El Paso Natural Gas Co. v. Strayhorn

OPINION

Opinion by

El Paso Natural Gas Company (the Company) and the Texas Comptroller of Public Accounts battle over the Company’s franchise tax liability for the years 1989 through 1991, in a protracted conflict with possibly millions of dollars at stake. The battlefield is littered with accounting and procedural details and is mined with obscure and often unclear statutes and agency rules.

*678 The Company and the Comptroller filed competing motions for summary judgment in the trial court. Both sides partially won and partially lost in those summary judgment proceedings. Both appeal, 1 raising challenges to the summary judgments on three issues:

1. Should the Company be allowed to change its accounting method from the “full cost” method to the “successful efforts” method in its 1989 and 1990 franchise tax reports? The trial court’s summary judgment allowed the change, and the Comptroller appeals.

2. Should the Company be entitled to remove from its 1989 and 1990 taxable capital (a) revenues garnered from interstate gas transportation and (b) amounts attributable to un-amortized losses on reacquired debts? The trial court’s summary judgment disallowed the removal, and the Company appeals.

3. Should the Company be entitled to remove from its 1991 taxable capital (a) revenues garnered from interstate gas transportation, (b) amounts attributable to unamortized losses on reacquired debts, and (c) monetary values erroneously included from the Company’s account number 228-4000, which had a zero balance? The trial court’s summary judgment disallowed the removal, and the Company appeals.

We reverse and remand on issues one and three, and affirm on issue two.

The propriety of a traditional summary judgment is a question of law to be reviewed de novo on appeal. Robinson v. Tex. Timberjack, Inc., 175 S.W.3d 528, 530 (Tex.App.-Texarkana 2005, no pet.). When reviewing a summary judgment, we take as true all evidence favorable to the nonmovant and indulge every reasonable inference and resolve any doubts in the nonmovant’s favor. Limestone Prods. Distrib., Inc. v. McNamara, 71 S.W.3d 308, 311 (Tex.2002); Rhone-Poulenc, Inc. v. Steel, 997 S.W.2d 217, 223 (Tex.1999). Summary judgment is proper when the movant establishes that there is no genuine issue of material fact and that he or she is entitled to judgment as a matter of law. Tex.R. Civ. P. 166a(c); City of Houston v. Clear Creek Basin Auth., 589 S.W.2d 671 (Tex.1979); Baubles & Beads v. Louis Vuitton, S.A., 766 S.W.2d 377 (Tex.App.-Texarkana 1989, no writ). The question on appeal is not whether the summary judgment proof raises a fact issue with reference to the essential elements of the plaintiffs cause of action, but whether the summary judgment proof establishes the movant is entitled to judgment as a matter of law. Gonzalez v. Mission Am. Ins. Co., 795 S.W.2d 734, 736 (Tex.1990). Because the movant bears the burden of proof, all conflicts in the evidence are disregarded, evidence favorable to the non-movant is taken as true, and all doubts as to the genuine issue of material fact are resolved in favor of the nonmovant. Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546 (Tex.1985).

(1) The Company Was Not Entitled to Summary Judgment Alloiving It to Change to the “Successful Efforts” Accounting Method for 1989 and 1990

In the trial court, the Company argued it was entitled, as a matter of law, to amend its 1989 and 1990 franchise tax reports to reflect a change in its account *679 ing methodology from “full cost” to “successful efforts.” 2 If allowed, this change would result in a large tax refund from the State to the Company. The Comptroller countered that the Company’s claims premised on a change of accounting method were, as a matter of law, time barred.

A little background is in order. In August 1978, the Securities and Exchange Commission (SEC) began allowing certain petroleum companies to use either the “full cost” or the “successful efforts” accounting method in filing the reports with the SEC. The Financial Accounting Standards Board (FASB) had previously sought to limit petroleum companies to the “successful efforts” method. After the SEC began allowing the use of “full cost” accounting for certain petroleum companies, however, the FASB relented in its efforts to limit businesses to a single accounting method.

The Texas Legislature followed suit in the late 1980s and amended the Texas Tax Code to allow petroleum producers and manufacturers specifically to use either the “full cost” or the “successful efforts” accounting methods. See Tex. Tax Code Ann. § 171.109(g). 3 Likewise, in February 1991, the Comptroller changed its policy in order to permit use of either method. Moreover, the Comptroller gave taxpayers an extraordinary opportunity: petroleum producers would be permitted to amend their 1988, 1989, and 1990 franchise tax returns to reflect a change from the “full cost” accounting method to the “successful efforts” method, thereby allowing these companies to take advantage of the 1989 statutory change — which had occurred after the deadline by which companies previously had to file their methodology election. 4 There was, however, one catch: the *680 businesses had to file their 1988, 1989, and 1990 amended returns by February 28, 1991. 5 But if a business filed a “protective claim” letter by that same date 6 and later supplemented the protective claim letter with the business’ amended returns at any time within the following six months, that would satisfy the Comptroller’s requirements to effect any desired retroactive accounting change. In real terms, the petroleum companies were given approximately fourteen days in which to file their “protective claim” letters.

On February 28, 1991, officials from the Comptroller’s office talked with the Company about the latter amending its franchise tax returns. The summary judgment evidence suggests that, in response to that conversation, the Company, on February 28, 1991, sent the required protective claim letter to the Comptroller. The record before us, however, viewed in the light most favorable to the Comptroller, does not show that the Comptroller ever received this letter. William Ham-ner, Assistant Director of Tax Administration, testified in his affidavit that he had performed a search of the Comptroller’s records and found no evidence that the Comptroller had ever received the Company’s protective claim letter. See Tex.R. Evid. 801(1) (absence of public record or entry). Janet Spies, another employee of the Comptroller, testified similarly. The Company admitted it has no evidence showing the Comptroller received the protective claim letter. The Company admitted it had no documents responsive to the Comptroller’s request for production of documents showing the Comptroller received the protective claim letter. Thus, while a change in law and policy would have permitted the Company to amend its 1989 and 1990 franchise tax returns— thereby converting to the “successful efforts” accounting method — and while there is evidence the Company timely mailed its “protective claim” letter, there also exists evidence that the Comptroller did not receive that letter.

The trial court granted partial summary judgment in the Company’s favor, holding that “the Company’s claims in Hearing Number 37,477 are not barred by limitations.” Logically, this holding rests on implicit findings that the Company timely filed, and the Comptroller subsequently received, the Company’s protective claim letter. But viewing the evidence in the light most favorable to the nonmovant on this issue — the Comptroller — the record before us does not conclusively prove that the letter was received by the Comptroller.

*681 As an alternative argument on this issue, the Company contends the Comptroller’s change to rule 8.391 — affording companies an opportunity to amend their franchise tax reports retroactively, but also setting the arbitrary deadline of February 28, 1991 — is illegal and unenforceable because it conflicts with state law that provides companies a four-year statute of limitations in which to amend their returns. This argument was presented by the Company to this Court at oral argument, but the Company did not raise this argument in its briefing to this Court.

Oral argument should be limited to the issues and arguments raised in the written briefing. Tex.R.App. P. 39.2. Texas appellate courts, including this one, spend a significant amount of additional time preparing for oral argument cases. Attorneys who request argument should arrive at oral argument ready to answer questions about both the facts and the law of the case. See id. Advocates should have also first filed cogent briefs. See Tex.R.App. P. 38.1(h), 38.2(1). Counsel should not waylay opponents at oral argument by raising new issues or alternative arguments not first presented in their briefs. See Tex.R.App. P. 39.2. Parties ignore these rules at their own peril. 7

Assuming arguendo that the Company is correct regarding the Comptroller’s lack of authority to set an arbitrary February 29 deadline, the Company still loses on this argument. The thrust of the Company’s argument is the Comptroller may make rules changes only when they do not conflict with state law. But extending the Company’s argument to its natural conclusion would lead to the corollary result that the Comptroller’s rule allowing retroactive accounting changes also conflicts with state law, namely Section 171.109(e) of the Texas Tax Code. See Tex. Tax Code Ann. § 171.109(e) (prohibiting changes in accounting methodology solely because it results in reduction of tax liability). Moreover, eliminating the February 28 deadline does not also eliminate the Comptroller’s rules that otherwise prohibit retroactive accounting changes. Accordingly, the Company still does not prevail under this new alternative argument.

Based on our review of the record, we hold that a fact issue exists whether the Company timely filed its protective claim letter. Therefore, we must reverse the trial court’s holding that, as a matter of law, the Company was entitled to amend its 1989 and 1990 tax reports to reflect a change to the “successful efforts” accounting method. At trial, the Company may ultimately persuade the fact-finder on this issue, but its summary judgment on this issue fails.

(2) The Comptroller Was Entitled to Summary Judgment Barring the Company’s Claims for Deductions in 1989 and 1990 of (a) Revenues from Interstate Gas Transportation and (b) Amounts Attributable to Unamortized Losses on Reacquired Debts

The Company next claims it is entitled to deduct, on its 1989 and 1990 returns, (a) revenues from interstate gas transportation and (b) amounts attributable to unam-ortized losses on reacquired debts. 8 The *682 Comptroller argues that these claims are barred by limitations, as well as by the finality of certain administrative proceedings and the failure of the Company to exhaust its administrative remedies. The trial court granted the Comptroller a summary judgment barring these claims, a ruling the Company now contends is erroneous. We agree that, because these claims are barred by limitations as a matter of law, the summary judgment on these issues was proper. We do not reach the questions of finality and exhaustion of remedies.

The following procedural time line will provide needed context to understand the limitations issue:

Date Action or Event

February 28,1991 The Company allegedly mails a general protective claim letter for years 1988-90 regarding its desire to change to the “successful efforts” method of accounting.

September 28, 1994 The Company files its original petition in administrative proceeding number 34,943 on issues other than those involved in this appeal.

December 2,1997 The Company and the Comptroller file a joint motion to dismiss administrative proceeding number 34,943.

January 12,1998 The administrative judge formally dismisses administrative proceeding number 34,943; the parties file a joint waiver of their right to file a motion for rehearing.

January 28,1998 The Company files its original petition in administrative proceeding number 37,477.

March 1998 The Comptroller files a “position letter” in administrative proceeding number 37,477.

July 16,1998 This was the Company’s final, extended deadline to file its response to the Comptroller’s position letter in administrative proceeding number 37,477 and, thus, the deadline to amend, as a matter of right, to add issues to administrative proceeding number 37,477.

April 2, 2001 The Company seeks permission to “reopen the administrative record” and amend its oi’iginal petition in administrative proceeding number 37,477 to add the instant issues.

February 6, 2002 The administrative law judge denies the Company’s request for permission to amend the original petition in administrative proceeding number 37,477.

September 13, 2002 The Company files its original petition in administrative proceeding number 43,135 asserting the instant issues.

March 28, 2003 The Company files its taxpayer

lawsuit in the Travis County District Court.

January 6,2004 The administrative law judge dismisses administrative proceeding number 43,135.

February 13, 2004 The Company amends its petition in the taxpayer lawsuit filed in district court.

February 24, 2005 The Travis County District Court partially grants and partially denies the parties’ competing motions for summary judgment.

The Comptroller argues these claims are barred by limitations based on the following rationale:

• Limitations on these claims had been extended — not tolled — by virtue of prior agreements between the Comptroller and the Company and by the pendency of administrative proceeding number 34,943, so that limitations would expire on these claims on the *683 day administrative proceeding number 34,943became final. 9

• Administrative proceeding number 34,943was settled and dismissed by Order of January 8,1998.

• By further written agreement dated January 12, 1998, the Company waived its right to file a motion for rehearing. Thus, as of January 12, 1998, administrative proceeding number 34,943 became “final” and the limitations period expired.

• Since the Company filed administrative proceeding number 43,135 thereafter, the instant claims were barred by limitations.

The Company argues that administrative proceeding number 43,135, asserting the instant claims, was timely because (a) administrative proceeding number 34,943 became final January 28, 1998, rather than on January 12 as asserted by the Comptroller; (b) limitations was further extended, under Section 111.104(c)(3) of the Texas Tax Code, for an additional six months after administrative proceeding number 34,943became final; and (c) the 1991 protective claim letter filed by the Company independently tolled limitations on the claims at issue. We will address those arguments in that order.

(a) Administrative Proceeding Number 3⅛,9⅛3 Became Final January 12, 1998

The Company argues that, under Section 2001.144(a)(4) of the Texas Government Code, administrative proceeding number 34,943 became final “on the date specified in the order,” that is, January 28, 1998. See Tex. Gov’t Code Ann. § 2001.144(a)(4) (Vernon 2000). While Section 2001.144 applies generally to this analysis concerning the date of finality, Section 2001.144(a)(4) does not apply here. Subsection (a)(4) applies only when “all parties agree to the specified date [of finality] in writing or on the record.” Id. Because the parties did not agree to a specific date of finality “in writing or on the record,” subsection (a)(4) does not apply. 10

We can also rule out the applicability of two of the three other subsections, subsection (a)(2), which deals with a timely filed motion for rehearing, and subsection (a)(3), dealing with imminent peril declared by the agency. See Tex. Gov’t Code Ann. § 2001.144(a)(2)-(3). Since a timely motion for rehearing was not filed and because no imminent peril declaration appears in the record, neither of those subsections apply here.

On the other hand, subsection (a)(1) does apply here, because a motion for rehearing was not timely filed. That subsection provides that, when a timely motion for rehearing is not filed, the decision is final “on the expiration of the period for filing a motion for rehearing.” See Tex. Gov’t Code Ann. § 2001.144(a)(1). In this case, while the period for filing a motion for rehearing would have normally expired January 28, 1998, the parties waived the *684 right to file such a motion. That meant that, because of the waiver, the period for filing such a motion had effectively expired the day of the waiver. As no timely motion for rehearing was filed and there was no claim that the waiver was somehow ineffective, the date of finality became the date of the waiver, January 12, 1998. Since the Company filed administrative proceeding number 37,477 after that date, administrative proceeding number 37,477 was not timely as to the instant claims, that is, these claims were barred by limitations, unless the statute of limitations was further extended by one of the other two methods advanced by the Company.

(b) Section 111.104.(c)(3) Does Not Extend Limitations Another Six Months for These Claims

The Company also argues that, under Section 111.104(c)(3) of the Texas Tax Code, it had six months after finality to file administrative proceeding number 37,477. This subsection allows a taxpayer to file a refund claim “before the expiration of the applicable limitation period ... or before the expiration of six months after a ... deficiency determination becomes final, whichever period expires later.” Tex. Tax Code Ann. § 111.104(c)(3) (Vernon Supp.2006).

The Comptroller responds that Section 111.104 applies only if there has been a “deficiency determination,” which it says did not happen here. But the record reflects that a deficiency determination, see Tex. Tax Code Ann. § 111.008 (Vernon 2001) (Deficiency Determination), was made against the Company, which determination, we have held, became final January 12. Therefore, Section 111.104 would apply to the Company’s instant claims, if they fall within its terms.

But the Company’s claims do not fall within Section 111.104. Section 111.104(d), perhaps inartfully, puts in proper context the claims to which Section 111.104 generally applies and, thus, the claims for which Section 111.104(c) would extend the period of limitations. Section 111.104(d) refers to a “refund claim for an amount of tax that has been found due in a jeopardy or deficiency determination.” Tex. Tax Code Ann. § 111.104(d) (Vernon Supp.2006). There is no reason to believe that subsection (d) would limit refund claims to the taxes found due in a Comptroller determination, while the other subsections of Section 111.104 would not be so limited. We hold, therefore, that the six-month extension of the period of limitations under Section 111.104(c) is triggered not by just any deficiency determination, but only by a jeopardy or deficiency determination on the same issues as the claims for which the extension is claimed. 11 Since the deficiency determination in administrative proceeding number 34,943 was on a different set of issues as the instant claims, the statute of limitations was not so extended.

(c) The Company’s 1991 “Protective Claim” Letter Cannot Make These Claims Timely

Finally, the Company argues that, because a refund claim, for franchise taxes from the same periods as those in question, had been filed February 28, 1991, the statute of limitations on the instant claims was sufficiently tolled to save these claims. The Company asserts that the statute of limitations is tolled by former Section 111.207(d) of the Texas Tax Code, which provided as follows:

*685 In determining the expiration date for filing a refund claim for a tax imposed by this title, the period during which an administrative proceeding is pending before the comptroller for the same period and type of tax is not considered....

Tex. Tax Code Ann. § 111.207(d) (Vernon 2001) (repealed effective June 20, 2003).

The record does not reflect whether any action was ever taken relative to the Company’s 1991 protective claim letter, by either party, for many years after its filing. That record silence, paired with the minimal discussion by the parties concerning this earlier letter, suggests that the Comptroller’s factual assertion, that the letter was neither acted on by the Comptroller, nor pursued by the Company, is tacitly accepted by the Company.

The Comptroller argues this letter should not be allowed to toll limitations because of the Company’s lack of due diligence in pursuing it for eight years. The Comptroller cites as authority for that proposition only Walls v. Travis County, 958 S.W.2d 944, 947 (Tex.App.-Austin 1998, pet. denied); and Perry v. Kroger Stores, 741 S.W.2d 533, 534 (Tex.App.-Dallas 1987, no writ); both cases dealing with due diligence in obtaining service of process against a defendant after the expiration of the period of limitations. While those cases may provide some persuasive authority to support the Comptroller’s argument, they do not provide the “well established” precedent on this point claimed by the Comptroller.

The letter in question is what has become called a “protective claim,” a letter which, by practice, the Comptroller recognizes as a timely-flled claim, if followed by a substantive claim. The letter requests a refund in very general terms:

[Company] respectfully requests that it be granted a refund of franchise tax in an amount which represents the difference between the total franchise tax previously paid for ... report years [1988-90] and the amount it should have paid.

It is our intent to submit amended franchise tax reports for 1988,1989 and 1990 which will reflect the use of alternative generally accepted accounting principles’ (GAAP) methods for the recognition of income and expenses.

While, in a colloquial sense, this protective claim letter may have presented a claim, we hold it is insufficient to commence an “administrative proceeding” for the purpose of the tolling provided by former Section 111.207(d).

The Third Court of Appeals in Austin, presiding over the district from which this case originates, ruled only last year on when, short of a formal administrative claim with a “hearing” number, an “administrative proceeding” is pending under former Section 111.207(d) of the Texas Tax Code. See Strayhorn v. Willow Creek Res., Inc., 161 S.W.3d 716, 723-28 (Tex.App.-Austin 2005, no pet.). That case held that an “informal [claim] review” process by the Comptroller was an “administrative proceeding” which tolled the statute of limitations under former Section 111.207(d). The Austin court so held because the “informal review” process under consideration (1) involved a dispute, (2) was begun by a document, served on the opposing party, analogous to a complaint in a civil lawsuit, in that it involved an accusation or statement of issues, and (3) the document “set in motion mechanisms ... under which the dispute will ultimately be resolved” and “in which the non-initiating party has a legal duty to respond.” Id. at 724 (citing Hickel v. Halford, 872 P.2d 171, 178,181 (Alaska 1994)).

Here, the Company’s protective claim letter was intended to make timely the Company’s change of its accounting meth *686 od. It was intended that the Company would follow that letter with some further action. At the very least, there was no requirement that the Comptroller respond to the protective claim letter. For that reason, the protective claim letter was insufficient, under the authority of Willow Creek, to initiate an “administrative proceeding” and thus begin the tolling of former Section 111.207(d).

Therefore, the instant claims are not saved by the tolling provided by former Section 111.207(d) of the Texas Tax Code.

For the above reasons, the instant claims were, as a matter of law, barred by limitations; and the summary judgment for the Comptroller on these claims was proper. Because we so hold, we do not address the other issues argued by the parties on these claims, finality and exhaustion of remedies.

(8) The Comptroller Was Not Entitled to Summary Judgment Denying the Company’s Request to Deduct (A) Interstate Gas Transportation Revenues, (B) Amounts Attributable to Unamor-tized Losses on Reacquired Debts, and (C) $1,988,202.00 Included in the Company’s Account Number 228-1000

The Company next contends it is entitled to the removal of amounts it says were improperly included in the company’s taxable capital for the tax year 1991. In the trial court and in its brief to this Court, the Comptroller asserted these claims were time barred. At oral argument, however, the Comptroller conceded these claims were not time barred and asked to have this issue remanded to the trial court for determination of the Company’s 1991 tax liability. While the Company happily accepted the Comptroller’s concession on this point, the Company disagreed with the Comptroller’s proposed remedy— remanding the case for further proceedings regarding the 1991 tax year. Instead, the Company has asked us to use the existing record to determine the Company’s proper surplus valuation and to render the appropriate judgment for the Company.

As stated above, summary judgment is appropriate when no genuine issue of material fact exists and the movant demonstrates it is entitled to judgment as a matter of law. Tex.R. Civ. P. 166a(c). The record before us contains conflicting evidence regarding the proper valuation of the Company’s 1991 surplus. The Company’s summary judgment evidence, if undisputed, would support a reduction of its 1991 surplus valuation by the amounts of $24,147,150.00 for its unamortized losses, $1,988,202.00 for its claim relative to its account number 228^1000, and $172,438,869.00 for its interstate gas transportation claim. The Comptroller, however, presented evidence that the Company’s 1991 refund, if any, might be much lower. Some of the Comptroller’s evidence suggests the Company’s surplus should be reduced by $3,277,170.75. Other evidence in the record suggests the proper reduction is $1,965,437.25. The summary judgment evidence is clearly in conflict. Accordingly, we cannot say that no genuine issue of material fact exists on this issue. We must, therefore, remand this issue to the trial court for further proceedings.

Conclusion

We reverse the partial summary judgment in favor of the Company which decreed that it was, as a matter of law, entitled to amend its 1989 and 1990 franchise tax reports to reflect a change in accounting methods from the “full cost” accounting method to the “successful efforts” method. We affirm the partial summary judgment in favor of the Comptroller which decreed that the Company was barred, as a matter of law, from pursuing *687 its interstate gas transportation and unam-ortized losses claims for 1989 and 1990. And, in accordance with the Comptroller’s concession at oral argument, we reverse and remand that portion of the trial court’s summary judgment regarding all claims for franchise tax year 1991. We remand this case to the trial court for further proceedings consistent with this opinion.