicata or collateral 
estoppel if future litigation would arise concerning rights and obligations 
under the agreement since the other party to the contract, Penexx, was not a 
party to the tax proceeding.

[¶13]   Second, Preferred contends that the 
Board did not make any finding that it received or had a right to receive any 
production proceeds for the period in question. This, Preferred maintains, is 
fatal to the Board's claim that it was an owner because without it there is 
insufficient evidence to support a determination that it was an 
owner.

[¶14]   We disagree. The Board specifically 
found that Preferred had not conveyed to Penexx any interest in the property or 
in the mineral production.

The terms of the farmout agreement, while primarily 
conveying certain rights to oil proceeds, do not convey any interest in the 
property or mineral production from Preferred to Penexx.

While it is expressed in the 
negative, the Board found that Preferred had retained all of its interest in the 
property including its right to receive the mineral production. Preferred's 
argument is without merit.

[¶15]   Lastly, Preferred claims that 
severance and ad valorem taxes are levied against personal property, not real 
property; and since Penexx owned the minerals after extraction, its interest was 
one of real property, not subject to the tax.2

[¶16]   As we already noted, the Board 
found that Preferred had not conveyed its interest in the mineral production, 
thus retaining an ownership interest in the mineral production. That finding is 
supported by the evidence, specifically, the farmout 
agreement:

[Penexx] agree[s] that during the entire term of this 
agreement and any subsequent agreements (working interest, etc.) arising from 
this agreement, that [Penexx] will pay or cause to be paid to [Preferred] a 
minimum royalty of Ten Thousand Dollars ($10,000) monthly. * * 
*

*           
*           
*           
*           
*           
*

[¶17]   Upon written request, and after 
completion of the test well provided hereinabove in accordance with all the 
terms and provisions of this agreement to [Preferred's] satisfaction, 
[Preferred] agree[s]:

                        
(A) That a working interest equal to Fifty Percent (50%) of [Preferred's] 
working interest in any and all depths on the particular ten acre parcel on 
which [Penexx has] completed a test well producing an economically justifiable 
amount for a period of thirty days shall be forthwith assigned to 
[Penexx].

                        
(A-1) In addition to the working interest described in (A) above, that 
Fifty Percent of the proceeds [Preferred] receive[s] from [its] remaining Fifty 
Percent of [its] working interest, over and above the minimum royalty called for 
in this agreement, shall be forwarded forthwith upon [Preferred's] receipt to 
[Penexx] until such time as [the] total cost of drilling and completion are 
recovered by [Penexx].

The record is completely 
devoid of any evidence that any further conveyance to Penexx occurred. It is 
clear from the agreement that Preferred retained the right to proceeds from 
production; therefore, the Board did not err in finding that Preferred had an 
ownership interest in the property which was subject to severance and ad valorem 
taxes.

CONCLUSION

[¶18]   Preferred owned an interest in the 
subject property and, consequently, was liable for severance taxes up to the 
amount of its interest pursuant to W.S. 39-6-307(e). Preferred is also liable 
for the assessed ad valorem taxes.

[¶19]   Affirmed.

FOOTNOTES

1 The order required Preferred to 
"protect the property from all liens & encumbrances," while W.S. 39-6-307(e) 
states that unpaid taxes will become a lien on the property. Thus Preferred's 
claim that it did not have authority to pay the taxes is dubious, at 
best.

2 While ostensibly challenging the 
assessments for both severance and ad valorem taxes, this is the only argument 
in which Preferred directly addresses the ad valorem tax issue. In its Summary 
of Argument, Preferred claims that it is not liable for ad valorem taxes but 
then fails to provide us with any cogent argument (except for the one above) as 
to why it is not liable. Therefore, we will consider the ad valorem taxes in the 
context of the above argument only.