CO2 Comm., Inc. v. Montezuma Cnty.

491 P.3d 516

CO₂ COMMITTEE, INC., Plaintiff-Appellant,

v.MONTEZUMA COUNTY, Colorado ; Montezuma County Board of County Commissioners; Montezuma County Board of Equalization; Montezuma County Assessor; and Montezuma County Treasurer, Defendants-Appellees.

Court of Appeals No. 19CA1798

Colorado Court of Appeals, Division II.

Announced March 18, 2021

As Modified on Denial of Rehearing May 13, 2021

Cogswell Law Offices, John M. Cogswell, Buena Vista, Colorado, for Plaintiff-Appellant

Dufford, Waldeck, Milburn & Krohn, L.L.P., Nathan A. Keever, Jon T. Burtard, Grand Junction, Colorado, for Defendants-Appellees

Opinion by JUDGE BROWN

¶ 1 This oil and gas leasehold tax case requires us to determine whether a nonoperating fractional interest owner in an oil and gas unit who pays real property taxes on its leasehold interest has standing to claim that its due process rights were violated when it did not receive individual notice of or an opportunity to challenge a retroactive assessment and increased tax. We conclude, as a matter of first impression, that a taxpaying nonoperating fractional interest owner who has been denied the panoply of rights afforded a taxpayer under the governing statutes and guidelines — including the rights to receive notice of and to protest a retroactive assessment or to seek an abatement of a retroactively increased tax — has standing to claim a violation of those rights.

¶ 2 The plaintiff in this case, CO₂ Committee, Inc. (CO2), is a nonprofit corporation whose members include nonoperating fractional interest owners in the McElmo Dome Unit (the Unit) who pay real property taxes to Montezuma County.¹ Following an audit, Montezuma County² retroactively increased the assessed value of the taxable real property in the Unit for tax year 2008, which resulted in an increased tax liability for the Unit.

¶ 3 On behalf of its members, CO2 filed a complaint alleging that Montezuma County violated its members’ due process rights by failing to provide each member individual notice of and an opportunity to challenge the retroactive assessment. The district court dismissed the complaint for lack of standing.

¶ 4 We conclude that CO2's members include nonoperating fractional interest owners who are taxpayers with standing to pursue the claims asserted in the complaint. Accordingly, we reverse the district court's order dismissing the complaint and remand the case for further proceedings.

I. Background

¶ 5 An estate in minerals such as oil and gas is a form of real property. § 24-65.5-101, C.R.S. 2020; § 39-1-102(14), C.R.S. 2020. When the owner of a mineral estate leases the right to extract oil and gas from the land,

the lease may create various interests, which generally take the form of either a working interest (the oil and gas company's right to extract the minerals and develop them for profit) or a royalty interest (the estate owner's right to receive a share of the production or a share of the value of the proceeds of production).

Kinder Morgan CO2 Co., L.P. v. Montezuma Cnty. Bd. of Comm'rs , 2017 CO 72, ¶ 4, 396 P.3d 657 ( KM II ) (citing 1 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law §§ 201-216 (2014 ed.)).

¶ 6 In the oil and gas context, a "unit" is "a consolidation of working interests that extract resources from a single geological reservoir. Units are created for the purpose of efficiently extracting resources from the reservoir through coordinated engineering and operation, often by a single operator." KM II , ¶ 12 n.4 (citing 6 Martin & Kramer, § 901); see also § 39-10-106(5), C.R.S. 2020 (" ‘[U]nit’ means any single oil, gas, or other hydrocarbon well or field which has multiple ownership, or any combination of oil, gas, or other hydrocarbon wells, fields, and properties consolidated into a single operation, whether by a formal agreement or otherwise ...."). The operator is the "person responsible for the day-to-day operation of a well by reason of contract, lease, or operating agreement." 3 Div. of Prop. Tax'n, Dep't of Loc. Affs., Assessor's Reference Library , at 6.25 (rev. Jan. 2008) (ARL).³

¶ 7 The Unit at issue here is a consolidation of working interests in a large deposit of pure carbon dioxide in Montezuma and Dolores Counties. KM II , ¶ 12 n.4 (citing Colorado Oil and Gas Conservation Commission Order No. 389-1 (Nov. 17, 1982)). Although several other individuals and entities own various working interests and royalty interests in the Unit, Kinder Morgan CO2 Company, L.P. (Kinder Morgan) is the largest working interest owner and the sole operator of the Unit. Kinder Morgan owns a 44% fractional interest in the Unit. CO2's members include nonoperating working interest owners collectively owning an 11.224% fractional interest in the Unit.

¶ 8 As the Unit operator, Kinder Morgan extracts and compresses the carbon dioxide and then transports it by pipeline to Texas where it is sold for use in oil and gas operations. See id. at ¶¶ 12 -13. Kinder Morgan also manages the Unit's development by paying for the facilities and equipment and supplying labor to produce the carbon dioxide, and then billing the other working interest owners for its expenses in operating the Unit and arranging for transportation of the carbon dioxide to the point of sale. Id. at ¶ 13.

¶ 9 As the Unit operator, Kinder Morgan also files an annual property tax statement for and pays property taxes on behalf of all interest owners in the Unit. Id. ; see also § 39-7-101(1), C.R.S. 2020; § 39-10-106.

¶ 10 Oil and gas leaseholds are taxed as real property. KM II , ¶ 4 ; see also Colo. Const. art. X, § 3 (1)(b); § 39-7-102, C.R.S. 2020. "Unlike most property interests, however, the value of an oil and gas leasehold interest comes not from the physical space or land the leasehold occupies, but rather, from the quantity and value of oil and gas underground." KM II , ¶ 4. That value, in turn, depends on the "selling price of the gas or oil ‘at the wellhead,’ " id. at ¶ 7 ; see also §§ 39-7-101(1), - 102, a term we discuss in greater detail below in Part II.C.2.b.

¶ 11 In 2009, following an audit of the annual property tax statement Kinder Morgan filed for the Unit for tax year 2008, Montezuma County determined that Kinder Morgan had underreported the selling price at the wellhead by deducting costs that it was not allowed to deduct. KM II , ¶¶ 15-16. Consequently, Montezuma County retroactively increased its valuation of the leaseholds in the Unit by approximately $57 million, increasing the Unit's property tax liability by over $2 million. Id. at ¶ 16.

¶ 12 Kinder Morgan paid the increased taxes under protest, petitioned for and was denied an abatement, and unsuccessfully appealed the retroactive assessment all the way to the Colorado Supreme Court. Id. at ¶¶ 17, 46 ; see Kinder Morgan CO2 Co., L.P. v. Montezuma Cnty. Bd. of Comm'rs , 2015 COA 72, ¶ 44, 399 P.3d 735 ( KM I ), aff'd , KM II . In KM II , the supreme court concluded that "the statutory scheme governing property taxation of oil and gas leaseholds and lands authorizes the retroactive assessment of taxes when an operator has underreported the selling price of oil or gas," KM II , ¶ 40, and affirmed the Board of Assessment Appeals’ conclusion that Kinder Morgan had underreported the selling price at the wellhead, id. at ¶ 46.

¶ 13 Ultimately, Kinder Morgan billed the nonoperating fractional interest owners, including CO2's members, for their proportionate shares of the increased taxes. CO2 alleged in its complaint that Montezuma County has since retroactively increased its valuation of the leaseholds in the Unit and retroactively assessed taxes against the Unit for tax years subsequent to 2008. Kinder Morgan has paid the increased taxes and billed the fractional interest owners, including CO2's members, for their proportionate shares. CO2 alleged that its members have collectively been assessed retroactive taxes estimated at $500,000 per year.

¶ 14 During the audit of the 2008 tax statement, the retroactive assessment, the petition for abatement, and the subsequent appeals, Montezuma County communicated only with Kinder Morgan as the operator of the Unit. It issued special notices of valuation only to Kinder Morgan. It did not provide individual notice to any other fractional interest owner and no other fractional interest owner participated in the proceedings resulting in the increased tax liability.

¶ 15 According to its complaint, after CO2 received notice from Kinder Morgan that Kinder Morgan had paid increased taxes for the Unit, it attempted to challenge the retroactive assessment on behalf of its members. In substance, it argued that its members were entitled to deduct the costs that Kinder Morgan was disallowed, so its members did not underreport their selling price at the wellhead. As a result, CO2 argued, Montezuma County improperly increased the taxable value of their interests by retroactively assessing the entire Unit without making individual proportionality computations for each fractional interest owner.

¶ 16 CO2 filed an objection with the Montezuma County assessor pursuant to section 39-5-122, C.R.S. 2020, claiming that Montezuma County wrongfully determined that CO2's members had underreported their selling price at the wellhead beginning with the 2008 tax year. CO2 alleged that Montezuma County responded, claiming it was unable to establish that CO2's members should be treated differently than Kinder Morgan for purposes of computing the selling price at the wellhead, and that separate special notices of valuation have never been provided to CO2's members and were not required.

¶ 17 CO2 then appealed to the board of equalization pursuant to section 39-8-106, C.R.S. 2020, and filed a petition for abatement with the board of county commissioners pursuant to section 39-10-114, C.R.S. 2020. CO2 alleged that Montezuma County responded as follows: "The Montezuma County Assessor's office has not sent Notices of Value [to CO2]. As [CO2] is...