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Steager v. Consol Energy, Inc.

Supreme Court of West Virginia

June 5, 2019

DALE W. STEAGER, WEST VIRGINIA STATE TAX COMMISSIONER, Respondent Below/Petitioner
v.
CONSOL ENERGY, INC., d/b/a CNX GAS COMPANY LLC, Petitioner Below/Respondent AND DALE W. STEAGER, WEST VIRGINIA STATE TAX COMMISSIONER, Respondent Below/Petitioner
v.
CONSOL ENERGY, INC., d/b/a CNX GAS COMPANY LLC, Petitioner Below/Respondent AND DALE W. STEAGER, WEST VIRGINIA STATE TAX COMMISSIONER and DAVID E. SPONAUGLE, ASSESSOR OF DODDRIDGE COUNTY, Respondents Below/Petitioners
v.
CONSOL ENERGY, INC., d/b/a CNX GAS COMPANY LLC, Petitioner Below/Respondent AND DALE W. STEAGER, WEST VIRGINIA STATE TAX COMMISSIONER and ARLENE MOSSOR, ASSESSOR OF RITCHIE COUNTY, Respondents Below/Petitioners
v.
ANTERO RESOURCES CORPORATION, Petitioner Below/Respondent AND DALE W. STEAGER, WEST VIRGINIA STATE TAX COMMISSIONER and DAVID E. SPONAUGLE, ASSESSOR OF DODDRIDGE COUNTY, Respondents Below/Petitioners
v.
ANTERO RESOURCES CORPORATION, Petitioner Below/Respondent AND THE COUNTY COMMISSION OF DODDRIDGE COUNTY, Sitting as the Board of Assessment Appeals and Board of Equalization, Respondent Below/Petitioner
v.
CONSOL ENERGY, INC., d/b/a CNX GAS COMPANY LLC, Petitioner Below/Respondent AND THE COUNTY COMMISSION OF DODDRIDGE COUNTY, Sitting as the Board of Assessment Appeals and Board of Equalization, Respondent Below/Petitioner
v.
ANTERO RESOURCES CORPORATION, Petitioner Below/Respondent

          Submitted: March 12, 2019

          Appeal from the Circuit Court of Lewis County, Business Court Division The Honorable Christopher C. Wilkes, Judge Civil Action No. 17-C-11

          Appeal from the Circuit Court of McDowell County, Business Court Division The Honorable Christopher C. Wilkes, Judge Civil Action No. 16-C-135

          Appeal from the Circuit Court of Doddridge County, Business Court Division The Honorable Christopher C. Wilkes, Judge Civil Action Nos. 17-AA-2, 17-AA-1, 17-AA-3

          Appeal from the Circuit Court of Ritchie County, Business Court Division The Honorable Christopher C. Wilkes, Judge Civil Action No. 17-AA-1

          Patrick Morrisey Attorney General L. Wayne Williams, Esq. Assistant Attorney General Charleston, WV Counsel for Petitioner Dale W. Steager, West Virginia State Tax Commissioner

          Jonathan Nicol, Esq. Brandy D. Bell, Esq. Lindsay M. Gainer, Esq. Kay Casto & Chaney PLLC Charleston, WV Counsel for Respondent the County Commission of Doddridge County

          James Brian Shockley, Esq. Assistant Prosecuting Attorney Harrison County Prosecutor's Office Clarksburg, WV Counsel for Amicus Curiae the Harrison County Commission and Joseph R. Romano, Assessor of Harrison County

          Jack C. McClung, Esq. Charleston, WV Counsel for Amicus Curiae West Virginia Association of County Officials, Inc.

          Kelli D. Talbott, Esq. Senior Deputy Attorney General Charleston, WV Counsel for Amicus Curiae Steven L. Paine, West Virginia State Superintendent of Schools

          Ancil G. Ramey, Esq. Steptoe & Johnson PLLC Huntington, WV Craig A. Griffith, Esq John J. Meadows, Esq. Steptoe & Johnson PLLC Charleston, WV Counsel for Respondents Consol Energy Inc. d/b/a CNX Gas Company LLC and Antero Resources Corporation

          Timothy E. Haught, Esq. Wetzel County Prosecuting Attorney New Martinsville, WV Counsel for Amicus Curiae the County Commission of Wetzel County, West Virginia

         SYLLABUS

         1. "As a general rule, there is a presumption that valuations for taxation purposes fixed by an assessor are correct. Thus, a tax assessment of coal property will be presumed to be correct when the assessor, in assessing the coal property: (1) relies upon the legislative rules prescribing the methods by which property is to be assessed; and (2) uses, as a guide, information furnished by the tax department, such as a list of comparable sales of similar property. The burden is on the taxpayer challenging the assessment to demonstrate by clear and convincing evidence that the tax assessment is erroneous." Syl. Pt. 2, W. Pocahontas Properties, Ltd. v. Cty. Comm'n of Wetzel Cty., 189 W.Va. 322, 431 S.E.2d 661 (1993).

         2. "Interpreting a statute or an administrative rule or regulation presents a purely legal question subject to de novo review." Syl. Pt. 1, Appalachian Power Co. v. State Tax Dep't of W.Va., 195 W.Va. 573, 466 S.E.2d 424 (1995).

         3. "Where the issue on an appeal from the circuit court is clearly a question of law or involving an interpretation of a statute, we apply a de novo standard of review." Syl. Pt. 1, Chrystal R. M. v. Charlie A. L., 194 W.Va. 138, 459 S.E.2d 415 (1995).

         4. "A regulation that is proposed by an agency and approved by the Legislature is a 'legislative rule' as defined by the State Administrative Procedures Act, W.Va. Code, 29A-1-2(d) [1982], and such a legislative rule has the force and effect of law." Syl. Pt. 5, Smith v. W.Va. Human Rights Comm'n, 216 W.Va. 2, 4, 602 S.E.2d 445, 447 (2004).

         5. "A statute, or an administrative rule, may not, under the guise of 'interpretation,' be modified, revised, amended or rewritten." Syl. Pt. 1, Consumer Advocate Div. of Pub. Serv. Comm'n of W.Va. v. Pub. Serv. Comm'n of W.Va., 182 W.Va. 152, 154, 386 S.E.2d 650, 652 (1989).

         6. "If the language of an enactment is clear and within the constitutional authority of the law-making body which passed it, courts must read the relevant law according to its unvarnished meaning, without any judicial embroidery. Even when there is conflict between the legislative rule and the initial statute, that conflict will be resolved using ordinary canons of interpretation." Syl. Pt. 3, in part, W.Va. Health Care Cost Review Auth. v. Boone Mem'l Hosp., 196 W.Va. 326, 472 S.E.2d 411 (1996).

         7. "'"Where economic rights are concerned, we look to see whether the classification is a rational one based on social, economic, historic or geographic factors, whether it bears a reasonable relationship to a proper governmental purpose, and whether all persons within the class are treated equally. Where such classification is rational and bears the requisite reasonable relationship, the statute does not violate Section 10 of Article III of the West Virginia Constitution, which is our equal protection clause." Syllabus Point 7, [as modified, ] Atchinson v. Erwin, [172] W.Va. [8], 302 S.E.2d 78 (1983).' Syllabus Point 4, as modified, Hartsock-Flesher Candy Co. v. Wheeling Wholesale Grocery Co., 174 W.Va. 538, 328 S.E.2d 144 (1984)." Syl. Pt. 4, Gibson v. W. Virginia Dep't of Highways, 185 W.Va. 214, 406 S.E.2d 440 (1991), holding modified by Neal v. Marion, 222 W.Va. 380, 664 S.E.2d 721 (2008).

         8. West Virginia Code of State Rules § 110-1J-4.3 (2005) does not permit the imposition of a "not to exceed" limitation on the operating expense deduction authorized thereunder and use of such limitation along with a percentage deduction violates the "equal and uniform" requirement of West Virginia Constitution Article X, Section 1, as well as the equal protection provisions of the West Virginia and United States Constitutions.

         9. "Judicial review of an agency's legislative rule and the construction of a statute that it administers involves two separate but interrelated questions, only the second of which furnishes an occasion for deference. In deciding whether an administrative agency's position should be sustained, a reviewing court applies the standards set out by the United States Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). The court first must ask whether the Legislature has directly spoken to the precise question at issue. If the intention of the Legislature is clear, that is the end of the matter, and the agency's position only can be upheld if it conforms to the Legislature's intent. No deference is due the agency's interpretation at this stage." Syl. Pt. 3, Appalachian Power Co. v. State Tax Dep't of W. Virginia, 195 W.Va. 573, 466 S.E.2d 424 (1995).

         10. "If legislative intent is not clear, a reviewing court may not simply impose its own construction of the statute in reviewing a legislative rule. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. A valid legislative rule is entitled to substantial deference by the reviewing court. As a properly promulgated legislative rule, the rule can be ignored only if the agency has exceeded its constitutional or statutory authority or is arbitrary or capricious. W.Va. Code, 29A-4-2 (1982)." Syl. Pt. 4, Appalachian Power Co. v. State Tax Dep't of W.Va., 195 W.Va. 573, 466 S.E.2d 424 (1995).

         11. "Generally the words of a statute are to be given their ordinary and familiar significance and meaning, and regard is to be had for their general and proper use." Syl. Pt. 4, State v. Gen. Daniel Morgan Post No. 548, Veterans of Foreign Wars, 144 W.Va. 137, 107 S.E.2d 353 (1959).

         12. The provisions contained in West Virginia Code of State Rules §§ 110-1J-4.1 and 110-1J-4.3 (2005) for a deduction of the average annual industry operating expense requires the use of a singular monetary average deduction.

          WORKMAN, JUSTICE.

         These are seven consolidated appeals from the business court's January 17, 2018 and February 7, 2018, orders reversing various Boards of Assessment Appeals and rejecting the West Virginia State Tax Department's valuation of respondents' gas wells for ad valorem tax purposes. The business court concluded that the Tax Department's valuation violated the applicable regulation by improperly imposing a "cap" on the amount of operating expenses which may be deducted and was likewise in violation of West Virginia Constitution Article X, Section 1's "equal and uniform" provision and the equal protection provisions of the United States and West Virginia Constitutions. The business court further concluded that a survey utilized to ascertain the average industry operating expenses for Marcellus shale wells failed to properly permit itemization of "post-production" expenses for inclusion in the calculation of the operating expense average. Following entry of these orders, the business court subsequently declined to alter or amend its judgment upon motion of the Doddridge County Commission.

         Upon careful review of the briefs of the parties and amici curiae, [1] the appendix record, the arguments of the parties, and the applicable legal authority, we agree with the business court's conclusion that the Tax Department acted in violation of the applicable regulations by improperly imposing a cap on respondents' operating expense deductions and therefore affirm its decision to that extent. However, we find that the business court erred in rejecting the Tax Department's interpretation of the applicable regulations concerning the inclusion of post-production expenses in the calculation of the annual industry average operating expenses. We likewise find that the business court erred in crafting relief which permitted an unlimited percentage deduction for operating expenses in lieu of a monetary average, and therefore reverse that aspect of the business court's decision and remand for further proceedings consistent with this opinion.

         I. FACTS AND PROCEDURAL HISTORY

         Respondents Consol Energy, Inc. d/b/a CNX Gas Company, LLC ("CNX") and Antero Resources Corporation ("Antero") (collectively "respondents") are owners of various gas wells in Doddridge, Ritchie, Lewis, and McDowell Counties; CNX owns conventional, vertical gas wells and Antero owns horizontal, Marcellus shale gas wells ("Marcellus wells"). These gas well interests are appraised for ad valorem tax purposes by petitioner Dale W. Steager, West Virginia State Tax Commissioner ("Tax Department"), and assessed by the respective county commissions. This case involves valuation of CNX's conventional gas wells for the 2016 tax year and Antero's Marcellus wells for both the 2016 and 2017 tax years.

         Gas Well Valuation and Deduction of Operating Expenses

         To determine the value of gas wells for ad valorem taxation purposes, gas well owners provide gross receipts from their well production, to which the Tax Department applies a "production decline rate." From this figure, the "average annual industry operating expenses" are deducted to establish a "net receipts" value. That value is then capitalized to determine the taxable value. This formula is described in West Virginia Code of State Rules § 110-1J-4.1 (2005) as follows:

4.1. General. -- Oil and/or natural gas producing property value shall be determined through the process of applying a yield capitalization model to the net receipts (gross receipts less royalties paid less operating expenses) for the working interest and a yield capitalization model applied to the gross royalty payments for the royalty interest.

         (emphasis added). With respect to the operating expenses referenced above, West Virginia Code of State Rules § 110-1J-4.3 provides that the Tax Commissioner shall "every five (5) years, determine the average annual industry operating expenses per well. The average annual industry operating expenses shall be deducted from working interest gross receipts to develop an income stream for application of a yield capitalization procedure." (emphasis added).

         Each tax year, the Tax Department issues an Administrative Notice which states what the average annual industry operating expense is for that tax year; it is expressed by way of a percentage of the well's gross receipts, with a "not to exceed" amount or, as respondents have characterized it, a "cap."[2] For the tax year 2016, Administrative Notice 2016-08 provided that for conventional gas wells the "[d]irect ordinary operating expenses will be estimated to be 30% of the gross receipts derived from gas production, not to exceed $5, 000 . . . ." (emphasis added). For Marcellus horizontal wells, the Administrative Notice provided that "the maximum operating expenses allowed is 20% of the gross receipts derived from gas production, not to exceed $150, 000." For the tax year 2017, the Administrative Notice provided for operating expenses of 20% not to exceed $175, 000 for Marcellus wells.[3]

         Respondents appealed their gas well valuations to the respective Boards of Assessment Appeals ("Board(s)") for the appropriate county, claiming that their actual expenses[4] were in excess of the stated percentages and that the cap resulted in an artificial reduction in the operating expense deduction where their expenses exceeded the cap.[5] Respondents provided expert testimony in support of these figures and analysis of the inequality occasioned by the cap.[6] These experts also testified that industry-reported operating expense percentages[7] were closer to respondents' actual values than the Tax Department's average percentage. The experts further noted that in tax years preceding the 2016 tax year, the Administrative Notice invited taxpayers to submit their actual expenses and that, despite no change in the law, the 2016 and subsequent Administrative Notices did not make such an invitation.

         In response, the Tax Department offered testimony from its appraiser Cynthia Hoover who explained that the average operating expense figures were derived from a survey of gas well producers conducted in 2014. She explained that, based on the results of that survey for conventional gas wells, on average each well incurred expenses of $5, 000.00. This monetary amount approximated, on average, 30% of the gross receipts per well. Notably, she agreed that application of the $5, 000.00 "not to exceed" amount served to treat higher-producing wells differently than lower-producing wells and that the cap resulted in certain wells with higher gross receipts not realizing a full 30% operating expense deduction. Ms. Hoover agreed that the Tax Department had previously ...


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