The Colorado Supreme Court stepped in this week to determine whether owners of an oil and gas formation in Montezuma County have the ability to contest a retroactive $2 million increase in their collective property taxes.
The underlying sequence of events went to court back in 2017, when the court ruled that energy company Kinder Morgan had to be held liable for an additional $2 million by operating a large carbon storage facility in southwest Colorado. However, when Kinder Morgan passed on the cost of the increase to those who held an ownership interest, those owners launched their own legal battle against the higher tax burden.
Although the state Court of Appeals sided with the owners in 2021, finding that as taxpayers they had a right to protest the assessment, lawmakers stepped in that year to clarify the law and individual owners appeared to be out of control rule out procedures.
Now the Supreme Court must decide whether to uphold the Circuit Court’s interpretation of the law or to rule that owners must go elsewhere than Montezuma County to contest their tax bill.
“Perhaps your clients have a cause of action against Kinder Morgan,” Judge Melissa Hart suggested during Tuesday’s hearing. “Isn’t this the right place to look?”
The plaintiff, CO2 Committee, Inc. is comprised of individuals who collectively own 11.2% of the McElmo Dome Unit, a carbon field located in Montezuma and Dolores counties. Kinder Morgan extracts oil and gas, pipelines it to Texas, and bills owners accordingly.
Unlike other types of real estate, oil and gas taxation is based on the quantity and value of the material produced. While owners have the option to submit their own revenue reports to an operator, the unit operator otherwise estimates and reports the production value for property tax and apportions the taxes owed among the owners.
In 2009, a Montezuma County audit found that Kinder Morgan understated the total sales price by miscalculating the deduction for transportation costs. The county valued the McElmo Dome Unit at an additional $57 million, meaning Kinder Morgan had to pay an additional $2 million in taxes.
Kinder Morgan protested the increase and took her case all the way to the Supreme Court. However, the judges affirmed the retrospective valuation of the property.
In response, Kinder Morgan billed the other owners, including members of the carbon committee, for their share of the increase.
The committee then sued Montezuma County, arguing that as property owners and taxpayers, they also have the right to protest the retrospective increase. They asked for a court order banning any retrospective assessment and returning “all unlawful taxes” to committee members.
In June 2019, District Court Judge Todd Jay Plewe found that while Kinder Morgan made the direct tax payment to Montezuma County and passed the costs on to the other owners, state law only authorized the county to deal with the operator of the unit itself to negotiate.
“The law assumes that the plant operator will act in the best interests of the non-essential owners. In this matter, Kinder Morgan made repeated attempts to argue for the non-essential shareholders up to the Colorado Supreme Court,” Plewe wrote.
If counties had to address protests from hundreds of individual owners, “assessors would be overwhelmed. Appeals and competitions could clog the system,” he added.
However, the appeals court interpreted the law differently, noting that counties must give “all taxpayers” the right to protest. The court found that there is no indication that a plant operator is the only one who has this right.
“We recognize that our involvement today may disrupt established practices regarding counties’ review, audit and retrospective valuation of the value of oil and gas leasehold properties,” Judge Jaclyn Casey Brown wrote for the court, warning that individual Owners have the right to protest, they can no longer rely on the machine operator to do it for them.
The Supreme Court agreed to review the Court of Appeals decision in March this year. At the same time, lawmakers have introduced a bill in response to the issues raised in the case. Senate Bill 26, passed without a single negative vote, made it clear that a plant operator is “the single point of contact” for any tax protest.
“There was a recent court decision in Montezuma County. It noted that it is not clear who the assessor needs to communicate with,” said Senator Barbara Kirkmeyer, R-Brighton, one of SB 26’s sponsors. “The law must say that the assessor communicates only with the operator . This is common practice. It is working.”
Similarly, the government asked the Supreme Court to rule that individual owners on the CO2 committee had no independent right to protest the value of the McElmo Dome unit.
It makes sense to have the operator of the unit represent the owners before the county, argued First Assistant Attorney General Robert H. Dodd, because “there’s an alignment of interests there.”
The Supreme Court members questioned how the CO2 Committee could enforce against Montezuma County, especially after lawmakers changed the statute to clarify that the county assessors would work exclusively with the operator.
“I read the appeals court’s opinion as really focusing on the statute that gives the operator power of representation with respect to (tax) collection,” said Judge Richard L. Gabriel. “And the Court of Appeals was concerned that the statutes did not clearly provide for a similar power of representation when it comes to (tax) protest.”
But, he added, “that’s why the Senate bill is so critically important here. … My suggestion to you is that this Senate bill was in response to the appeals court’s opinion of basically saying, ‘We think you misunderstood.’”
John M. Cogswell, the committee’s attorney, argued that there could be unintended consequences of an operator-centric interpretation, citing a hypothetical example of a single owner providing the plant operator with inaccurate documentation as to the value of its interest in the oil and gas revenues. In this case, it would be appropriate to take retrospective action against the owner rather than the operator.
But when the operator is the only point of contact and “you have the crook down the line, that means the operator is responsible and everything goes to the operator,” Cogswell noted.
“And the operator follows the crook to collect,” Gabriel replied.
The case is Colorado Property Tax Administrator v CO2 Committee, Inc. et al.