Title: BHP Petroleum Co., Inc. v. State, Wyoming Tax Com'n

State: wyoming

Issuer: Wyoming Supreme Court

Document:

BHP Petroleum Co., Inc. v. State, Wyoming Tax Com'n1989 WY 3766 P.2d 1162Case Number: 88-232Decided: 01/04/1989Supreme Court of Wyoming
BHP 
PETROLEUM COMPANY, INC., A DELAWARE CORPORATION, APPELLANT 
(PLAINTIFF),

 
 
v.

 
 
STATE OF 
WYOMING, WYOMING TAX COMMISSION AND ITS MEMBERS, SHIRLEY WITTLER, CARROL ORRISON 
AND THOMAS E. TROWBRIDGE IN THEIR OFFICIAL CAPACITIES AND THE DEPARTMENT OF 
REVENUE AND TAXATION, STATE OF WYOMING, APPELLEES 
(DEFENDANTS).

 
 
Appeal from 
the District Court, LaramieCounty, Nicholas G. Kalokathis, 
J.

 
 
W. Perry 
Dray of Dray, Madison & Thomson, P.C., Cheyenne, and John C. Siegesmund, 
III, of Parcel, Mauro, Hultin & Spaanstra, Denver, Colo., for appellant.

 
 
Joseph B. 
Meyer, Atty. Gen., Michael L. Hubbard, Sr. Asst. Atty. Gen., Cheyenne, for appellees.

 
 
Before CARDINE, C.J., and THOMAS, URBIGKIT, MACY 
and GOLDEN, JJ.

 
 

GOLDEN, 
Justice.

 
 

[¶1.]     Appellant BHP Petroleum 
Company Inc. (BHP) filed an action for declaratory judgment seeking district 
court interpretation of statutes and regulations governing the assessment of 
severance taxes on oil and gas production. The district court denied declaratory 
relief finding that BHP had not presented issues ripe for judicial review. We 
reverse the district court's decision on ripeness and remand for a district 
court interpretation of the statutes and regulations challenged by 
BHP.

 
 

[¶2.]     BHP has been the 
operator of a large federal oil and gas unit called the Madden Deep Unit (Unit) 
since 1982. The Unit includes leases in Fremont 
and Natrona Counties, 
Wyoming. BHP owns a small 
percentage of the oil and gas produced from the Unit, but manages the entire 
Unit for other parties owning interests in production derived from Unit leases. 
Its duties as Unit operator are set forth in written agreements with parties who 
own working interests in the leases.

 
 

[¶3.]     Each working interest 
owner in the Unit has the right to take in kind, or separately dispose of, its 
share of production as it sees fit. Working interest owners therefore negotiate 
their own sales contracts with various purchasers. BHP acts as collection agent 
for some of the working interest owners on a number of these sales contracts. 
Under the Unit agreements BHP files a single comprehensive production report on 
all production from the Unit and makes severance tax payments on that 
production. Two scenarios develop from BHP's assumption of this duty: (1) when 
BHP is acting as collection agent for a working interest owner it computes the 
severance tax due based on the purchase contract information available to it and 
remits the tax to the state; (2) when BHP is not acting as collection agent, 
i.e., where the working interest owner receives direct payment for its share of 
production, BHP relies on information from the working interest owner to 
calculate the severance tax; it then remits the tax and invoices the working 
interest owner for that amount.

 
 

[¶4.]     In the spring of 1988, 
appellee the State of Wyoming, Department of Revenue and Taxation 
(Department) began a comprehensive audit of severance taxes paid on the Unit. 
Preliminary findings from that audit revealed that some of the purchase 
contracts required the purchasers to reimburse the working interest owners for 
any severance taxes due on Unit production they purchased. Department auditors 
concluded that these reimbursements should have been included in the tax base. 
The results of the audit were officially released to BHP when, on April 26, 
1988, Mr. Edward Dean, Department Senior Examiner, sent BHP a set of 
"Preliminary Findings" in which the Department concluded that BHP was liable for 
severance tax deficiencies on past Unit production and that BHP would have 
thirty days to review the Department's decision. BHP also received an April 27, 
1988, letter from Mr. James Petry, Department Director of Revenue, stating that 
the Department would rely on Department of Revenue and Taxation Rules of 
Practice and Procedure, Ch. IX, § 7, to hold BHP liable for the entire severance 
tax deficiency along with any penalty or interest. BHP then received additional 
time to respond to the Department's preliminary actions and, through counsel, 
questioned the preliminary report and argued that it should not be liable for 
the entire alleged deficiency because the Department lacked statutory authority 
to promulgate the rule requiring that result.

 
 

[¶5.]     Communications between 
the Department and BHP did not resolve BHP's concerns and on June 14, 1988, BHP 
filed a complaint seeking declaratory judgment. The complaint requested a court 
order specifically finding that: the alleged deficiency could only be collected 
from the production itself or the owners of that production; BHP was not liable 
for the entire alleged deficiency; the Department lacked statutory authority to 
promulgate a rule holding BHP liable for the entire alleged deficiency; and that 
the rule relied on by the Department be declared invalid. The district court 
held a hearing on June 23, 1988, after which it ruled against BHP. In a June 29, 
1988, decision letter, the district court identified the critical issues in the 
case as whether BHP, acting as Unit operator, was a person "holding the 
privilege of severing or extracting" production from the Unit under W.S. 
39-6-302(a) and W.S. 39-6-304(h) (May 1985 Repl.); and, whether the language of 
W.S. 39-6-307(e) (May 1985 Repl.), stating that the severance tax "is a lien 
upon the interest of any owner and the 
interest of any person extracting" production from the Unit, applied to BHP 
as Unit operator. After identifying these issues, the district court concluded 
generally that initial determination of whether BHP was liable for the alleged 
deficiency under the severance tax statutes was committed to Department 
discretion and expertise. The district court also found that there were fact 
determinations underlying a resolution of the interpretation of these statutes; 
it did not elaborate on what those factual determinations might be. Based on 
these findings the district court denied relief finding that, based on the 
procedural and factual posture of the case, it was without authority to hear the 
declaratory judgment action.

 
 

[¶6.]     On July 5, 1988, the 
Department filed a motion to dismiss BHP's complaint for failure to state a 
cause upon which relief could be granted. The district court granted the motion 
the same day. BHP filed a petition to certify to this court the questions of 
statutory interpretation identified in the district court's decision letter on 
July 19, 1988. Attached to the petition as "Exhibit A" was a June 30, 1988, 
notice of deficiency addressed to BHP ordering it to pay a deficiency, penalty, 
and interest of $1,807,447 within thirty days. Simultaneously, BHP filed its 
notice of appeal to the final order dismissing its complaint. This appeal 
followed.

 
 

[¶7.]     BHP argues that the 
factual and legal posture of the case was such that the district court should 
have determined the statutory validity of the Department rule. Although BHP at 
one point argues that the district court's failure to reach the merits was based 
on the doctrine of exhaustion of administrative remedies, the substance of both 
parties' briefing amounts to an argument that the district court incorrectly 
applied the administrative law doctrine of ripeness.

 
 

[¶8.]     The doctrine of 
ripeness is a judicially created limitation of the availability of judicial 
review in administrative law cases.

 
 
[I]ts basic 
rationale is to prevent the courts, through avoidance of premature adjudication, 
from entangling themselves in abstract disagreements over administrative 
policies, and also to protect the agencies from judicial interference until an 
administrative decision has been formalized and its effects felt in a concrete 
way by the challenging parties.

 
 
Abbott 
Laboratories v. Gardner, 387 U.S. 136, 148-149, 87 S. Ct. 1507, 
1515, 18 L. Ed. 2d 681, 691-692 (1967). See also R. Pierce, S. Shapiro & P. 
Verkuil, Administrative Law and Process § 5.7.4 at 196-204 (1985). We evaluate 
ripeness in two prongs, which include, first, an evaluation of the fitness of 
the issues presented for judicial review and, second, an evaluation of the 
hardship to the parties if judicial review is denied. Abbott, 387 U.S.  at 149, 87 S. Ct.  at 
1515, 18 L.Ed.2d at 691-692; and State of Wyoming v. Hoffman, 423 F. Supp. 450, 452 
(D.Wyo. 1976).

 
 

[¶9.]     The first prong of the 
analysis is not an issue here and rebukes the Department's argument that a 
declaratory judgment action is not appropriate in this case. It is clear that a 
substantive administrative rule promulgated by the Department constitutes final 
agency action subject to review by the district court. W.S. 16-3-114(a) (Oct. 
1982 Repl.). Cf. Abbott, 387 U.S.  at 149, 87 S. Ct.  at 1516, 18 L. Ed. 2d  at 692; and Hoffman, 423 F. Supp.  at 451. Declaratory judgment is a 
proper cause of action in which to assert that such a rule exceeds the 
Department's statutory authority. State Board of Equalization v. Jackson Hole 
Ski Corporation, 737 P.2d 350, 354 (Wyo. 1987). See also W.R.A.P. 12.12. This type 
of review presents a question of law. See Rocky Mountain Oil and Gas Association 
v. State, 645 P.2d 1163, 1168-1169 (Wyo. 1982).

 
 

[¶10.]  The second prong of the analysis is 
dispositive. When the district court filed its decision letter on June 29, 1988, 
BHP was in receipt of preliminary notice of an alleged deficiency on severance 
taxes for past production from the Unit. BHP had also received a letter from the 
Department indicating that BHP would be held liable for the entire alleged 
deficiency along with any penalty and interest. Consequently, the record before 
the district court did contain evidence of agency action that could work an 
actual hardship on BHP. What the district court did not have in the record was a 
definitive assessment from the Department indicating that it had completed its 
audit on the Unit and was giving BHP a set time to remit payment. However, on 
June 30, 1988, the Department mailed such a notice of deficiency to BHP 
demanding payment of $1,807,447 in deficiency, penalty, and interest within 
thirty days.

 
 

[¶11.]  We hold that sufficient evidence existed 
in the record at the time the district court issued its decision letter to show 
that actual hardship would befall BHP if judicial review was denied. This 
satisfies the second prong of the ripeness analysis. While a final assessment 
had not been issued when the decision letter was filed, it was clear at that 
time that the Department had decided to hold BHP liable for a large tax 
deficiency, penalties, and interest. This was confirmed when the Department sent 
BHP the assessment for $1,807,447 the day after the decision letter was filed. 
Cf. Hoffman, 423 F. Supp.  at 452-453 (potential cost to the state in preparing 
applications for federal permits was sufficient to work a predictable or almost 
certain hardship indicating ripeness).

 
 

[¶12.]  The district court erred when it refused 
to consider the merits of BHP's legal challenge to the statutory validity of the 
Department rule. We reverse the district court's order dismissing BHP's 
complaint and remand the declaratory judgment action for a district court 
interpretation of the Department's rule and pertinent severance tax 
statutes.