Session August 10, 2017
from the Chancery Court for Knox County No. 190298-1 John F.
appeal concerns whether a tax on certain property containing
oil and gas deposits constitutes an unlawful additional
severance tax. The Coal Creek Company ("Coal
Creek") appealed the tax assessments of various county
property assessors ("Assessors"). After
administrative proceedings and appeals, the Tennessee
Assessment Appeals Commission reinstated the original
assessments. Coal Creek filed suit in the Chancery Court for
Knox County ("the Trial Court") seeking judicial
review of the Appeals Commission's decision. Following a
bench trial, the Trial Court entered an order dismissing Coal
Creek's complaint. Coal Creek appeals to this Court. We
hold, inter alia, that the taxes assessed upon Coal
Creek's property relative to oil and gas remaining in the
ground are property taxes, not a severance tax. We affirm the
judgment of the Trial Court.
R. App. P. 3 Appeal as of Right; Judgment of the Chancery
Court Affirmed; Case Remanded.
S. Howard, Jr. and Erin J. Wallen, Knoxville, Tennessee, for
the appellant, The Coal Creek Company.
T. Lee, Mt. Juliet, Tennessee, for the appellee, Anderson
G. Coker, Jacksboro, Tennessee, for the appellee, Campbell
N. Hall, Wartburg, Tennessee, for the appellee, Morgan
Sharpe, Assistant General Counsel for the appellee, Tennessee
Division of Property Assessments.
Herbert H. Slatery, III, Attorney General and Reporter,
Andrée Sophia Blumstein, Solicitor General, and, Mary
Ellen Knack, Senior Counsel, for the appellees, State Board
of Equalization and Assessment Appeals Commission.
MICHAEL SWINEY, C.J., delivered the opinion of the court, in
which JOHN W. MCCLARTY and THOMAS R. FRIERSON, II, JJ.,
MICHAEL SWINEY, CHIEF JUDGE.
Creek owns the subject real property in Anderson, Campbell,
and Morgan Counties. This property contains oil and natural
gas deposits, which Coal Creek also owns in fee simple. The
majority of Coal Creek's oil and gas operations are
centered in Anderson County, Tennessee. Coal Creek receives
royalty payments from lessees who remove the oil and gas.
This case has its origin in a 2009 change in how the Coal
Creek property was classified for tax purposes. Before 2009,
Coal Creek's property had been classified as farm
property and assessed at a 25% rate. Beginning in 2009, the
Assessors assessed the property's mineral value at the
industrial or commercial rate of 40%. From 2009 through 2014,
Coal Creek paid these additional taxes to Anderson County in
the amount of $122, 742.59; Morgan County in the amount of
$27, 408; and, Campbell County in the amount of $1, 662. The
Tennessee Division of Property Assessments assisted the
Assessors in their work valuing the mineral interests. An
income approach was utilized in the valuations.
Creek appealed the assessments to the State Board of
Equalization. In October 2013, Coal Creek filed a motion for
summary judgment. In January 2014, the Administrative Judge
entered an initial decision and order granting Coal
Creek's motion for summary judgment. In finding for Coal
Creek, the Administrative Judge stated in part:
The Administrative Judge finds that the Assessors'
methodology for estimating the contributory value of the oil
and gas reserves does not comport with Tenn. Code Ann. §
67-5-602(a) insofar as the dictates of the Assessment Manual
have been ignored. For example, the portions of the
depositions summarized or quoted above make clear that the
Assessors have no knowledge of, and make no meaningful
attempt to obtain, information concerning the quantity of the
reserves and the remaining economic life of the reserves.
Moreover, no attempt is made to obtain information from the
operator concerning its plans, income from royalties etc.
The Assessors have absolutely no information to support the
assumption that the prior year's production is a reliable
indicator of future production. Indeed, if a producer chooses
to cease production for a year in hopes that the price of oil
and gas will increase, the Assessors would assign no value to
the oil and gas reserves for the current year because of no
production the prior year. This valuation method quite
clearly results in nothing more than an additional severance
tax on oil and gas production that is purported to be an
ad valorem tax on property containing oil and gas
reserves. Consequently, the Assessors' methodology for
valuing the mineral component of subject parcels violates the
prohibition in Tenn. Code Ann. § 60-1-301 against taxing
oil and gas removed from the ground except for a severance
tax as set forth in that statutory provision.
(Footnote added). In February 2014, the Tennessee Division of
Property Assessments, acting on behalf of the counties,
appealed the Administrative Judge's decision to the
Tennessee Assessment Appeals Commission. In April 2015, a
hearing was conducted before the Appeals Comission.
Gibson, an area supervisor for the Tennessee Division of
Property Assessments, testified regarding the methodology
used in valuing mineral interests:
I've been with the Division for 32, 33 years, started
doing the mineral valuation probably in 2006 or 7. I had done
it previously years ago as a young staff member that
basically just plugged in a few numbers but just kind of took
over this aspect of it in 2007 or 8. Since that time, I have
been promoted up to supervisor, the current position that
I'm in. I have not been directly involved with these
appraisals, but I oversee each and every one of them.
Therefore, I have the most knowledge.
But what we're trying to do is, we contend that it's
not a severance tax, that all we're doing is just valuing
an income stream. If you take two like properties, exactly
like Mr. Howard suggested awhile ago, where you have a
property that does not have a known mineral reserve and then
you have another one that does, all we're doing is just
looking at the royalty that they received from that one year
and then projecting a lifetime in saying, you know, what is
that income stream worth over a period of time. If you
receive $5, 000.00 one year and you're expecting to
receive that for an additional five or six years, what is
that worth today? So that's all we're trying to do as
far as valuing an income stream. It's not a severance
tax. It's just saying that if you have two exact
properties and both were up for sale, you know, what would
you prefer to have, one that you're going to receive a
royalty check for the next duration period of time or would
you rather have the other one that you don't have a known
We're very conservative whenever we make all these
estimates. On coal, we receive the Office of Surface Mining
Permit which has not only reserve studies, but they have
projections on what they're to receive each year. We look
at that. We only put an economic life up to their legal use.
In other words, if that permit even said that they had a
20-year life on it, they don't have a legal use to permit
it for 20 years. They only give a five-year permit; so
we're very conservative on coal by using only that legal
use of the property.
On oil and gas, there is no reserve studies. It's kind of
a run-by-wildcat operation. It's a lot simpler for them
to go out and do a test hold just to tap and see if
there's any oil and gas. Even if there were reserve
studies, it's very unreliable. I mean, you know, you may
do different kinds of tests to try to find out what kind of
oil and gas you have down there, but it doesn't mean
it's feasible to get out. So we have a very conservative
approach with that.
In 2014, the Division had a meeting with several members of
the oil and gas members. There were attorneys, purchasers,
producers. We had a meeting with them and they had the same
thought process on why we use a five-year life and we
don't reduce it each and every year, we just keep the
On cross-examination, Gibson testified as follows:
Q. So when you are taking the estimate of cash value annually
of oil and gas reserves in the ground, that's just pure
speculation, is it not?
A. Repeat the question.
Q. You don't have any idea what the reserves are that
you're talking about, do you?
A. The remaining reserves?
Q. Yes, sir.
A. No, sir. We do not have a reserve study to follow.
Q. And the manuals don't allow you to assess based on
speculation, do they?
A. The Mineral Manual that we have in this section details
different observations that you have to make; so I feel like
I've applied everything that I can. Yes, sir.
Q. Well, what have you applied? What have you done to
determine the mineral reserves?
A. There's nothing that I can do without a mineral
reserve study; so I guess
I did everything that I could do to make an assumption, which
you make assumptions all the time in an appraisal.
2015, the Appeals Commission issued its final decision and
order wherein it reinstated the original assessments. In its
final decision and order, the Appeals Commission stated in
The tax here was duly levied by the counties as an ad valorem
tax based on the determined value of the property, and
demonstrated error in the value determination does not
convert the levy to another form of tax. The boards of
equalization may reject the value as unduly speculative, or
just plain wrong, but the boards do not thereby avoid their
duty to determine value using the most persuasive evidence
available. In this case, as in the coal cases decided in
years past, the only evidence came from the assessing
authority. The owner of the mineral interest offered no
measure of actual depletion for these properties, in fact no
evidence at all pertinent to the properties' value.
The assessors offered the testimony of Keith Gibson, a staff
appraiser employed by the Tennessee Division of Property
Assessments, who explained there were no reserve studies
available to the Division or taxing authorities, just annual
data on production for oil and gas. He stated the implicit
assumption of a five year remaining life for these interests
is conservative based on their historic production which
typically exceeds five years. Projecting the coming year
production will equal the prior year is a neutral assumption,
not unlike any income projection for commercial properties,
and the assessor invites more accurate information from the
property owners who are better positioned to estimate future
production. Lacking more accurate information would not
excuse the assessor from the responsibility of assessing the
contributory value of proven mineral reserves.
Disproving the assessors' assumptions, or raising the
likelihood that a more accurate value is possible, did not
render the tax levy void, and did not meet the property
owner's burden to establish a more credible value.
Accordingly, the Commission finds and concludes the original
assessments for these properties should be reinstated subject
to the owners' rights of further appeal.
September 2015, Coal Creek filed a complaint in the Trial
Court seeking judicial review of the Appeals Commission's
decision. This matter was tried in January 2017. William S.
Lyon, III ("Lyon"), executive vice president for
Coal Creek, testified. Lyon testified, in pertinent part, as
Q. When did -- well, how much property does The Coal Creek
Company own and where is it located?
A. We own 72, 000 acres across four counties, being Campbell,
Anderson, and Blount.
Q. And where are the majority of the gas and oil operations
A. Anderson County.
Q. And when was the first time that you, on behalf of The
Coal Creek Company, became aware of the taxation of these
mineral interests that we've been talking about here
Q. And how did that -- how did you become aware of that
A. Well, we received tax notices that -- in the past, we
always received tax notices on the value of the land. And
then in 2009, there was a tax notice on the mineral
Q. Was it a separate tax notice?
Q. Did the valuation of the land change in regard to -- well,
did the valuation of the land change when you started
receiving these separate mineral notices?
A. No. It probably increased just a tad because of the
reappraisal period, but no appreciable change.
Q. And has the same process been followed from 2009 through
Q. Have you had any conversations with any of the assessors
for Morgan, Campbell, or Anderson counties regarding any sort
of allocation of how these taxes are allocated ...