Title: WYOMING DEPARTMENT OF REVENUE V. EXXON MOBIL CORPORATION

State: wyoming

Issuer: Wyoming Supreme Court

Document:

WYOMING DEPARTMENT OF REVENUE V. EXXON MOBIL CORPORATION2007 WY 21150 P.3d 1216Case Number: 05-220Decided: 02/01/2007
OCTOBER 
TERM, A.D. 2006

 
 
WYOMING DEPARTMENT OF 
REVENUE,

 
 
Appellant

(Defendant),

 
 
v.

 
 
EXXON MOBIL 
CORPORATION,

 
 
Appellee

(Plaintiff).

 
 
Appeal from the 
DistrictCourtofLaramieCounty

The Honorable Dan 
Spangler, Retired, Judge

 
 
Representing Appellant:

Patrick J. 
Crank, Attorney General; Michael L. Hubbard, Deputy Attorney General; Martin L. 
Hardsocg, Senior Assistant Attorney General; William Russell, Assistant Attorney 
General.

 
 
Representing Appellee:

Lawrence J. 
Wolfe, Patrick R. Day, and Walter F. Eggers, III, of Holland & Hart, 
Cheyenne, Wyoming; Brent R. Kunz, of Hathaway & Kunz, P.C., Cheyenne, 
Wyoming.

 
 
Before 
VOIGT, C.J., and GOLDEN, and BURKE, JJ., and KAUTZ, and DEEGAN, 
D.JJ.

 
 

BURKE, 
Justice.

 
 
[¶1]      The Department of 
Revenue ("Department") appeals a declaratory judgment in favor of Exxon Mobil 
Corporation ("ExxonMobil").  The 
Department asserts that the district court should have dismissed the declaratory 
judgment action.  Additionally, the 
Department claims that the district court misinterpreted Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D), the proportionate profits valuation method for oil and gas 
production.  We 
affirm.

 
 
ISSUES

 
 

1.                  
Did the district court 
abuse its discretion when it denied the Department's Motion to Dismiss on the 
grounds of failure to exhaust administrative remedies or primary 
jurisdiction?           

 
 

2.                  
Did the district court 
correctly conclude that neither production taxes nor royalties are "direct costs 
of producing" in the proportionate profits formula set forth in § 
39-14-203(b)(vi)(D) of the Wyoming Statutes?

            

FACTS

 
 
[¶2]      ExxonMobil owns 
and operates deep natural gas wells in SubletteCounty, as part of its LaBarge 
project.  LaBarge gas has a unique 
and complex composition.  The gas is 
largely carbon dioxide but also contains helium and methane.  It is called a "sour gas" because it 
contains hydrogen sulfide.  In its 
untreated state, the gas is not flammable and the gas stream is lethal.  Consequently, the costs of processing 
the gas are high.

 
 
[¶3]      In the mid-1980s, 
ExxonMobil invested more than a billion dollars in transportation and processing 
facilities for the LaBarge project in Sublette and LincolnCounties.  When production began in 1986, natural 
gas prices were low.  Under the 
netback method of valuing production for taxation purposes in use at the time, 
ExxonMobil's massive capital investments failed to yield a return on investment 
and resulted in a zero taxable value.  
In response to this situation, legislation was passed in 1988 to cap the 
deductions that could be claimed for processing.  

 
 
[¶4]      Litigation ensued 
when ExxonMobil challenged the constitutionality of the legislation capping 
deductions.  Eventually, ExxonMobil 
and the Department were able to resolve the litigation, agreeing upon a 
valuation methodology that was incorporated into a judicial decree.  This agreed upon method, referred to by 
the parties as the "TSA method," was binding through August 1991.1  ExxonMobil and the Department continued 
to use the TSA method in subsequent years.

[¶5]      In 1997, 
SubletteCounty challenged the use 
of the TSA after August 1991.  On 
May 20, 2004, after seven years of administrative proceedings, the Board of 
Equalization determined that the use of the TSA was authorized by Wyoming law.  The next day, the Department sent a 
letter to ExxonMobil directing it to file amended tax returns and pay taxes 
according to the proportionate profits methodology for the 2003 production 
year.  On July 22, 2004, the 
Department sent another letter stating that it would require reporting utilizing 
the proportionate profits method for the 2004 production year "and beyond."  Within that letter, the Department 
specified that royalties and production taxes should be included as "direct 
costs of producing" in the proportionate profits formula.

            

[¶6]      ExxonMobil filed 
a declaratory judgment action in the district court for the First Judicial 
District.  ExxonMobil requested a 
declaration that the Department did not have the authority to change the 
valuation methodology for 2003 and 2004 without complying with the notice 
requirements of Wyo. Stat. Ann. § 39-14-203(b).2  Additionally, ExxonMobil challenged the 
Department's directive to include production taxes and royalties as direct costs 
of production in calculating proportionate profits under Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D).

 
 
[¶7]      The Department 
filed a motion to dismiss.  The 
Department urged the district court to decline jurisdiction over ExxonMobil's 
declaratory judgment action because similar claims were the subject of appeals 
pending before the Board of Equalization.  
In support of its motion, the Department argued that ExxonMobil failed to 
exhaust its administrative remedies and relied upon the primary jurisdiction 
doctrine.  The district court denied 
the motion.

 
 
[¶8]      Subsequently, 
ExxonMobil moved for summary judgment.  
The district court granted judgment in favor of ExxonMobil.  The order of judgment 
declared:

 
 

1)     
The Department does not 
have authority to require ExxonMobil to change tax valuation methodologies under 
Wyo. Stat. § 39-14-203(b) without complying with the advance notice provision in 
the statutes.  Section 
39-14-203(b)(vi) requires notice of the selection of the valuation methodology 
on or before September 1 of the year preceding the year in which it is to be 
employed.  The Department's attempt 
to require ExxonMobil to employ the proportionate profits methodology for 
production years 2003 and 2004 is contrary to law and void, and therefore the 
Tax Settlement Agreement methodology applies for those production 
years.

 
 

2)     
Production taxes and 
royalties are not "direct cost[s] of producing" as that term is used in the 
proportionate profits statute, Wyo. Stat. § 39-14-203(b)(vi)(D), or the 
Department's Rule, 
Ch. 6, Section 
4b(w).  As a result, the Department 
has no authority to require ExxonMobil to include production taxes and royalties 
in the numerator or denominator of the proportionate profits quotient described 
in Wyo. Stat. § 39-14-203(b)(vi)(D)(I), and its direction to ExxonMobil that it 
do so for production years 2003, 2004 and beyond is null and void.  

 
 
[¶9]      This appeal 
followed.  In its opening appellate 
brief, the Department challenged the district court's conclusion that the 
Department lacked authority to change ExxonMobil's valuation methodology for tax 
years 2003 and 2004.  This issue was 
also being considered by the Board.  
Ultimately, the Board reached the same result as the district court and 
concluded that the Department could not retroactively change methodologies or 
impose a method for the upcoming year without timely notice to ExxonMobil.  The Board issued its decision on 
December 1, 2005.  Subsequently, on 
December 22, 2005, the Department withdrew its challenge to the first paragraph 
of the judgment, leaving only the propriety of the declaration in the second 
paragraph for our review.3  

 
 
STANDARD OF 
REVIEW

 
 
[¶10]   The decision to dismiss a 
declaratory judgment action on the basis of non-exhaustion of remedies is 
committed to the sound discretion of the district court.  Rissler & McMurry Co. v. State, 917 P.2d 1157, 1160 (Wyo. 1996); Union Pacific Resources Co. v. State, 
839 P.2d 356, 366 (Wyo. 1992); Glover v. State, 860 P.2d 1169, 1171 
(Wyo. 
1993).  

 
 
[¶11]   Pursuant to Wyo. Stat. Ann. § 
1-37-109, we review final orders and judgments entered in declaratory judgment 
proceedings as in other civil actions.  Sherard v. Sherard, 2006 WY 105, ¶ 8, 
142 P.3d 673, 676 (Wyo. 2006).  
Determination of the proper treatment of royalties and production taxes 
under the oil and gas proportionate profits formula involves statutory 
interpretation and presents a question of law which we review de novo.  RME Petroleum Co. v. Wyoming Department of 
Revenue, 2007 WY 16, ¶ 13, ___ P.3d ___, ___ (Wyo. 
2007).

 
 
DISCUSSION

            

Motion to 
Dismiss

            

[¶12]   First, the Department contends that 
the district court should have granted its motion to dismiss the declaratory 
judgment action.  It argues the 
district court abused its discretion by allowing ExxonMobil's tax appeal to be 
"fragmented and litigated in a piecemeal fashion simultaneously in the courts 
and before the . . . Board."  The 
Department claims the district court should have required ExxonMobil to exhaust 
its administrative remedies, allowing the Board to use its expertise and 
experience in handling complex tax disputes.  ExxonMobil maintains that the issues in 
the declaratory judgment action were questions of law properly decided by the 
district court.

 
 
[¶13]   Wyoming's Uniform Declaratory Judgments Act, ("Act"), 
allows "[a]ny person  whose rights, status or other legal relations are 
affected by the Wyoming constitution or by a statute" to 
"have any question of construction or validity arising under the instrument 
determined and obtain a declaration of rights, status or other legal 
relations."  Wyo. Stat. Ann. § 
1-37-103 (LexisNexis 2005).  The Act 
is remedial. Wyo. Stat. Ann. § 1-37-114 (LexisNexis 
2005).  "Its purpose is to settle 
and to afford relief from uncertainty and insecurity with respect to legal 
relations, and is to be liberally construed and administered."  Id.  The existence of another remedy, 
including an administrative appeal, does not preclude declaratory judgment 
relief.  Rocky Mountain Oil and Gas Ass'n v. 
State, 645 P.2d 1163, 1167-1168 (Wyo. 1982); W.R.A.P. 12.12; W.R.C.P. 57.  However, a district court retains 
discretion to withhold relief and "may refuse to render a declaratory judgment 
where the judgment would not terminate the uncertainty or controversy giving 
rise to the proceeding."  Wyo. Stat. Ann. § 
1-37-108 (LexisNexis 2005).

 
 
[¶14]   We have recognized that the 
availability of declaratory relief may be restricted when administrative matters 
are involved.  Rocky Mountain Oil and Gas Ass'n, 645 P.2d  at 1168-1169.  "Where the 
action would result in a prejudging of issues that should be decided in the 
first instance by an administrative body, it should not lie."  Id. 
at 1168.  

 
 
An action for 
declaratory judgment cannot be a substitute for an appeal from 
administrative decisions but is available even though there is a statutory 
method of appeal if it concerns the validity and construction of agency 
regulations, or if it concerns the constitutionality or interpretation of a 
statute upon which the administrative action is, or is to be based. 

 
 

Hirschfield v. Board of 
CountyCom'rs, 944 P.2d 1139, 1142 
(Wyo. 
1997).

 
 
[¶15]   The desire to avoid usurping the 
role of an administrative agency is manifested in two doctrines relied upon by 
the Department:  the exhaustion 
requirement and the primary jurisdiction doctrine.  We have explained these concepts as 
follows:

 
 
The doctrine of primary 
jurisdiction, like the rule requiring exhaustion of administrative remedies, is 
concerned with promoting proper relationships between the courts and 
administrative agencies charged with particular regulatory duties. Exhaustion 
applies where a claim is cognizable in the first instance by an administrative 
agency alone; judicial interference is withheld until the administrative process 
has run its course. Primary jurisdiction, on the other hand, applies where a 
claim is originally cognizable in the courts, and comes into play whenever 
enforcement of the claim requires the resolution of issues which, under a 
regulatory scheme, have been placed within the special competence of an 
administrative body; in such a case the judicial process is suspended pending 
referral of such issues to the administrative body for its 
views.

 
 

Glover, 860 P.2d  at 1171 
(citations and quotation marks omitted).   The purpose of the exhaustion 
doctrine is to avoid premature interruption of the administrative process where 
the agency has been created to apply a statute in the first instance.  People v. Fremont Energy Corp., 
Wyo., 651 P.2d 802, 811 (1982).  By contrast, the 
primary jurisdiction doctrine is apt when there is a basis for judicial action 
independent of agency proceedings, but where courts refer certain issues to the 
agency charged with primary responsibility for governmental supervision or 
control of the particular industry or activity involved.  Zezas Ranch, Inc. v. Board of Control, 
714 P.2d 759, 761 (Wyo. 1986) (finding proper application of the doctrine where 
the district court had jurisdiction to interpret a decree, it properly called 
upon the state agency with expertise to ascertain the facts necessary to correct 
an omission in the decree).  We do 
not find the primary jurisdiction doctrine applicable here because no genuine 
issues of material fact existed, and no threshold determinations would be better 
made by an agency with expertise.4  Rather, only questions of law were 
presented.

 
 
[¶16]   In tax appeals, we have recognized 
the potential applicability of the exhaustion requirement because the judiciary 
is not the taxing authority.  Union Pacific Resources Co., 839 P.2d  at 
364.  In Union Pacific, the district court 
determined that the taxpayer was required to exhaust point of valuation issues 
before the Board.  Id. at 360.  This Court found no abuse in the 
district court's dismissal and "recognized a primary administrative agency 
function of the State Board of Equalization."  Id. 
at 365.  Additionally, this Court 
declined any invitation to assert original jurisdiction over point of valuation 
matters and observed: "The complexities of the Wyoming taxation system provide an 
adjudicatory challenge that will not be accepted for judicial resolution until 
administrative agency review and reconciliation  can be completed."  Id. 
at 366.  The Department claims that 
Union Pacific supports the exhaustion 
requirement in this case.

 
 
[¶17]   We do not find Union Pacific to require exhaustion in 
this case.  The declination of 
jurisdiction in Union Pacific was not 
intended to be a broad refusal to entertain any future declaratory judgment 
action concerning a tax dispute.  
Rather, discretion would allow future determinations to be made on a case 
by case basis.  Id. at 366 
n.4.  The instant case presented 
issues of a different character from the factually complex point of valuation 
matters in Union Pacific.  According to the taxpayer in Union Pacific, the appeal involved "the 
proper method and manner in which the State, County and other named government 
officials  may value, audit, assess, collect and review taxes on Union Pacific 
Resources Company's  oil and gas production."  Union Pacific Resources Co., 839 P.2d  at 
358.  Here, ExxonMobil challenged 
the Department's authority to retroactively select a valuation methodology 
contrary to statutory requirements, not the results obtained from the 
application of a particular methodology.  
ExxonMobil's proportionate profits issue posed a discrete and narrowly 
defined question of statutory construction.  We see these issues pertaining to the 
Department's authority and the interpretation of the statutes underlying its 
actions as appropriate subjects for declaratory relief.  WCCC v. Casper Community College, 
2001WY 86, 
¶ 13, 31 P.3d 1242, 1248 (Wyo. 2001).

 
 
[¶18]   "The Act is an appropriate vehicle, 
not for prejudging issues that should be decided by an administrative agency, 
but for interpreting the statute  upon which the administrative action is 
based."  Snake River Brewing v. Town of Jackson, 
2002 WY 11, ¶ 6, 39 P.3d 397, 402 (Wyo. 2002).  The district court's decision in the 
action filed by ExxonMobil did not "bypass an appropriate administrative ruling 
resulting in the prejudging of issues that should be decided in the first 
instance by an administrative body."  Quinn Revocable Trust v. SRW, Inc., 2004 
WY 65, ¶ 18, 91 P.3d 146, 151 (Wyo. 2004).  
Dismissal was not warranted because the district court did not 
intrude on the agency's fact-finding or administrative prerogative.  Memorial Hosp. of LaramieCounty v. Department of Revenue & Taxation, 
770 P.2d 223, 226 (Wyo. 1989).  We conclude that the district court did 
not abuse its discretion in denying the Department's motion to dismiss 
ExxonMobil's action for declaratory judgment.

 
 
Proportionate Profits 
Formula

            

[¶19]   We recently considered the 
character of royalties and production taxes in the oil and gas proportionate 
profits formula in RME Petroleum Co. v. 
Wyoming Department of Revenue, 2007 WY 16, ___ P.3d ___ (Wyo. 2007).  In RME, we reached the same conclusion as 
the district court and held that production taxes and royalties are not "direct 
costs of production" under Wyo. Stat. Ann. § 39-14-203(b)(vi)(D).  Id., ¶ 47, ___ 
P.3d at ___.  Our holding in RME is dispositive of the Department's 
challenge, and further discussion of the proportionate profits formula is not 
necessary to resolve this appeal.  
The decision of the district court is affirmed.

 
 
FOOTNOTES

 
 

1We described 
the development of the circumstances and litigation leading to the TSA in Exxon Corp. v. Board of County Comm'rs, 
987 P.2d 158, 160-161 (Wyo. 1999):

 
 
In 1986, 
Exxon began extracting natural gas from the LaBarge wellfield in SubletteCounty. Pursuant to Wyoming statutes, Exxon's 
production is subject to severance and ad valorem taxes. For the 1986 and 1987 
tax years, Exxon used the "netback" method of valuation. After deductions, Exxon 
reported a taxable value of zero for its LaBarge production. The Department of 
Revenue disputed this valuation and did not certify taxable value for those 
years.

 
 
Litigation 
regarding valuation of the LaBarge production began in 1988. That year, the 
Wyoming 
legislature enacted Wyo. Stat. Ann. §§ 39-1-401 and -402 (Michie Cum.Supp. 
1988). These statutes, which have since been repealed, provided that total 
deductions allowed by the Department of Revenue from the sale of taxable natural 
gas and associated natural resources could not exceed 40% of the annual gross 
receipts from the sale of these products. Wyo. Stat. Ann. § 39-1-402(a) (Michie 
Cum.Supp. 1988) (Repealed by 1989 Wyo. Sess. Laws ch. 57, § 1). Shortly after 
these statutes were enacted, Exxon filed a declaratory judgment action in 
district court for the First Judicial District seeking a declaration that the 
40% "cap" legislation was an unconstitutional delegation of legislative 
authority. Among the defendants named in the suit were the Department of 
Revenue, the Board of Equalization, and SubletteCounty.

 
 
In January 
1989, a settlement was reached in the cap litigation, and a "Stipulation for 
Entry of Declaratory Judgment" was filed in district court. Signed by 
Exxon, the Wyoming Attorney General, and the Sublette County Attorney, the 
stipulation provided: "The parties have engaged in settlement negotiations which 
have resulted in an agreement which is embodied in a Settlement Agreement, an 
executed copy of which is attached." SubletteCounty was listed among the parties to the 
settlement agreement. Pursuant to the stipulation, the district court entered a 
declaratory judgment pronouncing the 40% cap legislation unconstitutional, thus 
ending the cap litigation.

 
 
Under the 
terms of the settlement agreement, Exxon paid the State and SubletteCounty $12 million in full satisfaction of 
Exxon's severance and ad valorem tax liability for the 1986, 1987, and 1988 
LaBarge production. The settlement agreement also established the method to be 
used to value post-1988 LaBarge production. For January 1, 1989, through August 
31, 1991, the State and County agreed to apply the comparison value method of 
valuation; and two of Exxon's processing agreements, the Howell and Yates 
agreements, were to be used as comparable value in computing valuation. In 
exchange, Exxon agreed that, during this period, it would not contest the 
applicability of ad valorem and severance taxes to federal helium.  As to the valuation method to be used 
 after August 31, 1991, the agreement 
provided:

 
 
After August 
31, 1991, the State agrees that it will recognize the Howell and Yates 
agreements as a comparison value and that the comparison value method may be 
used in conjunction with other recognized appraisal techniques to determine 
value. If the State uses any method other than the comparison value method based 
on the Howell and Yates agreements, the Parties agree that the question of 
future taxability, for severance and ad valorem purposes, and value of future 
helium production remain open and are not resolved by this 
Agreement.

 
 
(Footnotes 
omitted.)

 
 

2Wyo. Stat. Ann. § 
39-14-203(b) (LexisNexis 2005) provides, in pertinent 
part:

 
 

(b) 
Basis of tax. The following shall apply:

 

      (i) Crude oil, 
lease condensate and natural gas shall be valued for taxation as provided in 
this subsection;

 

      

 

      (vi) In the event 
the crude oil, lease condensate or natural gas production as provided by 
paragraphs (iii) and (iv) of this subsection is not sold at or prior to the 
point of valuation by bona fide arms-length sale, or, except as otherwise 
provided, if the production is used without sale, the department shall identify the method it 
intends to apply under this paragraph to determine the fair market value and 
notify the taxpayer of that method on or before September 1 of the year 
preceding the year for which the method shall be employed. The department 
shall determine the fair market value by application of one (1) of the following 
methods:

 



 

(D) 
Proportionate profits - The fair market value is:

 

(I) 
The total amount received from the sale of the minerals minus exempt royalties, 
nonexempt royalties and production taxes times the quotient of the direct cost 
of producing the minerals divided by the direct cost of producing, processing 
and transporting the minerals; plus

 

(II) 
Nonexempt royalties and production taxes.

 

      (vii) When the 
taxpayer and department jointly agree, that the application of one (1) of the 
methods listed in paragraph (vi) of this subsection does not produce a 
representative fair market value for the crude oil, lease condensate or natural 
gas production, a mutually acceptable alternative method may be 
applied;

 

      (viii) If the 
fair market value of the crude oil, lease condensate or natural gas production 
as provided by paragraphs (iii) and (iv) of this subsection is determined 
pursuant to paragraph (vi) of this subsection, the method employed shall be used 
in computing taxes for three (3) years including the year in which it is first 
applied or until changed by mutual agreement between the department and 
taxpayer. If the taxpayer believes the valuation method selected by the 
department does not accurately reflect the fair market value of the crude oil, 
lease condensate or natural gas, the taxpayer may appeal to the board of 
equalization for a change of methods within one (1) year from the date the 
department notified the taxpayer of the method selected;

 

      (ix) If the 
department fails to notify the taxpayer of the method selected pursuant to 
paragraph (vi) of this subsection, the taxpayer shall select a method and inform 
the department. The method selected by the taxpayer shall be used in computing 
taxes for three (3) years including the year in which it is first applied or 
until changed by mutual agreement between the taxpayer and the department. If 
the department believes the valuation technique selected by the taxpayer does 
not accurately reflect the fair market value of the crude oil, lease condensate 
or natural gas, the department may appeal to the board of equalization for a 
change of methods within one (1) year from the date the taxpayer notified the 
department of the method selected;

 

  

 
 
(Emphasis 
added.)

 
 

3The 
Department withdrew its asserted claims of error regarding three 
issues:

 
 

I.                     
Did the 
District Court possess subject-matter jurisdiction [pursuant to the Wyoming 
Governmental Claims Act and Article 16, Section 7 of the Wyoming Constitution] 
to adjudicate Exxon Mobil Corporation's claim for specific performance of a 
contract with the Department of Revenue?  

 
 

IV.                
Did the 
District Court incorrectly rule that the Department lacked authority to 
terminate the 1989 Tax Settlement Agreement because it did not follow the notice 
requirement set forth in Wyo. Stat. § 
39-14-203(b)(vi)?

 
 

V.                  
Did the 
Department have authority to discontinue application of the 1989 Tax Settlement 
Agreement, by its terms, for valuation of Exxon Mobil Corporation's 2003 LaBarge 
production? 

 
 

4The 
Department does not argue that a genuine issue of material fact 
existed.