' No. 90-632 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1991 

GARY DRILLING COMPANY, 

Plaintiff and Respondent, 

THE STATE OF MONTANA DEPARTMENT 

OF REVENUE; THE STATE OF MONTANA; 

THE COUNTY OF YELLOWSTONE; 

TREASURER OF YELLOWSTONE COUNTY; 

and ASSESSOR OF YELLOWSTONE 

COUNTY, 

Defendants and Appellants. 

APPEAL FROM: District Court of the Thirteenth Judicial District, 

In and for the County of Yellowstone, 

The Honorable G. Todd Baugh, Judge presiding. 

COUNSEL OF RECORD: 

For Appellants: 

Paul Van Tricht (argued), Montana Department 

of Revenue, Helena, Montana; Dennis Paxinos, 

Yellowstone County Attorney, Billings, Montana; 

David W. Hoefer, Deputy County Attorney, 

Billings, Montana 

For Respondent: 

Raymond K. Peete (argued), Attorney at Law, 

Billings, Montana 

Submitted: September 18, 1991 

Decided: November 8, 1991 

Filed: 
Justice Terry N. Trieweiler delivered the opinion of the Court. 

Respondent Gary Drilling Company (Gary) filed a complaint for 

declaratory judgment in the Thirteenth Judicial District Court in 

Yellowstone County, requesting the District Court to declare that 

the oil produced from certain wells should be taxed as "new 

productionu rather than old or existing production. The District 

Court entered judgment in favor of Gary. The Department of 

Revenue, the County of Yellowstone, and the Treasurer and Assessor 

of Yellowstone County appeal from the District Court's decision. 

We affirm. 

The issue presented is whether the District Court erred in 

determining that the oil produced from respondent's wells should 

be assessed as "new produ~tion'~ under 1 15-23-601(2), MCA (1985). 

The oil wells in question are located on Section 3, 

Township 6N, Range 32E, Yellowstone County. The mineral interests 

in and under Section 3 are owned an undivided 50 percent each by 

Ralph and Sarah Botts, husband and wife, and by the estate of Inola 

Botts . 

In 1980, Inola Botts granted an oil and gas lease covering her 

mineral interests in and under all of Section 3. This lease was 

later assigned to Beartooth Oil & Gas Company, et al. (Beartooth). 

In November 1984, Ralph and Sarah Botts granted an oil and gas 

lease to respondent. This lease covers all of their mineral 

interest in and under all of Section 3, i. e., the same surface 

description as Beartooth's lease. 
In December 1984, Beartooth began drilling a well known as 

Botts No. 1 in the SE4 of the NE4 of Section 3. This well was 

completed in the Amsden formation in May 1985. Botts No. 1 

produced oil, in limited quantities, between January 1985 and 

January 1986, when it was abandoned. A total of 1258 barrels of 

oil were produced from Botts No. 1. Beartooth stated that the cost 

of drilling and operating Botts No. 1 was more than $375,000; the 

value of that production was in the order of about $32,000. 

In early 1985, Beartooth petitioned the Montana Board of Oil 

and Gas conservation to determine that the portion of Section 3 

containing Beartooth's well was an appropriate well-spacing unit 

for oil production under 5 82-11-201, et sea., MCA. In order to 

prevent waste of oil or gas, the Board is authorized to establish 

well-spacing units for any pool of oil or gas. Generally, the 

order establishing well-spacing units directs that only one well 

may be drilled and produced from the common source of supply on a 

spacing unit. Section 82-11-201, MCA. The Board ordered that all 

mineral interests in the Amsden formation underlying the E3 of the 

NE& of Section 3 were to be pooled. 

Pooling is intended to provide for an equitable sharing of the 

oil or gas produced and the expenses of production among the 

persons owning interests in the pool. If an owner refuses to pay 

his share of the costs of a well, the Board can order his share to 

be paid, but only out of the production from the well. Section 

82-11-202, MCA. Gary refused to pay its share of the costs from 

Beartooth's Botts No. 1. Gary did not bear any of the expenses of 
Beartooth's well, except for those costs Beartooth could recover 

from Gary's share of the oil produced from Botts No. 1. 

Gary contested the Board's pooling order. By late 1985, after 

it had become clear that Beartooth's Botts No. 1 well was not 

producing much oil, Beartooth agreed that Gary could drill an 

additional well in the spacing unit, and supported Gary's 

application for a modification of the pooling order. The Board 

granted Gary's application to drill an additional well in the 

spacing unit. 

In December 1985, Gary began drilling a well known as Botts 

No. 2-3 in the NE4 of the NE4 of Section 3, about 1340 feet away 

from Beartooth's well. Botts No. 2-3 began producing oil in 

January 1986, producing more than 80,000 barrels of oil in 1986 

and over 50,000 barrels in 1987. 

In June 1986, Gary began drilling another well, Botts No. 1-3, 

in the NW4 of the NEJ of Section 3 (e., not within the 

well-spacing unit). This well only produced 246 barrels of oil in 

1986 and 4039 barrels in 1987. Both of Gary's wells, like the 

Beartooth well, produced in the Amsden formation. 

During the 1985 legislative session, the legislature amended 

the statutes governing the oil and gas net proceeds tax. 1985 

Mont. Laws 695. "New production, I' as defined in 5 15-23-601 (2) , 

MCA (1985), received favorable treatment, being taxed at seven 

percent of net proceeds. Section 15-23-607 (2) (a) , MCA (1985) . 

Gary believed that the production from its Botts Nos. 2-3 and 

1-3 should be taxed as "new production." Appellants, tax 
collectors for Yellowstone County and the State of Montana, thought 

otherwise, and classified the production from Botts Nos. 2-3 and 

1-3 as existing or old production. Gary paid the net proceeds 

taxes to Yellowstone County under protest. 

In January 1988, Gary filed a complaint for declaratory relief 

in the Thirteenth Judicial District Court. Gary requested the 

District Court to declare that the production attributable to the 

Ralph and Sarah Botts lease from Botts Nos. 2-3 and 1-3 was "new 

productiontg under § 15-23-601 (2) , MCA (1985) , and that the taxes 

be reduced accordingly. 

On September 5, 1990, the District Court entered judgment in 

Gary's favor. Appellants appeal from this order. 

The issue in this appeal is whether the District Court erred 

in determining that the oil produced from Gary's wells constitutes 

Itnew productiongt within the meaning of 3 15-23-601(2), MCA (1985). 

The statute states: 

The term Ifnew productiontg means the production of natural 

gas, petroleum, or other crude or mineral oil from any 

lease that has not produced natural gas, petroleum, or 

other crude or mineral oil during the 5 years immediately 

preceding the first month of qualified new production. 

[Emphasis added.] 

The dispute centers around the meaning of the term tglease.lt 

Appellants contend that ggleasegg means 'la tract of land." The 

Department of Revenue so defined the word "leasew in its 

Administrative Regulations, e.g., 42.25.1001(1), ARM (1985). Under 

the Department of Revenuegs interpretation, Gary's production would 

not be Ifnew production," because Beartooth produced oil from the 

same tract of land within the pr ceding five years. 5 
Gary contends, and the District Court agreed, that ttleasetf 

means contract or legal arrangementtl' under which Gary was 

permitted to go on the land and drill for oil. By this definition, 

Garyts production was "new productionIt because Gary drilled its 

wells under a separate contractual agreement. 

We are persuaded that the word ItleaseItt as used in this 

statute, refers to the contract or legal arrangement giving the 

driller the right to go on the land and drill for oil. The ttleaselt 

is not Itthe landIt' but is a separate interest. This definition is 

consistent with customary usage in the oil and gas industry. 

Williamst and Meyerst Manual of Oil and Gas Terms defines lease as: 

"(1) The conveyance of a nonfreehold interest in land. (2) The 

instrument by which a leasehold or working interest is created in 

minerals.t1 8 Williams and Meyers, Oil and Gas Law 503-04 (1987). 

Further, by so construing the word "leaseI1 in the instant case, we 

effectuate the legislaturets public policy of encouraging new 

production on newly leased lands. 

Alternatively, the Department of Revenue contends that the 

prior production from Beartoothts well should be attributed to Gary 

by virtue of the pooling order issued by the Board of Oil and Gas 

Conservation. As authority for this contention, the Department of 

Revenue cites three sections of Title 82, ch. 11, MCA (Oil and Gas 

Conservation), fifi 82-11-202(1), -211(1), and -212, MCA. We note, 

however, that these statutes are specifically concerned with oil 

and gas conservation and the prevention of waste, rather than 

taxation. The portions of the statutes cited by the Department of 
Revenue were all enacted several years before the 1985 amendments 

of 5 15-23-601 (2) , MCA, distinguishing "new productionw from 

existing production, and it does not appear that the earlier 

conservation statutes were drafted in contemplation of a later 

statute containing a new classification of oil production for tax 

purposes. We conclude that the cited statutes are not helpful in 

construing the tax statute at issue in this case. 

Gary contends, and we agree, that it is unfair to penalize 

Gary economically for Beartooth's production since Gary did not 

receive any benefit from Beartooth's production, and in fact, 

refused to participate in it. Beartooth's Botts No. 1 well was 

drilled by a different operator under a separate contractual 

agreement, executed several years before Gary's lease agreement. 

Gary had no right or ability to control Beartooth's operations. 

Gary did not join in drilling Beartooth's well, and received no 

economic benefit from it. Gary was the sole operator of its own 

wells under a separate lease. We agree with the District Court 

that Beartooth's production should not be charged to Gary. The oil 

produced from Gary's Botts Nos. 2-3 and 1-3 wells was production 

from a new lease which had not produced during the first preceding 

five years. The District Court correctly determined that the 

production from Gary's wells constituted "new productionw under 

15-23-601(2), MCA (1985) . 

Af f irmed. 
We concur: 

L_C , ,. ~href J'ustice 

4 
Justice R. C. McDonough re'spectfully dissents. 

The general oil and gas net proceeds tax, which is involved 

here, is in lieu of a year-to-year ad valorem property tax on the 

oil and gas in the ground. The actual tax is arrived at by 

applying the applicable local millage against 100% of the net 

proceeds value of the produced oil and gas. The specific sections 

involved were an exception to the application of the general net 

proceeds tax and provided that net proceeds for new production 

would be considered as the equivalent of the gross sale proceeds, 

and instead of applying the local millage rate to the net proceeds 

value, however defined, levied a straight seven percent tax against 

the gross sale proceeds. See § 15-23-607, MCA (1985). The 

taxation of Ifnew production" is an exception to the general law 

taxing net proceeds of oil and gas. See the first sentences of 

88 15-23-602 and-603, MCA (1985). 

The statute at issue, § 15-23-601, MCA (1985), reads as 

follows: 

(2) The term "new productionI1 means the production of 

natural gas, petroleum, or other crude or mineral oil 

from any lease that has not produced natural gas, 

petroleum, or other crude or mineral oil during the 5 

years immediately preceding the first month of qualified 

new production.- (Emphasis added.) 

Websterfs Seventh New Colleqiate Dictionary, p. 480 states: 

lease \'les\n 1 : a contract by which one conveys real 

estate for a term of years or at will usu. for a 

specified rent; also : the act of such conveyance or the 

term for which it is made 2 : a piece of land or property 

that is leased. 

We have previously said that when a taxing statute is 
susceptible to two constructi~ns and legislative intent is in 

doubt, relative to exemptions and deductions, the construction is 

to be against the taxpayer and in favor of the taxing power. See, 

State ex rel. Anderson v. State Board of Equalization (1957), 133 

Mont. 8, 13, 319 P.2d 221; Anaconda Co. v. Dept. of Revenue (1978), 

178 Mont. 254, 258, 583 P.2d 421, citing Anderson. 

I realize that we are dealing with an exception and not a 

deduction or an exemption, but it is, in essence, the same because 

it is a net reduction of the general net proceeds tax. The maxim: 

"Where the reason is the same, the rule should be the sameIvv 

applies here. See 5 1-3-202, MCA. 

If there is a doubt as to legislative intent then this being 

an exception, such words should be construed against the 

taxpayer. Specifically, what is not clear is the meaning of the 

word ttleaseu if one looks at it in isolation but when used in the 

context of vtproduction of natural gas, petroleum, or other crude or 

mineral oil from any leasev1 it becomes clear. The word tgfromvl 

refers to the source. Oil and gas are produced from a place, real 

property and premises. For an example, the oil and gas leases 

involved herein and agreements of the lessees herein, provide in 

their text for oil and gas produced and saved from the premises. 

Oil and gas are not produced from a written instrument or lease; if 

it were to be from a written lease, it would be production under or 

by virtue of a lease. 

The effect of the majority's construction is to give tax 

reductions on new production to those who have multiple written 
leases with production coming from the same place. For example, if 

minerals in the ground in a piece of land are owned by ten 

different owners as co-tenants, each gives a different written 

lease to a lessee or even the same lessee, such lessees then 

complete nine different additional development wells for each 

written lease adjacent to a producing well from the same vertical 

formation and pool. The nine wells would have the advantage of the 

tax reduction. However, a lessee who has one written lease 

covering two pieces of land, with a well on each, one five miles 

away from the other on an entirely different geological structure, 

would not receive the tax reduction even though the second well 

would be geologically considered new production and the second well 

would be an expensive exploratory wildcat well and would open up a 

new field. Rules of construction and logic support the reversal of 

the District Court. 

Chief Justice J. A. Turnage: 

I concur in the dissent of Justice McDonough. 

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