Amax Coal Co. v. Wyoming State Bd. of Equalization
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Amax Coal Co. v. Wyoming State Bd. of Equalization
1991 WY 143
819 P.2d 834
Case Number: 90-265
Decided: 11/18/1991
Supreme Court of Wyoming
AMAX COAL COMPANY, PETITIONER,
v.
WYOMING STATE BOARD OF
EQUALIZATION, RESPONDENT.
Appeal from the District
Court, CampbellCounty, Terrence
O'Brien.
Lawrence J. Wolfe and
Matthew H. Thomas of Holland & Hart,
Cheyenne, for
petitioner.
Joseph B. Meyer, Atty.
Gen. and Michael L. Hubbard, Sr. Asst. Atty. Gen., Cheyenne, for
respondent.
Before URBIGKIT, C.J.,
and THOMAS, CARDINE, MACY and GOLDEN, JJ.
GOLDEN, Justice.
[¶1.] In this appeal we
address petitioner Amax Coal Company's protestations that respondent Wyoming
State Board of Equalization (Board) erred in assessing its Belle Ayr and Eagle
Butte coal mines for tax year 1988. The thrust of Amax's protest is that the
Department of Revenue and Taxation, Minerals Division (Division), used an
improper assessment formula which overvalued their coal production and operated
in a discriminatory manner prohibited by Wyoming's Constitution, which valuation was
then confirmed by the Board after a hearing. Further, Amax contends the Board
incorrectly treated an intercompany royalty, which Amax pays to its wholly owned
subsidiary, Meadowlark, Inc., as a private royalty and improperly included Black
Lung Excise Tax in the assessment process.
[¶2.] We will affirm the
Board's decision and order in all respects.
ISSUES
[¶3.] Amax proposes these
issues for our disposition:
I. Whether the Board's
inclusion of taxes and fees as mining costs in the cost approach erroneously
attributes profit to taxes, is discriminatory, fails to result in uniform and
equal taxation and is unsupported by substantial evidence.
II. Whether the Board's
decision approving the use of direct costs instead of total costs in the cost
ratio is contrary to the department's rules and produces erroneous taxable
values.
III. Whether the Board's
decision approving the tax treatment of Amax's intercompany royalty, that
results from Amax's dual corporate structure, fails to treat Amax uniformly and
equally with companies that have a single corporate structure.
[¶4.] In response, the Board
presents this statement of the issues:
Did the petitioner prove
that the Board's inclusion of taxes and fees in the direct cost ratio was
arbitrary, capricious, an abuse of discretion, contrary to constitutional right,
or unsupported by substantial evidence?
Did the petitioner prove
that the Board's use of a direct cost ratio, as opposed to a total cost ratio,
was arbitrary, capricious, an abuse of discretion, contrary to the Board's own
rules, or resulted in overvaluation? Did the petitioner prove that the
petitioner's intercompany royalty should be treated differently than any other
private royalty?
FACTS AND
BACKGROUND
[¶5.] Amax initiated this
litigation to contest the Board's taxable valuation on 1988 coal production from
Amax's Eagle Butte and Belle Ayr mines located in Campbell County, Wyoming. At these mines, coal is removed by
shovels and loaded onto large haul trucks. As the coal is trucked out of the
mine pit, it passes the mouth of the mine. The Board's rules and regulations,
which have been adopted in accordance with the Constitution of Wyoming and
pertinent Wyoming statutes, provide that the mining of
coal is complete at the mouth of the mine. Rules and Regulations of the Wyoming
State Tax Commission/State Board of Equalization, the Minerals Division,
Department of Revenue and Taxation, Chapter XXI, § 9(a). Amax does not sell coal
at the mouth of the mine. Rather, the coal is sold after it leaves the load-out
facilities. Chapter 9, § 9(c) of the Board's rules accommodates this
circumstance:
(c) Where a mineral is
sold away from the mouth of the mine or wellhead pursuant to a bona fide arms
length sale, the fair market value shall be determined by the Division in
accordance with recognized appraisal techniques.
The Board's rules, at
Chapter XXI, § 10, also supply guidance in selecting an appropriate appraisal
technique:
Section 10. Recognized
Appraisal Techniques.
(a) When the Division is
required to appraise or determine the fair cash market value of a mineral by
application of recognized appraisal techniques, the Division shall use one or
more of the following approaches or a combination thereof:
(i) Cost approach.
Applied to minerals, the cost approach is a method of estimating the value of a
mineral by determining the total of direct and indirect costs attributable to
mining or production of a mineral. Other elements of value include but are not
limited to royalty, and return on and of investment.
(ii) Comparison approach.
Applied to minerals, the comparison approach is a method of determining the fair
cash market value of a mineral by comparison with sales of minerals similar in
quality and characteristics. This approach includes consideration
of:
(A) Direct arms length
sales of unprocessed minerals at the mine or mining claim, and
(B) Direct sales of
processed or transported minerals whether at or away from the mine or mining
claim.
(b) The Division shall
consider whether the sales price includes the value of processing or
transportation to market or both added after the mineral has passed beyond the
mouth of the mine or well-head.
(i) If the selling price
includes such value, the Division shall deduct such value from the selling price
to determine the fair cash market value of the mineral.
(ii) If the value or cost
of processing or transportation to market or both is represented by a bona fide
arms length contract, such value or cost shall be deemed to be the appropriate
deduction from the selling price.
(c) Return on investment
may be determined by proportion of costs, the proportion of investment, or rates
of return prevalent in the industry.
(d) The Division shall
weigh the relative significance, applicability and appropriateness of the
indicators of value derived from the approaches to value or methods outlined
above, including comparison of value indicators for similar minerals which best
approximates the value of the mineral being appraised or valued.
(e) The fair cash market
value of a mineral shall not include direct and indirect costs attributable to
processing or transportation to market.
[¶6.] The Board's order
reflects that:
3. In arriving at the
taxable value for 1988 production, the Department used a proportionate
methodology which depends on a cost ratio and the sales price of the mineral
product in arriving at the taxable value at the mouth of the mine (point of
taxation). The cost ratio consists of a numerator of direct mining costs (less
royalties), over a denominator of total direct costs (less royalties). This
direct cost ratio is multiplied by the arms-length sales price of the mineral
(less royalties). After the multiplication process, any private royalty amount
is added back. This multiplication and addition process results in an
apportionment of a part of the total sales price and is intended to represent
the "taxable value" of the mineral after the mining is complete. The difference
between this "taxable value" and the sales price is intended to represent the
nontaxable value added to the mineral by processing and transportation after the
point of taxation.
[¶7.] Amax asserts the
methodology is arbitrary, capricious, an abuse of discretion and not in
conformity with law because it does not produce a fair valuation of the coal
Amax has produced. In its findings of facts and conclusions of law, the Board
articulated this summary of Amax's contentions with regard to the methodology
used by the Division to value Amax's product:
The use of only a
direct cost factor is illegal and erroneous. The Department failed to follow its
own rules which specify the inclusion of indirect costs. The Department also
failed to provide any explicit definition of direct costs, and identified direct
costs not by accounting principles but rather on the basis of physical
activities such as overburden removal, drilling, blasting, etc. The Department
should use a total cost factor which relies on the taxpayers' accounting
systems to identify all Wyoming profit-bearing costs (both direct and
indirect) in both the numerator and the denominator. The Department's factor
erroneously apportions indirect costs based upon the arbitrary assumption that
indirect costs occur in the same ratio as direct costs. The allocation of
indirect costs should not be by a direct cost factor but should be assigned by
the taxpayer in compliance with generally accepted accounting principles
("GAAP"). If the taxpayer is allowed to assign indirect costs between mining,
transportation and processing, this would result in a more accurate
apportionment of these costs and thus a more accurate determination of taxable
value. It is erroneous for the Department to rely on a direct cost factor for
the apportionment of indirect costs.
[¶8.] Amax also claims that
the royalty it pays to its subsidiary, Meadowlark, Inc., should be viewed as a
cost of mining and not as a private royalty. The agreement between Amax and
Meadowlark is not an arm's length bargain and should, Amax contends, not be
treated like private royalties. Amax assigns the royalty (it is an accounting
entry, rather than an actual payment) to Meadowlark as a means of "paying"
Meadowlark for the services it performs for Amax.1
[¶9.] Amax also contends that
the Board erred in including Black Lung Excise tax in the assessment
formula.
DISCUSSION
[¶10.] In addressing the issues raised by this
appeal, we apply the scope of review enunciated in W.S. 16-3-114(c) (July 1990
Repl.) and the standards set out in the related case, Amax Coal Company v.
Wyoming State Board of Equalization, 819 P.2d 825, 828-829 (Wyo.
1991).
[¶11.] In the instant case, the Board concluded
that the Division's proportionate methodology was a valid indicator of value,
"inasmuch as costs are a factor that aids and guides an appraiser's evaluation
of market value." In reaching its conclusion, the Board relied, in part, upon
this court's decision in Hillard v. Big Horn Coal Company, 549 P.2d 293 (Wyo.
1976). We agree that Hillard responds to all the concerns raised by Amax. There,
we said:
The coal companies
contend, however, that the formula was not followed by the Board. They rely upon
testimony of one of their company officials in which he demonstrated how he
arrived at a different value by a so-called literal application of the formula.
The essential difference between his approach and that of the Board was that his
first step was to deduct from the sales price all costs, that is, mining costs,
processing costs, and indirect costs, in arriving at a money profit. He then
deducted the royalty paid from all of these costs and divided that result into
the money profit to determine his per cent of profit. He then applied that per
cent of profit to mining costs only and added his product to the mining costs
plus the royalty. His method eliminated any allocation of the indirect costs to
the mining operations. The Board, on the other hand, attributed a pro rata share
of the indirect costs to the mining operations. The Board did not adopt any
rules or regulations setting forth interpretations of its minute entry or
furnishing instructions with respect to its application. Under these
circumstances the construction manifested by the application of the minute entry
by the Board is reasonable and certainly not unlawful. The fact that the coal
companies' witnesses disagreed with the manner in which the formula was
interpreted or disagreed with the result which was reached, is not sufficient to
meet the companies' burden of demonstrating that the Board acted fraudulently,
arbitrarily, capriciously, or in abuse of its discretion. It simply demonstrates
there was a difference of opinion from that held by the members of the Board.
State ex rel. Greenwood v. Pearson [46 Wyo. 307, 26 P.2d 641
(1933)].
Hillard, 549 P.2d at
300.
[¶12.] Amax proposes a valuation methodology
which is different from that used by the Division, but it is unable to
demonstrate that the method used by the Division violates the applicable review
standards. The evidence offered by Amax demonstrates a difference of opinion, as
in Hillard, and, of course, Amax's model would have the effect of reducing their
tax assessments. Amax complains that the Board is incorrect in its reliance on
Hillard because the question of discrimination was not addressed. That topic,
along with all other specific points raised by Amax in this case, was addressed
in Hillard:
Complaint also is made
by the coal companies of the fact that the formula as it is described and
interpreted by the Board was applied only to these two companies and one other.
The comparative valuation of the product of other mines is then relied upon as
showing a lack of uniformity resulting in illegality of the assessment. The
Board pragmatically and plausibly meets the argument arising out of the
discrepancy in valuations by pointing out that there were similar and
proportionate discrepancies in the sales prices of the coals involved. The
record demonstrates further that the comparative valuations were made using as a
base the valuations reached pursuant to the formula or through an approach which
the Board found to be equivalent to the formula. This results in uniformity of
assessment, not the lack of uniformity about which the coal companies complain.
Granted it does not result in a uniform value for all of the coal mined in the
State of Wyoming, but the record demonstrates
that the coal mined from different places in the State of Wyoming in fact does have
different values. If the valuation of the other coals had not been made in
comparison to coals to which the formula have been applied, it then would seem
that the Board's position would be a departure from its constitutional and
statutory duties. Since the converse is demonstrated by the record, however, the
decision of the district court upholding the conclusion of the Board that the
valuations properly were arrived at and the correct assessments made, which has
the benefit of a presumption of lawfulness, is not shown by the record to be
erroneous.
In relying upon a
disparity in valuations the coal companies overlook another concept found in
Bunten v. Rock Springs Grazing Ass'n [29 Wyo. 461, 215 P. 244 (1923)]. The court
pointed out that not every discrimination should render an assessment or tax
invalid either in whole or in part, and noted that it frequently had been held
that omission to assess property either from mistake of law or fact, or
accidentally, did not protect other taxpayers from the tax assessed against
them.
Hillard, 549 P.2d at
300-01.
[¶13.] Amax goes on to claim that the use of
indirect costs "creates hypothetical costs" which may not be used in making a
valuation. To support this claim, it cites Appeal of Monolith Portland Midwest
Co., Inc., 574 P.2d 757 (Wyo. 1978). What we said there is:
The Constitution of the
State of Wyoming does not require the inclusion in a
cost appraisal formula of hypothetical costs not borne by a particular mining
enterprise in order to tax that firm equally and uniformly with those firms
which actually do have such costs. Hypothetical costs have no relationship to an
arms-length sale price which is the value to be established by recognized
appraisal techniques where no sale occurs.
Monolith, at
761.
The decision does not say
that hypothetical costs are per se illegal. But, more importantly, we do not
agree with Amax that the method used creates hypothetical costs. Amax itself
admitted at the hearing that the costs were not hypothetical. The Division's
evaluation of Amax's operations may have produced a different result (number)
than did that evaluation which Amax has done - the numbers may be different, but
that does not make one hypothetical.
[¶14.] In support of the logic of the method
employed by the Division, it quotes 26 C.F.R. § 1.613-4(d)(4)(i)
(1980):
(4) Proportionate profits
method. (i) The objective of the "proportionate profits method" of computation
is to ascertain gross income from mining by applying the principle that each
dollar of the total costs paid or incurred to produce, sell and transport the
first marketable product or group of products (as defined in subdivision (iv) of
this subparagraph) earns the same percentage of profit. Accordingly, in the
proportionate profits method no ranking of costs is permissible which results in
excluding or minimizing the effect of any costs incurred to produce, sell and
transport the first marketable product or group of products.
* * * * * *
(iii) Those costs which
are paid or incurred by the taxpayer to produce, sell, and transport the first
marketable product or group of products, and which are not directly identifiable
with a particular mining process or a particular nonmining process shall, in the
absence of a provision of this section providing an apportionment method, be
apportioned to mining and nonmining by use of a method which is reasonable under
the circumstances. One method which may be reasonable in a particular case is an
allocation based on the proportion that the direct costs of mining processes and
the direct costs of nonmining processes bear to each other.
[¶15.] The testimony at the hearing before the
Board established two possible alternatives for the Board to follow. The
Division's expert witness testified that the method of valuation used by the
Division yields the fairest results producer to producer and that leaving out
production taxes understates value. The cross-examination, as well as
questioning done by members of the Board, developed the fact that the use of a
valuation formula like that proposed by Amax would result in considerably less
uniformity as each coal company came forward with a different method of
"accounting" and view of what are direct costs versus indirect costs. Amax
complains somewhat that the Division's witness's testimony was short and to the
point, but it must also be remembered that all witnesses for Amax were
thoroughly cross-examined by the Division's counsel. Amax's witnesses' testimony
varied somewhat from place to place. It was Amax's contention that the valuation
method it proposed is "more accurate." Later, its method was described as "a lot
more accurate." On the issue of time value of money,2 one Amax witness conceded that Amax
does earn money on tax payments made by customers which are then not paid out
until a later date. Counsel for Amax stated Amax could prove without a doubt
that it does not earn a profit on taxes collected, but that was not done.
Finally, a primary witness for Amax conceded that he did not know if Amax earned
a profit on taxes or not, and from the gist of his testimony it can be inferred
that Amax is not able, or does not attempt, to keep track of that.
[¶16.] It is readily apparent the Board was
presented with two opposing views of what valuation method or methods might
properly be used. The Division established that the method it chose was fair.
Amax demonstrated that the method it proposed was fair. Both methods are
recognized and acceptable appraisal techniques. See P. Maxfield, Taxation of
Mining Operations ¶ 2.03[2][c] (1991); 36 Rocky Mtn.Min. L.Inst., ch. 11 (1990);
34 Rocky Mtn.Min. L.Inst., ch. 2, § 2.03 (1988). We hold that, under the
applicable standard of review, supra, the Board's decision cannot be
impugned.
[¶17.] We will be brief in disposing of Amax's
contention that the Board's decision to treat the intercompany royalty the same
as any other private royalty violated the standards of review we apply in
reviewing such a decision. It may be inferred from the testimony presented at
the hearing that the principal purposes of the intercompany royalty are to avoid
federal income tax to the maximum extent provided by law and to suit the
convenience of Amax in accounting for what it perceives as two separate segments
of its coal mining activities. The most that can be said of Amax's contentions
regarding this issue is that they have a fair degree of credence; indeed, the
Division's only witness indicated that he agreed to some extent with Amax's
position regarding the intercompany royalty. Nonetheless, the Board decided that
it would treat the intercompany royalty like a private royalty and the evidence
presented at the hearing provided it with sufficient justification for that
decision. The testimony revealed that if Amax and Meadowlark were an integrated
company then the profit made by Meadowlark could be included in the assessment
process. If they were not integrated, then it would be a cost of mining and
would not be included. The Board could fairly infer from the evidence that the
relationship between Amax and Meadowlark was essentially an artificial
relationship that provided Amax with many benefits. However, one benefit that
could fairly be said to not accrue to Amax under these circumstances is that the
royalty paid to Meadowlark be treated by the Board any differently than other
arm's length, private royalties. Weighing all the factors we are required to
weigh in this review process, we hold the Board's decision is sustainable under
the standard of review.
[¶18.] Finally, Amax also raised as an issue the
inclusion of Black Lung Excise Tax in the valuation in this case. The related
case, Amax Coal, 819 P.2d at 834, disposed of this issue, and our decision in
that case also governs here.
[¶19.] The decision of the Board is, therefore,
affirmed in all respects.
FOOTNOTES
1 Amax Coal Industries is
the parent company of Amax Coal Company and Meadowlark, Inc. Amax Coal Company
is in the business of mining coal, whereas Meadowlark is in the business of
obtaining, holding and managing lands owned or leased by Amax.
2 The basic theory of the
time value of money is this:
The time value of
money is a generic term which encompasses all aspects of converting cash flows
at one time to their equivalent values at another time. The starting point is
that a dollar today is worth more than a dollar one year from today. Depending
upon the problem to be analyzed, the interest rate may be referred to as a
discount rate, compounding rate, opportunity cost, cost of capital, yield to
maturity, or a growth rate. Whichever name is used, if the problem is one of
converting a value at one time to its equivalent value at another time, the
basic calculations remain the same.
D. Logue, Handbook of
Modern Finance, p. 6-2 (1984); and see V. VanCaspel, The Power of Money
Dynamics, pp. 330-31 (1983); V. VanCaspel, Money Dynamics for the 1990's, pp.
229-65 (1988).
The penultimate
conclusion that must be reached is that if Amax holds money belonging to others
over time it does realize a profit or benefit that it would not otherwise
realize. Amax stresses that any time value of money there might possibly be
would end up being a wash for one reason or another, though in the same breath
it is admitted that no such accounting is made by them. The ultimate conclusion,
however, is that in the absence of convincing evidence (as opposed to creative
accounting testimony), we conclude that the Board could fairly infer that tax
monies received by Amax and later paid out are a legitimate value to be
considered in the assessment process.
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