Union Oil Co. v. State Tax Comm'n

2009 UT 78
This opinion is subject to revision before final
publication in the Pacific Reporter.
IN THE SUPREME COURT OF THE STATE OF UTAH
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Union Oil Company of California, 	No. 20080068
Petitioner,
v.
F I L E D
Utah State Tax Commission,
Respondent. 	December 8, 2009
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Original Proceeding in this Court
Attorneys: 	David J. Crapo, Layne T. Smith, Salt Lake City,
for petitioner
Mark L. Shurtleff, Att’y Gen., Clark L. Snelson,
Asst. Att’y Gen., Salt Lake City, for respondent
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WILKINS, Justice:
INTRODUCTION
¶1 	The Union Oil Company of California (Unocal) petitioned
this court for review of a Utah State Tax Commission (Tax
Commission) decision holding that Unocal was not entitled to a
refund of severance tax payments. 	We affirm the decision of the
Tax Commission in part and reverse in part.
PROCEDURAL BACKGROUND
¶2 	In 1997, Unocal filed for a refund of the severance
taxes it paid for the years 1994 through 1997. 	The Commission
paid the refund, then sent it to the Auditing Division to be
audited. 	The Auditing Division determined that the original tax
filings were correct, and that the refund had been provided in
error. 	Consequently, in 2000 the Auditing Division sent Unocal a
deficiency notice for the 1994-1997 period (First Assessment
Period). 	Unocal petitioned for a redetermination, which the Tax
Commission stayed pending the resolution of a severance tax
appeal by ExxonMobil, which was then pending before us. 	Unocal

1 These sections have since been amended. 	We cite to the
version in effect during the relevant time period.
No. 20080068 	2
filed an amicus brief in the ExxonMobil matter. 	We issued our
opinion in November of 2003 in favor of ExxonMobil. 	In the
opinion we expressly limited any retroactive application to
ExxonMobil. 	ExxonMobil Corp. v. Utah State Tax Comm’n, 2003 UT
53, 86 P.3d 706. 	Several amici parties, including Unocal,
petitioned for rehearing seeking full retroactive application of
the decision. 	We denied rehearing.
¶3 	In 2004, the Auditing Division issued a second
severance tax deficiency notice to Unocal, along with a
conservation fee deficiency notice, for the years of 1998 and
1999 (Second Assessment Period). 	Unocal appealed the new
deficiency assessment to the Tax Commission. 	The Tax Commission
consolidated the appeal with Unocal’s first pending appeal and
held a formal hearing in 2007. 	The Tax Commission upheld the
deficiency assessments against Unocal in a final decision issued
on December 24, 2007. 	Unocal then petitioned us for review,
which we granted.
FACTUAL BACKGROUND
¶4 	During the period of January 1994 to June 1999, Unocal
was the designated Unit Operator for oil and gas production from
the Lisbon Unit, located in San Juan County, Utah. 	The Lisbon
Unit is comprised of federal and state oil and gas leases.
Unocal operated multiple wells within the Lisbon Unit and
operated a processing facility, the Lisbon Plant, just outside
the legal parameters of the Unit. 	The oil and gas extracted from
within the Lisbon Unit was “sour,” meaning that it included
various contaminants, including several natural gas liquids
(NGLs) that could be separated out and sold. 	The audits at issue
in this review involve the production of oil, gas, and NGLs from
the Lisbon Unit.
¶5 	Unocal was required by state statute to pay severance
taxes on the value of the oil and gas it extracted under its
lease agreements. 	See Utah Code Ann. §§ 59-5-101 to -215
(2000). 1 	The statute provided the details for valuing the oil
and gas for taxation purposes, including allowing for several
valuation methods. 	Id. § 59-5-102. 	For the First Assessment
Period, Unocal valued the oil and gas at the point of sale in its
original severance tax calculations, but later filed for a refund
based on calculations using the net-back valuation method.
Though the Tax Commission initially paid the refund, the Auditing
Division determined that the refund was in error and issued a

3 	No. 20080068
deficiency notice using different valuation methods--the contract
prices at the Lisbon Plant tailgate for the oil and gas, and the
net-back method for the NGLs. 	The NGL calculation included a
processing costs allowance of two-thirds. 	For the Second
Assessment Period, Unocal used the net-back method of valuation.
The Auditing Division issued a deficiency notice, relying on the
posted prices for sweet oil produced in a different field and
using the tailgate sale price for the gas and NGLs.
¶6 	In addition, Unocal was eligible for a statutory annual
tax exemption on the combined taxable value of its oil, gas, and
NGLs. 	The Auditing Division applied the full tax exemption in
1998 and prorated the exemption at fifty percent in 1999 because
Unocal was the Lisbon Unit operator only until June 1999.
¶7 	Unocal challenges the Auditing Division’s tax valuation
methods and the proration of the annual exemption.
STANDARD OF REVIEW
¶8 	We review the Tax Commission’s interpretation of case
law and statutes for correctness, according the Tax Commission no
deference. 	See ExxonMobil Corp. v. Utah State Tax Comm’n, 2003
UT 53, ¶ 10, 86 P.3d 706.
ANALYSIS
I. 	THE PROSPECTIVE RELIEF DECLARATION OF EXXONMOBIL
¶9 	We first address Unocal’s request that we overturn our
express limitation in ExxonMobil and allow retroactive
application of its holding to this case.
¶10 	While Unocal’s appeal before the Tax Commission was
pending, we decided ExxonMobil Corp. v. Utah State Tax
Commission, 2003 UT 53, 86 P.3d 706. 	In that case, we
interpreted the statutory definition of the appropriate point in
oil and gas production for calculating the state severance tax.
Under the Utah Code, those persons owning interests in the
production of oil and gas from within the state are required to
pay a four percent severance tax to the state “of the value, at
the well, of the oil or gas produced, saved, and sold or
transported from the field where the substance was produced.”
Utah Code Ann. § 59-5-102(1)(a) (2000). 	The statute defines
“value at the well” as “the value of oil or gas at the point
production is completed.” 	Id. § 59-5-101(19). 	ExxonMobil argued
that production, as specified by the statute, was complete when
extraction was complete, thus valuation should occur at the

No. 20080068 	4
“point of removal from the earth,” when the oil and gas price
would be lower due to the impurities still within. 	ExxonMobil
Corp., 2003 UT 53, ¶¶ 7, 12. 	The Tax Commission rejected this
argument and asserted that valuation would occur at the “point of
actual sale,” which typically occurs after impurities are removed
from the oil and gas resulting in a higher contract price. 	Id.
¶ 7. 	We held that valuation for severance tax purposes should
occur “in the immediate vicinity of the point at which the oil or
gas is physically removed from the earth,” but that “to qualify
as the point at which production is complete, that point must be
one at which sales of the oil and gas may actually occur.” 	Id.
¶ 19. 	In addition, we gave our holding limited application,
recognizing that “retroactive application could result in large
refunds of taxes already collected and spent by governmental
entities.” 	Id. ¶ 23. 	Thus, with the exception of ExxonMobil we
limited the holding to prospective application “as to other
parties who may have refund requests, deficiency proceedings, or
similar matters pending before the Tax Commission.” 	Id. ¶ 24.
¶11 	Following ExxonMobil, Unocal’s appeal recommenced
before the Tax Commission, and Unocal sought to have the
ExxonMobil holding applied to its severance tax assessments. 	The
Tax Commission declined to do so because Unocal’s appeal was
pending when ExxonMobil was decided and was therefore outside the
scope of the limited holding. 	Unocal asks us to overrule the
limitation on retroactivity in order to apply the ExxonMobil
holding to its appeal.
¶12 	The Tax Commission opposes our consideration of
Unocal’s request, in part on the theory of res judicata. 	But we
need not wrestle with the application of res judicata. 	As the
court of last resort on matters of state law, we are always at
liberty to review, and revise, our prior decisions. 	While legal
principles like res judicata play an important role in the
predictability and stability of our legal framework, they always
bow to the wisdom of time when a prior action or decision is
truly in need of change.
¶13 	We are convinced that our decision in ExxonMobil
requires some modification and clarification. 	The concern for
upheaval caused by requiring governmental units to repay already
committed and spent funds is still a valid one, and our express
declaration that the holding in ExxonMobil is to be limited to
prospective matters still applies in part. 	However, as explained
hereafter, we address questions of application differently.

5 	No. 20080068
II. 	APPLICATION OF EXXONMOBIL TO PENDING PROCEEDINGS
¶14 	Unocal alternatively asks us to clarify the scope of
ExxonMobil’s retroactivity limitation. 	This task requires that
we look first to the plain language used by this court to
determine the scope. 	See Kennecott Corp. v. Utah State Tax
Comm’n, 862 P.2d 1348, 1350 (Utah 1993) (“Hence, the opinion’s
plain language dictates that it apply only to those litigants and
only for . . . the tax year for which the suit . . . was
brought.”).
¶15 	In ExxonMobil we stated, “whether in refund requests or
deficiency proceedings, as to all but ExxonMobil the rule
announced today is to have prospective application only.”
ExxonMobil Corp. v. Utah State Tax Comm’n, 2003 UT 53, ¶ 23, 86
P.3d 706. 	We restated in the conclusion, “Although ExxonMobil is
entitled to further adjudication of its claim for a refund, as to
other parties who may have refund requests, deficiency
proceedings, or similar matters pending before the Tax
Commission, our holding is to apply prospectively only.” 	Id.
¶ 24 (emphasis added).
¶16 	The Tax Commission interprets our holding, and the word
“pending,” to refer to the period being taxed, rather than the
time at which proceedings are commenced before the Commission.
Thus, proceedings based on taxes accrued during periods prior to
ExxonMobil would be immune from application of its holding,
regardless of when they were initiated. 	The Tax Commission cites
American Trucking Ass’n, Inc. v. Smith, 496 U.S. 167 (1990), as
support for this contention. 	In American Trucking, the United
States Supreme Court indeed reasoned that where the federal
taxation statute had been declared unconstitutional, “the
critical event for prospectivity is the occurrence of the
underlying transaction, and not the payment of the money
therefore.” 	Am. Trucking Ass’n, Inc., 496 U.S. 167 at 188
(internal quotation marks omitted). 	However, the Court also
recognized that its retroactivity determination was “a matter of
federal law” and that “[w]hen questions of state law are at
issue, state courts generally have the authority to determine the
retroactivity of their own decisions.” 	Id. at 177. 	We agree.
“[W]hen the rule involved is one of state law, . . . the decision
of prospectivity or retroactivity belongs to the state.”
Kennecott Corp., 862 P.2d at 1351. 	We are not bound by the
court’s reasoning in applying federal tax law. 	We make our own
retroactivity determinations in matters of state law. 	The
holding of ExxonMobil expresses our decision to base prospective
application on the date of the tax refund or deficiency
proceeding, declining to retroactively apply the holding to

No. 20080068 	6
currently pending proceedings, except for those matters initiated
by ExxonMobil. 	Additionally, matters initiated and resolved
prior to ExxonMobil are not subject to retroactive application.
Only matters commenced subsequent to ExxonMobil will be subject
to the articulated holding.
¶17 	Accordingly, because the Tax Commission issued the
deficiency notices against Unocal for the Second Assessment
Period after the announcement of ExxonMobil, they were commenced
after ExxonMobil and were not “pending.” Therefore they are not
subject to analysis under the rule announced in ExxonMobil.
¶18 	The Tax Commission contends that because the Second
Assessment Period deficiency appeal was consolidated with the
deficiency proceeding for the First Assessment Period, which was
pending at the issuance of ExxonMobil, the Second Assessment
Period deficiency appeal should also be considered part of the
“pending proceedings.” 	This argument is unpersuasive. 	The fact
that the proceedings were consolidated only confirms that they
were separate matters at the outset, one of which was commenced
before ExxonMobil and one afterwards. 	We are unwilling to apply
a relation back analysis to such a situation. 	We thus hold that
the deficiency proceeding against Unocal for the Second
Assessment Period was not pending at the issuance of ExxonMobil
and is subject to the holding announced therein.
¶19 	Conversely, the deficiency proceeding against Unocal
for the First Assessment Period was pending at the issuance of
ExxonMobil and clearly falls within the limitation on
retroactivity. 	However, deficiency assessments do not implicate
the same revenue concerns as refund requests. 	As we explained,
albeit briefly, in ExxonMobil, our limitation on retroactivity
was to “protect the solvency of governmental entities” from the
potential burden of “large refunds of taxes already collected and
spent.” 	2003 UT 53, ¶ 23. 	However, as Unocal argues here, if a
taxpayer prevails in challenging a deficiency assessment, the
government would never be required to pay out funds already
collected. 	The only possible adverse result suffered by the
state in a deficiency assessment action is a failure to receive
additional tax revenue from the taxpayer.
¶20 	Given this distinction and the implications for the
public treasury, we are persuaded to refine our limitation on
retroactivity with respect to deficiency assessment matters
pending at the time of our decision in ExxonMobil. 	Deficiency
assessments issued by the Tax Commission but unresolved at the
time of our decision in ExxonMobil fall within the ambit of the
ExxonMobil analysis. 	As before, the ExxonMobil holding will not

7 	No. 20080068
apply retroactively to those pending matters that are taxpayer
initiated refund requests. 	Consequently, the deficiency
assessments pending against Unocal for the First Assessment
Period are subject to ExxonMobil.
III. 	REMAINING VALUATION ISSUES
¶21 	Finally, Unocal appeals a number of valuation
determinations in the Tax Commission’s decision. 	These
determinations were made without application of ExxonMobil’s
point of valuation guidance. 	Because we hold that both of
Unocal’s appeals are subject to the valuation definition set
forth in ExxonMobil, we remand the valuation issue stemming from
the point of valuation to the Tax Commission for consideration
under the analysis and rule as set forth in ExxonMobil. 	We
affirm the Tax Commission as to the remaining valuation
questions.
¶22 	We discuss only Unocal’s appeal of the application of
the annual exemption for guidance to the Tax Commission and
parties generally. 	Utah Code section 59-5-102(2)(a) exempts “the
first $50,000 annually in gross value of each well or wells” from
the severance tax and provides that the exemption is “to be
prorated among the owners in proportion to their respective
interests.” 	Utah Code Ann. § 59-5-102(2)(a) (2000). 	In
accordance with the statute, the Commission gave Unocal a single
exemption for all wells located within the Lisbon Field for each
year through 1998. 	In 1999, because Unocal sold its interest in
the Lisbon Field halfway through the year, the Commission reduced
the annual exemption by fifty percent.
¶23 	Unocal contends that this application of the exemption
was error because under the statutory language it is entitled to
the full exemption for each individual well within the Lisbon
Field and should receive the full exemption for 1999 where the
first $50,000 in gross value was produced while Unocal retained
its interest in the production.
¶24 	In considering Unocal’s contentions, we look to the
statute’s plain language. 	Evans v. State, 963 P.2d 177, 184
(Utah 1998). 	The statute exempts from severance taxation “the
first $50,000 annually in gross value of each well or wells as
defined in this part.” 	Utah Code Ann. § 59-5-102(2)(a) (1992 &
Supp. 1996) (emphasis added). 	“Well or wells” is defined as “any
extractive means from which oil or gas is produced or extracted,
located within an oil or gas field, and operated by one person.”
Id. § 59-5-101(20) (2000). 	As the Commission points out, this
statutory definition does not distinguish between the single or

2 See Parson Asphalt Prods., Inc. v. Utah State Tax Comm’n,
617 P.2d 397, 398 (Utah 1980) (“Statutes which provide for
exemptions should be strictly construed, and one who so claims
has the burden of showing his entitlement to the exemption.”)
(footnotes omitted).
No. 20080068 	8
plural, but acknowledges that oil and gas may be extracted from a
field by a single well or a number of wells. 	Thus, the
Commission concluded that “the operation of a number of wells to
extract oil and gas would appear to be a single means of
extraction.” 	That the exemption applies to extractive means
“located within an oil or gas field” indicates that an operator
of more than one field would receive the exemption for each
field. 	In addition, the statute contemplates an extractive means
operated by one person or entity. 	During the time of its
operation, Unocal was the sole operator of the Lisbon Field.
Thus, according to the plain language of the statute, and
supported by the fact that tax exemptions are to be construed
narrowly, 2 we agree with the Tax Commission that the annual
exemption is to be applied as a “field exemption” and not as a
“well exemption” to each individual well.
¶25 	The statute goes on to provide that the exemption “be
prorated among the owners in proportion to their respective
interests in the production or in the proceeds of the production”
of “the first $50,000 annually in gross value.” 	Id. § 59-5-
102(2)(a). 	Unocal contends that the legislature intended that
the exemption be prorated among the parties who share ownership
when “the first $50,000" of oil or gas is extracted from the
wells, rather than among the parties who share ownership of the
entire annual production. 	Were this to be the case, a party who
had an ownership interest in oil and gas production only during
the latter part of a year, as here, would not be entitled to any
portion of the exemption, though it bore its share of the costs
and burdens of production. 	We believe such an interpretation
runs contrary to the accepted principle that “taxes should be
imposed equally and without discrimination so that everyone bears
his fair share of the tax burden.” 	See Parson Asphalt Prods.,
Inc. v. Utah State Tax Comm’n, 617 P.2d 397, 398 (Utah 1980).
Instead, each owner in the annual oil and gas production is
entitled to a proportional share of an exemption of the first
$50,000 from production. 	This analysis was applied by the Tax
Commission, and we therefore affirm.
¶26 	The other valuation issues presented by Unocal are
within the discretion of the Tax Commission to determine. 	As we
find no error in the Tax Commission’s determinations, we remand
only the question arising from the point at which the oil and gas

9 	No. 20080068
are to be valued for consideration of the appropriate valuation
as set forth in ExxonMobil.
¶27 	We note that the centerpiece of the ExxonMobil
controversy has been the circumstances under which it is subject
to retroactive application. 	Our resolution of the controversy
here does not actually concern prospective application. 	Rather,
after Union Oil, a claim’s status as “pending” will be
inconsequential for severance tax calculation purposes. 	Instead,
the nature of the claim will determine whether it survives
ExxonMobil. 	In every deficiency action, the ExxonMobil valuation
formula will apply. 	Where refunds are sought, however,
ExxonMobil will have only prospective application, except as to
Exxonmobil itself. 	We acknowledge that this development
represents a substantial modification of ExxonMobil.
¶28 	Affirmed in part, reversed in part, and remanded for
further proceedings consistent with this opinion.
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¶29 	Chief Justice Durham, Associate Chief Justice Durrant,
Justice Parrish, and Justice Nehring concur in Justice Wilkins’
opinion.