87-0142 - Oil & Gas






v. :



Respondent. :



An Informal Hearing was held on XXXXX. James E. Harward, Hearing Officer, heard the matter for the Utah State Tax Commission. XXXXX and XXXXX, represented Petitioner. Petitioner is requesting a waiver of penalty and interest assessed against the late filing of occupation and conservation reports and taxes for the XXXXX tax years. The occupation and conservation taxes were due on the following oil and gas wells located in XXXXX County: XXXXX. In XXXXX XXXXX was the operator of each of the wells. XXXXX owned non-operated working interests in the XXXXX and the XXXXX. XXXXX did not own interest in the other well. Subsequently, XXXXX merged into Petitioner, XXXXX. The wells were completed in XXXXX, and XXXXX billed the working interest owners for their proportionate shares for the drilling, completing, and operating costs including taxes due the state of Utah. XXXXX paid the amounts billed to XXXXX. In late XXXXX and early XXXXX, XXXXX was incurring significant financial problems. Some of XXXXX creditors were considering filing a petition in bankruptcy against XXXXX, and XXXXX was considering filing a voluntary petition in bankruptcy. In XXXXX, the working interest owners retained counsel and hired XXXXX to investigate XXXXX financial problems and to help resolve the problems. An audit investigation determined that XXXXX had total claims and liens on the wells in the amount of $$$$$. This amount did not include tax liability to the State of Utah or XXXXX County. XXXXX had no assets and the wells were shut-down because XXXXX could not pay the nominal operating expenses. At this point, the alternatives were to file a petition in bankruptcy against XXXXX or to try to work out an out of court resolution of the problem. XXXXX creditors determined that an out of court resolution to the problem would be the most logical because if XXXXX were in bankruptcy the unsecured creditors would receive nothing and litigation would use up assets. Consequently, XXXXX agreed to give its working interests in the subject wells and to assign the interest to the other working interest owners. The working interest owners including XXXXX use the money to help satisfy the financial claims. Currently XXXXX total claims and liens of well over $$$$$ have been reduced to less than $$$$$. Petitioner argues that the %%%%% non-filing penalty found in Utah Code Ann. 59-5-70 (Supp. 1986) will be waived when the taxpayer can show that the failure to file the return was due to reasonable cause and not due to willful neglect. The occupation tax filing is required under Section 59-5-68(3) (Supp. 1986) which provides that every producer engaged in producing oil and gas shall file a return. A producer is a working interest owner in the lands or in the oil and gas field from which oil and gas is produced under Section 59-5-66(10)(b) (Supp. 1986). Petitioner argues that during the tax years in question Petitioner was not a producer and because Utah law placed the obligation to file on the producer imposition of the non filing penalty on Petitioner is improper because the Petitioner had no individual duty to file. Moreover, Petitioner argues that to the extent that XXXXX is subject to the tax on its interest in two of the wells, it paid its taxes to XXXXX in the expectation that XXXXX would file the returns timely and pay the tax timely. Petitioner argues that there was no willful neglect on the part of XXXXX and that this belief was reasonable because Utah law and regulations place the obligation to file on XXXXX. With respect to interest, Petitioner argues that interest charges are intended to offset the advantage a taxpayer obtains from delaying his tax payments. Petitioner enjoyed no advantage from delaying his tax payment because (1) with respect to three of the wells, Petitioner had no tax liability because it owned no interest, and (2) for the other two wells, Petitioner enjoyed no advantage from delaying tax payments because it did not delay its tax payments to XXXXX.


The Commission finds that were it not for Petitioner's actions in taking over the XXXXX wells and reducing the claims against XXXXX, XXXXX would have been forced into bankruptcy, whether voluntarily, or involuntarily, and although the state's claim for taxes would not have been dischargeable, its ability to collect the taxes would have been jeopardized. The Commission lauds Petitioner's efforts to prevent XXXXX bankruptcy and its efforts to request audit by the state in order to determine any outstanding tax liabilities. Petitioner's actions in requesting an audit in order to clear claims and liens have benefitted many parties of which the state is only one. Therefore, the Commission agrees to waive the penalty and interest assessed against the late filing of the XXXXX occupation and conservation taxes because without Petitioner's actions the tax may never have been collected and with respect to interest because Petitioner never had economic benefit of the money.


Based on the foregoing, it is the Decision and Order of the Utah State Tax Commission to grant Petitioner's request for waiver of penalty and interest. Therefore, Respondent is ordered to adjust its records in order to reflect the decision of the Commission

DATED this 2 day of September, 1987.


R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco G. Blaine Davis

Commissioner Commissioner