Exxon's Brief to the Board of Equalization

FOR THE STATE OF WYOMING

EXXON CORPORATION'S RESPONSE TO SUBLETTE COUNTY'S PETITION FOR INVESTIGATION UNDER WYO. STAT. ' 39-11-102.1(C)(X)

IN THE MATTER OF THE ALLEGATIONS BY )

THE BOARD OF COUNTY COMMISSIONERS, ) Docket No. 97-10

SUBLETTE COUNTY, WYOMING, OF ILLEGAL, )

IMPROPER AND UNEQUAL ASSESSMENT OF )

MINERAL PRODUCTION OWNED AND/OR )

EXTRACTED AND SOLD BY EXXON COMPANY, )

U.S.A., FROM CERTAIN GAS WELLS PRODUCING )

FROM THE MADISON FORMATION LOCATED IN )

THE LABARGE WELLFIELD IN SUBLETTE COUNTY,)

WYOMING, FOR PRODUCTION YEARS 1991, 1992 )

1993, 1994 AND 1995 )

Exxon Corporation ("Exxon"), by its counsel Holland & Hart and Hathaway, Speight & Kunz, LLC, respectfully submits this response to Sublette County's Petition for a Board investigation under WYO. STAT. ' 39-11-102.1(x) (formerly WYO. STAT. ' 39-1-304(a)(xiv) and thus referred to below as Section "14").

INTRODUCTION

There are three separate reasons why the County's Section 14 Petition does not allege any basis for an independent investigation. First, Section 14 can, and should, be limited to allegations of fraud, negligence or malfeasance by the tax authorities. None of the County's allegations raise genuine concerns about official fraud, negligence or malfeasance in the administration of the tax laws, and therefore the Petition fails to state a claim under Section 14.

Second, none of the County's allegations have merit. Most are based on incorrect factual assumptions, and several conflict with existing law. Others raise issues which the Departments of Audit or Revenue have long since resolved to their satisfaction.

Finally, there are a number of practical considerations which strongly counsel against unwinding the last eight years worth of valuations. As the Supreme Court held, the Settlement Agreement with the County is binding, and therefore any proceeding which changes the valuation method retroactively will reopen the taxation of federal helium (a $10 million potential refund) and require the Department and Exxon to derive a new valuation method where no adequate alternative exists. Both practically and financially, there is no compelling reason to invite these new issues, and what would likely be years of additional litigation.

This brief will fully develop each of these arguments. As requested by the Board, the first section outlines Exxon's view on the proper scope of Section 14. Next, Exxon will recount the history of the 1989 Settlement Agreement and the valuation methodology at issue. Exxon will then respond to the central allegations of the County's Petition, and explain why they fail to identify any substantial grounds to believe that there has been some fraud, malfeasance or negligence in the administration of the tax laws. Finally, Exxon will look ahead, and point out the substantial problems this Board and the parties will unavoidably incur if the present valuation method is effectively set aside following an investigation.

I. THE BOARD SHOULD LIMIT THE SCOPE OF SECTION 14 TO ALLEGATIONS OF FRAUD, NEGLIGENCE OR MALFEASANCE IN THE ADMINISTRATION OF THE TAX SYSTEM.

The first question is the scope of any investigation. As Exxon stated at the hearing before the Board last month, the scope of the Board's inquiry must be resolved in advance so that the Board's investigative powers can be appropriately exercised. See, e.g., WYO. STAT. ' 39-11-102.1(xv) (ability to discover information from the parties is governed by "the scope of the inquiry"). To define the correct scope of its investigative powers, therefore, the Board must construe Section 14. In construing Section 14, as in construing any tax statute, it is well settled that any doubt as to the construction of a tax statute must be resolved in favor of the taxpayer. Gould v. Gould, 245 U.S. 151, 153 (1917); Kelsey v. Taft, 263 P. 2d 135, 138 (Wyo. 1953).

Section 14 requires the Board to: carefully examine into all cases wherein it is alleged that property subject to taxation has not been assessed or has been fraudulently, improperly, or unequally assessed, or the law in any manner evaded or violated, and cause to be instituted proceedings which will remedy improper or negligent administration of the tax laws of the state ....

WYO. STAT. ' 39-11-102.1(c)(x). The County contends that this provision requires the Board to conduct an examination whenever anyone, at any time, alleges any error, in any assessment. Exxon submits, however, that such a broad interpretation of Section 14 ignores the legislative history, flies in the face of the most fundamental cannons of statutory interpretation, and contravenes sound tax policy. A thorough analysis of Section 14 and its place among the other tax statutes is therefore the best place to begin.

Section 14 was first enacted in 1919. 1919 WYO. SESS. LAWS, Chapter 135, 11(2). At that time, there were no state assessments and there was no Department of Revenue. All valuations, appraisals, and levies occurred at the county level, and were conducted by county assessors. In a far-flung rural state, this naturally created fertile ground for fraud, improper conduct by local tax officials, and unequal assessment of like property in different parts of the State. As a result, the new State Board of Equalization was created for the purpose of regulating this system to insure uniformity and legality. Significantly, the same Act that created Section 14 also established a separate appeal right to the Board. See 1919 WYO. SESS. LAWS, Ch. 135, 11(1). Thus, from the outset, Section 14 was viewed as something entirely different than a vehicle to pursue an ordinary appeal.

Over the years, the tax statutes were repeatedly amended but the distinction between appeals and "examinations" remained. Amendments in 1923 and 1957 changed the Board's responsibilities but maintained a careful separation between appeals and examinations. See 1923 WYO. SESS. LAWS Ch. 56,  1(a) and  1(b); WYO. STAT.  39-26(a) (1957) (power to review individual assessments) and WYO. STAT.  39-26(b) (1957) (power to investigate). In 1973, a major overhaul of the tax system occurred but the Legislature again maintained separate statutes for appeals and investigations. In fact, the Legislature codified the requirement that appeal had to be filed within thirty days, thus cementing the policy of finality in individual assessments. WYO. STAT. 39-43.10(i) (1973).

As this history demonstrates, the Legislature has always considered the appeals process the appropriate vehicle for correcting any alleged errors in individual assessments, not the Section 14 "examination" provision. Today, as has been the case since at least 1973, the statutes and the Board's own rules require a separate timely appeal to challenge alleged errors in an individual assessment. Ch. 3, ' 2(a), Rules and Regulations of the State Board of Equalization; WYO. STAT.  39-11-102.1(c). The Supreme Court has honored and enforced this requirement. Amax Coal West, Inc. v. Wyoming State Bd. of Equalization, 896 P.2d 1329, 1333 (Wyo. 1995). In short, the "examination" powers found in Section 14 have never been thought by the Legislature to include the right to address alleged errors in individual assessments subject to appeal--these errors are handled by appeal, not by "examination" under Section 14.

The County will nevertheless contend that the word "improperly" means that any appraisal judgment or arguably incorrect valuation is fair game for an investigation under Section 14. Loosely construed, an "improper" assessment could be taken to mean any assessment that is less than perfect. The word "improper" has multiple dictionary definitions. In some contexts it means "incorrect," while in other contexts it means "wrongdoing." See, e.g., Black's Law Dictionary, 7th Ed. 1999 at 761 (improper means "incorrect" or "fraudulent or otherwise unlawful."). In the Section 14 context, "improper" must take the latter meaning. Otherwise, Section 14 could be used by anyone, at any time, to challenge any appraisal judgment of the Department. Anyone with an axe to grind could, at any time, haul a taxpayer before the Board and trigger an investigation into the Department of Revenue's subjective tax valuations.

Moreover, interpreting the word "improper" to encompass honest errors or differences of appraisal opinions would fly in the face of fundamental cannons of statutory construction and would contravene the intent of the Legislature. It would make Section 14 an appeals provision without a time limit, rendering superfluous the existing appeals provision and rendering meaningless the finality doctrine codified elsewhere in the tax statutes.1 It is a basic rule of statutory construction that multiple provisions addressing the same subject should be construed in such a fashion as to harmonize all provisions, and give each effect. No statute should be construed in such a fashion as to render another on the same subject meaningless. McAdams v. State, 907 P.2d 1302 (Wyo. 1995); Moncrief v. Williston Basin Interstate Pipeline Co., 880 F.Supp. 1495 (D.Wyo. 1995) (when two sections of legislation contradict each other, court should give them reading that gives them both effect). For this reason, Section 14 should not be construed to cover errors in assessments or differences of opinions on values which can, and should, be handled by the appeals process. Furthermore, such a construction would nullify the Department's authority to exercise discretion in construing the valuation statutes and in arriving at valuation decisions. The Board could always be asked to substitute its conclusions for the Department's. See, e.g., WYO. STAT. ( 39-14-203(b)(vii). Also, if the Legislature had intended Section 14 to allow the Board to review mere errors it would have stated so explicitly as it did in other provisions. See, e.g., WYO. STAT. 39-13-109(c)(ii); 39-14-209(c)(i).

Section 14 is therefore not an appeals substitute and is not intended to address ordinary errors in an individual assessment. It is instead directed to administration of the tax laws by the tax authorities. This is evident from both the first and last phrases of the statute. The first phrase authorizes the Board to examine, " . . . wherein it is alleged that property . . . has not been assessed or has been . . . fraudulently, improperly, or unequally assessed . . ." (emphasis added). The focus on how the property was assessed, rather than how information was reported, demonstrates that Section 14 addresses the conduct of the assessor, not the taxpayer. Moreover, the last phrase provides that any proceeding instituted by the Board should be directed to remedying "improper or negligent administration of the tax laws of the state." (emphasis added). The focus on administration of the tax laws shows that the Legislature was concerned about neglect and improprieties on the part of tax officials--not errors or mistakes in a particular assessment.2

The types of misconduct the Legislature identified in Section 14 also support this reading. Section 14, on its face, is devoted to three types of problems that the ordinary appeals provision is ill-suited to address: 1) allegations that taxable property has never been assessed; 2) allegations that tax authorities have committed a fraud or an impropriety; and 3) allegations that similar classes of property have been unequally assessed in violation of the constitution. Each of these problems involve violations of the law--not mistakes of valuation--and each relate to the administration of the tax system--not individual assessments. Each could also evade ordinary review through the audit process or ordinary appeal. For example, property owners are unlikely to appeal a failure to assess their property, tax administrators "on the take" or fraudulently engaging in their duties are not likely to be challenged in an appeal, and property in one part of the state assessed differently than identical property elsewhere may never be reviewed for uniformity problems within the context of an individual appeal.

Construing Section 14 to focus on problems of tax administration, and not upon problems in individual assessments, also promotes sound administration of the tax statutes. If Section 14 can be used to complain about anything, as the County contends, Section 14 will destroy the finality of any assessment, or indeed of any Board decision. (In this case, the County effectively seeks an investigation into the legality of the Board's 1989 decision to adopt the Howell and Yates Agreements to value Exxon's production). Just as important, it would permit endless collateral attacks on the ordinary exercise of the Department of Revenue's discretion, undermining its authority irrevocably. Indeed, this case is a good example of a Section 14 "second-guessing" exercise.

For these reasons, Exxon respectfully urges that the Board adopt a narrow and precise construction of Section 14; specifically, a construction consistent with the fact that Section 14 was designed to root out neglect and malfeasance on the part of tax officials--serious problems in the tax system that cannot be addressed through the ordinary appeals process. This should be the only subject of a Section 14 petition and investigation.3

Prior decisions of the Supreme Court do not require a different result. The principal Supreme Court case before this one which discussed Section 14 is Wyoming State Tax Commission v. BHP Petroleum Co., Inc., 856 P. 2d 428 (Wyo. 1993) ("BHP Petroleum"). In BHP Petroleum, the Supreme Court was faced with a contention by the taxpayer that no provisions in the tax code authorized a retroactive adjustment to its taxes following an audit that found the taxpayer had underpaid its taxes. The Supreme Court, however, disagreed. This result was obviously correct, for the reason that audits would be toothless if nothing could be done with the audit findings. However, the Court's reference to Section 14 as a provision which would "permit [the Department] to carry out its legislative mandate" does not mean the provision can be invoked by any person for any reason.

Here, the State has determined that Exxon's production was correctly valued the first time. Thus, there is no need to find a statute to carry out the Department of Audit's legislative mandate. In addition, this proceeding involves allegations by the County which, unlike the Department of Revenue, has no legislative authority to correct valuations made by the State. Although the County is attempting to acquire such authority through Section 14, the Court's decision in BHP Petroleum does not compel such a result. This is not a BHP situation, where the State would be hamstrung if its audit findings had no effect. Thus, the Court's comments in BHP Petroleum, which are dicta, do not govern this case. More importantly, the Court did not have before it a construction of Section 14 by the Board. Nor did the Supreme Court attempt to construe the scope of Section 14.

In Exxon Corp. v. Board of County Commissioners of Sublette County, slip op. No. 98-45 at 8 (Aug. 27, 1999) ("Exxon"), the Court again pointedly did not define Section 14 or articulate the types of matters which may be considered under it. The Court only decided that the County's Section 14 Petition was not time barred and therefore the County could present its allegations to the Board. The matter thus rests before this Board, as the agency with explicit authority to construe the tax statutes. WYO. STAT. ' 39-11-102.1(iv) (the Board shall "[d]ecide all questions that may arise with reference to the construction of any statutes affecting the assessment, levy and collection of taxes ... upon the application of any person adversely affected."). The Board is free to construe the statute as it sees fit, and can expect its construction to receive substantial deference by the courts. Sorensen v. Andrus, 456 F.Supp. 499 (D.Wyo. 1978); State ex rel. Lynch v. Board of County Commissioners, 296 P.2d 986 (Wyo. 1956).

Exxon therefore urges the Board to construe Section 14 as concerned with "administration" of the tax laws, not with individual assessments.4 In this case, the scope of the Board's inquiry should be to determine if the County has alleged fraudulent or negligent conduct in the Department's assessment of Exxon. If so, such allegations should be investigated. If not, the Petition should be dismissed.

II. THE 1989 SETTLEMENT AND THE HOWELL AND YATES AGREEMENTS.

The central theme of the County's Petition is that the Howell and Yates Agreements cannot be used to value Exxon's production. However, the Howell and Yates Agreements were selected by the Department of Revenue in 1989 with the express approval of the Board of Equalization, the Governor's Office, the Attorney General and Sublette County. This history is extremely important, because the County is essentially alleging that this Board should investigate as illegal a process previously approved by a past Board. In fact, the County is asking this Board to second-guess the comprehensive 1989 Settlement Agreement previously accepted--and in fact embraced--by the prior Board, the Governor, the Attorney General and the County itself. At stake is the finality of a comprehensive settlement previously approved by the State, as well as the statutory authority of the Department of Revenue to agree with a taxpayer to a valuation methodology under WYO. STAT. ' 39-13-203(b)(vii).

A. The 1989 Settlement Agreement.

In the mid-1980s, Exxon decided to construct a multi-billion dollar natural gas processing plant to render marketable vast quantities of deep natural gas located in the Overthrust belt of southwest Wyoming. This was no easy task, as the gas in this area contains large amounts of hydrogen sulfide which makes it deadly, corrosive, and unmarketable. It also contains large amounts of carbon dioxide and significant quantities of helium and nitrogen, all of which must be removed from the gas stream to make the methane marketable.

Exxon was willing to make the huge capital investment necessary to render these products marketable, and this promised the production of trillions of cubic feet of natural gas. Not surprisingly, everybody got excited about the revenue potential of the project. Exxon hoped to make money, the State hoped to enjoy vast severance tax revenues, and Sublette County expected great things with its share of the ad valorem taxes.

Unfortunately, reality never met expectations. First, the process of permitting and siting the plant was complex and costly. For example, to address regulatory demands Exxon was required to construct the plant 40 miles south of the gas fields. This necessitated the construction of approximately an $120,000,000 (one hundred twenty million) dehydration plant to render the gas non-corrosive for pipeline transportation and a very costly and highly engineered pipeline to deliver the gas to the plant. An additional expense then had to be incurred to rehydrate the gas once it reached the processing plant. After the plant was constructed, the market for natural gas softened and CO2 sales have been far short of expectations.

At the same time, taxation of the finished product has also proven difficult. Under the valuation methods in place when production began, Exxon used the "net-back" method which allowed it to deduct or "net-back" processing and transportation costs from the sales values. Given the soft market prices, the capital costs and the substantial expense of operating this complex plant, the "net-back" method resulted in a taxable value of essentially zero, crushing the high expectations of the tax authorities. For tax years 1986, 1987 and 1988, Exxon's production essentially had no taxable value. This of course led to a great political clamor, which culminated in legislation "capping" deductions at 40% of value, regardless of true processing costs.

This was not only unfair to Exxon, it was also illegal. The Wyoming constitution requires taxation at fair value, not some arbitrary "cap." It was also a bill targeted specifically at Exxon, which was also contrary to the Wyoming constitution. As a result, on May 13, 1988, Exxon sued the State of Wyoming, the Board of Equalization, the Department of Revenue and the Sublette County Commissioners, the Sublette County Assessor and the Sublette County Treasurer, seeking a declaration that the "cap" legislation was illegal and unconstitutional.

Eventually, all of the parties agreed that the "cap" legislation was illegal and an improper method for valuing Exxon's production. However, three problems remained: 1) the dispute over Exxon's tax liability for the years its production had essentially no taxable value; 2) the taxability of federal helium developed and sold, but not owned, by Exxon; and 3) the manner and method by which Exxon's future production would be valued. Lengthy negotiations over these issues ensued between Exxon, the Governor's Office, the Attorney General, the Department of Revenue, the Board of Equalization and Sublette County. Eventually, a Settlement Agreement was negotiated. The Agreement was hailed by both the State and the County as a fair and reasonable resolution of the issues. Governor Sullivan was so pleased that he held a press conference to announce the Agreement. Sublette County also spoke glowingly of the deal in the local press. The Board of Equalization also blessed the deal, as did the Attorney General. In short, after long and difficult negotiations the parties all agreed on a comprehensive, thorough and legal means to value Exxon's production for tax purposes.

The Settlement Agreement was carefully drafted to resolve both pending and future disputes. There were three principal components to the deal: 1) Exxon would pay $12 million in cash to resolve its disputed tax liability through 1988; 2) the Department of Revenue would value Exxon's production through August 1991, using the processing fee charges negotiated by Exxon with two third-party mineral owners, Howell Petroleum Corporation and Yates Petroleum Company, and thereafter the Department could value Exxon's production by either the Howell and Yates Agreements or some other lawful method, provided that: 3) as long as the Department used the Howell and Yates Agreements Exxon would pay taxes on helium production, but could challenge such taxation if the Department decided not to use the Howell and Yates Agreements thereafter.

For purposes of this proceeding, several key facts are important from this history. First, the parties negotiated a binding settlement under which the Sublette County Commissioners agreed to the use of the Howell and Yates Agreements for valuing Exxon's production. Section 2(e) of the Settlement Agreement states that "[t]he State and County agree to value, for all tax purposes, all production ... using the comparison value method ... by using the agreements negotiated between Exxon and Howell Petroleum Corp. and Yates Petroleum Corp. as the comparable value." Sublette County may think the Howell and Yates Agreements are improper now, but it felt differently in 1989.

Second, the Department of Revenue, the Attorney General, and the Board of Equalization signed off on the methodology as well. In short everyone agreed, after careful review and consideration, that the Howell and Yates Agreements arrived at a fair market value for Exxon's production. Nothing was done in secret. No under-the-table agreements were made. The processing fee called for in the Howell and Yates Agreements were reviewed and approved by all tax authorities.

Finally, Exxon agreed to pay $12 million in taxes and give up its right to challenge the taxation of federal helium for as long as the Howell and Yates Agreements were used. Since August of 1991, Exxon has paid approximately $10 million in taxes on helium production. All told, therefore, between the settlement and the helium taxes Exxon has paid $22 million in addition to annual taxes on its production, based upon the belief that the County and the State entered into a binding Settlement Agreement that they understood, carefully studied, and would honor.

In part for this reason, Exxon is deeply concerned about the County's use of Section 14 to collaterally attack a method it previously promised to honor. Any effort by a county to back out of a settlement should give the Board significant pause; settlement agreements ought to be encouraged, particularly when they result in large tax payments. Allowing parties to such contracts to collaterally attack them many years later by filing a demand for an investigation renders them of doubtful value from the taxpayer's point of view, and will greatly discourage their use. While it may be appropriate to investigate whether or not the tax authorities have properly followed the deal, it is another thing altogether to allege, as the County does, that a prior Board of Equalization's decision should be investigated as illegal and improper.

B. The Howell and Yates Agreements.

A key objective of the 1989 Settlement was the parties' desire to establish a valuation method for Exxon's production. This production is simply difficult to value. The plant is unique, the gas stream is unique, and the processing requirements are complex and expensive. The capital investment required to build the plant was enormous. All of these facts made the valuation techniques used in the 1980s inadequate to the task. In fact, the cap legislation was passed solely because Exxon's production had a taxable value of essentially zero under the then existing netback method.

To solve this problem, the Board of Equalization, the Department of Revenue, the County, the Attorney General and the Governor's Office all decided that the private processing agreements negotiated by Howell and Yates represented a reasonable means to value Exxon's production. The basic concept is simple: Howell, Yates and Exxon were adversaries and had negotiated their own comprehensive agreement to cover processing fees. Because the Agreements were negotiated at arm's length, and over a substantial period of time, the economic self-interest of the parties could be relied upon to arrive at a fair processing cost. Howell and Yates could safely be assumed to pay only what they had to pay for processing and Exxon could be trusted to demand as full a return as possible for its efforts. The end result of this market-driven process would be a fair processing fee. Just as the "willing buyer - willing seller" test relies upon economic self interest to set a fair market value, so did the agreement between Howell and Exxon. Although the County now complains that certain components of these Agreements compensate Exxon for allegedly "non-deductible" costs, the Agreements call for a single fee, not a series of cost deductions, In addition, the Department of Revenue and the Board of Equalization concluded the Agreements were appropriate when they reviewed and approved use of the Agreements in 1989. The point is that under basic economic principles how two parties arrive at a price matters much less than whether or not the parties negotiated at arm's length. If they did, a market value is the result. This is, in fact, the basic economic theory underlying the comparable value method.

In 1989, when this Agreement was selected, the regulations permitted valuations based upon "comparison values," which includes the use of a private fee agreement to determine processing costs for tax purposes. The Howell and Yates Agreements were such a comparison value.5 In 1990, the statutes were amended to authorize the Department to value natural gas production with a "comparable value" third-party agreement, or with an independent agreement struck between the taxpayer and the Department. The Howell and Yates Agreements fit both methods--they represent a comparable value for a processing fee deduction, and they also represent an agreed upon valuation methodology between the Department and Exxon. See WYO. STAT. ' 39-14-204(b)(vi)(B) and (b)(vii). Use of these Agreements has therefore been authorized by law since 1989.

The Howell and Yates Agreements were the product of arm's length negotiation between sharp adversaries. Howell and Yates owned significant mineral interests in the leases to be produced and processed by Exxon. In 1985, a dispute between Howell and Yates and Exxon had arisen which led to litigation in the United States District Court for the Southern District of Texas, No. H-85-6542. Millions of dollars in damages were alleged in the case. Eventually, the parties negotiated a comprehensive settlement which required Exxon to process Howell and Yate's natural gas interests in the LaBarge fields served by the plant. This, in turn, required Exxon, Howell and Yates to agree on a processing fee to be charged by Exxon. In short, Howell, Yates and Exxon entered into substantial adversarial negotiations over a multimillion dollar dispute to arrive at an agreement which would govern the costs Exxon could charge to process the natural gas. Negotiations concluded with comprehensive, lengthy Processing Agreements. As the Board will see from a review of the Howell Agreement, the parties spent very substantial time and effort negotiating this fee. (A copy of the Howell agreement is attached for the Board, under seal).

The Board and the Department studied these Agreements in 1989 and concluded that they fairly reflected value. The County has not alleged, and there is no reason to believe, that the Board and the Department did not understand or review the terms of the Howell and Yates Agreements before selecting their use. The selection of these agreements was an informed decision authorized by law.

The same is still true. There is no doubt whatsoever that the Department is fully authorized to reach an agreement with a taxpayer to use a unique valuation method carefully tailored to fit a specific and unique situation:

When the taxpayer and the department jointly agree, that the application of one of the methods listed in paragraph (vi) of this subsection does not produce a representative market value ...a mutually acceptable alternative method may be applied.

WYO. STAT. ' 39-14-203(b)(vii). Significantly, by statute the County is not a party to such an agreement. This points out the legal infirmity associated with the County's use of Section 14 to attack the Agreements. If an entity with no standing to agree in the first place can effectively make itself a party to any contract through a Section 14 "investigation," then the legislative intent to leave it to the Department's discretion to select such an agreement is entirely frustrated.

In any event, since 1989 the Department and Exxon have mutually agreed that the Howell and Yates Agreements fairly determine value. Such a decision was, and still is, perfectly legal. More important, such a decision is firmly committed by statute to the Department's discretion, not the County's.

Moreover, it would be error for this Board to accept the County's invitation to investigate "portions" of these Agreements. Because the Howell and Yates Agreements are complex contracts which represent a complicated exchange of value, it would be improper to "pick and chose" portions of the Agreements to complain about, or portions of the Agreements to use. The County, for example, wants to contest the current 75% processing fee, and wants to argue about certain cost components of the Agreements. The County would like to slice the processing fee back to 65% or less and disqualify or challenge certain components of the deal. However, the Agreements cannot be used that way because they represent a total package, and the value of any particular part is a function of the rest of the consideration set forth in the Agreements. The Agreements call for a single processing fee, not itemized deductions. They are therefore all or nothing propositions for valuation purposes. The County's argument is rather like a plaintiff who settles a case for a $12 million payment by the defendant and then later demands to revoke the release given for the payment while simultaneously keeping the money. However, there is either an enforceable deal or there is no deal. The issue before the Board is therefore quite simple: since the Department's use of these Agreements is legal, complaints about their terms by the County have no legal significance.

C. Administration of the Settlement.

Since 1991, the Department of Revenue has used the Howell and Yates Agreements to determine the annual taxable value of Exxon's production, as permitted by the Settlement Agreement. In addition, the Department of Audit has once done a complete audit of this process and is close to finishing another. The Department of Audit has also examined Exxon's records of sales and production and has taken those steps necessary to make certain that everything has been properly handled. Although the County likes to complain that Wyoming's "honor" system means taxpayers like Exxon will cheat if not watched, and therefore the Board better take a hard look, the fact is that the agencies charged with responsibility to conduct such reviews have been doing so. Over the last eight years, the Departments of Revenue and Audit have become familiar with the Howell and Yates Agreements, have applied them consistently, and have audited their use by Exxon. Since 1989, the Agreements have been honored and understood by the Department of Revenue, the Department of Audit, the Attorney General, Exxon, Howell and Yates. Only Sublette County now complains.

III. THE COUNTY'S ALLEGATIONS.

The specific allegations of the County's Petition appear to fall into four general categories, although some of the allegations are difficult to understand. First, the County makes several allegations to the effect that Exxon is not calculating its taxes on gross proceeds and is taking illegal deductions for transportation and marketing costs. Next, the County alleges that the Howell and Yates Agreements permit Exxon to charge too high a percentage processing fee and allow Exxon to recover costs not normally deductible as processing fees. Third, the County makes several allegations that Exxon is improperly deducting amounts associated with helium proceeds and royalty and working interest deductions. Finally, the County advances a hodgepodge of assorted complaints about minor reporting and calculation errors.

None of these allegations withstand scrutiny, and certainly none of them identify fraud, negligence, or malfeasance in the administration of the tax laws by the Department of Revenue. At most, these allegations represent differences of opinions with the appraisal judgment of the Department of Revenue. Because many of the allegations are vague, or involve minor details and calculations, Exxon will not burden the Board with a detailed discussion about the County's various complaints, footnotes and speculations. Exxon will instead address in this Brief what it perceives to be the heart of the issues raised by the County. However, if this Board desires additional information or explanation on any point raised by the County, Exxon will be happy to provide additional information. In addition, Exxon strongly encourages the Board to review each allegation with the Departments of Revenue and Audit. These agencies have addressed all of these issues in the past and can fully answer any questions the Board might have regarding them.

A. Reporting on "Net" Rather Than "Gross" Proceeds.

The County first alleges that Exxon is reporting "net" proceeds rather than "gross" proceeds. This allegation is not well explained in the Petition. However, it appears that the County's underlying concern is that Exxon is deducting improper transportation and marketing charges.

This assertion is not true. In the first place, Wyoming law taxes the fair market value of production, not "gross proceeds." As a result, the law permits any number of deductions from "gross proceeds" to arrive at the fair market value. For example, transportation and processing fees are deductible under the comparable value method. Exempt royalties are also deducted from the proportionate profits method. In short, a naked allegation that "net" proceeds are being used fails to identify any illegality.

To the extent the County is suggesting that Exxon is improperly deducting transportation fees or a "marketing commission" from its gross proceeds, the County is incorrect. Transportation fees charged to third parties are explicitly deductible both under the comparable value method and under the valuation methodology agreed upon between Exxon and the Department. In addition, to the extent the County alleges Exxon is deducting the same transportation costs more than once, the County is simply mistaken. Exxon does not double dip. As for marketing commissions, contrary to the County's contention, no such costs are deducted.

Perhaps the County's confusion stems from how Exxon reports its gross revenue on sulfur, which is different and a little more complicated than how it reports gross revenue on the other minerals. Exxon does not sell the sulfur to an unrelated third party, so to compute the gross receipts Exxon uses a "transfer value." Exxon sells the sulfur to another Division, Exxon Chemicals America (ECA), at the tailgate of the plant. ECA then sells the sulfur--some of it is sold to third parties at the plant, the rest is sold FOB the customer's place of business. The price ECA pays Exxon at the tailgate of the plant is the price charged by ECA to its customers, less transportation and less a marketing charge. For tax purposes, however, the marketing charge is added back to value. Thus, Exxon does not deduct the marketing charge (although it is arguably deductible). The transportation deduction, permitted by law, only occurs once.

B. The Howell and Yates Processing Fees.

The core allegation of the County's Petition is that the processing fees authorized in the Howell and Yates Agreement are illegal and, therefore, should not be used by the Department of Revenue. There are, however, two fundamental problems with the County's allegation. First, the Agreements were approved by the County, the Board, the Department, the Attorney General and the Governor's Office when the cap litigation was settled in 1989. To contend now, as the County does, that this agreement is illegal, or that the Department is negligent in using it, is tantamount to asserting that everyone involved in the 1989 Settlement, including the Board of Equalization, the Governor, the Attorney General, the County and the Department, were acting negligently and unlawfully in 1989. It is no exaggeration to state that the County is asking this Board to investigate what it asserts was the illegal activity of the prior Board and the Governor's Office in 1989. This is a dangerous invitation--one which this Board should decline.

Furthermore, use of the Howell and Yates Agreements is explicitly authorized by statute. The Howell and Yates processing fee qualifies as a third party comparable value agreement authorized by WYO. STAT. ' 39-14-203(b)(vi)(B). It is also an independent agreement for valuation between Exxon and the Department, authorized by WYO. STAT. ' 39-14-203(b)(vii). This provision, WYO. STAT. ' 39-14-203(b)(vii), recognizes that there are occasions when specifically tailored valuation techniques are appropriate to approximate fair market value. When this occurs, the Department and the taxpayer are free to arrive at an independent agreement for valuation. In this case, the Department has agreed that the Howell and Yates Agreement represents an adequate method for valuing Exxon's production.

Moreover, the Howell and Yates Agreement is a perfectly logical tool to arrive at value. The underlying concept behind the Department's use of the Howell and Yates Agreement is that market forces will determine an economically accurate processing fee if third parties with significant monies at stake negotiate a comprehensive agreement of their own. The "self-interest" of Howell serves to insure that the processing fee charged by Exxon accurately reflects the overall market cost of processing. How this number is arrived at is irrelevant because it can be safely assumed that Howell will pay no more for processing than it has to. There is no direct relationship to costs in a third party processing fee agreement. The Howell and Yates Agreements merely set a market fee for processing fees. By statute, it is not "negligent" or "improper" for the Department to value Exxon's production the same way an adversarial private party values that production. WYO. STAT. ( 39-13-203(b)(vii). Indeed, it makes powerful economic sense to rely on market forces and upon the adversarial nature of a private processing agreement.

The County complains that the Agreement permits Exxon to deduct certain direct and indirect costs associated with activities before the legal point of valuation. However, the Agreements do not contain or employ any cost-related deductions. There is no "netbacking" of costs. There is simply a single processing fee set by third party agreements. Moreover, the Department of Revenue, the Attorney General, the Governor and the Board of Equalization carefully considered these Agreements and all were satisfied that the Howell and Yates Agreements were acceptable. The comparable value method only requires a bona fide arm's length processing agreement. And ( 39-14-203(b)(vii), at most, requires that the fee, in the Department's judgment, reflects a fair value. (Section 39-14-203(b)(vii) is in fact quite broad and does not even attempt to limit the Department's discretion--it authorizes any "mutually agreeable alternative method.") In short, there is no legal justification to tear apart an arm's length processing fee. Third-party agreements roll all economic considerations into a processing fee which the processor and payors can live with as a price to process production. The net result is a true, fair market value, processing fee. Attempting to complain about the manner in which the processing fee was negotiated, or the components of cost it supposedly addresses, as the County does, ignores the basic economic exchange of the entire bargain.

The County further alleges that it is not a beneficiary of the services provided by Exxon under the Agreement and therefore its tax assessment cannot include deductions for the types of costs considered in the Howell and Yates Agreement. This argument is flat wrong. If Exxon had not invested more than a billion dollars in capital to build the plant the gas would still be in the ground. Neither the State nor the County would have received a dime in taxes. Both Sublette County and the State of Wyoming therefore benefit every bit as much as Howell and Yates from the capital investment made by Exxon and the services it provides to process the gas. Like Howell and Yates, the State and the County must bear the true costs of making this gas marketable. All of these costs are comprehensively addressed in the Howell and Yates Agreements, and Exxon and Howell arrived at a processing fee which accounts for these costs. Exxon provides the gas processing service and Howell and Yates have priced it. The Department, the County, the Board, the Attorney General, and the Governor's Office all agreed that it was a reasonable price in 1989.

The County also alleges that the Wyoming Land Office caught Exxon taking illegal deductions on its royalties. This allegation has no legal bearing on this dispute. Royalties are different than taxes. The calculation of royalty obligations is governed by lease terms, not valuation statutes. Exxon has a separate contractual agreement for the calculation of royalties with the State, and this Agreement does not use the Howell and Yates processing fees or any other valuation method related to taxes. Royalties and taxes are apples and oranges. For this reason, the County's suggestion that the 55% deduction used for royalty purposes reflects "true" processing costs is completely misleading, not to mention untrue. The 55% does not represent actual processing costs. Besides, the allegation that 55% more accurately reflects true costs is a red herring. True cost is a netback concept. Comparable value methods involve arm's length third-party agreements, which do not necessarily have to have any relationship to actual costs. They depend entirely on market forces--how much the market will require third parties to pay to process their gas.

The bottom line is that the Department's use of the Howell and Yates Agreement cannot be characterized as negligent, fraudulent, or an evasion of the tax laws. It is not only authorized by statute, it is also based upon sound economic theory. By authorizing the comparable value method the Legislature has in fact blessed the Department's reliance upon these agreements; in effect, the Legislature has already decided that Howell's economic self-interest was an adequate proxy for the County's interest. And, of course, the County, the Board, the Department of Revenue and the Governor all shared that view in 1989. Use of these Agreements simply cannot be called "negligent administration of the tax laws."

C. Improper Deductions for Helium and Royalties.

The County also asserts that Exxon is improperly deducting the shares of working interests and improperly accounting for the helium production. Neither assertion is true. In the first place, the interests of royalty owners and other working interest owners are deductible. The reason is simple. These interests are obligated to pay their own taxes. Ad valorem taxes are based upon ownership of the minerals, not severance. These other owners own the mineral being taxed, so they are responsible for such tax. BHP Petroleum, 856 P.2d at 432. In addition, Section 6 of the Wyoming Tax Regulation clarifies that each interest is liable for the severance tax attributable to its proportionate share of production. Thus, although the operator or lessor may be secondarily liable under some theory, primary responsibility for the tax lies with the interest owner in proportion to its share of production.

With respect to helium, the County misunderstands both the calculations and the underlying ownership concept. Under Exxon's Agreement with the federal government, the government owns the helium and Exxon severs it from the federal government. The government continues to own the helium. Since Exxon does not own the helium at the point of taxation, it should not be taxed on it until it is severed from the gas stream during processing. At that point, Exxon takes title. Nevertheless, pursuant to the settlement that the parties struck, Exxon does pay tax on 11/12s of this helium.

In addition, the County seems to believe that Exxon is also subtracting 1/12th of the proceeds from the sale of helium from state leases, thus under-reporting the taxable proceeds of helium sales. This, however, is false. Exxon only deducts 1/12th from the federal helium. In paragraph 7(c) of the Petition, the County appears to allege that Exxon is deducting the 1/12th federal fee twice by deducting it once from the gross proceeds of helium sales and again when computing the processing fee. This is, again, incorrect. To arrive at the processing fee, Exxon multiplies the processing fee percentage by 100% of the gross revenue from all minerals except helium, and then multiplies the processing fee against 11/12ths of the gross revenue from helium. The County's allegation that this results in a double deduction is curious, because multiplying the processing fee by 11/12ths instead of by 100% decreases the processing fee, resulting in higher, not lower, taxable value.

D. Application of the Processing Fee.

The County also makes several allegations that Exxon is improperly applying the processing fee. First, the County complains that vented carbon dioxide has no value and therefore Exxon must reduce the processing fee deduction for the amount of the fee that is attributable to processing the vented carbon dioxide. Second, the County contends that Exxon is applying the wrong formula for application of the processing fee. Neither argument is correct.

With respect to carbon dioxide, the County alleges that vented carbon dioxide has no value and thus costs associated with it cannot be deducted. This contention ignores economic reality. Processing fees are only attributable to gas processed for sale. The cost of removing impurities (and gas that is vented) is a necessary cost of getting to the valuable minerals. Thus the cost of removing the impure and unused portions of the gas stream are a cost of processing the methane, nitrogen, helium, and carbon dioxide processed for sale. In fact, Section 8(d) of the Wyoming regulations contemplates that vented gas will not affect the amount of the processing fee deduction. The regulations place a zero value on vented gas. Thus, the vented gas and any processing fee that might ostensibly apply to it are included in the valuation--the vented gas simply has a zero value. Any other result would mean that the taxpayer is not entitled to recover the costs of removing impurities and unusable minerals in the gas stream. If this were the rule, the gas would stay in the ground.

In paragraph 8(b), the County alleges that the processing fee is being incorrectly applied to the royalty and working interests in the production, rather than against Exxon's share only. Currently, Exxon calculates gross revenues for all product sales and applies the processing fee against all of these sales. Then, Exxon deducts the amounts paid to the royalty and working interest owners, who pay taxes on their share of the taxable value. The County, on the other hand, contends that Exxon should not apply the processing fee until after it has deducted royalties and working interests. The County's Petition illustrates its position with the following example:

Taxable value if the 75% processing fee is multiplied on the entire share of production:

$1,000 gross proceeds - (1,000 gross proceeds x .75) - $65 exempt royalties = $185 taxable value

Taxable value if the 75% processing fee is multiplied on the lessee's share of production:

$1,000 gross proceeds - $65 exempt royalty = $935 lessee's share of production

$935 - ($935 x .75) = $233.75 taxable value

This calculation is flawed. Exxon processes all of the gas, not just its share. As a result, the processing fee applies to all gas, not just Exxon's share. Moreover, the production attributable to the royalty and working interest owners is also entitled to a processing fee deduction. Because these royalty and working interest owners also pay their share of the taxes, the total tax liability is correct. This is shown in the following example:

Total Sales (100%) $10,000

Total processing fee ( 75%) - 7,500

Total taxable value (25%) 2,500

Actual payments (i.e., value of production remitted) to the owners:

MMS* $468

State* 23

ORRI 30

WIO 125

$646

Value of production retained by Exxon $1,854

total taxable value $2500

*(tax exempt interests)

At the end of the day, the full $2500 in taxable value is accounted for. Exxon pays tax on the full value of its share of production, and the other interest owners, to the extent they are not exempt from taxation, pay tax on the remaining value of the production.6 Under the County's faulty formula, Exxon ends up paying taxes attributable to other interest owners, contrary to the rule set forth in BHP Petroleum, 856 P.2d at 432. It is also worthwhile to note that the amount the other interest owners receive is the fair market value of their production. They do not, again, deduct a processing fee. Thus, the fair market value for all the minerals is $2,500, and that is the total value for which taxes are accounted. It is the County's formula which is wrong, not Exxon's.7

E. The Petition Does Not Allege Grounds For a Section 14 Examination.

When each of the County's allegations are considered it becomes apparent that no investigation is warranted under Section 14. The County has not alleged any conduct by the Department which can be characterized as negligent, improper, fraudulent or an evasion of the law. At bottom, the County is contending that the Department should not be using the Howell and Yates Agreements. However, use of these Agreements is authorized by statute and was explicitly approved in 1989 by the Board, the County, the Governor and the Department. Unless this Board is prepared to conclude that the conduct of the prior Board in 1989 was illegal and improper, and unless this Board is prepared to conclude that the Governor's Office and the Attorney General were negligent, and unless this Board is prepared to conclude that Sublette County itself was acting improperly when it agreed to the deal it now challenges, this Petition should be dismissed.

With respect to the County's technical complaints, Exxon urges the Board to consult with the Departments of Revenue and Audit. They are familiar with the issues and calculations and have reviewed many of the County's issues in audits of Exxon's production. They can answer the Board's questions.

IV. LEGAL, PRACTICAL AND EQUITABLE CONSIDERATIONS DEMONSTRATE THAT FURTHER PROCEEDINGS ARE NOT WARRANTED.

As Exxon pointed out in its initial brief, the Board is not obligated to order additional proceedings in response to the County's Petition even if it believes some irregularities have been adequately alleged. The only obligation imposed by Section 14 is to "carefully examine" an allegation. Once this examination is complete, it is up to the Board to decided if it should "cause to be instituted" proceedings to remedy problems in the administration of the tax laws. This decision may properly be influenced by practical and equitable considerations, even if the Board has reason to believe that some violations of the tax law occurred (which of course Exxon vigorously denies):

The reasons for this [rule] ... are many. First, an agency decision not to enforce often involves a complicated balancing of a number of factors which are peculiarly within its expertise. Thus, the agency must not only assess whether a violation has occurred, but whether agency resources are best spent on this violation or another, whether the agency is likely to succeed if it acts, whether the particular enforcement action best fits the agency's overall policies, and, indeed, whether the agency has enough resources to undertake action at all. An agency generally cannot act against each technical violation of the statute it is charged with enforcing. The agency is far better equipped than the courts to deal with the many variables involved in the proper ordering of its priorities.

Heckler v. Chaney, 470 U.S. 821, 831-32 (1985). See also, Board of Equalization Rules, Ch. 4, ( 3(b) (providing summary dismissal for, among other things, good cause). Significantly, the Wyoming Supreme Court expressly acknowledged this same principle in footnote seven of its Opinion in this case: "[w]e recognize that some examinations [under Section 14] may be limited by equitable, legal, and/or practical considerations." Exxon at 8, n. 7.

There are many powerful reasons why the Board should exercise its discretion to conclude this proceeding after carefully examining the Petition, Exxon's response, the County's Reply, and the information afforded by the Departments of Revenue and Audit. First, the method set forth in the settlement agreement is lawful, and in fact efficacious. The Wyoming Supreme Court held that the Settlement Agreement is valid and binding upon the parties. Exxon at 11. The County, as party to the Agreements, is therefore obligated to live up to the Agreements, even if it does not like it, as long as the Agreement is lawful. In this case, the Howell and Yates Agreements are third-party processing fee arrangements explicitly authorized by the comparable value method set forth in WYO. STAT. ' 39-14-203(b)(vi)(B). It is also an agreement the Department of Revenue has selected with Exxon, as permitted by WYO. STAT. ' 39-13-203(b)(vii). It is a lawful and logical measurement of fair value. As previously explained, there is no better indicia of fair value than an agreement driven by real economics and market forces. Because the Department's use of the Agreements is lawful, the Petition fails to state a claim and should be dismissed as a matter of law. The County, the Board, the Department and the Governor all concurred, after careful consideration, that the Howell and Yates Agreements lawfully valued Exxon's production. Why should another Board of Equalization spend its precious time and resources second-guessing that decision?

Second, if this Board causes the valuation issues to be reopened, the parties will become embroiled in years of litigation regarding a multitude of issues. As the Supreme Court pointed out, if the Howell and Yates Agreements are thrown out, the issue of whether helium is taxable reopens. Any decision to abandon the Howell and Yates method will therefore lead to the following issues and potential contested proceedings: 1) a new valuation method will have to be selected; 2) appeals can be expected from the party disappointed with the new method; 3) Exxon will likely have to seek a refund for overpayment of taxes as calculated by a new method; 4) Exxon will challenge the taxation of helium; and 5) it is possible that Exxon will be entitled to a refund of its 1989 $12 million payment, if this Board were to conclude that the Howell and Yates Agreements were unlawful valuation measures. If the Board thrusts the participants into this morass more litigation costs and attorney's fees will be sucked out of Exxon, the County, and the taxpayers of Wyoming. This Board and the Wyoming courts will also be forced to waste valuable resources and time to resolving the inevitable disputes that will occur. Such consequences counsel against the institution of further proceedings, particularly since the valuation method at issue has already been once approved by the State of Wyoming and the County.

Third, there is no evidence that the County's Petition will generate any positive effect. The Board cannot legally "pick and chose" parts of the Howell and Yates Agreements, as suggested by the County. The Board can only affirm its use or reject their use. As a result, any additional proceeding in this case will either result in an affirmance of the Department's use of the Agreements or an order that some other method be used. If that occurs, the Department and Exxon will have to find some other valuation method, putting the parties right back where they were before they settled in 1989. And all this for what? There is no evidence that any other method would yield greater taxes. Under proportionate profits, for instance, Exxon's preliminary assessment is that use of this method would entitle Exxon to a refund. The net result of this proceeding could therefore be to throw out a method already approved by the State and the Board to adopt another method yielding lower taxes.

Fourth, this Board should adopt a policy which respects the official acts and decisions of prior Boards. The Wyoming State Board of Equalization was a party to the Settlement which adopted the Howell and Yates Agreements. Thus, a prior Board decided that the Howell and Yates Agreements are a legitimate comparable value. Why should this Board, ten years later, substitute its judgment for the judgment of the prior Board? The County is inviting this Board to establish the dangerous precedent that prior Board decisions may be collaterally attacked under Section 14. This not only destroys finality; it undermines this Board's authority. No Board action will ever be final if subsequent Boards adopt a policy of investigating the decisions of prior Boards. What would prohibit Exxon, for example, from filing a Section 14 Petition to challenge any conclusion reached by this Board the next time a new Board is appointed? In short, if the Board endorses the County's use of Section 14, the Wyoming's tax system would quickly become a joke.

Fifth, second-guessing the Department's choice of valuation method will place this Board's authority on a collision course with the powers of the Department. WYO. STAT. ( 39-14-203(b)(vi) gives the Department the authority and discretion to choose a valuation method. Subsection (vii) authorizes the Department to reach negotiated solutions to valuation problems with the taxpayer. The County's Petition is a plain request for this Board to undermine the Department's authority under WYO. STAT. ( 39-14-203(b)(vi) and WYO. STAT. ( 39-14-203(b)(vii). The Department's statutory authority should not be so easily weakened, particularly where, as here, the settlement was approved by the Board of Equalization. Whether or not Section 14 trumps the Department's authority to choose a valuation method may be the subject of a valid dispute. The Board, however, need not reach the issue of whether it can overturn decisions that are committed to the Department's judgment. The Board can, in its discretion, decline to second-guess the Department's decision in this instance.

Sixth, this Board should not encourage collateral attacks on settlements. The law encourages settlements. As the Supreme Court noted in its opinion in this case, settlements approved by courts are entitled to the force of a judicial decree. Exxon at 10. Making a practice of investigating such agreements at the insistence of disgruntled counties makes them meaningless.

Seventh, administration of the tax laws in Wyoming will be severely compromised if the Board endorses the County's use of Section 14. Under the current statutory scheme, counties do not conduct either valuations or audits. Nor do counties negotiate valuation agreements. These are all the responsibilities of state agencies, the Departments of Revenue and Audit. That will change if this Board allows Section 14 to be used by counties to upset prior judgments of these agencies (not to mention prior judgments of the Board). To avoid routine "investigations," the Department and the taxpayer will be forced to join counties into the valuation process. Agreements with the counties will be both necessary (to avoid an immediate challenge) and meaningless (because later county commissioners can challenge them all over again anyway). That is what the future holds if this Board signals any willingness to rehash old agreements. It is no accident that the Legislature has placed valuation decisions in the hands of a single state agency. Until the Legislature decrees otherwise, this Board should uphold that scheme.

Eighth, the Board should, in its discretion, decide not to engage in an intrusive and costly investigation where there are no allegations of serious, systemic problems in the administration of Wyoming's tax laws. Even if this Board declines to adopt Exxon's proposed construction of Section 14, the Board retains its discretionary right to decline to initiate any proceedings. To keep Section 14 petitions from getting out of hand, the Board is free to adopt the internal policy that such proceedings will be initiated only when serious legal problems are alleged in the administration of the tax laws. That is not the case here, where the County is really just attempting to get this Board to re-review a valuation technique already approved by a prior Board.

Ninth, if the Board decides that the Howell and Yates Agreements are illegal, then the underlying consideration of the Settlement Agreements is void and Exxon will be entitled to a refund of its $12 million settlement payment, as well as any overpayment calculated under a new valuation method. Exxon will be entitled to prove that its assessed values in the prior years should be much lower than they were under the Settlement.

Tenth, the Board should exercise its discretion to stop this proceeding on equitable grounds. When a taxpayer reports its tax liability in good faith, and the Departments of Revenue and Audit do not take exception, and no appeal is filed, the issue of valuation should be over. Taxpayers should be able to finalize their books and report to their shareholders. Exxon expected, as any taxpayer would, that its tax liability was settled. It would be unfair to subject Exxon to a valuation dispute which it resolved with the tax authorities to their satisfaction years ago, and was for many years never questioned by the County. In its Opinion, the Supreme Court acknowledged that this Board's rules permit it to decline to investigate on equitable grounds. Exxon at 8 n.7.

Finally, the County's Petition alleges nothing of real substance or merit. At bottom, the County wants to pick apart an arm's length processing fee. It argues for comparable value, but wants to use a percentage that does not exist in any processing fee that could be considered a comparable value. It seeks to accomplish that result by applying "net-back" concepts to pick apart the Howell and Yates Agreements. The essence of the County's argument is that no matter what the parties agreed, only those deductions authorized by netback principles can be used to determine a processing fee. This is unlawful and contrary to the concept which underlies the comparable value method. The statute does not authorize use of a portion of a third-party processing fee agreement. Other allegations of the County are supposition, factually inaccurate, or illogical. As Exxon has endeavored to show with this submittal, there has been a lot of table pounding by the County but no identification of any actual illegality, fraud, or other serious malfeasance by the tax administrators of such a magnitude as to warrant upsetting a Settlement Agreement already approved by the State.

CONCLUSION

The County does not like the use of the Howell and Yates Agreements to value Exxon's production. That much is clear. However, the law authorizes the Department and Exxon to agree to an independent method of valuation, and the law authorizes the use of third-party processing agreements. In 1989, the Department, the Board, the Attorney General, the Governor, Exxon, Howell, Yates and Sublette County all concurred that use of the Agreements was legal and appropriate. The County has offered no allegation sufficient to justify overturning the considered judgment of these prior authorities, and the Board must protect its own ability--now and in the future--to insure that its judgments are final and respected by its successors. Setting aside the Howell and Yates Agreements offers the County and the State no assurance of higher taxes. It promises only years of additional litigation. The remaining accounting and calculating issues raised by the County are ordinary issues which should be handled on an appeal. For these reasons, Exxon respectfully requests that the County's Petition be dismissed.

DATED this 15th day of November, 1999.

Lawrence J. Wolfe, P.C.

Patrick R. Day, P.C.

HOLLAND & HART

2515 Warren Ave., Suite 450

P.O. Box 1347

Cheyenne, WY 82003-1347

(307) 778-4200 - phone

(307) 778-8175 - facsimile

Brent R. Kunz

Hathaway, Speight & Kunz, LLC

P.O. Box 1208

Cheyenne, WY 82003-1208

(307) 634-7723 - phone

(307) 634-0985 - facsimile

CERTIFICATE OF SERVICE

This is to certify that on the 15th day of November, 1999, I served a true and correct copy of the foregoing EXXON CORPORATION'S RESPONSE TO SUBLETTE COUNTY'S PETITION FOR INVESTIGATION UNDER WYO. STAT. ' 39-11-102.1(C)(X) by U.S. mail, postage prepaid, to the following:

John C. McKinley

Nancy D. Freudenthal

Davis & Cannon

P.O. Box 43

Cheyenne, WY 82003

Vicci M. Colgan

Chief Deputy Attorney General

Wyoming Attorney General's Office

123 Capitol Building

Cheyenne, WY 82002

CHEYENNE:0098056.04

TABLE OF CONTENTS

INTRODUCTION

I. THE BOARD SHOULD LIMIT THE SCOPE OF SECTION FOURTEEN TO ALLEGATIONS OF FRAUD, NEGLIGENCE OR MALFEASANCE IN THE ADMINISTRATION OF THE TAX SYSTEM.

II. THE 1989 SETTLEMENT AND THE HOWELL AND YATES AGREEMENT.

A. The 1989 Settlement Agreement.

B. The Howell and Yates Agreement.

C. Administration of the Settlement.

III. THE COUNTY'S ALLEGATIONS.

A. Reporting on "Net" rather than "Gross" Proceeds.

B. The Howell and Yates Processing Fees.

C. Improper Deductions for Helium and Royalties.

D. Application of the Processing Fee.

E. The Petition Does Not Allege Grounds For a Section 14 Examination.

IV. LEGAL, PRACTICAL AND EQUITABLE CONSIDERATIONS DEMONSTRATE THAT FURTHER PROCEEDINGS ARE NOT WARRANTED.

CONCLUSION

BEFORE THE STATE BOARD OF EQUALIZATION

1 There are several provisions which explicitly impose deadlines for appealing or challenging valuation decisions. See, e.g., WYO. STAT.  39-14-203(viii) and (ix) (imposing deadlines for appeals relating to the selection of a valuation methodology); WYO. STAT.  39-13-102(n) (requiring a party to file written objections to an ad valorem valuation decision within 30 days). Even this Board's own rules require an appeal to be filed within thirty days. Board of Equalization, Ch. 3, ' 2(a).

2 Because both the first and last phrases of the statute refer to administration of the tax laws, under the canon of construction ejusdem generis the Legislature's concern over "the law in any manner being evaded or violated" also relates directly to enforcement of the law by the tax authorities. Such a construction is also implicit in the Board's interpretation of the clause, found in the Board's rules. Chapter 4, section 3(a) limits examinations under that clause to allegations that "the law governing assessment, levy, and collection has been evaded or violated." There is no mention of alleged mis-valuations.

3 If the Board determines that there is neglect or malfeasance, it can institute proceedings to remove or punish the offending tax official. Also, in appropriate instances, such as where the taxpayer is culpable, the Board can institute proceedings to adjust the tax liability of the taxpayer whose assessment was improperly made. Removal, for instance, may be accomplished by sending a special directive to the Department to exercise its power to commence removal proceedings pursuant to WYO. STAT. 39-11-102(c)(xii) and (xvii).

4 Significantly, misconduct or failure to comply with the laws by a taxpayer or by a county official has been left to the Department to handle. See WYO. STAT. ' 39-11-102(c)(xvii). Together, Section 102.1(c)(x) (Section 14) and Section 102(c)(xvii) reveal a clear statutory scheme: the Department supervises and investigates errant taxpayers and county officials under Section 102(c)(vii), and the Board investigates alleged errant tax conduct by the Department of Revenue under Section 14.

5 Incidentally, tax officials and taxpayers used the terms comparison value and comparable value interchangeably, and the 1990 codification of the comparable value method represents a codification of the method used in the settlement agreement. In fact, the settlement agreement uses both terms to describe the Howell and Yates method.

6 This calculation is in fact required by the Department of Revenue. During negotiations, Exxon proposed several possible calculations, but the Department required that this one be adopted.

7 Once again, this is the same formula that the County signed onto in the 1989 settlement contract. Nothing has happened between 1989 and the present that would invalidate this formula.

42