1

Nos. 123,488

 123,489

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

JOHN O. FARMER, INC. and DAMAR RESOURCES, INC.,

Appellees,

v.

BOARD OF ELLIS COUNTY COMMISSIONERS,

Appellant.

SYLLABUS BY THE COURT

1. 

Since property tax exemptions are effective from the date of the first exempt use 

(K.S.A. 79-213[j]), and mineral leases are appraised as of January 1 each year (K.S.A. 

79-301), a property tax exemption under K.S.A. 79-201t is effective January 1 of the tax 

year in which the mineral lease produced at exempt levels. 

2.

A taxpayer is entitled to a refund of property taxes paid on a mineral lease for the 

tax year in which the mineral lease produced at exempt levels under K.S.A. 79-201t. 

K.S.A. 79-213(k).

Appeal from Ellis District Court; EDWARD E. BOUKER, judge. Opinion filed May 6, 2022. 

Affirmed.

Michael A. Montoya, of Michael A. Montoya, P.A., of Salina, for appellant. 

Bradley A. Stout, of Adams Jones Law Firm, P.A., of Wichita, for appellees.

Before HILL, P.J., POWELL and CLINE, JJ.
2

CLINE,J.: John O. Farmer, Inc. and Damar Resources, Inc. (Taxpayers) sought

property tax exemptions under K.S.A. 79-201t for tax year 2018 on several oil and gas 

leases in Ellis County. The Board of Tax Appeals (BOTA) granted the exemptions 

"commencing with the ad valorem personal property taxes assessed on the 2018 oil 

production," which effectively made the exemptions applicable to Taxpayers' 2019 taxes 

but not their 2018 taxes on the leases. Taxpayers appealed to the district court, seeking a 

determination that their exemptions were effective January 1, 2018. They also sought a 

refund of their 2018 taxes. The district court found BOTA misinterpreted the law when 

determining the effective date of the exemptions and ordered the refund. The County 

appeals, arguing the exemptions should instead be effective January 1, 2019.

Because we find the district court correctly determined BOTA misinterpreted the 

statutes governing Taxpayers' exemptions, we affirm the district court's ruling which 

modified BOTA's decision and ordered a refund of Taxpayers' 2018 taxes.

Proceedings before BOTA

Taxpayers own mineral leasehold interests in Ellis County, Kansas (the Leases). 

Kansas taxes oil and gas leases and wells that are producing or capable of producing oil 

or gas in paying quantities as personal property. K.S.A. 79-329. To that end, mineral 

leasehold interests in the state must be appraised annually with their fair market value 

determined as of January 1, for the determination of property taxes owed each year. 

K.S.A. 79-301; K.S.A. 79-329.

Taxpayers paid property taxes on the Leases in 2018. In March 2019, they timely 

applied to exempt the Leases from property taxes under K.S.A. 79-201t, which exempts 

certain low-producing leases from taxation. Taxpayers requested the exemptions be 

effective January 1, 2018, based on the Leases' 2018 production. The county appraiser 
3

reviewed Taxpayers' exemption applications, confirmed their factual accuracy, and 

recommended the exemptions be granted without a hearing. 

BOTA found the Leases qualified under K.S.A. 79-201t and granted the 

exemptions "commencing with the ad valorem personal property taxes assessed on the 

2018 oil production, and each succeeding year, so long as the property continues to be 

used for exempt purposes." Taxpayers petitioned for reconsideration, requesting that 

BOTA clarify they were entitled to a refund of the 2018 property taxes paid on the 

Leases. BOTA denied the petitions, finding no reason to modify its orders.

The district court finds Taxpayers' 2018 taxes should be refunded.

Taxpayers petitioned for judicial review of BOTA's decision in Ellis County 

District Court. They requested the district court either modify BOTA's order to state that 

they were entitled to a refund of the 2018 taxes or remand the matter to BOTA with 

instructions to address whether the 2018 taxes could be assessed against an exempt lease. 

The district court consolidated the cases involving each lease, and the parties stipulated to 

the facts. The parties agreed Taxpayers paid ad valorem property taxes on the Leases in 

2018. The parties also agreed the Leases produced less than five barrels per day in 2018 

and therefore qualified for an exemption from property taxes under K.S.A. 79-201t. 

The parties agreed that BOTA used different language when granting prior

exemption requests under K.S.A. 79-201t. In the past, BOTA's standard language granted 

the exemptions "from January 1" of the tax year at issue (here, 2018). This time, BOTA 

ordered the exemptions "commencing with the ad valorem personal property taxes 

assessed on the 2018 oil production." According to the parties, this phrasing change is 

meaningful because Taxpayers would receive a refund of their 2018 property taxes paid 

on the Leases under the prior language, but not under the new language. 
4

Taxpayers argued that in failing to refund their 2018 taxes, BOTA's orders were 

unconstitutional, erroneously interpreted or applied the law, were arbitrary and 

capricious, and failed to decide an issue requiring resolution. The County, for its part, 

argued BOTA correctly granted exemptions to begin in the 2019 tax year, based on the 

method used to appraise oil and gas leases in Kansas. Under this method, the prior year's 

production is generally used to determine a lease's fair market value as of January 1 (with 

some exceptions not applicable here). Because the 2017 production (which was used to 

determine the Leases' fair market value as of January 1, 2018) was not at exempt levels, 

the County argues the Leases should not be exempt from 2018 taxes.

At trial, the district court heard testimony from long-time Ellis County Appraiser 

Lisa Ree. Ree explained how county appraisers value mineral leasehold interests for ad 

valorem property tax purposes and how they determine whether a lease qualifies for an 

exemption under K.S.A. 79-201t. Using a formula supplied by the Department of 

Property Valuation's annual Oil and Gas Appraisal Guide (the Guide), lease production 

from the past two years is used to estimate the value of oil remaining in the ground for 

future production (also called the gross reserve value of a lease). The gross reserve value 

is then apportioned between the royalty (or landowner) interest and the working (or 

operator) interest. Under this formula, the first time 2018 production from a lease would 

be used in calculating the lease's gross reserve value is tax year 2019.

Ree explained that ad valorem property taxes are assessed annually as of January 1 

against the gross reserve value. While property taxes are assessed against the gross 

reserve value, not annual production, the past two years of production are used to 

estimate the decline rate in the production of the lease and forecast the productive 

capability of the lease for the next seven years. The forecasted future production, 

discounted back to present worth, is used as an estimate of the gross reserve value as of 

January 1 of the given tax year.
5

Ree also testified that county appraisers across the state disagree about how to 

interpret BOTA's standard language when granting exemptions under K.S.A. 79-201t. 

She said some county appraisers interpreted the prior language, which granted the 

exemption as of January 1 of the year in which production fell below the exempt level, to 

entitle the taxpayer to a refund for property taxes paid on the gross reserve value for the 

year in which production fell to exempt levels. Other appraisers took the opposite 

position and would not grant such refunds. Ree, a board member of the Kansas County 

Appraiser's Association, said the issue had been a frequent topic of conversation over the 

years.

Ree interpreted the new wording used in BOTA's order—granting the exemptions 

on the property taxes "'assessed on the 2018 oil production'"—to mean Taxpayers were 

not entitled to a refund of their 2018 property taxes. This was because the first time the 

2018 oil production would be included in calculating the gross reserve value of the 

Leases would be for tax year 2019.

The district court also heard testimony from Kevin Hupp II, an oil and gas 

consultant specializing in ad valorem taxation. Hupp confirmed Ree's description of the 

assessment process and confusion among county appraisers as to how to interpret the 

language used in BOTA's previous exemption orders. He testified the appraisal of a 

mineral lease as of January 1 is an estimate of what the lease will produce for that tax 

year. And the taxes are assessed based on that projection of future production.

The district court found that BOTA incorrectly interpreted and applied the law in

granting an exemption from "property taxes assessed on the 2018 oil production," since 

property taxes are not assessed on lease production. The court observed that BOTA's 

language change granted an exemption from a form of taxation which does not exist. The

district court found BOTA's new phrasing misinterpreted K.S.A. 79-201t, K.S.A. 79-301 

(requiring appraisal of personal property as of the first day of January of each year), and 
6

K.S.A. 79-501 (requiring tangible personal property to be appraised at its fair market 

value).

The district court found the Leases were exempt from property taxes since average 

daily production on the Leases fell below five barrels per day in 2018, and, under K.S.A. 

79-213(j), the exemption applied from the first day of exempt use, which was January 1, 

2018. The court also found that BOTA, in failing to order a refund of the taxes for 2018, 

left a matter unresolved which requires resolution. The court rejected Taxpayers' claim 

that BOTA's orders were unconstitutional and ordered the County to refund the 2018 

property taxes paid on the Leases.

The County asks us to reverse the district court and affirm BOTA.

The County claims Taxpayers are not entitled to a refund of their 2018 taxes paid 

on the Leases since the 2017 production was not at exempt levels. It asks us to reverse the 

district court and find the exemptions on the Leases should be granted with an effective 

date of January 1, 2019.

The Kansas Judicial Review Act (KJRA) controls judicial review of BOTA 

decisions. See K.S.A. 74-2426(c). The district court found that BOTA's orders violated 

K.S.A. 77-621(c)(3) and (4). Taxpayers, as the parties seeking to invalidate BOTA's 

action, have the burden to prove BOTA was wrong. K.S.A. 77-621(a)(1). Our review of 

BOTA's interpretation and application of the law is unlimited and without deference to 

the agency's view. May v. Cline, 304 Kan. 671, 675, 372 P.3d 1242 (2016).

The standards governing judicial interpretation of statutes—including tax 

statutes—are well known:
7

"Under the Kansas Constitution and statutes, taxation is the rule and exemption is 

the exception. One claiming exemption from taxation has the burden of showing that the 

use of the property comes clearly within the exemption claimed. Ordinarily, tax 

exemption statutes are to be construed strictly in favor of imposing the tax and against 

allowing the exemption for one who does not clearly qualify. However, the strict 

construction rule is subordinate to the fundamental rule of statutory construction that the 

intent and purpose of the legislature govern if that intent can be ascertained. [Citations 

omitted.]" In re Tax Appeal of Hutchinson's Historic Fox Theatre, Inc., No. 90,145, 2003 

WL 22119343, at *2 (Kan. App. 2003) (unpublished opinion). 

See In re Tax Appeal of LaFarge Midwest, 293 Kan. 1039, 1045, 271 P.3d 732 (2012).

If the statute is plain and unambiguous, a court must give effect to its express 

language, rather than determine what the law should or should not be. In re Paternity of 

S.M.J. v. Ogle, 310 Kan. 211, 212, 444 P.3d 997 (2019). Additionally, courts must 

consider the various provisions of an act in pari materia to reconcile and bring them into 

harmony if possible. 310 Kan. at 213.

Article 11, § 1(a) of the Kansas Constitution requires the Legislature to "provide 

for a uniform and equal basis of valuation and rate of taxation of all property subject to 

taxation." K.S.A. 79-329 requires oil and gas leases and wells that are producing or 

capable of producing oil or gas in paying quantities to be assessed and taxed as personal 

property. Personal property must be appraised uniformly and equally at its fair market 

value as of the first day of January each year. See K.S.A. 79-501; K.S.A. 79-1439(a); 

K.S.A. 79-301. "'Fair market value'" is defined as "the amount in terms of money that a 

well informed buyer is justified in paying and a well informed seller is justified in 

accepting for property in an open and competitive market" as of January 1 of a given 

year. K.S.A. 79-503a.
8

The Legislature has given the Director of the Division of Property Valuation, a 

division of the Kansas Department of Revenue, the authority to prescribe guides to help 

county appraisers establish fair market value for personal property. K.S.A. 75-5105a(b). 

The annual Oil and Gas Appraisal Guide is one of those guides. This Guide provides a 

uniform methodology for determining the fair market value of oil and gas leases as of 

January 1 of the given tax year. The Guide's formula determines the fair market value of 

any given lease by estimating the lease's "gross reserve value," which is the present value, 

as of January 1, of all reserves to be recovered in the future over the life of the lease.

Thus, property taxes are assessed not against annual production but against the fair 

market value of the mineral interest itself as of a specific date.

The Legislature has also exempted certain low-producing leases from taxation. 

K.S.A. 79-201t provides: 

"The following described property, to the extent herein specified, shall be and is 

hereby exempt from all property or ad valorem taxes levied under the laws of the state of 

Kansas:

"(a) All oil leases, other than royalty interests therein, the average daily 

production from which is three barrels or less per producing well, or five barrels or less 

per producing well which has a completion depth of 2,000 feet or more."

Any taxpayer seeking an exemption under this statute, like any exemption from 

property taxes, must file a request with the county appraiser. After examining the request, 

the appraiser submits it to BOTA along with the appraiser's recommendation on whether

the exemption should be granted and whether a hearing is necessary. BOTA then 

examines the request and appraiser's recommendation. BOTA may hold a hearing but 

need not do so. K.S.A. 79-213. If BOTA grants a taxpayer's request for exemption, the

exemption is effective "beginning with the date of first exempt use." K.S.A. 79-213(j). 

"In the event that taxes have been paid during the period where the subject property has 

been determined to be exempt, the board shall have the authority to order a refund of 
9

taxes for the year immediately preceding the year in which the exemption application is 

filed." K.S.A. 79-213(k).

Although K.S.A. 79-201t exempts oil wells, the "average daily production from 

which" is equal or below a certain level, it does not state how "average daily production"

should be calculated. Under K.S.A. 75-5105a and K.S.A. 79-506, the Director of 

Property Valuation has provided guidelines for this calculation:

"Average daily production per well is defined as annual production divided by 

365 days divided by the number of producing wells; or, in the case of new leases, actual 

production divided by the number of actual days produced divided by the number of 

producing wells. Normal downtime is expected and included in the 365 days. Abandoned 

or shut-in wells are not included in the calculation as producing wells.

"The statute is specific as to production and no consideration may be given to 

well shut down, pumping unit, or transportation problems. In these cases, the annual 

production divided by the actual producing days is to be used to determine the 

exemption; normal downtime does not qualify as one of these cases. Lease production 

that began during the year should not be annualized, but should be calculated from the 

date the lease went into production. The royalty interest and the production equipment do 

not qualify for the exemption." 

BOTA's new interpretation ignores the Legislature's directive.

The County, in asking us to affirm BOTA's order, contends that a change in 

average daily production after January 1 should not have retroactive effect. Since the 

methodology used to tax oil and gas properties includes any change in production after 

the January 1 appraisal date in calculating the gross reserve value for the next tax year, 

the County argues Taxpayers' exemptions should be granted only for that next tax year 

(here, 2019). 
10

On the other hand, Taxpayers argue (and the district court found) that K.S.A. 79-

201t grants an exemption from property taxes for any tax year in which annual 

production is equal or below a certain number of barrels. Because average daily 

production from each of the Leases fell below five barrels in 2018, the district court 

found Taxpayers were entitled to an exemption from ad valorem taxes on the Leases for 

that year. See K.S.A. 79-201t. 

As noted by the parties, BOTA previously interpreted the law just like the district 

court, and another panel of this court has also approved this interpretation. See In re Tax 

Exemption Application of Graham-Michaelis Corp., 27 Kan. App. 2d 467, 470, 2 P.3d 

795 (2000). In In re Graham-Michaelis Corp., Barton County sought review from several 

BOTA orders granting exemptions under K.S.A. 79-201t for the 1997 tax year. The 

taxpayers applied for the exemptions in 1998 based on actual production for the 1997 

calendar year. BOTA granted the exemptions beginning January 1, 1997, explaining that 

K.S.A. 79-213(j) required it to grant the tax exemption beginning in the year in which 

actual production met the statutory standards found at K.S.A. 79-201t. 

On appeal, Barton County argued that the taxpayers were only entitled to 

exemptions for 1998. The panel agreed with BOTA, noting the taxpayers met the 

requirements under K.S.A. 79-201t and that, under K.S.A. 79-213(j), the exemption was 

effective as of the date of first exempt use. The panel recognized an ambiguity in K.S.A. 

79-201t about how to apply the exemption but explained that the authority to resolve this 

question had largely been delegated to BOTA. 27 Kan. App. 2d at 470. The panel noted 

BOTA was a specialized agency whose "decisions should be given great credence and 

deference when it is acting in its area of expertise." 27 Kan. App. 2d at 469. 

The County asserts that we must defer to BOTA's new interpretation of the law, as 

this court deferred to BOTA's previous interpretation in In re Graham-Michaelis Corp.

While the County acknowledges that K.S.A. 79-213(j) provides an exemption "shall be 
11

effective beginning with the date of first exempt use," it argues that "BOTA retains the 

right to determine in which tax year the exemption should commence."

Since the decision in In re Graham-Michaelis Corp., Kansas courts have been 

freed from the deferential yoke previously required when reviewing an agency's 

interpretation of the statutes it is tasked with administering. See, e.g., Douglas v. Ad Astra 

Information Systems, 296 Kan. 552, 559, 293 P.3d 723 (2013) (explaining that the 

doctrine of operative construction "has been abandoned, abrogated, disallowed, 

disapproved, ousted, overruled, and permanently relegated to the history books where it 

will never again affect the outcome of an appeal"). So we need not defer to BOTA's 

revised interpretation of K.S.A. 79-213(j). And it is the Legislature, not BOTA, who 

retains the right to determine when tax exemptions should begin. 

That said, just because the panel in In re Graham-Michaelis Corp. applied a now 

disfavored deferential standard of review in approving BOTA's previous interpretation 

does not mean its ultimate decision is invalid. That panel correctly noted BOTA's prior 

interpretation of K.S.A. 79-213(j) accurately reflected the statutory language, which 

provides the exemption "shall be effective beginning with the date of first exempt use."

On the other hand, BOTA's new interpretation ignores that language.

Since the Leases began producing at exempt levels in 2018, their date of first 

exempt use was in tax year 2018. And in harmonizing the various statutory provisions, 

the district court found the specific date of first exempt use was the first day of 2018 

since oil and gas leases are appraised as of January 1. See K.S.A. 79-301. As the district 

court noted, the Guide addresses how fair market value of a lease is determined; it does 

not address how exemptions are determined. And even if it did, the statutory language 

would control.
12

The Legislature clearly intended the exemption to be retroactively applied by 

allowing Taxpayers to claim it on the first date their Leases qualified. K.S.A. 79-213(j). 

And, to further underscore this intent, it provided BOTA the authority to refund taxes 

already paid on property later found to be exempt. K.S.A. 79-213(k). Since a lease is

taxed based on a projection of its future production, it only makes sense that those taxes 

be refunded if the lease produces at exempt levels instead of the projected production 

levels.

The district court correctly found BOTA misinterpreted the law in its order. 

Taxpayers are entitled to exemptions with an effective date of January 1, 2018.

The district court also relied on K.S.A. 77-621(c)(3) in granting Taxpayers relief. 

It found that BOTA, in failing to order a refund of the taxes for 2018, left a matter 

unresolved which requires resolution. Since we agree the effective date of Taxpayers'

exemptions is January 1, 2018, they are entitled to a refund of property taxes they paid 

for tax year 2018. See K.S.A. 79-213(k). We also affirm the district court's order that the 

County refund those taxes to the appropriate Taxpayer in each case.

While the County also argues BOTA's orders were not unconstitutional, the 

district court did not find they were, nor did Taxpayers make this argument on appeal. 

Therefore, we need not address this issue.

Affirmed.