State orders Exxon audit

by Cat Urbigkit

In the wake of a new administration in Cheyenne and the discovery that the previous administration had a secret agreement to jointly defend against Sublette County's claims in its mineral taxation dispute with Exxon, Wyoming Attorney General Pat Crank said in an interview Friday that the state's tactic in handling the case will now change.

Part of that change involves recently initiated actions by two state agencies. Crank said the Department of Revenue is conducting a review, while the Department of Audit is beginning an audit, all aimed at getting to the facts of the matter. Crank's emphasis is on the last two years of production, current production and future production.

Crank said at the very least, he is re-examining the position the state took in this case.

"We've looked at some documents and other materials that cause us some concern," Crank said. Sublette County officials provided some of those materials. The law firm handling the case for the county is Davis and Cannon of Cheyenne.

Two weeks ago, Crank went before the State Board of Equalization with documents showing that state officials had entered into the confidential agreement to jointly defend against Sublette County's claims that Exxon's LaBarge production wasn't properly valued from 1993 through 1999.

In the statement filed with the BOE last Thursday, the state noted that the Department of Revenue now recognizes that the accuracy and validity of the audit assessments "depend directly upon the integrity of the information provided by Exxon. The department has identified several documents which raise significant questions regarding the accuracy and validity of information received from Exxon and relied upon by the DOR.

"Consequently, the assessments may be improper as a result of incorrect information provided by Exxon which was relied upon to complete the audit assessments," the Attorney General's statement reported.

Attached to the statement were the joint defense agreement and a letter from Exxon attorney Brent Kunz regarding a review of preliminarily audit findings.

The 1998 Kunz letter to Vicci Colgan of the Attorney General's office suggested the certain procedures be applied to an upcoming Exxon audit, including: "Exxon would like to have as few documents as possible copied and taken back to Cheyenne;" "Before any conclusions or preliminary write-ups, discussions, summaries, etc., on issues are completed, Exxon would like to see them and be able to comment on them;" and, "There should be a closing meeting with the auditors to do a final review of all their conclusions and proposed write-ups."

Also referred to in filing were documents provided by Sublette County "which contain statements or indications that specific financial information was withheld from the Departments of Revenue and/or Audit and indications and/or representations that certain Exxon accounting efforts were performed separate and apart from the accounting practices used to report taxable value to the DOR and/or Department of Audit."

In Friday's interview, Crank said the state has a statutory responsibility to ensure that all mineral production is taxed at fair market value. To do that, the state needs to look at how the production is valued, Crank said, so the DOR and DOA are "taking a look" to learn if the state is really achieving that fair market value taxation.

Under the current valuation formula used for Exxon (which the county asserts is improper), the company is allowed to deduct 75 percent of its revenue, while it pays on the remaining 25 percent. So when the cost of natural gas rises, so does the amount of Exxon's deductions, without any relationship to the actual costs of operating the LaBarge facility. That's troubling to the Sublette County Commission and to Crank.

Using hypothetical figures, Crank posed a scenario in which Exxon's gross revenue is $100 million in one year, so considering that 75-percent deduction, Exxon isn't taxed on that first $75 million, but only on the remaining $25 million.

Crank's hypothetical continues into a second year, one in which the price of natural gas rises to give Exxon a $500 million revenue. That deduction would protect the company from paying taxes on $375 million, again having no relationship to the cost of operating the facility.

"I would assume that the cost of operating the plant is fairly static," Crank said. That Exxon could go from a $75 million deduction one year to a $375 million deduction the next year, "for performing the same function," Crank said, demonstrates the problem associated with using a set formula.

"It makes no sense," Crank said, that when the price of natural gas fluctuates, that Exxon is able to deduct such large amounts "for doing the same thing. That's our concern."

Crank said the current administration has notified Exxon that it is looking at using another valuation method for the company's production.

"I can say we have asked questions of Exxon," Crank said. "We have concerns."

Crank said he has not found any evidence of illegal or unethical wrongdoing by state officials in the previous administration, but is confused as to what the possible benefit could have been to the state.

"It's troubling to me," Crank said. "I see no benefit to the State of Wyoming from this."

The state, through the departments of revenue and audit, have access to all of Exxon's records and documents, Crank said, so he can't understand why the state would enter into an agreement with a taxpayer, against another taxing authority that is actually a subdivision of state government.

"I've been scratching my head about that," Crank said.

Colgan was the attorney for the state who signed the secret joint defense agreement and is still working in the attorney general's office. Crank said Colgan is now working in the natural resources section, not on tax matters.

When asked how he became aware of the secret agreement, Crank said while he had been aware of Sublette County's litigation, an attorney for Sublette County told him that he had seen a draft of a joint defense agreement. That prompted state officials to search their records and led to the discovery of the signed agreement.

Crank said as a lawyer, he has a duty of candor to be straight with any judge or administrative board he appears before, including the Board of Equalization.

"My duty of candor to the board required me to tell them there was a joint defense agreement ... that operated apparently to the detriment of Sublette County," Crank said.

Crank noted that the BOE has already decided at least one issue posed by Sublette County in 2000. Walking a mile in another's shoes led Crank to believe that the board should have known about the agreement, because Exxon and state officials had submitted information about the valuation method.

"I would have wanted to know there is this joint defense agreement in place," Crank said, had he been on the board. He added that this knowledge "may or may not affect" how they viewed the information being presented.