Ferdig Oil Company v. Department of Revenue

1
BEFORE THE STATE TAX APPEAL BOARD
OF THE STATE OF MONTANA
-----------------------------------------------------------------
THE DEPARTMENT OF REVENUE )
OF THE STATE OF MONTANA, )
) DOCKET NO.: PT-1999-24
Appellant, )
)
-vs- )
)
FERDIG OIL COMPANY, ) FACTUAL BACKGROUND,
) CONCLUSIONS OF LAW,
Respondent. ) ORDER and OPPORTUNITY
) FOR JUDICIAL REVIEW
-----------------------------------------------------------------
The above-entitled appeal was heard on August 2, 2000, in
the City of Shelby, in accordance with an order of the State Tax
Appeal Board of the State of Montana (the Board). The notice of
the hearing was given as required by law.
The taxpayer, represented by Charles Jansky, president,
and Curtis Dahlgaard, vice president, presented testimony in
opposition to the Department of Revenue appeal. The Department of
Revenue (DOR), represented by Charles Pankratz, Region 2 leader,
and Kevin Watterud, appraiser, presented testimony in support of
its appeal. Testimony was presented and exhibits were received. The
Board then took the appeal under advisement; and the Board having
fully considered the testimony, exhibits and all things and matters
presented to it by all parties, finds and concludes as follows:

2
FACTUAL BACKGROUND
1. Due, proper and sufficient notice was given of this
matter, the hearing, and of the time and place of the hearing. All
parties were afforded opportunity to present evidence, oral and
documentary.
2. The property which is the subject of this appeal is
described as follows:
Personal property identified as oil field
storage tanks located in Toole County, State
of Montana (Assessor number: 000G751517)
3. The taxpayer appealed to the Toole County Tax Appeal
Board on November 22, 1999, citing the following reason for appeal:
All personal property (stock tanks/
gas shacks) not returned to personal
property using acquired year/acquired
cost basis as specified by 1999
legislature.
4. In its January 28, 2000 decision, the county board
approved the appeal, stating:
Please be advised that the Toole
County Tax Appeal Board has met and
arrived at a decision regarding the
above-referenced appeal, which was
heard on January 27, 2000.
The Toole County Tax Appeal Board
finds that the Montana Department of
Revenue is in error in taxing the
storage tanks as they currently are
and must revert the storage tanks
back to Class eight property as
specified in Section 15-6-138 (c),
MCA (1999). SB 487 in the 1999
Legislative Session added paragrah c

3
to Section 15-6-138, MCA (1999).
Oilfield storage tanks are included
in this paragraph, and thus must be
taxed as Class eight property. Your
appeal for reclassification is
approved and the Department of
Revenue is directed to make those
changes. . .
5. The DOR then appealed that decision to this Board on
February 25, 2000, stating: “The nature of the proof adduced at
the hearing was insufficient, from a factual and a legal
standpoint, to support the Board’s decision.”
DOR’S CONTENTIONS
Mr. Pankratz testified that the DOR appealed to this
Board because the county board decision was “rather vague. I
believe they felt that they had written specifically to the
particular issues that they’d heard, but, as I read their decision,
it would have been my opinion that we had already done what they’d
asked. . . I wanted some further explanation.” (DOR Exhibit A, a
copy of the Toole County Tax Appeal Board decision dated January
28, 2000).
DOR Exhibit B is a copy of the 1999 assessment notice to
Ferdig Oil. This document lists the legal description, property
class code, quantity, 1998 and 1990 market value, the taxable
percentage and the taxable value of personal property subject to
taxpayer under the ownership of Ferdig Oil. Mr. Pankratz noted
that this document shows that the DOR has classified the subject

4
personal property as Class 8 with a taxable percentage of six
percent. Therefore, he contended, the DOR has already complied with
the directive of the Toole County Tax Appeal Board. Thus, the
issue before this Board is not a classification issue; rather, it
is a valuation issue.
DOR Exhibit D is a copy of DOR policy regarding the
valuation and assessment of oilfield buildings and tanks, dated
October 18, 1996. In pertinent part, this policy directs DOR
employees that “This procedure establishes guidelines for
completing the valuation and assessment of oilfield buildings and
tanks. Beginning with the 1998 tax year, oil field storage tanks
(class code 3310) and buildings (permanent and movable) shall be
considered real property. These improvements will be appraised and
assessed as Class 4 commercial property.”
Mr. Pankratz’ testimony was that, in 1999, the Montana
Legislature met and, “because of some lobbying”, revised Montana
code pertaining to the valuation of oilfield buildings and tanks.
SB487, codified in Section 15-6-138 (c), MCA, provided that
“all oil and gas production machinery, fixtures, equipment,
including pumping units, oil field storage tanks, water storage
tanks, water disposal injection pumps, gas compressor and
dehydrator units, communication towers, gas metering shacks
treaters, gas separators, water flood units, gas boosters, and

5
similar equipment that is skidable, portable, or movable, tools
that are not exempt under 15-6-201 (1) (r), and supplies except
those included in class five” was to be classified as class eight
property and taxed at six percent for tax years beginning after
December 31, 1997.
Mr. Pankratz stated that SB184 was also passed by the 1999
legislative session, “which was a major change in assessment of
real estate and affected almost all properties statewide. Compared
to this particular law change, SB487, had minimal impact.” (SB184
concerned the “phasing in” of increased valuations as a result of
the 1997 statewide reappraisal of property).
According to Mr. Pankratz, implementation of SB487 (Section
15-6-138 (c), MCA) was “put on the back burner in view of the
massive undertaking of implementation of SB184.” Sometime in the
latter part of 1999, DOR staff was still receiving instruction on
how to implement SB487 in an equitable manner among all affected
taxpayers. The decision was made at that time that, if “individual
comprehensive field reviews had been done on properties last year
(in 1998), and depreciation levels had been correctly determined to
arrive at market value, the same depreciation levels could be used
this year when entering the properties onto BEVS.”(Business
Equipment Valuation System. Taxpayer’s Exhibit 5, August 27, 1999
memorandum to all regional DOR offices from administrative staff in
Helena). Mr. Pankratz explained that, according to the August 27,

6
1999 directive, “we would use the CAMA (computer assisted mass
appraisal) system to arrive at a market value, a replacement cost
new less depreciation and then that CAMA system market value would
be transferred to the business equipment valuation system and be
used to set the market value for storage tanks and gas shacks. . .
I don’t believe that the administrative rule was changed other than
that, based on Department personnel interpretation, that the first
line (of ARM 42.21.138 (1), oil and gas field machinery shall be
valued using the cost approach to market value, provided us enough
authority to value the oil and gas storage tanks and the gas
shacks.”
The DOR did not use the taxpayer’s acquired cost in its
valuation and, therefore, did not apply trending factors specified
in ARM 42.21.138 (3).
Mr. Pankratz stated that the DOR used the cost approach
(replacement cost new less depreciation) in valuing the subject
personal property. “We (the DOR) used the CAMA system, which has
tank values incorporated into their cost tables. CAMA is generally
for land and improvements valuation. . .” According to Mr.
Pankraz, the DOR consulted pages 45-46, part 4, under replacement
cost, of the Montana Appraisal Manual, to determine replacement
cost new. That value was “tempered based on new information that
we got about what these tanks are really worth, Fort Benton, tank

7
manufacturers. . . we did this informal review and we found that
our tank values, under replacement cost, were rather high. We
didn’t have the ability to change the cost tables because there are
other properties that we valued with the same cost tables but we
did have an opportunity to adjust the depreciation. The tanks
needed considerably more depreciation to get them to the final
replacement cost new less depreciation value which we have
determined to be market value. . . we attempted, because we had
people in the field, we had people going out with the actual oil
and gas producers, we made every attempt that we could arrive at a
market value that was appropriate based on the conditions of these
tanks and within our capacity. Our business equipment valuation
system applies a percent good at the lowest possible rate of 27
percent for the year in question, salvage value. We needed to use
depreciation levels lower than that. The depreciation levels that
we are using, in many cases, are ten percent good because of the
replacement cost new being higher than it should have been. We
overrode the depreciation. . .” (Charles Pankratz testimony, State
Tax Appeal Board hearing, August 2, 2000).
TAXPAYER’S CONTENTIONS
The properties at issue in this appeal are: all properties
that had oil field storage tanks classified as real property in

8
1998 and returned to personal property in 1999. This specifically
includes all new properties acquired by Ferdig in 1998 and first
rendered as of 1 January 1999 by Ferdig (properties 84-88 listed in
Attachment (6) [Svare, Dix Mont State, Flesch, Kalbar,and Great
Northern]). (Taxpayer’s Exhibit one, page three).
The taxpayer is unsure of a dollar amount to request:
“because for the year 1999 there was so much flying back and forth
that at the end of the day we don’t know, because the tanks were
mixed in with other things, we don’t actually what the final tank
numbers were in all cases, all we got was a lump of money we owed
on a property, you couldn’t break it out among the tanks so I can’t
say exactly what the tax would have been versus what we paid. That
was not information that we got.” (Charles Jansky testimony, State
Tax Appeal Board hearing, August 2, 2000).
Mr. Jansky argued that the DOR established the market value
of the subject personal property using real property criteria. Once
that was determined, the subject property “was certainly taxed as
Class 8 personal property. So, in that sense, I think that the
Toole CTAB’s decision maybe wasn’t completely clear. It basically
said the taxpayer won, so assess the property as if it were
personal property. Well, the fact of the matter is, the State
did.”
The taxpayer’s position is contained in Taxpayer’s

9
Exhibit 1 (Statement of Position): “For tax year 1999 Ferdig
believed that oil field storage tanks were not properly returned to
the category of personal property by the Montana Department of
Revenue (DOR) in accordance with the legislative mandate of SB487.
As a result, Ferdig’s oil field storage tanks were grossly over
valued in 1999 and Ferdig was excessively taxed by the DOR. Ferdig
filed a timely appeal with the Toole County Tax Appeal Board and
this appeal was heard on 27 January 2000. The result of the appeal
was that Ferdig’s position was sustained. The DOR appealed the
Toole County Tax Appeal Board’s findings and that has resulted in
the matter now being heard before the State Tax Appeal Board.
Background:
Prior to 1997 all oil and gas field machinery and equipment
(wellheads, pump jacks, water separators, pumps, oil field storage
tanks, injection pumps, gas compressors, etc.) were categorized as
mining machinery which made such items of machinery and equipment
Class eight personal property per 15-6-138 (1) (b) MCA.
15-6-138. Class eight property – description- taxable
percentage. (1) Class eight property includes:
(b) all mining machinery, fixtures, equipment, tools that are not
exempt under 15-6-201 (1) (r), and supplies except those included
in class five;
The method of valuing and depreciating this oil and gas
field machinery and equipment was (and remains) outlined in ARM
42.21.138 (1) as follows:
“Oil and gas field machinery and equipment shall be
valued using the cost approach to market value. The
taxpayer must provide to the department the acquired
cost, the year acquired, and an itemized description of
each piece of machinery and equipment. The acquired cost
will be trended to current replacement cost and then
depreciated according to the scheduled mentioned in (2).”
In 1996 the DOR decided that since oil field storage tanks
were not specifically listed under the definition of “all mining
machinery, fixtures, equipment,” they (the DOR) had the latitude to
administratively reclassify oil field storage tanks from class
eight personal property to class 4 commercial property and that is
what they did, starting for the 1998 tax year. Attachment (3),
provided by DOR representative Kevin Watterud during the hearing
before the Toole County Tax Appeal Board, concisely sets forth this
administrative change in the treatment of oil field storage tanks,
moving them from the BEVS (Business Equipment Valuation System –

10
generally used for personal property) to the CAMAS (Computer
Assisted Mass Appraisal System –generally used for real property).
The effect of this reclassification in 1998 was, in Ferdig’s
case, to increase the taxable value of the oil field storage tanks
by a factor of approximately ten. As Ferdig’s situation was by no
means unique, there was a considerable amount of industry objection
to the entire process. This resulted in some modifications to the
valuation by the DOR but the bottom line is that Ferdig’s oil
field storage tanks wound up with an artificial market value in
1998 significantly higher than their acquired costs. The taxpayer
did not appeal in 1998 because “most of the time, on one, or two,
or three, or five properties, life’s too short to fight about it
and we had more things to do and there was some give and take back
and forth and, at the end of the day, we accepted it for 1998 and
went on about our business.” (Charles Jansky testimony, State Tax
Appeal Board hearing, August 2, 2000).
In 1999, the Montana legislature was made aware of the
inconsistencies regarding the administrative reclassification of
Oil field storage tanks (and certain other items of oilfield
equipment and machinery) from personal property to real property.
As DOR spokespersons were unable to provide any rational basis for
having made the reclassification, the legislature (with virtually
no dissent) passed SB487 [(attachment (1)]. SB487 was intended to
do nothing more than legislatively correct an overreach of
administrative discretion by the DOR. To accomplish this, SB487
specifically listed oil field storage tanks (and certain other
items of oilfield equipment) as class eight personal property in a
new paragraph (c) to Section 1 of 15-6-138, MCA as follows:
15-6-138. Class eight property – description – taxable
percentage. (1) Class eight property includes: (c) all
oil and gas production machinery, fixtures, equipment,
including pumping units, oil field storage tanks, water
storage tanks, water disposal injection pumps, gas
compressor and dehydrator units, communication towers,
gas metering shacks, treaters, gas separators, water
flood units, gas boosters, and similar equipment that is
skidable, portable, or movable, tools that are not exempt
under 15-6-201 (1) (r), and supplies except those
included in class five.
SB489 (sic) also provided (Section 3) that the act applied
retroactively to tax years beginning after December 31, 1998.
The legislative intent was unambiguous: Starting in the

11
1999 calendar year, oil field storage tanks were again to be
categorized as “oil and gas field machinery and equipment” and were
to be valued on the basis of acquired year/acquired cost per ARM
42.21.138 (1) [Attachment (2)]. This is not only what the plain
language of the law stated, but was also consistent with the
understanding of the legislative sponsor of the bill (Senator Glen
Rosch) and the primary author of the bill (Mr. Patrick Montalban on
behalf of the Northern Montana Oil and Gas Association.)
Analysis of DOR’s Implementation of SB489: (sic)
Instead of reverting back to the original method of valuing
the oil field storage tanks (acquired year/acquired cost per ARM
42.21.138 (1), however, the DOR made another administrative
decision, this time to value the reclassified equipment
“utiliz(ing) the current appraised value to ascertain the original
installed cost and year of installation for these tanks and
buildings.” This decision is outlined in Attachment 4, a DOR
Memorandum dated 6 August 1999, with the offered justification
being that doing it any other way would have required “a
considerable amount of time and work. . . .”
Cutting to the chase, this means that in Ferdig’s particular
case the oil field storage tanks got returned to personal property
at values far higher (by a factor of five) than even their original
acquired cost. We believe this procedure was wrong; we believe it
was contrary to the specific intentions of the legislation as
explained by Mr. Montalban and Senator Rouch; and we believe that
at least in Ferdig’s case it would have required less time for the
DOR to have “done it right” than to have followed the course
actually taken. Indeed, it can be noted from Attachment (5), a DOR
memorandum of 27 August, 1999, that the problems of adapting the
CAMAS valuation to the BEVS depreciation schedule was akin to
shoving a square peg in a round hole: it didn’t fit very well . ..
Proposed method of resolution:
In all instances, the DOR has already furnished all items of
cost on each of the involved properties. Thus, the only work
necessary will be to return the value of the oil field storage
tanks to their acquired cost basis as originally reported by
Ferdig. Attachment (6) contains a summation of all of the acquired
cost/acquired year information on all of Ferdig’s oil field storage

12
tanks and is consistent with that previously furnished the DOR
going back over twenty years.
Illustration of Error:
Attachment (6) is a listing of values assigned by the DOR
for all of Ferdig’s oil and gas storage tanks as of 1 January 2000.
We believe the values assigned by the DOR for 2000 are identical to
those used by the DOR in 1999 although no similar rendition was
provided by the DOR for 1999. Attachment (6) also shows the
variation between the acquired year/acquired cost used by Ferdig
and the values assigned by the DOR. As can be noted, the total
value assigned by the DOR for Ferdig’s stock tanks is over five
times the acquired cost of Ferdig’s oil field storage tanks
($647,900 vs. $125,580) without even considering depreciation.
Action requested by STAB:
Direct the DOR to value all of Ferdig’s oil field storage
tanks utilizing the acquired year/acquired cost method (ARM
42.21.138 (1).
BOARD’S DISCUSSION
The Board finds that the taxpayer has satisfactorily
demonstrated that the valuation methodology employed by the DOR in
valuing the subject personal property was inappropriate.
ARM 42.21.138 (1) provides that “oil and gas field machinery
and equipment shall be valued using the cost approach to market
value. The taxpayer must provide to the department the acquired
cost, the year acquired, and an itemized description of each piece
of machinery and equipment. The acquired cost will be trended to
current replacement cost and then depreciated according to the
scheduled mentioned in (2). (Emphasis supplied.)
Mr. Pankratz acknowledged that the use of CAMA, primarily

13
used for real estate valuation, has overstated the replacement cost
new of these tanks.
When questioned as to his opinion regarding the appropriate
valuation methodology to be used for the subject storage tanks, he
testified: “I would say, based on my knowledge and my experience
with the Department of Revenue, generally, that would fall right in
the acquired year/acquired cost category. For future years, we
will be using acquired year/acquired cost. We’ve finally settled
that issue and, also came to the understanding that the law change
requires us to put oil storage tanks and gas shacks into the
category of class eight and then rely on the acquired year/acquired
cost methodology for the future. So, in the future we will be doing
that. We’ve learned our lesson for 2000. . . We had equalized it,
but did we follow the strict administrative rule? Probably not.”
CONCLUSIONS OF LAW
1. The State Tax Appeal Board has jurisdiction over this
matter. Section 15-2-301, MCA, Appeal of county tax appeal board
decisions. (4) In connection with any appeal under this section,
the state board is not bound by common law and statutory rules of
evidence or rules of discovery and may affirm, reverse, or modify
any decision.
2. Section 15-6-138, MCA. Class eight property – description –
taxable percentage. (1) Class eight property includes: (c) all oil

14
and gas production machinery, fixtures, equipment, including
pumping units, oil field storage tanks, water storage tanks, water
disposal injection pumps, gas compressor and dehydrator units,
communication towers, gas metering shacks, treaters, gas
separators, water flood units, gas boosters, and similar equipment
that is skidable, portable, or movable, tools that are not exempt
under 15-6-201 (1) (r), and supplies except those included in class
five.
3. ARM 42.21.138 (1) Oil and gas field machinery and equipment
shall be valued using the cost approach to market value. The
taxpayer must provide to the department the acquired cost, the year
acquired, and an itemized description of each piece of machinery
and equipment. The acquired cost will be trended to current
replacement cost and then depreciated according to the scheduled
mentioned in (2).
4. It is true, as a general rule, that the appraisal of the
Department of Revenue is presumed to be correct and that the
taxpayer must overcome this presumption. The Department of Revenue
should, however, bear a certain burden of providing documented
evidence to support its assessed values. (Western Airlines, Inc.,
v. Catherine Michunovich et al., 149 Mont. 347, 428 P.2d 3,(1967).
The Board finds that the DOR did not satisfactorily meet its
burden, through substantial and credible evidence, in opposition to
the taxpayer’s contentions.

15
ORDER
IT IS THEREFORE ORDERED by the State Tax Appeal Board of the
State of Montana that the subject personal property shall be
entered on the tax rolls of Toole County at values consistent with
the use of the taxpayer’s acquired cost and acquired year with the
application of appropriate trending methodologies prescribed in ARM
42.21.138 (3). The appeal of the DOR is hereby denied.
Dated this 21st of August, 2000.
BY ORDER OF THE
STATE TAX APPEAL BOARD
_______________________________
GREGORY A. THORNQUIST, Chairman
_______________________________
( S E A L ) JAN BROWN, Member
_______________________________
JEREANN NELSON, Member
NOTICE: You are entitled to judicial review of this Order in
accordance with Section 15-2-303(2), MCA. Judicial review may be
obtained by filing a petition in district court within 60 days
following the service of this Order.

16
CERTIFICATE OF SERVICE
The undersigned hereby certifies that on this 21st day of
August, 2000, the foregoing Order of the Board was served on the
parties hereto by depositing a copy thereof in the U.S. Mails,
postage prepaid, addressed to the parties as follows:
Attn: Charles Jansky
President
Ferdig Oil Company
16126 Chasemore Drive
Spring, Texas 77379
Office of Legal Affairs
Department of Revenue
Mitchell Building
Helena, Montana 59620
Appraisal Office
Toole County
County Courthouse
Shelby, Montana 59474
Hales Scalese
Chairman
Toole County Tax Appeal Board
RR Box 22
Galata, Montana 59444
_________________________
DONNA EUBANK
Paralegal