Hess Corp. v. N.M. Taxation

HESS CORPORATION, Plaintiff-Appellant,

v.NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Defendant-Appellee.

Docket No. 28, 967

COURT OF APPEALS OF THE STATE OF NEW MEXICO.

Filing Date: January 20, 2011

APPEAL FROM THE DISTRICT COURT OF SANTA FE COUNTY Timothy L. Garcia, District Judge

Holland & Hart, LLP Bradford C. Berge Michael H. Feldewert Kristina Martinez Santa Fe, NM for Appellee.

Jones, Snead, Wertheim & Wentworth, P.A. Jerry Wertheim Jerry Todd Wertheim John V. Wertheim Santa Fe, NM for Appellant.

OPINION

CASTILLO, Judge.

{1} Appellant, the Hess Corporation (Hess), was a defendant in a class action lawsuit brought in federal district court by royalty interest owners who claimed that Hess suppressedthe value of the carbon dioxide for which they received royalty payments. The class action lawsuit was settled, and Hess agreed to compensate the royalty interest owners. Thereafter, Respondent, the New Mexico Taxation and Revenue Department (the Department) issued Hess a severance tax assessment citing NMSA 1978, Section 7-29-4.3 (1985) as authority for the assessment. Hess paid the assessment in order to contest it and filed a refund claim in district court arguing that the Department lacked a statutory basis for the assessment. The district court rejected this argument, but nonetheless entered judgment making a partial refund to Hess on other grounds. We affirm.

I. BACKGROUND

{2} From 1984 onward, Hess and other oil and gas companies have produced carbon dioxide from the Bravo Dome Carbon Dioxide Gas Unit in Northeastern New Mexico (the Bravo Dome Unit). The carbon dioxide produced from the Bravo Dome Unit is subject to severance taxes. Hess reported and paid its severance taxes on a monthly basis.

{3} In 1995, a class action lawsuit styled Feerer v. Amoco Production Co., No. 95-0012, 1998 U.S. Dist. Lexis 22248 (D.N.M. 1998) (the Feerer Litigation) was filed in the federal district court of New Mexico against Hess and other defendants engaged in carbon dioxide production at the Bravo Dome Unit. The class members were overriding royalty interest owners in the Bravo Dome Unit who alleged underpayment of royalties under the Bravo Dome Carbon Dioxide Gas Unit Agreement. The Feerer Litigation resulted in the Feerer Settlement Agreement (FSA) which was finalized and approved by the federal district court in 1998.

{4} The FSA was memorialized in an opinion in which the federal district court set forth the terms of the FSA and assessed whether, under Federal Rule of Evidence 23(e), the terms of the FSA were fair. Feerer, 1998 U.S. Dist. Lexis 22248. Under paragraph eight of the FSA, Hess made a payment into the registry of the federal court in the amount of $8,500, 000 dollars. Hess also agreed to "future relief that involved changes to the manner in which Hess paid royalties.

{5} In December 2004, the Department issued Hess a notice of assessment in which the Department claimed that, as a direct result of the FSA, Hess owed roughly eight million dollars in severance taxes. This included principal, interest, and penalties. The Department cited Section 7-29-4.3 as authority for the assessment and asserted that the FSA constituted a taxable event under this statute. The Department alleged that one of the claims underlying the litigation which led to the FSA was that Hess suppressed the value of carbon dioxide on which royalties were paid. Thus, according to the Department, the FSA established an increased taxable value for carbon dioxide gas severed in New Mexico that should have been reported to the Department.

{6} Hess paid the assessment in order to halt the running of interest and perfect its right to pursue a full refund. Thereafter, Hess submitted an administrative refund claim, which was denied. Hess then filed a complaint in district court pursuant to the New Mexico tax refund statute, NMSA 1978, Section 7-1-26(C)(2) (2007).

{7} The district court issued a pretrial order identifying the uncontroverted facts, the contested facts, and the contested issues of law. The following is a summary of the pertinent portions of that order. At the time the federal court approved the FSA, the Feerer Litigation class's claims were comprised of seven allegations. Six of the seven allegations related to whether Hess made inappropriate deductions and charges in calculating royalty payments. The remaining allegation related to Hess's purported failure to achieve a reasonable sales price for the carbon dioxide produced from the Bravo Dome Unit. Thus, the allegations underlying the Feerer Litigation concerned both matters unrelated to Hess's alleged suppression of the price of carbon dioxide (non-price issues) as well as matters related to Hess's alleged suppression of the price of carbon dioxide (price issues). The Department's assessment was based on (1) the legal conclusion that, when pricing issues are litigated, the oil and gas statutes impose taxes on any increased value of product imputed by court-approved settlement and (2) on the factual assumption that Hess settled price claims through the FSA. The parties agree that Hess is not liable for additional severance taxes as a result of the non-price portion of the FSA. The Department's assessment was based on an allocation of the settlement proceeds between the price and non-price claims. Hess contested the Department's factual assumption that any portion of the FSA settlement proceeds related to price claims and contested the Department's legal conclusion that the federal district court's approval of the FSA constituted a finding or order by a court that increased the taxable value of a product at the production unit, giving rise to tax liabilities under Section 7-29-4.3.

{8} Following a three-day bench trial, the district court entered its findings of fact and conclusions of law which were later amended. The district court's findings were, for the most part, a restatement of the parties' divergent positions concerning the nature of the FSA and whether Hess was liable for severance taxes under Section 7-29-4.3 as a result of the FSA. The district court did not expressly accept or discredit either parties' version of the facts. Rather, the district court observed that, during the negotiations that led to the FSA, the parties failed to reach any allocation of the settlement proceeds as to the price versus non-price claims. The court then concluded that the FSA settled both price and non-price claims, that the Department's allocation of the settlement proceeds to the price versus non-price claims (eighty-one percent to price and nineteen percent to non-price) was not reasonably supported by the evidence, and that Hess's allocation (zero percent to price and one hundred percent to non-price) was also not reasonably supported by the evidence. The district court utilized a standard formula which equally allocated the settlement proceeds and found and concluded that a proper allocation of the proceeds was one-half to price and one-half to non-price.

{9} Based on its findings and conclusions, the district court entered judgment refunding Hess a partial amount of the 2004 assessment. Of the original roughly $8,000, 000 assessment, Hess was refunded $4,432, 323 plus interest. The refund amounted to $6,550, 973. The Department retained $1,516, 629. Hess filed a timely notice of appeal.

II. DISCUSSION

{10} On appeal, Hess asks that we vacate the district court's ruling and award Hess a fullrefund of the amounts paid under the assessment with interest from the date of payment. Hess's primary argument is that the FSA is "not the type of administrative or judicial event that triggers additional severance tax reporting and payment obligations under the plain language of Section 7-29-4.3." Alternatively, Hess contends that the assessment was barred by the controlling statute of limitations. Finally, Hess raises a number of other arguments. We address these issues in turn.

A. Section 7-29-4.3

{11} Section 7-29-4.3 reads as follows:

When an increase in the value of any product is subject to the approval of any agency of the United States of America or the [S]tate of New Mexico or any court, the increased value shall be subject to this tax. In the event the increase in value is disapproved, either in whole or in part, then the amount of tax which has been paid on the disapproved part of the value shall be considered excess tax. Any person who has paid any such excess tax may apply for a refund of that excess tax in accordance with the provisions of Section 7-1-26.

Whether Section 7-29-4.3 provides a statutory basis for the assessment is a matter we review de novo. TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-007, ¶ 10, 133 N.M. 447, 64 P.3d 474 ("[W]e review de novo a lower court or administrative agency's application of law to facts."). To the extent this inquiry requires us to interpret Section 7-294.3, our review is also de novo. TPL, Inc., 2003-NMSC-007, ¶ 10 ("[W]hen we are required to interpret the phrases within a statute, we are presented with a question of law, which we review de novo.").

{12} Tax statutes, like any other statutes, "are to be interpreted in accordance with the legislative intent and in a manner that will not render the statutes' application absurd, unreasonable, or unjust." Amoco Prod. Co. v. N.M. Taxation & Revenue Dep't, 118 N.M. 72, 74, 878 P.2d 1021, 1023 (Ct. App. 1994). "We look primarily to the language of the statute, and when the language is free from ambiguity, we will not resort to any other means of interpretation." Kilmer v. Goodwin, 2004-NMCA-122, ¶ 18, 136 N.M. 440, 99 P.3d 690. "Where an ambiguity or doubt exists as to the meaning or applicability of a tax statute, it should be construed most strongly against the taxing authority and in favor of those taxed." N.M. Elec. Serv. Co. v. Jones, 80 N.M. 791, 793, 461 P.2d 924, 926 (Ct. App. 1969). As a leading treatise on the subject instructs,

in the interpretation of statutes relating to

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