99-049

Response September 27, 2000

REQUEST LETTER

99‑049

RE: COMPANY

Pursuant to Utah Code Ann. '63-46b‑3 (Petitions for Agency Action under Utah Administrative Procedures Act) and Administrative Rules R861-1A-4 and R861-1A-5(Q).

(respectively, Petition for Commencement of Adjudicative Proceedings and Declaratory

Judgments). Petitioner, COMPANY. ("COMPANY") requests a ruling from the Tax

Commission that tax credits to which COMPANY is entitled under Utah Code Ann. '59-5-102(3)(a) as a Aworking interest owner who pays for all or part of the expenses of a recompletion or workover" are assignable to successor in interest.

II. Taxes Involved

This Petition involves the tax credit against the severance tax on oil and gas wells as provided in Utah Code Ann. '59-5-102(3).

III. Relief Sought

COMPANY seeks the following relief:

An Order from the Tax Commission declaring that the tax credits COMPANY earned in the

amount of ##### are assignable to COMPANY B, a purchaser of natural gas and an oil and gas well operator in Utah.

IV. Relevant Statutes and Rules

All references herein are to the Utah Tax Code, 1998 edition. The relevant laws and rules

applicable to this Request for Agency Action are:

A. Utah Code Ann. '63-46b-3 (1998) (Utah Administrative Procedures Act).

B. Utah Code Ann. '59-5-102(3)(a) and (b). (1998) (Severance Tax on Oil, Gas and Mining)

E. Administrative Rule R861-1A-4 (1998) (Administrative Adjudication).

F. Administrative Rule R865-1A-5 (1998) (Declaratory Judgment).

V. Statement of Facts

Background on COMPANY and its Utah Operations

1. COMPANY is a STATE Corporation doing business in Utah. COMPANY was the owner and operator of the COMPANY C in the PLACE, Utah, from DATE, to DATE.

2. From May 11, 1998, through and including May 16, 1998, COMPANY incurred the following expenses for production enhancement of its COMPANY C. SPECIFIC DATA

3. Pursuant to Utah Code Ann. '59-5-102(3)(a) and (b), COMPANY, as a working interest owner in the COMPANY C, is entitled to a credit against severance taxes in the amount of $$$$$, which is ##% of the total workover expenditures amounting to $$$$$.

4. On January 13,1999, COMPANY sold its interest in the COMPANY C well to COMPANY B. and can no longer personally use the credits to which it is entitled.

5. COMPANY wants to sell its credits to COMPANY B., which is the oil and gas operator and the purchaser of COMPANY C.

Summary of Arguments and Authorities

A. Applicable Law

Utah Code Ann. '59-5-102(3)(a) provides:

Through December 31, 2004, a working interest owner who pays for all or part of a recompletion or workover is entitled to a tax credit equal to 20% of the amount paid.

Utah Code Ann. '59-5-102(3)(b) provides:

The tax credit for each recompletion or workover may not exceed $30,000 per well during each calendar year. The tax credit shall apply to the taxable year in which the recompletion or workover is completed and shall be claimed quarterly beginning on the third quarter after recompletion or workover is completed under rules made by the commission.

Neither Rule R865-15O-1, Oil and Gas Severance Tax," nor Rule R865-15O-2, AStripper Well Exemption Pursuant to Utah Code Ann. Section 59-5-101 and 59-5-102" interpret Utah Code Ann. '59-5-102(3).

B. Discussion and Analysis

In the absence of any rule interpreting Utah Code Ann. '59-5-102(3) or any language in the statute precluding an assignment of the tax credit to which a Aworking interest owner" is entitled, the fundamental issue in COMPANYS Petition is whether a statutory right is assignable under general legal principles. Analogous statutory law, case law and general legal treatises all support the conclusion that the tax credit under Utah Code Ann. '59-5-102(3) is assignable.

Analogous Statutory Law

The Utah Code includes several provisions whereby statutory rights are expressly assignable. For example, the statutory right to collect benefits paid under the Aid to Families with Dependent Children (AAFDC") is assignable under Utah law. The AFDC program was created by Title IV-A of the Social Security Act, 42 U.S.C. ''601-607. The program provides monetary assistance to families with children who are deprived of parental support to death, disability or absence of a parent. Utah administers this program for eligible Utah residents under Utah Code Ann. '62A-9-1 1. Recipients of AFDC are required to assign there entitlement to past-due and ongoing child support to the Utah Office of Recovery Services ("ORS") by 45 C.F.R. '232.11. The Code of Federal Regulations requires recipients to assign their statutory rights to AFDC payments to the ORS, and, therefore, necessarily presumes the validity of such assignments, even though the Utah Code neither expressly authorizes nor prohibits them.

Similarly, under the Medical Benefits Recovery Act, Utah Code Ann. '26-19-4.5, all benefits for medical services or payments from a third party otherwise payable to or on behalf a recipient are assigned by operation of law to the Utah Department of Health if it provides, or becomes obligated to provide, medical assistance on behalf of a recipient. Under the Utah Life and Disability Insurance Guaranty Association Act, Utah Code Ann. '31A-38-108(13), any person receiving benefits from the Guaranty Association (a Aprivate entity" which guarantees the policies of insolvent insurers) is "considered to have assigned" its rights to receive benefits to the association.

From these provisions, there is no prohibition in the Utah Code which precludes the assignment of statutory rights to a public or private entity, even if assignments are not expressly

authorized by state law.

This conclusion is in accord with the Utah Supreme Court's decision in Savage Industries, Inc. v. Utah State Tax Commission, 811 P.2d 664 (Utah 1991) which, in reversing the Tax Commission, upheld an acquired corporation=s right to take advantage of its loss carryovers incurred prior to the date of acquisition in order to offset its own as opposed to the acquiring corporation's income. Significantly, the reason the Court gave for this holding is that "the statute as written does not prohibit [it]." In other words, taxing statutes are to be construed liberally in favor of the taxpayer,[1] and should not be construed to preclude taxpayer's from taking reasonable steps to minimize their tax liability absent express statutory language to the contract. Here, the assignment of COMPANYS tax credits should be permitted because statutory rights are generally subject to assignment and there is nothing in Utah Code Ann. '59-5-103 precluding assignment.

Relevant Case Law

Utah case law on assignments supports the conclusion that statutory rights are assignable unless expressly precluded. In State v. Sucec, 924 P.2d 882 (Utah 1996), the Utah Supreme Court held that an assignment of past-due child support (already subject to assignment to ORS under the AFDC provision explained above) was subject to assignment to third-party private collection agencies even though there was no express language in the Utah Code authorizing the assignment. The ORS had argued that AFDC benefits could not be assigned because "the comprehensive state statutory and regulatory scheme has essentially occupied the entire area of child support and collection, preemption any inconsistent explanation of the common law to permit an assignment.1 The Court found this argument "to be without merit." The Court presumes that statutory rights are assignable and upheld the assignment because AORS has failed to show specifically how the assignment of past-due child support to private entities is inconsistent with the statutory scheme governing collection by ORS." Id.

Treatises

In developing the common law, Utah courts frequently rely upon accepted treatises such as American Jurisprudence or Am. Jur. 2d. See, e.g. Tanasse v. Snow, 929 P.2d 351 (Utah Ct. App. 1996) in which the Court of Appeals cites and relies upon Am. Jur. for its analysis of assignments. 6Am. Jur. 2d Assignments '14(1999) states "The law favors the assignability of rights generally, although rights that are personal to the assignor are incapable of an assignment." With respect to tax credits, Am. Jr. continues to provide "The assignment of a tax refund is not precluded on that ground that it is not property in existence at the time of the assignment." The treatise specifically notes a state case, Corn. v. Langenfelder, 38 Pa.D.&C.2d 605 (C.P. 1965) in which the assignment of a right to a tax refund by contract was upheld. Id. at n. 58.

Conclusion

For the reasons explained above, the Commission should enter an order confirming COMPANYS right to assign its tax credits arising under Utah Code Ann. '59-5-10 to a third party.

DATED this 6th day of October, 1999

RESPONSE LETTER

September 27, 2000

RE: Advisory Opinion - Sale or Transfer of Severance Tax Credits

Dear NAME,

We have received your request for information pertaining to severance tax credits authorized under section 59-2-102 (3) of the Utah Code. Specifically, you have asked if your client, COMPANY, can sell its severence tax credits to COMPANY B., COMPANY successor in interest in the underlying well. We offer the following tax guidance:

Section 59-5-102 (3) is explicit in its intent. It authorizes a credit against the tax liability of the interest owner who incurred actual recompletion or workover expenses. In promulgating the credit, the legislature also set explicit limits on the credit. The credit must be taken by the working interest owner who incurred workover expenses in the same calendar year that the work was completed.

You have cited the case of Savage Industries, Inc. v. Utah State Tax Commission as support for your position that severance tax credits are transferable. The court in that case did not suggest that tax credits may be sold or transferred. It merely held that a company was entitled to carry back its own loss after it was acquired and merged in a consolidation of subsidiary corporations. The legislature has not explicitly or implicitly authorized the sale or transfer of the severence tax credit to another party, nor have we found any legal authority to support an argument that tax credits in general are a commodity that may be bought or sold.

[1] AThe fact that statutes are construed in favor of the taxpayer and exemptions are construed against the taxpayer should be relevant to the Commission when it drafts its regulations [or makes its decisions].@ Airport Hilton Ventures v. Utah State Tax Commission, 336 Utah Adv. Rep. 25 (Utah 1996).