Title: WYOMING DEPARTMENT OF REVENUE V. MICHAEL T. GUTHRIE, d/b/a MTG OPERATING COMPANY

State: wyoming

Issuer: Wyoming Supreme Court

Document:

WYOMING DEPARTMENT OF REVENUE V. MICHAEL T. GUTHRIE, d/b/a MTG OPERATING COMPANY2005 WY 79115 P.3d 1086Case Number: 04-178Decided: 07/14/2005
APRIL TERM, A.D. 2005

 
 
WYOMING 
DEPARTMENT OF REVENUE,

 
 
Appellant

(Respondent),

 
 
v.

 
 
MICHAEL 
T. GUTHRIE, d/b/a

MTG 
OPERATING COMPANY,

 
 
Appellee

(Petitioner).

 
 
Appeal from theDistrictCourtofCampbellCounty

 
 

Representing 
Appellant:

Patrick 
J. Crank, Wyoming Attorney General; Michael L. Hubbard, Deputy Attorney General; 
Martin L. Hardsocg, Senior Assistant Attorney General.  Argument by Mr. 
Hardsocg.

 
 

Representing 
Appellee:

Randall 
T. Cox, Gillette, Wyoming

 
 
 
 
Before 
HILL, C.J., and GOLDEN, KITE, VOIGT, and BURKE, 
JJ.

 
 

GOLDEN, 
Justice.

            

[¶1]           
The 
Department of Revenue (the Department) disallowed a deduction taken by Michael 
T. Guthrie, d/b/a MTG Operating Company (MTG) for the price of its coal bed 
methane production used by the purchaser of the gas production to fuel related 
compression activities.  Although it 
is undisputed that MTG did not get paid for the gas the purchaser reported was 
used for fuel, the Department disallowed the fuel use deduction stating that 
upon audit MTG failed to verify, in a manner acceptable to the Department, the 
volume of gas used for fuel.  MTG 
appealed to the State Board of Equalization (the Board), which affirmed the 
decision of the Department.  MTG 
then appealed to the district court, which reversed the decision of the Board 
and ordered the Department to allow the fuel use deduction as presented by 
MTG.  The Department hereby appeals 
the order of the district court.  
After a full review of the facts and the record, this Court determines 
that MTG failed to produce sufficient evidence to support the fuel use deduction 
it claimed.  The decision of the 
district court is reversed.

 
 
 
 
ISSUES

 
 

[¶2]           
The 
Department presents the following issues for our review:

 
 
1.  Was the State Board of Equalization's 
Decision and Order, affirming the Department of Revenue's audit assessment, 
supported by substantial evidence?

 
 
2.  Did the District Court, in reviewing the 
evidentiary findings of the State Board, improperly substitute a different 
burden of proof for the burden of proof applied by the State Board of 
Equalization?

 
 
3.  Did the District Court improperly 
substitute its review and evaluation of the evidence for the State Board of 
Equalization's evaluation of the evidence and evidentiary 
findings?

 
 
4.  Did the District Court err in concluding 
that MTG Operating was not required to verify its taxable value as determined by 
the State Board of Equalization?

 
 
5.  Did the District Court err in concluding 
that the State Board of Equalization abused its discretion and exceeded its 
statutory authority?

 
 
MTG 
presents these issues:

 
 
Did the 
District Court correctly conclude that the Board of Equalization ignored the 
great weight of the evidence and acted arbitrarily and capriciously in its 
decision?

 
 
Did the 
Board of Equalization and the Department of Revenue commit legal errors by 
disregarding the statutes which govern valuation of gas sold through 
arm's-length contracts?

 
 
Did the 
Board of Equalization and the Department of Revenue improperly substitute their 
opinions of value for the statutory definition of taxable value of 
gas?

 
 
Did the 
Board of Equalization's decision, set aside by the District Court, unlawfully 
impair contracts entered into by the taxpayer with its investors and 
purchaser?

 
 
 
 
FACTS

 
 

[¶3]           
MTG 
produced coal bed methane in Wyoming.  
MTG sold the gas production at issue to Western Gas Resources (Purchaser) 
pursuant to a bona fide arm's-length transaction.  The terms of this transaction were 
reduced to writing in three gas purchase contracts.  Purchaser created the monthly gas 
purchase statements (invoices) and paid MTG for the volume of gas delivered, 
minus certain deductions taken by Purchaser.  MTG accepted the price on the invoices 
as full payment for its production.  
MTG reported and paid ad 
valorem and severance taxes upon the full amount of revenues it received 
from Purchaser.

 
 

[¶4]           
The 
Department of Audit conducted an audit of MTG's 1997 through 1999 
production.  The auditor discovered 
that subsumed in MTG's reported taxable value of gas production was a "fuel use 
adjustment."  Essentially, the fuel 
use adjustment, provided for under the terms of the gas purchase contracts, 
dictated that MTG would not receive payment for the quantity of its gas 
production delivered to Purchaser that Purchaser used for compression 
activities.  It is undisputed that 
Purchaser did reduce its payment to MTG by an amount allegedly relating to gas 
used for fuel.  

 
 

[¶5]           
The 
auditor requested information on how the fuel use adjustment was 
calculated.  MTG responded that it 
did not know how the fuel use adjustment was calculated and referred the auditor 
to Purchaser for further information.  
The auditor did not contact Purchaser but rather again requested the 
information from MTG.  The MTG 
contact responded to this further request by stating: "I do not have any 
information about fuel [use] deductions and I do not do any calculations for 
such."  The auditor looked to the 
gas purchase contracts and the invoices for guidance, but concluded they did not 
contain adequate information by which the auditor could verify the fuel use 
adjustment.  The auditor attempted 
to gather information from MTG by which the fuel use adjustment could be 
verified several more times.  MTG 
never responded to the satisfaction of the auditor.  Ultimately, the auditor disallowed the 
deduction, citing MTG's failure to produce verification for 
it.

 
 

[¶6]           
MTG appealed to the Board.  At the hearing, MTG offered testimony that 
the volume of fuel used for compression could be determined by applying a back 
calculation using the difference between the contract price and the monthly gas 
purchase statement prices.  MTG also presented some evidence that the 
actual fuel use allowance taken by Purchaser was within local industry 
standards.  

 
 

[¶7]           
The Board refused to accept the back calculation offered by 
MTG as verification of the fuel use adjustment.  The Board found that the gas purchase 
contracts required volumetric information for determining the purchase price of 
the gas production.  
The Board also found that MTG failed to produce evidence of the actual 
amount of gas used as fuel.  Because of the lack of volumetric information 
verifying the actual amount of fuel used for compression, the Board affirmed the 
Department's decision to disallow the fuel use deduction claimed by MTG.  

 
 

[¶8]           
MTG appealed the Board's decision to the district 
court.  The 
district court found that the evidence presented by MTG at the hearing was 
sufficient to adequately verify the fuel use adjustment.  The district court 
therefore reversed the Board's decision and ordered that the deduction for fuel 
use be allowed.  
The Department of Revenue brings this appeal, claiming the Board decision 
was correct and the district court improperly substituted its judgment for that 
of the Board.

 
 
 
 
DISCUSSION

 
 
Standard of Review

 
 

[¶9]           
Before this Court for review is a district court order 
reversing the action of an administrative agency.  When reviewing an agency action, the scope of 
district court review is limited to those matters specified in Wyo. Stat. Ann. § 
16-3-114(c)(ii) (LexisNexis 2005), which provides in pertinent part:

 
 
(c) To the extent necessary to make a decision and when 
presented, the reviewing court shall decide all relevant questions of law, 
interpret constitutional and statutory provisions, and determine the meaning or 
applicability of the terms of an agency action.  In making the following determinations, the 
court shall review the whole record or those parts of it cited by a party and 
due account shall be taken of the rule of prejudicial error.  The reviewing court 
shall:

 
 
* * * *

 
 
(ii) Hold unlawful and set aside agency action, findings 
and conclusions found to be:

(A) Arbitrary, capricious, an abuse of discretion or 
otherwise not in accordance with law;

(B) Contrary to constitutional right, power, privilege or 
immunity;

(C) In excess of statutory jurisdiction, authority or 
limitations or lacking statutory right;

(D) Without observance of procedure required by law; or

(E) Unsupported by substantial evidence in a case reviewed 
on the record of an agency hearing provided by statute.

 
 
W.R.A.P. 12.09.  It was incumbent upon MTG to present 
sufficient argument to the district court that the Board's decision should be 
reversed.  Taylor v. Wyoming Bd. of Medicine, 930 P.2d 973, 974 
(Wyo. 1997) ("Consistently, it has been stated that the party contesting the 
administrative agency decision has the burden of proving that the agency's 
decision was reached in violation of one or more of the standards set forth in 
Wyo. Stat.  § 
16-3-114(c).").  

 
 

[¶10]      The basic rules for this Court's review of a district court 
decision reviewing an agency action have been well-summarized by the Supreme 
Court of Kansas:

 
 
This court, on appeal from the district court in such 
cases, is reviewing the propriety of the decision of an inferior appellate 
tribunal. The legislature has not defined the limits or responsibility of this 
court on appeal. However, its responsibility is apparent. It must review the 
record for the purpose of determining whether the district court observed the 
requirements and restrictions placed upon it by statute.  (Thompson v. Commerce Comm., 1 Ill. 2d 350, 115 N.E.2d 622.)

The statute providing for proceedings on appeal from an 
order of the Commission is a directive to the district court as to the nature 
and extent of its review, and on appeal to the Supreme Court it must determine 
whether the district court has properly determined the matters to which its 
powers and duties extend. (Birmingham Electric Co. v. 
Alabama Pub. Serv. Comm., 254 Ala. 140, 47 So. 2d 455.)

If the findings of the district court are challenged on the 
basis that it did not give proper consideration to the presumption in favor of 
the Commission's findings, or if the district court substitutes its judgment for 
that of the Commission where the matter is in the realm of fair debate, this 
court must review the facts for the purpose of determining the issues so 
presented.

However, this court should not attempt to consider the 
appeal de novo and search the record for the purpose 
of determining the reasonableness of the Commission's order on the issues not 
challenged.

 
 

Southwestern Bell Tel. Co. v. State Corp. 
Comm'n, 386 P.2d 515, 526 (Kan. 
1963).  

 
 

[¶11]      This Court has acknowledged, for the purpose of determining 
whether the district court observed the requirements and 
restrictions placed upon it, the first duty of this Court is to make the 
same review of the agency's action as does the district court.  In order to fulfill 
this duty, we review the case as if the appeal from agency action came directly 
to this Court: 

 
 
On appeal from a district court's consideration of an 
agency action, this Court is not bound by the conclusions of the reviewing 
court.  Rather, 
using the same evidentiary materials and the same review standards as the 
district court, we conduct an independent inquiry into the matter, just as if it 
had proceeded directly to us from the agency.  

 
 

Southwest Wyoming Rehab. Ctr. v. Employment Sec. Comm'n of Wyoming, 781 P.2d 918, 920 (Wyo. 
1989).  

 
 

[¶12]      This brings us to our general standard and scope of 
review:

 
 
For the purpose of reviewing the propriety of the district 
court's action, we will review the agency action as though the appeal were 
directly to this Court from the agency.  We are governed by the same rules of review 
as was the district court. Federal Trade Commission v. 
Sun Oil Company, 371 U.S. 505, 83 S. Ct. 358, 9 L. Ed. 2d 466 (1963); Kansas State Board of Healing Arts v. Foote, 200 Kan. 
447, 436 P.2d 828 (1968); Alabama Public Service 
Commission v. Nunis, 252 Ala. 30, 39 So. 2d 409 (1949); Diamond Ring Ranch, Inc. v. Morton, 10th Cir. 1976, 531 F.2d 1397.

 
 
Therefore, we will not substitute our judgment for that of 
the agency.  Shenefield v. Sheridan County School District No. 1, 
Wyo., 544 P.2d 870 (1976); Sweetwater County Planning 
Committee for Organization of School Districts v. Hinkle, Wyo., 493 P.2d 1050 (1972).  
[The party as to whom the Board's action was adverse] has the burden of 
establishing the insufficiency of the evidence to sustain the Board's 
decision.  Board of Trustees, Laramie County School District No. 1 v. Spiegel, 
Wyo., 549 P.2d 1161 (1976).

 
 

Board of Trustees of Sch. Dist. No. 4, Big Horn Cty. v. 
Colwell, 611 P.2d 427, 428 (Wyo. 
1980).   

 
 

[¶13]      In conducting our independent inquiry of the agency action, 
we give deference to the agency's findings of fact and review the agency's 
findings of law de novo:

 
 
This Court will defer to an agency's findings of fact if 
they are supported by substantial evidence.  Whiteman v. Workers' 
Safety and Comp. Div., 984 P.2d 1079, 1081 (Wyo. 
1999).  
Substantial evidence is "relevant evidence that a reasonable mind can 
accept as adequate to support an agency's conclusion."  Id. (quoting Casper 
Oil Co. v. Evenson, 888 P.2d 221, 224 (Wyo. 
1995)).  We 
will affirm an agency's conclusions of law only if they are in accordance with 
the law.  Snyder v. State ex rel. Workers' Comp. Div., 957 P.2d 289, 293 (Wyo. 1998).  When an agency's 
determinations involve elements of law and fact, or ultimate facts, we do not 
give them the same deference we reserve for findings of basic fact.  Basin Electric Power Coop., Inc. v. Dep't of Revenue, 
970 P.2d 841, 850 (Wyo. 1998).  Instead, we 
separate the factual elements from the legal elements to determine whether the 
appropriate rule of law has been correctly applied to the facts and defer to the 
agency's ultimate factual finding only if there is no error in either stating or 
applying the law.  
Id. at 850-51.   

 
 

Amoco Prod. Co. v. State of Wyoming, Dep't of 
Revenue, 2004 WY 89, ¶6, 94 P.3d 430, ¶6 (Wyo. 2004).  

 
 
 
 
Analysis

 
 

[¶14]      Preliminarily, it should be noted that the taxable value of 
state assessed property in Wyoming is 
self-reported.  
Wyo. Stat. Ann. § 39-13-107 (LexisNexis 2005) (ad valorem taxation); Wyo. 
Stat. Ann. § 39-14-207 (LexisNexis 2005) (severance taxation of mine products); 
Moncrief v. Wyoming State Bd. of Equalization, 856 P.2d 440, 445 (Wyo. 1993) ("Since the 
severance tax was enacted in 1969, it has been a self-assessment system.").  The Department of 
Audit is authorized to conduct audits of the taxpayer-reported taxable value of 
production.  
Wyo. Stat. Ann. § 9-2-2003(e) (LexisNexis 
2005).  The 
Department of Revenue is authorized to request the Department of Audit to 
conduct an audit, involving the examination of "the books and records of any 
person paying ad valorem taxes," for the purpose of verifying a taxpayer's 
reported values.  
Wyo. Stat. Ann. § 39-14-208(b)(i) (LexisNexis 
2005). Wyoming Statute § 39-14-208(b)(vii) (LexisNexis 2003)(amended 2005) 
mandates that taxpayers retain "accurate books and records of all production 
subject to severance taxes imposed by this article and determinations of taxable 
value as prescribed by [Wyo. Stat. Ann. §] 39-14-203(b) for a period of seven 
(7) years and make them available to department examiners for audit 
purposes."  
Thus the taxpayer is required to maintain accurate records supporting its 
reported taxable value to produce to the Department, through the Department of 
Audit, upon audit.  

 
 

[¶15]      The respective orders of the Board and the district court 
sum up the divergent approaches those reviewing bodies took in reviewing the 
adequacy of MTG's attempt to verify its self-reported taxable value of its gas 
production at issue.  
The decision of the Board is precisely stated in its order denying the 
motion for reconsideration filed by MTG (all emphasis in original):

 
 
Our ultimate finding in this case was that [MTG] failed to 
present the volumetric information necessary to calculate the claimed fuel use 
adjustments pursuant to the formulas contained in its contracts with 
[Purchaser].  

We found [MTG] responded to the Department of Audit's 
requests for information concerning the fuel use by providing information 
indicating that the fuel use was the difference between the price reflected on 
[Purchaser's] sales statements and the price calculated pursuant to the terms of 
the contract. . . .

We found [MTG] did not provide volumetric information 
needed to verify the volume of [MTG's] gas used for 
fuel. . . .  We 
understand a fuel use figure can be back calculated using the difference between 
the contract price and the gas statement price.  However, the question is whether that 
information and the back calculation is [sic] sufficient to verify the claimed fuel usage.  We found it was 
not.  The 
volumetric information required by the contracts to calculate the fuel usage was 
necessary to verify the correctness of the claimed fuel usage.  The volumetric 
information was not provided to the auditor or to us at the hearing. . . .

 
 
* * * *

 
 
. . . Without the volumetric information specified by the 
contracts under which [MTG] sold its gas, it is not possible to verify that the 
price reported is correct.  Therefore, we found the Department was 
justified in denying the claimed price adjustment.  

 
 
The Board found the real issue to be that MTG was 
requesting that the Board accept its back calculation supported by generic data 
on typical industry fuel usage in the region without verification of the actual 
volume of gas used.  
The Board declined to accept MTG's proposed method of calculation "as a 
substitute for the information required by the contract so the actual fuel use 
may be verified."

 
 

[¶16]      The district court reversed the decision of the Board.  The district court 
found: 

 
 
[MTG] presented sufficient evidence at the [Board] hearing 
to satisfy its burden of proof regarding the fuel use deduction, and, in 
particular, that the amounts paid by Western Gas Resources for gas purchased 
from [MTG] were properly paid pursuant to arms-length [sic] contracts, including 
fuel use deduction clauses.  [MTG] properly reported these arms-length 
[sic] sales and paid severance and ad valorem tax upon all amounts received from 
Western Gas. 

 
 
The district court concluded that the Board improperly 
ignored the evidence presented by MTG.  The district court remanded the case for 
calculation of "the tax due on sales of gas by [MTG] based upon the amount 
actually received from the sales, allowing the fuel use deductions as invoiced." 

 

[¶17]      As can be seen from the orders, the primary issue in this 
appeal is what, exactly, MTG was required to prove.  Simply put, MTG 
argues that the taxable value of its production is the actual payment amount it 
received from Purchaser.  MTG's argument continues that its acceptance 
of the invoice pricing as the appropriate price under the gas purchase contracts 
should be sufficient.  
If more is needed, then the back calculation, supported by industry 
standards, provides sufficient verification of the fuel use adjustment.  If MTG is correct 
in its assertion that the invoices and the contracts, as well as evidence 
regarding industry standards, contain all the evidence needed to verify its 
reported taxable value for its gas production, then MTG has presented sufficient 
evidence to support its fuel use deductions.  If, however, the Board is correct in its 
assertion that the fuel use adjustment must be verified by volumetric 
information of the exact amount of MTG's gas used for fuel, MTG arguably has not 
presented sufficient evidence and the fuel use deduction was properly 
disallowed.    

 
 

[¶18]      In support of its evidentiary argument, MTG argues that the 
Department has no statutory authority to look beyond the actual payment received 
and accepted by MTG as full payment.  This Court agrees that an administrative 
agency, as a creature of statute, must limit its activities to those authorized 
by the legislature:

 
 
It is axiomatic that an agency has and may properly 
exercise only those powers authorized by the legislature.  U S West Communications, Inc. v. Wyoming Public Service 
Com'n, 958 P.2d 371, 374 (Wyo.1998) (quoting Tri County Telephone 
Ass'n, Inc. v. Wyoming Public Service Com'n, 910 P.2d 1359, 1361 
(Wyo.1996)); Preferred Energy Properties v. Wyoming 
State Bd. of Equalization, 890 P.2d 1110, 1113 (Wyo.1995); Hupp v. Employment Sec. Com'n of Wyoming, 715 P.2d 223, 
225 (Wyo.1986).  
An agency is wholly without power to modify, dilute or change in any way 
the statutory provisions from which it derives its authority.  When an 
administrative agency takes an action that exceeds its authority or proceeds in 
a manner unauthorized by law, that action is null and void.  Triska v. Department of Health and Environmental 
Control, 292 S.C. 190, 355 S.E.2d 531, 533 (1987).  

 
 

Platte Dev. Co. v. State of Wyoming, Envtl. Quality 
Council, 966 P.2d 972, 975 (Wyo. 
1998).  

 
 

[¶19]      Turning then to the applicable statutes, we find that the 
Department is charged with arranging for audits of taxpayer-reported values for 
the purpose of establishing if:

 
 
(A)  Taxable volumes or values were not 
accurately reported;

(B)  Clerical errors were made in determining 
taxable volumes or values;

(C)  Taxable volumes or values for the year that 
production occurred were not calculated in compliance with Wyoming statutes or rules governing the 
determinations; or

(D)  Additional payment for production was 
received and not reported whether such payment was received in the year of 
production or in subsequent years.

 
 

Wyo. Stat. Ann. § 39-14-208(b)(i) (LexisNexis 2005).  Subsection C 
clearly authorizes the Department to go beyond simply the numbers reported and 
payments received for production to independently determine if the taxable value 
was calculated in compliance with applicable Wyoming statutes and rules.  Hence, MTG's 
argument as to the scope of an audit is not well taken.

 
 

[¶20]      As for the actual determination of taxable value, both 
parties agree that the fair market value of MTG's gas production must be 
calculated according to Wyo. Stat. Ann. § 39-14-203 (LexisNexis 2005):

 
 
(a) Taxable event.  The following shall apply:

(i) There is levied a severance tax on the value of the 
gross product extracted for the privilege of severing or extracting crude oil, 
lease condensate or natural gas in the state.  The tax imposed by this subsection shall be 
in addition to all other taxes imposed by law including, but not limited to, ad 
valorem taxes imposed by W.S. 39-13-101 through 39-13-111.

(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;

 
 
* * * *

 
 
(v) If the crude oil, lease condensate or natural gas 
production as provided by paragraphs (iii) and (iv) of this subsection are sold 
to a third party, or processed or transported by a third party at or prior to 
the point of valuation provided in paragraphs (iii) and (iv) of this subsection, 
the fair market value shall be the value established by bona fide arms-length 
[sic] transaction[.]

 
 
The parties to the instant appeal agree that the terms of 
the sale of MTG's gas to Purchaser resulted from of a bona fide arm's-length 
transaction.  
The gas purchase contracts embody the terms of that arm's-length 
transaction.  
The parties disagree as to the role the gas purchase contracts should 
play in determining the taxable value of MTG's gas production.

 
 

[¶21]      MTG argues that the Department, pursuant to the valuation 
statute, has authority to determine only if a contract exists that is the 
product of a bona fide arms-length transaction.  MTG continues that, if such a contract 
exists, the Department cannot refer to the specific terms of the contract, but 
rather must accept what the parties agree is an acceptable price under the 
contract as the fair market value of the purchased gas.  Specifically, MTG 
argues that individual adjustments need not be verified as long as the 
adjustment itself is allowed by contract.  The logic behind this reasoning is that, 
since the parties to the gas purchase contract have adverse economic interests, 
neither party will be willing to accept an unreasonable sales price.  The price actually 
paid and received will be a fair reflection of actual market conditions.  

 
 

[¶22]      The Department, on the other hand, argues that such an 
informal approach to valuation will make it impossible to fulfill its statutory 
duties regarding verifying the self-reported fair market value of 
production.  
Specifically, the Department relies upon the language of the statute that 
"the fair market value shall be the value 
established by bona fide arms-length [sic] transaction" (emphasis added).  The Department 
argues that, in this case, the value established by the bona fide arm's-length 
transaction is embodied in the terms of the gas purchase contracts.  Therefore, the 
Department concludes, MTG's self-reported value of its gas production can only 
be verified upon audit by comparing the value reported to the value established 
by the specific pricing terms of the gas purchase contracts.

 
 

[¶23]      Statutory construction is a matter of law which this Court 
reviews de novo. Amoco Prod. Co. v. State of Wyoming, 
Dep't of Revenue, 2004 WY 89, ¶34, 94 P.3d 430, ¶34 (Wyo. 2004).  While MTG's logic 
is appealing, the Department presents the more persuasive argument.  The language of the 
statute is plain as it pertains to the instant issue.  The fair market 
value "shall be the value established by bona fide arms-length [sic] 
transaction."  
The gas purchase contracts embody the terms of the arm's-length sales 
transaction between MTG and Purchaser.  Thus, the fair market value "shall be the 
value established" in the gas purchase contracts.  It follows that it is the specific terms of 
the contracts that must be used to establish the legislatively defined fair 
market value.  
In verifying the value of gas production, therefore, the Department is 
required by the statute to refer to the specific terms of the contracts.

 
 

[¶24]      Additionally, this Court has previously determined that it 
is appropriate for the Department to refer to an applicable contract when 
independently verifying taxable values.  In Preferred Energy 
Properties v. Wyoming State Bd. of Equalization, 890 P.2d 1110 (Wyo. 1995), there was a disagreement as to 
whether appellant held an ownership interest in certain well production.  The Department and 
the Board referred to an applicable farmout agreement to resolve the 
question.  
Appellant argued that referring to the farmout agreement was beyond the 
scope of the Board's authority.  The Court's response was to:

 
 
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 [Wyo. Stat. Ann. §] 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 [Wyo. Stat. Ann. §] 16-3-114 (1990) (providing for judicial review of 
agency actions).  

 
 

Preferred Energy, at 1113.  Thus, we consider it settled that the 
Department can, and should, refer to any applicable contracts when independently 
verifying taxable values.

 
 

[¶25]      As applicable to the instant appeal, the gas purchase 
contracts between MTG and Purchaser all contain essentially the same pricing 
terms.  The 
pricing terms agreed to by the parties required the contract price of the gas to 
be computed using a formula that required volumetric information.  In other words, 
under the terms of the contracts, the exact contract price could only be 
computed if actual volumes were known.  The only reference to the fuel use allowance 
in the pricing terms is to the effect that the general price calculation formula 
"provides that fuel used in Purchaser's facilities shall be borne by 
Producer."  No 
formula for calculating the fuel use allowance is provided in the 
contracts.  
Because of the contracts' requirement of volumetric information for the 
general pricing formula, however, it is appropriate to conclude that the 
contracts anticipated that actual volumes of gas used for fuel would be 
reported, or at least be verifiable.  To this end, the contracts give MTG the right 
to audit Purchaser's books.  

 
 

[¶26]      The monthly gas purchase statements contained the volumes 
of gas delivered to Purchaser.  There is no dispute that MTG's total gas 
sales volumes were accurately reflected in the invoices.  However the 
invoices, as prepared by Purchaser, did not contain volumetric information 
regarding the gas used for fuel.  The lack of a reference in the invoices to 
the exact quantity of gas used for fuel is not consistent with the specific 
pricing term of the sales contracts.  Without knowing the exact quantity of gas 
used for fuel, there was no way of determining if the payment received 
accurately correlated to the payment that would be due if the sales price was 
computed according to the pricing terms of the gas purchase contracts.  

 
 

[¶27]      As explained above, the legislature has determined that the 
fair market value of gas production is controlled by the contract price.  The gas purchase 
contracts in this instance, as agreed to by the parties, required specific 
volumetric information for the computation of the contract price.  Therefore, in order 
to comply with the statute, the Department was correct in requiring verification 
of the quantity of gas used as fuel so the figure could be input into the 
contract pricing formula.  

 
 

[¶28]      There can be no doubt that MTG did not provide the 
Department with exact volume information concerning the actual amount of gas 
used for fuel during the audit.  MTG admitted, as part of the hearing 
procedures, that it never audited Purchaser's books or otherwise independently 
verified the fuel use deduction taken by Purchaser.  As stated in the 
above facts, when asked for information about how the fuel use adjustment was 
calculated, MTG responded that it did not know how the fuel adjustment was 
calculated and instead referred the Department to Purchaser.1  

 
 

[¶29]      The only MTG employee to testify at the hearing before the 
Board was Vicki Scheider, an MTG employee for almost twelve years at the time of 
the hearing, and the employee who did the general accounting for MTG.  Ms. Scheider did 
not, however, do the initial computation of taxable value on the gas production 
at issue, nor was she personally involved in the audit process.  After the audit was 
completed she used a calculation on the invoices to determine the alleged amount 
of fuel used by Purchaser for compression activities.  Regarding the fuel 
use adjustment claimed by Purchaser, she testified in part as follows:

 
 
[Mr. Hardsocg (for the Department)]:  Ms. Scheider, you 
stated that you were able to use the gas purchase statements to run through this 
calculation.  
Can you please explain to me how you got to the 31,169 [a figure derived 
after the fuel use allowance was taken by Purchaser], which is listed on your 
calculation and which is also listed on that first gas purchase statement?

 
 
[Ms. Scheider]: How I calculated it?

 
 
Q:  Yes.  How did you 

 
 
A:  I didn't calculate it.  I took it off the 
Western Gas statement.

 
 
Q:  Okay.  But how did Western Gas get to the number 
31,169?

 
 
A:  I haven't checked any of their numbers.  I couldn't say how 
they calculated that.

Q:  Is it fair to state that they made a fuel 
[use] adjustment to get to that number?

 
 
A:  Yes.

 
 
Q:  Do you have any idea how they made a fuel 
[use] adjustment?

 
 
A:  I don't have those calculations in front of 
me.

 
 
Q:  So what you're saying is by  you simply 
accepted as true the $31,169.10 as the value reported on the Western Gas 
purchase statement?

 
 
A:  Yes.

 
 
Q:  Isn't it true, then, that the fuel [use] 
adjustment is not specifically broken out on the Western Gas statement?

 
 
A:  It is not. 

 

 
 

[¶30]      MTG also evoked testimony at the hearing from a 
representative from Purchaser explaining the back calculation.  The testimony from 
the representative of Purchaser is summarized by the following excerpt:

 
 
[Board member]:  [I]f I were to look at this [gas purchase] 
statement, how would I know that the fuel factor was the correct fuel 
factor?

 
 
[Purchaser representative]:  You would have to run through exactly the 
calculation.

 
 
Q:  But how would I know that?  I mean, I can get 
the arithmetic portion, but how do I know that that's the correct portion I'm 
being billed for?

 
 
A:  You do not.  All you know is that is what you were billed 
for.  If you 
run through this calculation, you know that's what you were billed for.  If it's correct or 
not is somewhat a matter of being explained what the typical fuel rates would 
be.

 
 
Q:  Nevertheless, there is a leap of faith that 
goes on here on the part of the producer, then, correct?

 
 
A:  I would call it a very small leap of 
faith.  We feel 
an obligation as a provider of services or as a purchaser to at least 
demonstrate these are valid or reasonable numbers.  If they want to go 
further than that and take the time to audit the books, we're perfectly open to 
that, too, but most producers become fairly knowledgeable that it takes X amount 
of fuel and doesn't matter whether you're selling to Western or MIGC or Bear Paw 
or Enron or who it is, but that it takes X amount of fuel to provide that 
service.  As 
long as they back calculate this number and that is reasonable or lower than 
normal, they are quite satisfied, and I think rightfully so.   

 
 
The Purchaser representative also testified that the gas 
purchase contracts only provided for a fuel use deduction to be factored into 
the pricing.  
The pricing terms did not precisely dictate how the fuel use adjustment 
was to be calculated. The Purchaser representative did not present any evidence 
verifying the exact volume of gas used for fuel.

 
 

[¶31]      Purchaser was the entity that calculated the fuel use 
deduction and the entity that MTG referred the auditor and the Department to for 
information regarding the fuel use adjustment.  As such, it can be assumed that the Purchaser 
representative would be the person with the most knowledge as to the calculation 
of the fuel use allowance.   As the representative from Purchaser 
testified, the exact volume of fuel used could not be precisely determined 
solely from the contracts and the invoices.  The producer would have to audit Purchaser's 
books for further information.  No other evidence contradicted this 
testimony.  

 
 

[¶32]      Based upon the evidence received at the hearing, the Board 
specifically found that MTG failed to present volumetric information verifying 
the exact amount of fuel used for compression activities.  After a full review 
of the record, this Court determines that this finding is supported by 
substantial evidence.  
The evidence shows that MTG contractually had the option of auditing 
Purchaser's books but chose not to do so.  MTG simply accepted the payment price as 
calculated by Purchaser without verification of the actual volumes of gas used 
for fuel.  No 
further evidence regarding the actual volume of fuel used for compression 
activities was presented at the hearing.2  This Court also 
agrees that the lack of volumetric information made it impossible for the 
Department to verify that MTG received the contract price for its gas 
production. MTG's fuel use deduction was necessarily disallowed for lack of 
verification that the monetary amount of the deduction complied with the terms 
of the gas purchase contracts.  

 
 

[¶33]      We therefore disagree with the order of the district court 
and hold that the evidence presented by MTG at the Board hearing was not 
sufficient under the law to support its claimed fuel use deduction.  The district 
court's decision reflects the wrong standard of review.  Whether or not MTG 
presented sufficient evidence supporting its position is not relevant to the 
review of agency action after a full hearing.  The standard of review requires the reviewing 
court to determine if, upon review of the entire record, substantial evidence 
exists to support the agency action.  Upon reading the Board's order after hearing 
and the Board's order denying MTG's motion to dismiss, it is apparent that the 
Board did not ignore the evidence presented by MTG.  The Board simply 
decided that the evidence presented by MTG was not sufficient to verify the 
volume of gas used for fuel.  The Board concluded that without such volume 
verification, MTG could not prove that its reported taxable value was indeed the 
fair market price of that production.  The decision of the Board is supported by 
substantial evidence and is otherwise in accord with applicable law.

 
 

[¶34]      Finally, MTG argued before the Board, as it argues here, 
that any outcome requiring MTG to pay further taxes represents an unlawful 
impairment of its contracts with its royalty holders, working interest owners 
and net profits interest owners.  MTG's argument is not founded on law, but 
rather on the particular circumstances in which it finds itself.  MTG shut in the 
producing wells in question a few years ago and thus has no revenue from that 
field with which to pay any additional tax liability.  The only method of 
collecting additional funds for payment of the increased tax liability is to 
bill the interest holders for their respective share of the liability.  MTG argues that 
this billing, to collect for the payment of taxes on an amount of revenue never 
received, imposes a liability on the interest holders never anticipated in their 
contracts and therefore wrongfully impairs the contracts MTG has with its 
various interest holders.  

 
 

[¶35]      While we recognize the inherent difficulty involved in 
imposing further tax liabilities on a producer that has shut in its wells, the 
potential for such a result is clearly recognized by Wyoming statutes.  A producer must be 
aware of the potential for an audit of its reported production value to be 
commenced "within six (6) months immediately following the three (3) years 
following the reporting period." § 39-14-208(b)(vii) (amended 2005).  The producer may 
choose to pass any further potential liability for additional taxes on to its 
interest holders through its contracts with them, in which case the interest 
holders are aware of the possibility of an audit as well.  There are three 
possible results from an audit: taxpayer's tax liability stays the same; the tax 
liability is reduced, or the tax liability is increased.  Any of these 
results must be anticipated by the parties to the contracts.

 
 

[¶36]      An audit, as provided for by Wyoming statute, does not change the terms of 
the contracts nor does it impose liabilities upon the parties beyond those 
expected under the contract.  There is no impairment, unlawful or 
otherwise, of the contracts between MTG and its various interest holders since 
all parties at least should have anticipated the possibility of further tax 
liability upon audit.  
Neither MTG nor any of its interest holders can blame the Department for 
any increased tax liability caused by the reporting practices chosen by MTG that 
resulted in a self-reported taxable value that MTG could not adequately verify 
upon request by the Department.

 
 
 
 
CONCLUSION

 
 

[¶37]      The legislature has determined that the fair market value 
of natural gas production applicable to the instant sale is the value 
established by a bona fide arm's-length transaction.  When the terms of 
such a transaction are memorialized in writing, it is the written terms that 
determine the fair market value of the natural gas production.

 
 

[¶38]      MTG sold its gas to Purchaser pursuant to a bona fide 
arm's-length transaction.  The transaction was memorialized in written 
gas purchase contracts.  The contracts all provided that the sales 
price of MTG's gas was to be determined pursuant to a formula based on 
volumetric information.  MTG did not document the exact volume of gas 
used for fuel.  
Because the exact volume of gas used for fuel was not documented, the 
contract price for that gas, its legislatively defined fair market value, could 
not be precisely established.  

 
 

[¶39]      The decision of the Department disallowing MTG's deduction 
based upon the fuel use adjustment is affirmed.  The order of the district court is reversed 
and this case is remanded to the district court with directions to affirm the 
Board's order.

 
 
 
 

FOOTNOTES

1The Department 
never contacted Purchaser, nor was it required to.  As explained in 
¶14, the onus is on MTG to provide all necessary documentation.  

2MTG asserts that, for 
various reasons, neither itself nor Purchaser could obtain the actual volume 
figures.  Even 
assuming this assertion is correct, it has no relevance to this appeal.  MTG agreed to the 
terms of the contracts.  The parties could have agreed to any of 
several different methods for valuing gas used for fuel.  The fact that the 
contracts ultimately entered into by the parties call for information not 
readily available to either MTG or Purchaser simply reflects a mistake on their 
part.  MTG may 
be willing to accept valuations without verification, but the Department is 
statutorily prohibited from doing the same.  Referring to the terms of the contract for 
the method of verifying information concerning the contract price is not 
"reinterpreting" the contract.