BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
XXXXX, )
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
Respondent. : Tax Type: Cent. Assessed
_____________________________________
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.
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 County, 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 assessment XXXXX assessment
XXXXX $$$$$ $$$$$
XXXXX $$$$$ $$$$$
XXXXX $$$$$ $$$$$
XXXXX $$$$$ $$$$$
4. With respect to the XXXXX tax year, the
subject property is a single oil and gas lease and appurtenant personal property
located in XXXXX County (the "XXXXX County property" hereafter). Respondent assessed the XXXXX County
property at $$$$$ as of XXXXX.
5. In making the foregoing assessments,
Respondent relied upon the Commission's then-existing Rule R884-24O-1P ("former
rule 10P" hereafter). The rule
required that the fair market value of underground oil and gas rights be
determined by multiplying annual proceeds from such properties, less exempt
royalties, by 400%. The rule further
required that appurtenant tangible personal property be valued at fair market
value.
6. The parties stipulate that Respondent
properly applied former Rule 10P in computing the value of the subject
properties' oil and gas rights.
7. Petitioner purchased the XXXXX properties
between XXXXX and XXXXX by competitive bids for total consideration of $$$$$.
8. XXXXX, an independent oil and gas valuation
firm, appraised three of the four units comprising the XXXXX properties as of
XXXXX, using discounted cash flow ("dcf" hereafter) valuation
techniques. The appraisal was based
upon historical production curves, constant hydrocarbon prices, and a 10%
discount rate. The appraisal concluded
that the three units had the following fair market values:
Property name Fair market
value
XXXXX $$$$$
XXXXX $$$$$
XXXXX $$$$$
The
appraisal did not determine the value of XXXXX property, nor did it determine
the value of the XXXXX property.
9. Petitioner sold the XXXXX properties on
XXXXX, for $$$$$.
10. Petitioner purchased the XXXXX County property
for $$$$$ during XXXXX, then expended $$$$$ 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 windfall profits tax.
(Utah Administrative Code, R884-24l-OP, in effect on January 1, 1991.)
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 21 day of April, 1993.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B. Pacheco S.
Blaine Willes
Commissioner Commissioner