Title: State Ex Rel. Stephan v. Martin
Citation: 230 Kan. 747, 641 P.2d 1011
Docket Number: 53,477
State: Kansas
Issuer: Kansas Supreme Court
Date: February 27, 1982

230 Kan. 747 (1982)
641 P.2d 1011
STATE OF KANSAS, ex rel., ROBERT T. STEPHAN, Attorney General, Petitioner,
v.
PHILIP W. MARTIN, Director of Property Valuation, Kansas Department of Revenue, Respondent.
No. 53,477

Supreme Court of Kansas.
Opinion filed February 27, 1982.
Rodney J. Bieker, assistant attorney general, argued the cause and Robert T. *748 Stephan, attorney general, and Dan Biles, assistant attorney general, were with him on the brief for petitioner.
Carol B. Bonebrake, of the Department of Revenue of the State of Kansas, Legal Services, argued the cause and was on the brief for respondent.
The opinion of the court was delivered by
HOLMES, J.:
This is an original action in quo warranto filed in this court on the petition of the Attorney General of Kansas, to oust the Director of Property Valuation from valuing and assessing oil and gas leases and properties in accordance with K.S.A. 1981 Supp. 79-331 as enacted by the 1979 Legislature. The Attorney General contends the statute, as amended in 1979, is unconstitutional.
This action was brought by the State on the relation of the Attorney General pursuant to Article 3, Section 3 of the Kansas Constitution and K.S.A. 60-1202. This court has recognized on several occasions that in a proper case an original action in quo warranto is an appropriate procedure to question the constitutionality of a statute. See State ex rel. Tomasic v. Kansas City, Kansas Port Authority, 230 Kan. 404, 636 P.2d 760 (1981); State ex rel. Stephan v. Carlin, 229 Kan. 665, 630 P.2d 709 (1981); State, ex rel., v. Dwyer, 204 Kan. 3, 460 P.2d 507 (1969). The matter has been submitted to this court on an agreed statement of facts and we find the respondent's attack upon the standing of the attorney general to bring this action to be without merit. The court has determined that it will take jurisdiction of the controversy.
K.S.A. 79-331 (Weeks 1977) provided:
The first paragraph of the foregoing statute was first enacted in 1917 and the second paragraph was enacted in 1969. In 1979 the Legislature amended the statute by adding subsections (b) and (c) *749 effective January 1, 1980, and as enrolled and signed by the Governor it reads:
The 1979 amendments were adopted by the legislature in an attempt to address a problem of ad valorem tax valuation which is peculiar to the oil and gas industry. It has long been recognized that when a new well is completed it will ordinarily produce at a far greater rate than will be customary for that particular well after only a few weeks or months have elapsed. This initial excessive production is referred to as "flush production" and, if used as one of the factors for determining value, is misleading and often results in excessive valuation and assessment for the initial year of taxation. Prior to the amendments local assessors often failed or refused to take into consideration the "flush production" feature of new wells and for wells completed late in the year would merely annualize the initial "flush production" and arrive at a greatly inflated production factor resulting in excessive valuation and assessment along with other consequences detrimental not only to the oil and gas producers and royalty owners but to the public at large. The problems as testified to before the legislature and as summarized in the parties' stipulation of facts were:
Additional stipulations include:
*751 The petitioner asserts several grounds in support of his allegation that K.S.A. 1981 Supp. 79-331 is unconstitutional:
At the outset we will once again iterate certain principles to be followed by this court when the constitutionality of a statute is at issue.
Petitioner's first attack on the statute is that the statute as signed by the Governor and printed in the session laws and subsequent supplements to K.S.A. is not identical to the bill as approved by the legislature. We have hereinbefore set forth the statute as it was signed by the Governor and as it now appears on the statute books. Subsection (b) of the statute as passed by the legislature read in part:
Thus it becomes apparent that in the legislative process the word "or" in the original bill passed by the legislature somehow was changed to "and." As this court has interpreted Article 2, Section 14 of the Kansas Constitution to require the bill signed by the *752 Governor to be the same bill passed by the legislature, the petitioner claims this is a fatal error which invalidates the entire statute. Harris v. Shanahan, 192 Kan. 183, 387 P.2d 771 (1963); State ex rel. Williams v. Robb, 163 Kan. 502, 183 P.2d 223 (1947). Petitioner argues that the error in the statute as signed by the Governor is of such magnitude that it defeats the purpose of the statute. Petitioner, in his brief, states:
While we have no quarrel with the holdings and principles of Robb and Harris, we do not think they are applicable to the case before the court. Concededly the "and" in the statute should have been "or" as contemplated by the legislature. However, the Director of Property Valuation has consistently interpreted the word "and" in the statute to be in the disjunctive rather than the conjunctive. That is, he applies the statute as if it read:
We think such construction is not only proper but correct under the facts and background of this case. In Russell v. Cogswell, 151 Kan. 793, 101 P.2d 361 (1940), this court stated:
As stated in Black's Law Dictionary (4th ed.), "Or is frequently misused; and courts will construe it to mean `and' where it was so used." p. 1246. The reverse is also true and courts will construe "and" to mean "or" when necessary to reflect the true meaning and intent of a statute. This court has long recognized the problem. In Starr v. Flynn, 62 Kan. 845, 62 Pac. 659 (1900), the use of the word "and" in an early statute obviously conflicted not only with the intent behind the statute but with another statute. The court stated:
See also Rostocil v. United Oil &amp; Gas Royalty Ass'n, 177 Kan. 15, 274 P.2d 761 (1954); Kennedy v. Haskell, 67 Kan. 612, 73 Pac. 913 (1903). We hold that as used in K.S.A. 1981 Supp. 79-331, the word "and" is to be read in the disjunctive rather than the conjunctive and therefore should be considered and applied as if it read "or" as originally intended by the legislature. Based upon such an interpretation and application, petitioner's first attack upon the statute lacks merit.
Petitioner's next contention is that subsection (b) results in differential treatment of properties appraised thereunder as to those under subsection (a) and therefore constitutes a violation of the uniform and equal clause of the Kansas constitution. Secondly, he contends that if the results obtained under subsection (b) are permissible then the classification established between subsections (b) and (c) is unconstitutionally discriminatory.
Article 11, Section 1 of the Kansas Constitution provides:
The taxation of oil and gas leases and properties does not fall within any of the allowable constitutional classifications or exemptions. Therefore, they are subject to K.S.A. 79-101, which states:
K.S.A. 79-329 through 79-334 as amended set forth the various statutory provisions for listing, valuation and assessment of oil and gas leases and properties. 79-329 declares such leases and properties to be personal property; 79-501 provides all real property and tangible personal property are to be appraised at fair market value; 79-503 defines fair market value while 79-1439 provides that all such property shall be assessed at 30% of fair market value. We need not here go into a long dissertation on the interrelationship between Article 11, Section 1 of the Kansas Constitution and the various statutes requiring all property (except such as is exempt or subject to separate classification) to be taxed uniformly and equally on the basis of fair market value. The subject has received exhaustive treatment on numerous occasions and need not be repeated. See State ex rel. Stephan v. Martin, 230 Kan. 759, 641 P.2d 1020, (1982); State ex rel Stephan v. Martin, 227 Kan. 456, 608 P.2d 880 (1980).
It appears to be the position of the petitioner that subsections (a) and (b) of K.S.A. 1981 Supp. 79-331 are mutually exclusive and therefore leases or properties which fall within subsection (b) are being valued, assessed and taxed on a different basis than those falling under subsection (a). We do not read the statute in such a manner. One of the factors to be considered under subsection (a) is "the quantity of oil or gas produced" during the taxable period. Subsection (b) requires that for any base lease on property which first produces oil or gas in economic quantities on "or" after July 1 of the initial taxable year, the quantity of oil or gas produced shall be taken into consideration as required by *755 subsection (a) but shall be first calculated on an annualized basis and then reduced by 40% to reflect the effect of flush production. Subsection (b) merely adds one more factor to the other statutory factors to be utilized in determining the fair market value when the property is subject to the misleading phenomena of flush production. As such it is merely one element to be used in certain cases to assure that the lease or property is more nearly appraised at fair market value the same as other leases or properties which have an actual production history which may be relied upon in making the determination.
This court has long recognized that the legislature may prescribe the manner in which certain property shall be appraised in order to arrive at fair market value. See Bank v. Geary County, 102 Kan. 334, 170 Pac. 33 (1918); Hunt v. Allen County, 82 Kan. 824, 109 Pac. 106 (1910); and Francis, Treas., v. A.T. &amp; S.F. Rld. Co., 19 Kan. 303 (1877).
K.S.A. 79-503 defines fair market value to be:
The statute then goes on to state certain factors or criteria which are to be considered in arriving at fair market value. The statute also defines various classifications of real property on the basis of urban and rural usage. The objective of the statute is to guide the county appraiser in arriving at fair market value. Oil and gas leases and properties are considered personal property and are also to be valued at fair market value as defined by the first sentence of K.S.A. 79-503. Being unique from the ordinary type of personal property, the legislature, in K.S.A. 1981 Supp. 79-331, has recognized certain criteria, other than those in 79-503, to be utilized in arriving at fair market value in money. The objective under both statutes is to reach the actual fair market value in the market place as opposed to a fictional, unrealistic, or arbitrary determination as was attempted in K.S.A. 1979 Supp. 79-342 (found unconstitutional in State ex rel. Stephan v. Martin, 227 Kan. 456), and K.S.A. 1981 Supp. 79-343 (found unconstitutional in State ex rel. Stephan v. Martin, 230 Kan. 759, 641 P.2d 1020 (1982), wherein special treatment was given to the valuation *756 of farm machinery which bore no reasonable relationship to the actual fair market value of the machinery. The statute here in question was adopted to furnish criteria to be utilized in appraising a certain category of property because the general criteria set forth in 79-503 were not applicable. However, the goal of K.S.A. 1981 Supp. 79-331 is the same, that is, to arrive at the actual fair market value of the property appraised.
In Cities Service Oil Co. v. Murphy, 202 Kan. 282, 447 P.2d 791 (1968), the court had before it a dispute over the valuation and subsequent assessment of several oil and gas leases. Expert testimony had been received at the trial level and resulted in a great variance in the valuation of the leases. The proper application of K.S.A. 79-331 as it existed prior to the 1979 amendments was involved and the court stated:
The determination by the legislature that certain oil and gas leases and properties were to be valued by considering an additional factor which applies to all leases and properties within the same factual category is not unconstitutional. In addition to the stipulations already set forth, affidavits attached to and made a part of the stipulations state that utilization of the subsection (b) factor "assists the county appraiser in arriving at a value which is not less than fair market value in money" and that "utilization of the decline adjustment factor set forth in K.S.A. 1980 Supp. 79-331(b) and (c) merely tends to moderate the peak production data so as not to allow gross over-assessment of wells having inadequate production histories." The use of the additional factor in subsection (b) to arrive at a more nearly accurate production factor required when leases or properties are subject to flush production does not result in unequal taxation because the factor is not applied to leases or properties which are not subject to flush *757 production. There is no evidence before this court to indicate that subsection (b) is being applied by the respondent, exclusive of subsection (a) factors, to any leases or properties. We cannot assume that such is the case.
In Angle v. Board of County Commissioners, 214 Kan. 708, 522 P.2d 347 (1974), the court was faced with a situation where the trial court found that certain oil and gas leases were appraised for taxation without certain relevant factors of K.S.A. 79-331 being taken into account. It appears that the leases in question produced from the Lansing oil reservoir and that production from that formation in that locality had a notoriously short life. The assessor failed to take into account such rapid decline thereby ignoring the statutory factor of "the probable life of the wells." We affirmed the trial court's decision that such intentional refusal by the taxing officials to take into consideration relevant factors set forth in the statute was arbitrary and rendered the assessments void. Conclusions of the trial court, which were affirmed on appeal, included:
If it should develop in practice that a county appraiser has assessed an oil and gas lease or property based solely upon the production factor of subsection (b) of the statute then such action might be found to be arbitrary. However, we cannot assume that such is the required result of the statute. On the contrary, we must assume that the entire statute will be considered as a whole and properly applied with subsection (b) being considered only in determining "the quantity of oil or gas produced" during the taxable period. When so applied to all leases and properties from which production of oil or gas for the first time occurs on or after July 1 of the initial taxing year, no violation of the fair and equal provisions of the Constitution result.
*758 Finally, petitioner asserts that even if subsection (b) treatment of certain oil and gas leases or properties is valid, subsection (c) results in an unconstitutional discrimination between wells on the same lease or property in violation of Article 11, Section 1 of the Kansas Constitution. It is alleged that:
The argument of the petitioner misses the point. Wells, as such, are not being appraised but it is the entire lease or property which is being appraised. Production from the well or wells is one of the factors to be considered and, as indicated in the stipulation of facts, additional development wells on a particular lease are not ordinarily drilled by a prudent operator until a production history from the first well has been determined and the production from subsequent wells will normally parallel the production history of the first well. While these generalizations may be subject to dispute and while they obviously do not take into consideration the acreage involved, or the proximity of the subsequent wells to the first well, assuming such facts to be true, which we must do in view of the stipulation, it would appear that production from the subsequent wells could properly be calculated by comparison with the initial well without application of the subsection (b) formula or factor to arrive at the overall production from the lease or property.
Bound as we are by the stipulated facts before this court even though we recognize the same may be somewhat incomplete, and the legal principles which govern our consideration of the constitutionality of a statute, we cannot say that on the record before us, K.S.A. 1981 Supp. 79-331, or any of its sections, violates either Article 2, Section 14, or Article 11, Section 1 of the Kansas Constitution as alleged by the petitioner.
The petition for a writ of quo warranto is denied.