BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, : FINDINGS OF FACT
: CONCLUSIONS OF LAW
v. : AND FINAL DECISION
PROPERTY TAX DIVISION OF THE : Appeal Nos. 89-0670 to
UTAH STATE TAX COMMISSION, : 89-0678, 89-0785 to
: 89-0794, 90-1240 to
: 90-1265 and 91-0983
: Tax Type:
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for hearing on XXXXX. S. Blaine Willes, Commissioner, and Alan Hennebold, Administrative Law Judge, heard the matter on behalf of the Commission. XXXXX, attorney at law, appeared for Petitioner. XXXXX, Assistant Utah Attorney General, appeared for Respondent. XXXXX, of XXXXX, appeared for XXXXX and XXXXX Counties.
Based upon the evidence presented at the hearing, the Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is property tax.
2. The periods in question are XXXXX, XXXXX and XXXXX.
3. With respect to the XXXXX and XXXXX tax years, the subject properties are oil and gas leases in XXXXX, Utah, together with appurtenant personal property (the "XXXXX County properties" hereafter). The various XXXXX properties are identified below, with their respective assessments for each of the years now in question.
Property name XXXXX
4. With respect to the XXXXX tax year, the subject property is a single oil and gas lease and appurtenant personal property located in XXXXX County (the "XXXXX County property" hereafter). Respondent assessed the XXXXX County property at $$$$$ as of XXXXX.
5. In making the foregoing assessments, Respondent relied upon the Commission's then-existing RuleR884-24P-10 ("former rule 10P" hereafter). The rule required that the fair market value of underground oil and gas rights be determined by multiplying annual proceeds from such properties, less exempt royalties, by 400%. The rule further required that appurtenant tangible personal property be valued at fair market value.
6. The parties stipulate that Respondent properly applied former Rule 10P in computing the value of the subject properties' oil and gas rights.
7. Petitioner purchased the XXXXX properties between XXXXX and XXXXX by competitive bids for total consideration of $$$$$.
8. XXXXX, an independent oil and gas valuation firm, appraised three of the four units comprising the XXXXX properties as of XXXXX, using discounted cash flow ("dcf" hereafter) valuation techniques. The appraisal was based upon historical production curves, constant hydrocarbon prices, and a 10% discount rate. The appraisal concluded that the three units had the following fair market values:
Property name Fair market value
The appraisal did not determine the value of appurtenant personal property, nor did it determine the value of the XXXXX property.
9. Petitioner sold the XXXXX properties on XXXXX for $$$$$.
10. Petitioner purchased the XXXXX County property for $$$$$ during XXXXX,then expended $$$$$ to bring the well into production.
11. The XXXXX County properties are subject to XXXXX property and severance tax.
CONCLUSIONS OF LAW
The Tax Commission is required to oversee the just administration of property taxes to ensure that property is valued for tax purposes according to fair market value. (Utah Code Ann. §59-1-210(7).)
Petitioner has the burden of proof to establish that the fair market value of the subject properties is other than as determined by Respondent.
The method for determining the fair market value of productive mining property is the capitalized net revenue method or any other valuation method the commission believes, or the taxpayer demonstrates to the commission's satisfaction, to be reasonably determinative of the fair market value of the mining property. (Utah Code Ann. §59-2-201(2).)
The value of underground oil and/or gas rights shall be 400% of the proceeds from the sale of such oil or gas production from each property during the calendar year prior to the date of assessment, less applicable exempt federal, state, Indian royalties, and XXXXX profits tax. (Utah Administrative Code, R884-24l-0P, in effect on XXXXX.)
DECISION AND ORDER
Petitioner contends that the subject properties have been grossly overvalued by Respondent for the years in question. According to Petitioner, the alleged overassessment results from the application of former Rule 10P, requiring that gas and oil rights be valued at 400% of their annual net sales. While conceding that Respondent correctly applied former Rule 10P in this case, Petitioner argues that the rule does not account for differing production costs among different properties or reflect actual market judgments as to the value of oil and gas properties. Petitioner contends that a lower value for the XXXXX properties is supported by the properties' purchase price, by the XXXXX appraisal, and by the properties' subsequent sale price.
With respect to the purchase price, the XXXXX properties were purchased between XXXXX and XXXXX for total consideration of $$$$$. The transactions were arm's length, between knowledgeable buyer and seller, neither under compulsion to buy or sell. The transactions appear to have been a fair market exchange.
Petitioner also submits an appraisal prepared by an independent consulting firm. The appraisal used a dcf analysis based upon historical data and generally acceptable assumptions to arrive at its value of $$$$$ for gas and oil rights for three of the four XXXXX properties.
With respect to the subsequent sale of the XXXXX properties, Petitioner received total consideration of $$$$$, in an apparently arm's length transaction.
Under Utah's Property Tax Act, the Commission is responsible to oversee the just administration of property tax. (Utah Code Ann. §59-1-210.) In determining the value of oil and gas properties, the Commission is authorized to apply such valuation methods as are demonstrated to be reasonably determinative of fair market value. (Utah Code Ann. §59-2-201.)
On the evidence before it, the Commission concludes that application of former Rule 10P has resulted in an over-valuation of the subject properties' oil and gas rights.
A second issue before the Commission is the valuation of personal property used in operating the subject properties.
Petitioner has attributed a value to the personal property that is lower than the value assessed by Respondent. However, Petitioner has not substantiated the basis for its lower estimate of value.
In view of the foregoing, the Commission finds that the subject properties have been overvalued as a result of Respondent's use of "former Rule 10P". This matter is remanded to Respondent for reassessment of the subject properties in conformity with the dcf methodology of the current Rule 10P. It is so ordered.
DATED this 21st day of April, 1993.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco S. Blaine Willes