KEY ENERGY SERVICES, LLC, Appellant v. SHELBY COUNTY APPRAISAL DISTRICT, Appellee

NO. 12-13-00075-CV
IN THE COURT OF APPEALS
TWELFTH COURT OF APPEALS DISTRICT
TYLER, TEXAS
KEY ENERGY SERVICES, LLC, § APPEAL FROM THE 123RD
APPELLANT
V. § JUDICIAL DISTRICT COURT
SHELBY COUNTY
APPRAISAL DISTRICT,
APPELLEE § SHELBY COUNTY, TEXAS
OPINION
Key Energy Services, LLC appeals from the trial court‟s judgment affirming Shelby
County Appraisal District‟s (SCAD) valuations of two saltwater disposal wells owned by Key.
In seven issues, Key contends the trial court erred in refusing to reduce the valuations, allowing
SCAD‟s expert to testify, determining it had no jurisdiction over Key‟s challenge to the 2007 tax
year assessment, granting SCAD‟s motion for partial summary judgment, and failing to file
findings of fact and conclusions of law. We affirm the trial court‟s judgment.
BACKGROUND
Davis Vacuum Services purchased a tract of land and the saltwater disposal well located
on it on April 18, 2007. This well was known as the Davis #2. In December 2010, Davis
merged with Key Energy Services, LLC. Key calls this well the Davis #5. Key leases the land
on which its saltwater disposal well, known as the Davis #3, is located pursuant to a lease with
John and Deborah Leggett, the owners of the land. The lease has been in effect since December
2005. Prior to 2007, the wells had been valued at approximately $300,000.00 each for purposes
of ad valorem taxation. The valuations increased dramatically in 2007 and remained at that level
thereafter. Key protested the valuations for the years 2007 through 2010. The Shelby County
Appraisal Review Board heard the protests and determined that it would make no changes. Key
appealed that decision to the trial court for a trial de novo, naming SCAD and the Shelby County
Appraisal Review Board as defendants. Key later nonsuited the appraisal review board, and
Key‟s claims against it were dismissed.
Key filed a declaratory judgment action asking the trial court to declare that its protests to
the 2007 tax year appraisal and assessment were timely and that the appraisal roll entries for the
two wells for the 2007, 2008, 2009, and 2010 tax years are void. Key argued that the appraisal
roll entries are void because they fail to appraise the wells in the manner required by law and fail
to describe the property accurately or in proper categories. Alternatively, Key challenged the
assessments for 2007, 2008, 2009, and 2010 as excessive. Key filed a motion for summary
judgment requesting judgment on the 2007 tax year for the well known as the Davis #5 and that
the appraisals and assessments for both wells for all four tax years are void for failure to properly
describe and categorize the property. Alternatively, Key requested judgment that its challenges
concerning the 2007 tax year were timely. SCAD filed a motion for partial summary judgment
asking the court to find that the wells are real property subject to taxation. The trial court sent a
letter to the parties, on December 17, 2010, asking one of the attorneys to prepare an order
reflecting a ruling that Key‟s motion for summary judgment was denied and SCAD‟s motion was
granted. Key filed a second motion for partial summary judgment requesting a declaratory
judgment that the wells are personalty or that the Davis #3 be taxed to the landowner, John
Leggett.
SCAD filed a third party petition for declaratory judgment against John and Deborah
Leggett, the owners of the land on which the Davis #3 sits, requesting the court determine if the
property is taxable to Key or the Leggetts. In response, the Leggetts sought rescission of Key‟s
lease and attorney‟s fees.
The case was submitted to the trial court without a jury. At the close of the trial, the
Leggetts nonsuited their claims against Key. The court denied Key‟s request to change the
valuation of the wells for any of the years under review and denied Key‟s claims with respect to
the 2007 valuation due to lack of jurisdiction. Further, the court denied all requests for relief
pursuant to the Uniform Declaratory Judgments Act and ordered each party to bear its own costs
and attorney‟s fees. Key requested findings of fact and conclusions of law but none were filed.
Key appealed the trial court‟s judgment.1
1
The Leggetts are not parties to this appeal.
2
2007 TAX YEAR
In its sixth issue, Key asserts that the trial court erred when it determined that it lacked
jurisdiction to consider Key‟s claims concerning the 2007 tax year due to Key‟s failure to
exhaust the required administrative remedies. Relying on tax code Section 31.04(a-1), Key
argues that it timely filed a notice of protest with the appraisal review board and timely paid the
amount of taxes not in dispute, thus complying with jurisdictional prerequisites. SCAD asserts
that Section 31.04(a-1) does not apply because this case presents a supplemental appraisal
decision, not an omitted property question. This distinction is important because it dictates the
applicable delinquency date.
Applicable Law
Subject matter jurisdiction is essential to the authority of a trial court to decide a case.
Tex. Ass’n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 443 (Tex. 1993). The existence of
subject matter jurisdiction is a legal question and the standard of review is de novo. Mayhew v.
Town of Sunnyvale, 964 S.W.2d 922, 928 (Tex. 1998). The failure to exhaust the tax code‟s
exclusive administrative remedies deprives the trial court of jurisdiction to review most adverse
ad valorem tax decisions. TEX. GOV‟T CODE ANN. § 311.034 (West 2013); Cameron Appraisal
Dist. v. Rourk, 194 S.W.3d 501, 502 (Tex. 2006) (per curiam).
Property owners are entitled to administratively protest certain actions to the appraisal
review board pursuant to Chapter 41. See TEX. TAX CODE ANN. § 41.41(a) (West 2008); U.
Lawrence Boze’ & Assocs., P.C. v. Harris Cnty. Appraisal Dist., 368 S.W.3d 17, 24 (Tex.
App.–Houston [1st Dist.] 2011, no pet.). To take advantage of this option, generally, a property
owner must file a written notice of protest within thirty days after the owner receives a notice of
the appraised value of the property. See TEX. TAX CODE ANN. § 41.44(a) (West Supp. 2013).
Likewise, to be entitled to a hearing and a determination of a protest of a supplemental appraisal
record, the property owner initiating the protest must file a written notice of the protest with the
appraisal review board within thirty days after the date that notice was delivered to the property
owner. TEX. TAX CODE ANN. § 25.23(d) (West 2008).
However, tax code Section 25.25 grants a five year window to correct the appraisal rolls
under certain limited circumstances. See TEX. TAX CODE ANN. § 25.25 (West Supp. 2013). The
version applicable to this case states in pertinent part as follows:
3
(c) The appraisal review board, on motion of the chief appraiser or of a
property owner, may direct by written order changes in the appraisal roll for any
of the five preceding years to correct:
(1) clerical errors that affect a property owner‟s liability for a tax
imposed in that tax year;
(2) multiple appraisals of a property in that tax year; or
(3) the inclusion of property that does not exist in the form or at the
location described in the appraisal roll.
Act of May 26, 1979, 66th Leg., ch. 841, § 1, 1979 Tex. Gen. Laws 2218, 2276 (amended 1981,
1989, 1991, 2001, and 2011) (current version at TEX. TAX CODE ANN. § 25.25(c)).
Further, Section 25.25(d) provides that a property owner may file a motion with the
appraisal review board to change the appraisal roll to correct an error that resulted in an incorrect
appraised value at any time prior to the date the taxes become delinquent. TEX. TAX CODE ANN.
§ 25.25(d).
Analysis
The record shows that the subject properties were not included in the original 2007
appraisal roll or tax roll. However, by notice dated September 7, 2007, SCAD notified Davis
Vacuum Services of the 2007 appraisal of each well. That notice letter advised Davis that it had
until October 9, 2007, to file a written protest with the appraisal review board and even enclosed
a form to send in for that purpose. SCAD certified supplemental appraisal records regarding the
subject properties on December 26, 2007. On January 10, 2008, SCAD delivered to the Shelby
County Tax Assessor-Collector the supplemental appraisal roll containing the two wells. The
two accounts were added to the tax assessor-collector‟s tax rolls on February 11, 2008. The
original 2007 tax bills were mailed to Davis Vacuum on February 15, 2008. Davis sent two
checks for the base tax amounts to the tax assessor-collector on October 6, 2008. These checks
were returned to Davis. On December 16, 2008, Davis filed two protests with the appraisal
review board. One is entitled “Motion to Correct Alleged Error in Appraisal Roll.” This motion
cites to Section 25.25(c) and alleges that the appraisal roll entry reflects a clerical error, multiple
appraisals in a tax year, or the inclusion of property that does not exist in the form or at the
location described in the appraisal roll. Specifically, the alleged error is described as use of an
inappropriate appraisal technique. The second motion is entitled “Motion to Correct Alleged 1/3
Over-Appraisal Error” and is made pursuant to Section 25.25(d) and (e).
4
Protest Deadline
Property owners have the right to protest the appraised value of their property under
Chapter 41 of the tax code. See TEX. TAX CODE ANN. § 41.41(a). The legislature‟s intent is that
the appraisal rolls become fixed after property owners have been given adequate time to file their
protests. See Anderton v. Rockwall Cent. Appraisal Dist., 26 S.W.3d 539, 543 (Tex. App.–
Dallas 2000, pet. denied). For substantive challenges to property appraisals, the legislature has
determined that thirty days after receiving notice of appraised value is normally sufficient time
within which to file a protest. See TEX. TAX CODE ANN. § 41.44(a)(1). Here, the deadline for
filing a protest to the 2007 valuation under Chapter 41 was October 7, 2007.2 See TEX. TAX
CODE ANN. § 25.23(d). Key missed this deadline.
If a property owner fails to meet the deadline for a Chapter 41 protest, it may still file a
motion to correct certain types of errors in the appraisal roll under Section 25.25 of the tax code.
In enacting Section 25.25(c) of the tax code, the legislature specifically set forth the limited
corrections that may be made to an appraisal roll five years after the date the property values
were determined. TEX. TAX CODE ANN. § 25.25(c). The purpose of Section 25.25(c) is to allow
late changes to otherwise finalized appraisal records only in situations where the decision to
make the change is based on an objective, factual determination and the payment of taxes based
on the uncorrected records would be fundamentally unfair. GE Capital Corp. v. Dallas Cent.
Appraisal Dist., 971 S.W.2d 591, 593 (Tex. App.–Dallas 1998, no pet.). These limited
corrections include only objective and ministerial matters such as clerical errors. Anderton, 26
S.W.3d at 543. They do not include the substantive reevaluation of a property‟s market value.
Id. Here, the 25.25(c) motion to correct the appraisal roll raised a complaint requesting a
substantive reevaluation of the property‟s market value. Thus, the 25.25(c) motion was not the
proper vehicle to address Key‟s complaint. Id.
Date of Delinquency
Section 25.25(d), however, contains a provision specifically directed at changing the
appraisal roll due to an incorrect appraised value. See TEX. TAX CODE ANN. § 25.25(d) (West
Supp. 2013). This section extends the time to file a challenge to the appraised value of land for
properties that have been significantly overvalued due to an error. Anderton, 26 S.W.3d at 543.
2
October 7, 2007 was a Sunday. Monday, October 8, 2007 was Columbus Day. The record does not state
whether the appraisal review board was open that day. If it was closed, however, that would explain why the letter
stated that Davis had until October 9 to file a protest.
5
To be entitled to a correction under Section 25.25(d), the motion must be filed before the taxes
become delinquent, the incorrect appraised value must exceed the correct appraised value by
one-third, and the property owner must pay a penalty. TEX. TAX CODE ANN. § 25.25(d); Dallas
Cent. Appraisal Dist. v. G.T.E. Directories Corp., 905 S.W.2d 318, 320 (Tex. App.–Dallas
1995, writ denied).
Here, the parties disagree about the applicable delinquency date. Generally, taxes are due
on receipt of the tax bill and are delinquent if not paid before February 1 of the year following
the year in which the taxes were imposed. TEX. TAX CODE ANN. § 31.02(a) (West 2008).
Therefore, ordinarily, the extension under 25.25(d) ends on February 1 of the year following the
tax year, the date the yearly property taxes become delinquent. However, if a tax bill is mailed
after January 10, the delinquency date provided by Section 31.02 is postponed to the first day of
the next month that will provide a period of at least twenty-one days after the date of mailing for
payment of taxes before they become delinquent. TEX. TAX CODE ANN. § 31.04(a) (West 2008).
Here, the 2007 tax bill was mailed on February 15, 2008. Relying on Section 31.04(a), under
which the delinquency date is April 1, 2008, SCAD argues that the 25.25(d) motion and Key‟s
payment of taxes were late because Key did not meet the April 1, 2008 deadline.
Key asserts that the applicable deadline is provided for in Section 31.04(a-1), which
states as follows:
If a tax bill is mailed that includes taxes for one or more preceding tax
years because the property was erroneously omitted from the tax roll in those tax
years, the delinquency date provided by Section 31.02 is postponed to February 1 of
the first year that will provide a period of at least 180 days after the date the tax bill
is mailed in which to pay the taxes before they become delinquent.
TEX. TAX CODE ANN. § 31.04(a-1) (West 2008). Applicability of Section 31.04(a-1) hinges on
whether property was “erroneously omitted from the tax roll” in 2007. The chief appraiser‟s
listing of all taxable property in the district and its appraisal value constitutes the appraisal
records. See TEX. TAX CODE ANN. § 25.01. The appraisal roll with amounts of tax entered as
approved by the governing body constitutes the unit‟s tax roll. TEX. TAX CODE ANN. § 25.24
(West 2008). Key‟s argument is that, literally, the property did not appear on the tax roll in
2007, but was added in 2008. Therefore, the argument continues, Section 31.04(a-1) applies,
making the delinquency date February 1, 2009, after Key attempted to pay the base taxes.
6
While we appreciate Key‟s efforts to follow the plain language of the statute, there is a
distinction to be made here. As SCAD explains, this was a supplemental appraisal decision, not
an omitted property question. Robert Pigg, Chief Appraiser at SCAD, testified by deposition
that the two properties had “existed in some form in the past.” He explained that the reason the
appraisal notices were late was that Pritchard & Abbott (P&A), the private evaluation consulting
firm hired by SCAD, was “trying to gather some information to value these the way they felt
they should be valued.” The critical point is that the appraisal record was supplemented in 2007.
The fact that the tax roll was supplemented in 2008 did not turn a late appraisal into an omitted
one. Thus, because the property was not “erroneously omitted from the tax roll” in 2007,
Section 31.04(a-1) does not apply. Section 31.04(a) applies, making the delinquency date April
1, 2008. Section 42.08 requires the property owner to pay taxes due on the portion of the taxable
value of the property that is not in dispute before the date the taxes become delinquent or the
property owner forfeits the right to appeal. TEX. TAX CODE ANN. § 42.08 (West Supp. 2013).
Section 25.25(e) specifies that the movant must comply with Section 42.08. Key sent two
checks for the base tax amounts in October 2008. Key‟s failure to comply with Section 42.08,
and to exhaust the required administrative remedies, deprived the trial court of jurisdiction over
the 2007 tax year complaint. See Rourk, 194 S.W.3d at 502. We overrule Key‟s sixth issue.
EXPERT TESTIMONY
In its fourth issue, Key asserts that the trial court erred in denying Key‟s motion to
exclude the testimony of Rodney Kret, SCAD‟s expert witness. Key contends that (1) Kret‟s
expertise was as a mineral interest appraiser and there is no mineral interest at issue in this case,
(2) Kret‟s appraisal commingles real property and personal property, (3) he used the same
framework to appraise both wells even though one was located on land owned by Key and one
was located on land leased by Key, (4) he erroneously valued the property based on the gross
business revenue received by Key, and (5) Kret testified that P&A categorized the property as
personal property, but used the income method to appraise the property.
Standard of Review
We review a trial court‟s evidentiary rulings for abuse of discretion. Bay Area
Healthcare Group, Ltd. v. McShane, 239 S.W.3d 231, 234 (Tex. 2007). A trial court abuses its
discretion when it acts without regard for any guiding principles. E.I. du Pont de Nemours &
7
Co. v. Robinson, 923 S.W.2d 549, 558 (Tex. 1995). An expert‟s testimony must be relevant to
the issues and based upon a reliable foundation. See TEX. R. EVID. 702; Exxon Pipeline Co. v.
Zwahr, 88 S.W.3d 623, 628 (Tex. 2002). Expert testimony is unreliable if it is based on
unreliable data, or if the expert draws conclusions from his underlying data based on flawed
methodology. Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706, 714 (Tex. 1997).
Likewise, expert testimony lacking a proper foundation is incompetent. City of Keller v. Wilson,
168 S.W.3d 802, 813 (Tex. 2005). Expert testimony is also unreliable if there is too great an
analytical gap between the data the expert relies upon and the opinion offered. Zwahr, 88
S.W.3d at 629. The court‟s ultimate task, however, is not to determine whether the expert‟s
conclusions are correct, but rather whether the analysis the expert used to reach those
conclusions is reliable and therefore admissible. Id.
Analysis
Rodney Kret received a petroleum engineering degree in 1983 and immediately entered
the ad valorem tax appraisal industry. He is a registered professional appraiser, employed by
P&A, an evaluation consulting firm. See TEX. OCC. CODE ANN. § 1151.160 (West Supp. 2013).
He has extensive experience appraising property interests in the oil and gas industry. Kret
explained that P&A appraises real and personal property separately, but does not list them
separately. In other words, the tangible personal property and real property are commingled in
an account after they are separately appraised.
Kret explained that the subject property, that being valued, is the same in the Davis #3
and the Davis #5. In both cases, the interest being valued is “the right to inject into a subsurface
formation.” He clarified that a fee simple interest is not at issue here. The land on which each
well is located is listed separately from the interests being litigated. Additionally, many
variables were considered to arrive at the taxable value of the wells. Kret specifically noted that
P&A assumed a 45% expense burden for both wells. This was a greater burden than actually
existed on #5, resulting in a more favorable position for Key. Therefore, whether the land is
leased or owned by Key, the subject property is essentially the same in both cases, the right to
inject.
The tax code directs the appraisal district to consider the cost, income, and market data
comparison methods of appraisal and use the most appropriate method. See TEX. TAX CODE
ANN. § 23.0101 (West 2008). Kret testified that he routinely uses the income approach to
8
appraise oil and gas production, underground oil and gas storage, and saltwater disposal wells.
The income approach to value proceeds on the premise that a buyer of income-producing
property is primarily interested in the income that his property will generate. See Polk Cnty. v.
Tenneco, Inc., 554 S.W.2d 918, 921 (Tex. 1977). In simple terms, the approach involves
estimating the future income of the property and applying a capitalization rate to that income to
determine market value. Id. The saltwater disposal wells at issue here are income producing
properties. Therefore, the income approach to valuation was appropriate.
Finally, Kret testified that the “right to inject” is an “estate or interest in land,” a category
of real property under Section 1.04(2) of the tax code. See TEX. TAX CODE ANN. § 1.04(2)(F)
(West 2008). Kret explained that the appraised value is a compilation of several different and
separate appraisals. The appraisal model is complicated and took into account both the real
property component and the personal property component. Kret explained, “The conclusion of
value was, in this case, the replacement cost new limit that we put on the cash flow, the income
projection of net income discounted to present value.” They used the income approach to value
the interest being taxed but used the replacement cost new approach as a limit on the income
approach indicator of value. The resulting values represent a combination of real property and
business personal property. Thus, the types of property were appraised separately and the
income approach was not used on personal property.
Kret, a registered professional appraiser with close to thirty years of experience at the
time of trial, explained P&A‟s methodology. P&A applied their formulas, principles, and
economic theories to the specific facts surrounding each saltwater disposal well at issue here to
determine the appraised value of each well. Essentially, Key‟s complaints about Kret‟s
testimony go to its weight, not its admissibility. See Ford Motor Co. v. Ledesma, 242 S.W.3d
32, 40-41 (Tex. 2007). Kret‟s calculations were based on quantitative foundational data and
followed the methodology approved by Section 23.012. See TEX. TAX CODE ANN. § 23.012
(West 2008). The trial court did not abuse its discretion in admitting Kret‟s testimony. See
Robinson, 923 S.W.2d at 558. We overrule Key‟s fourth issue.
CATEGORIZATION AND DESCRIPTION
In its first issue, Key contends the trial court erred by allowing SCAD to value Key‟s
saltwater disposal facilities as categorized and described when SCAD admitted that the facilities
9
were made up of both personal and real property and the descriptions were impermissibly vague.
Key argues that SCAD was required to identify the property, place it into its proper statutory
categories (real or personal), and then describe and value it appropriately. Key contends that
SCAD commingled the real and personal property into a single property tax account for each
facility. As a result, Key argues, “[T]hese accounts fail as legally inadequate to provide
sufficient notice as to what is being taxed.” Key requests this court to void the appraisals.
Analysis
The tax code requires appraisal records to be in a particular form and to include certain
specified information. See TEX. TAX CODE ANN. § 25.02 (West 2008). The statute also requires
the appraisal district to send notice of appraised value to property owners and that notice must
include certain information. See TEX. TAX CODE ANN. § 25.19 (West 2008). However, Key has
not identified the specific SCAD record or document it contends fails to follow the statute.
Further, Key has not provided a record reference showing where this issue was raised in the trial
court. Key has also failed to provide authority for the assertion that it is entitled to have the
appraisals voided based on SCAD‟s record keeping.
The tax notices we found in the record specified the SCAD property identification
number, the name of the well, and the Railroad Commission identification number. Other
documents contain the name, the general location, and the Railroad Commission identification
number. Kret testified that the real property component was valued separately from the
personal property component and then the values were combined. We conclude that SCAD
provided sufficient notice as to what it was taxing. Even assuming that sending a tax bill stating
the full amount of tax owed without itemizing is error, the supreme court has ruled that including
property in an incorrect category does not exempt it from taxation. See Matagorda Cnty.
Appraisal Dist. v. Coastal Liquids Partners, L.P., 165 S.W.3d 329, 335 (Tex. 2005). We
overrule Key‟s first issue.
PARTIAL SUMMARY JUDGMENT
In its third issue, Key asserts that the trial court erred as a matter of law by granting
SCAD‟s motion for partial summary judgment and holding that the facilities were composed
entirely of real property. Key‟s argument is based on the faulty assumption that a letter sent to
counsel for both parties constitutes a ruling on the motion.
10
Generally, a judgment is rendered when the decision is officially announced orally in
open court, by memorandum filed with the clerk, or otherwise announced publicly. Garza v.
Tex. Alcoholic Beverage Comm’n, 89 S.W.3d 1, 6 (Tex. 2001). The words used by the trial
court must clearly indicate the intent to render judgment at the time the words are expressed.
S&A Rest. Corp. v. Leal, 892 S.W.2d 855, 858 (Tex. 1995) (per curiam). A letter to counsel
may constitute the pronouncement of judgment if it is in sufficient detail to state the court‟s
decision on all the matters at issue and filed with the clerk. Gregory v. Foster, 35 S.W.3d 255,
257 (Tex. App.–Texarkana 2000, no pet.). A letter is not a rendition of judgment if it only
indicates the court‟s intention to render judgment in a certain way and sets out guidelines by
which counsel are to draw a judgment. Id. Similarly, if a letter contains the language of
command that identifies an order, it is an order of the court. Id.
More than two years before the final judgment was rendered, SCAD filed a motion for
partial summary judgment requesting the court find that the subject property is real property
subject to property taxation. Key also filed a motion for summary judgment seeking to resolve
the case. Almost exactly two years before the judgment was rendered, the trial court sent a
cryptic letter to counsel stating that it had reviewed both motions and responses. The following
constitutes the remainder of the letter:
I am DENYING Plaintiff‟s Motion for Summary Judgment.
I am GRANTING Defendant‟s Motion for Partial Summary Judgment.
Mr. Low is directed to prepare an appropriate Order(s) reflecting my rulings for my signature.
The trial court‟s letter does not clearly indicate the intent to render judgment at the time
the letter was signed. See Greene v. State, 324 S.W.3d 276, 282-83 (Tex. App.–Austin 2010, no
pet.) (judge‟s letter including present tense language that “judgment is rendered” indicates intent
to render judgment at that time). Furthermore, the letter, if a judgment, could only have been
interlocutory and its terms were not incorporated in the court‟s final judgment. The court‟s letter
indicates only the court‟s intention to render judgment in a certain way in the future and
instructed counsel to draft an order for the court‟s signature. Thus, the letter was not a rendition
of judgment. Gregory, 35 S.W.3d at 257. We overrule Key‟s third issue.
11
ESTATE OR INTEREST
In its second issue, Key contends the trial court erred by allowing SCAD to attribute
taxable value to Key by categorizing each facility as an “estate or interest” in land when the
taxes on the land had already been assessed to Key for one facility and to the Leggetts for the
other facility. Specifically, Key argues that by allowing SCAD to attribute a value to the “right
to inject” as an estate or interest in real property, the trial court erred as a matter of law because
lesser estates are generally nontaxable as separate interests. Key asserts that the value of the
entire fee necessarily contains the lesser value of the leasehold the fee contains. Key argues that
the tax code prevents its leasehold interest in Davis #3 from being taxed apart from the Leggetts‟
fee simple interest; otherwise, invalid double taxation results. Likewise, Key asserts, taxing both
the facility under its “lesser interest” theory and the land where the #5 is located, which Key
owns, caused Key to be taxed twice on the same land.
Applicable Law
For taxation purposes, real property includes land, improvements, mines, quarries,
minerals in place, standing timber, or any estate or interest, other than a security interest, in any
of the above. TEX. TAX CODE ANN. § 1.04(2). A single tract may include several of these
aspects of realty, or perhaps even all. Coastal Liquids, 165 S.W.3d at 332. At least some of
these aspects of real property can be taxed separately even though all are part of the same surface
tract. Id. This rule does not depend on whether each aspect is separately owned. Id. Some of
the categories used to define real property clearly overlap. Id. at 334. The supreme court
acknowledged that it is difficult to state a precise rule about what property can be separately
assessed. Id. Each property should be appraised based upon the individual characteristics that
affect the property‟s market value. Id. Furthermore, property cannot escape taxation merely
because it is unclear which of the tax code‟s categories should apply. Id. at 334-35.
Analysis
Kret explained that the interest at issue here is “the subsurface interest, the right to inject
into a subsurface formation” that is an interest in real property. This interest is the “estate or
interest” in land referenced in tax code Section 1.04(2)(F). Key uses the property to dispose of
salt water. P&A appraised the interest “being separately put to some profitable use” that has
“value separate from the land, the surface estate, the real estate itself.” Kret explained that the
12
actual well bore is part of it, as well as the pumps and tanks, the business personal property. He
specifically stated that the hole is not a taxable item and they did not appraise the business itself.
Robert Pigg, SCAD‟s chief appraiser, also testified that the wells at issue are categorized
as an estate or interest in land pursuant to Section 1.04(2)(F). The taxed property referred to as
the wells is made up of this real property portion together with the above ground pumps and
tanks, which are personal property. SCAD produced a P&A document describing appraisal of
saltwater disposal properties for ad valorem tax purposes. It states that “[t]he real property of a
commercial salt water disposal facility is the interest (right) that allows the injection to take
place.” It goes on to explain as follows:
The appraisal of this real property (the rights associated with ownership of land)
should not be confused with appraisal of the land itself. The „bundle of rights‟
that are embedded within fee simple ownership of land require a separate
appraisal when monetized to the extent that additional value is evident.
Adding to the confusion is the fact that the “estate or interest” at issue here is a “right”
rather than a physical thing. We note other rights have been identified as being an “estate or
interest.” See Evans v. Ropte, 96 S.W.2d 973, 974 (Tex. 1936) (right to enter upon land and
appropriate water is interest in land); Davis v. Vidal, 151 S.W. 290, 293 (Tex. 1912) (right of re-
entry is estate or interest in land); Lochte v. Blum, 30 S.W. 925, 927 (Tex. Civ. App.–San
Antonio 1895, writ ref‟d) (grantor‟s estate or interest in mortgaged property may be sold, subject
to lien created by mortgage); Shepard v. Galveston, Houston & Henderson Ry. Co., 22 S.W.
267, 268 (Tex. Civ. App.–Houston 1893, no writ) (right of way is easement, which is estate or
interest in land).
Key owns the saltwater wells, which are, like the storage caverns in Coastal Liquids, in
active commercial use. See Coastal Liquids, 165 S.W.3d at 334-35. A Section 1.04(2)(F)
interest in land is taxable. Id. Taxation of the land is separate from taxation of the Section
1.04(2)(F) interest around which this litigation centers. See id. at 335. Therefore, there is no
double taxation. We overrule Key‟s second issue.
13
EXCESSIVE VALUATION
In its fifth issue, Key asserts that the trial court erred as a matter of law by refusing to
reduce the excessive valuation of the two saltwater disposal wells. It argues that Rodney Kret‟s
testimony is inadmissible and therefore should be disregarded, leaving only the testimony of
Key‟s expert, Trey Cobb. Key also asserts that Kret erred by valuing the property based on the
gross business revenue received by Key. Key argues that this amounts to valuing the business
concern and not the ad valorem value of the real and personal property at issue. Further, Key
asserts that Kret‟s testimony is at odds with the court‟s prior ruling that the property is all real
property.
Standard of Review
When the party who had the burden of proof at trial attacks the legal sufficiency of an
adverse finding, that party must show that the evidence establishes, as a matter of law, all vital
facts in support of the issue. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241 (Tex. 2001) (per
curiam). In our review, we first examine the record for evidence supporting the adverse finding,
crediting favorable evidence, if a reasonable jury could, and disregarding evidence to the
contrary, unless a reasonable jury could not. See City of Keller v. Wilson, 168 S.W.3d 802, 807,
822 (Tex. 2005); Dow Chem. Co., 46 S.W.3d at 241. If there is no evidence to support the
finding, we examine the entire record to determine if the contrary proposition is established as a
matter of law. Dow Chem. Co., 46 S.W.3d at 241. We will sustain the issue only if the contrary
proposition is conclusively established. Id. A matter is conclusively established only if
reasonable people could not differ in their conclusions. City of Keller, 168 S.W.3d at 816. The
fact finder is the sole judge of the credibility of the witnesses and the weight to give their
testimony. Id. at 819; Ford v. Panhandle & Santa Fe Ry. Co., 252 S.W.2d 561, 563 (Tex.
1952). It is the fact finder‟s role to resolve inconsistencies within or conflicts among the
witnesses‟ testimony. City of Keller, 168 S.W.3d at 819; Ford, 252 S.W.2d at 563.
Applicable Law
The Texas constitution mandates that no property in this state shall be assessed for ad
valorem taxes at a greater value than its fair cash market value. TEX. CONST. art. VIII, § 20.
“Market value” means the price at which a property would transfer for cash or its equivalent
under prevailing market conditions if (a) exposed for sale in the open market with a reasonable
time for the seller to find a purchaser; (b) both the seller and the purchaser know of all the uses
14
and purposes to which the property is adapted and for which it is capable of being used and of
the enforceable restrictions on its use; and (c) both the seller and purchaser seek to maximize
their gains and neither is in a position to take advantage of the exigencies of the other. TEX. TAX
CODE ANN. § 1.04(7) (West 2008). The market value of the property shall be determined by the
application of generally accepted appraisal methods and techniques. TEX. TAX CODE ANN.
§ 23.01(b) (West Supp. 2013). In determining the market value of property, the chief appraiser
shall consider the cost, income, and market data comparison methods of appraisal and use the
most appropriate method. TEX. TAX. CODE ANN. § 23.0101.
Analysis
Robert Pigg, SCAD‟s chief appraiser, explained that there was a change in the way
saltwater disposal wells were valued between 2006 and 2007. He did not think they were being
valued correctly so he asked P&A to look at the valuations to try to determine if they were
correct. He explained that the wells are being taxed as a real property interest. The wells are
real property and the tanks and pumps are personal property, but they are not taxed separately.
They combined them with assessments of the wells.
Rodney Kret testified that the tax code does not promulgate any particular method for
valuing any particular property. P&A uses the income approach for valuing saltwater disposal
wells. The income approach is a projection of future income. Kret explained that the appraised
value is a compilation of several different, separate appraisals. Included are various items of
personal property along with some real property. They appraise real and personal property
separately but do not list them separately. He further explained that the real property interest
involved here is not a fee simple interest. The thing being valued is the right to inject and that
right to use the property as disposal wells was appraised separately from the fee. Kret explained
that historically appraisals of saltwater disposal wells were done on a personal property basis.
The personal property interest was the only thing being appraised. He also explained that the
value of #3, where there is a lessor payment present, is less than the value of #5 where there is no
lessor payment to make.
The record includes exhibits indicating the use of the “Income Approach Discounted
Cash Flow Calculation” that resulted in “the present value of the future net income.” The report
includes the salvage value of the replacement cost new of the well. Kret explained that
embedded in that salvage value is a depreciation component. The unit value includes both real
15
and personal property and is the cost to construct that facility, including drilling and completing
the well and installation of surface equipment. The creation of the hole is part of the installation
cost. Kret explained that they valued the cost of the facility and drilling the well and applied a
percentage to find salvage value, which takes into account all forms of depreciation. He
explained that installation cost is a component part of “replacement cost new” for property that is
installed somewhere. He clarified that the replacement cost new captures all costs to create this
facility, including all the engineering and overhead, all the labor costs and materials, and the
tangible personal property. He explained that they do not list specific pumps, pipes, and tanks.
Instead, they use a mass appraisal figure that includes what is typical for the type of property
they are appraising. They used a linear cost, dollars per foot, related to the depth of the well.
They consulted Railroad Commission records to determine the volume of water that has been
disposed of in each well.
Summing up the approach used by P&A, Kret stated, “The conclusion of value was, in
this case, the replacement cost new limit that we put on the cash flow, the income projection of
net income discounted to present value.” This is a discounted cash flow analysis. The
calculations include a ten year projection of future net revenue. He explained that number of
barrels times price equals gross revenue stream. Expenses of operation are allowed against the
gross revenue to arrive at a net income stream. Future net income figures are discounted to
present value. Kret stated that income derived on an income producing property is the basis of
the appraisal. He explained that the wasting asset in the saltwater disposal well is the ability of
the reservoir to accept the water. P&A applied the same estimated expense burden to both wells.
Due to the absence of a payment to the landowner in the case of well #5, this amounted to a
greater expense burden on the #5 than actually existed, which Kret characterized as a gift to the
taxpayer. Clarifying, Kret stated that they used the income approach to value the property but
they applied a limit on that concluded value. They used a different approach as a limiting factor.
The replacement cost new approach was used as a limit on the income approach indicator of
value to determine the certified value.
Among numerous documents SCAD introduced is a paper Kret authored describing the
process of appraising saltwater disposal properties for ad valorem tax purposes. In it, he
explained that a replacement cost new less depreciation cost approach methodology is best suited
for appraising the tangible personal property component of saltwater disposal wells. However,
16
the income approach to value is the most appropriate way to appraise the real property of a
saltwater disposal facility, which is the interest or right that allows the injection to take place.
The relevant income to analyze is net of all expenses of operation and taxes; in other words, the
profitability. The income the appraiser forecasts represents future profit potential.
In arguing this issue, Key first urges us to disregard Kret‟s testimony. As we have
already explained, that testimony was admissible and we shall not disregard it. We have also
already determined that the trial court did not render judgment that the wells are solely real
property, and the wells were properly identified as a Section 1.04(2)(F) interest in real property.
Key asserts that the controlling case on valuation is Gregg County Appraisal District v.
Laidlaw Waste Systems, Inc., 907 S.W.2d 12 (Tex. App.–Tyler 1995, writ denied). That case
concerned valuing a 250 acre tract of land used as a landfill, but the discussion of the appraisal
methodology was in the context of whether the appraisal reports were admissible. This court
held that the trial court had properly excluded evidence that focused on Laidlaw as a going
concern including its state permit and private contracts, which constitute intangible personal
property. Id. at 19. Further, the proffered appraisal testimony commingled the value of the
business with the value of the property. Id. at 20. The excluded appraisal reports did not
identify what part of Laidlaw‟s income was derived from the land and what part was attributable
to the other assets, such as contracts and business acumen in running the company. The
appraisal reports were deemed inadmissible because they included some factors that would
confuse the jury. Id.
Here, Kret specifically stated that P&A did not appraise the business itself; they
appraised the use of the property. The appraisal is based on the use of the land for commercial
saltwater disposal purposes. Key overlooks the fact that, in Laidlaw, the trial court had
explained that it would allow evidence dealing with the usage of the property and residual
values, but that evidence was not offered in that case. Id. at 19.
In Laidlaw, the trial court properly admitted into evidence an appraisal using the income
method that involved estimating future lease proceeds, deducting appropriate expenses, and then
discounting the figures to the present worth. Id. at 18. Here, P&A used an income method
involving the future profit potential, deducting expenses of operation, and applying the
replacement cost new approach as a limit to determine the certified value. See TEX. TAX CODE
ANN. § 23.012.
17
Each property should be appraised based on the individual characteristics that affect the
property‟s market value. Coastal Liquids, 165 S.W.3d at 334. It is undisputed that the wells are
income producing. SCAD presented evidence that it is appropriate to use the income approach
to value income producing property. The income approach is a generally accepted appraisal
method. See TEX. TAX CODE ANN. § 23.0101. Each appraisal incorporated an income approach
and a cost approach. Kret described a laborious process using as much data as P&A was able to
obtain. An approach using two or more appraisal methods may be used, provided that the
method chosen as a whole generates relevant and reliable evidence of market value. Houston
R.E. Income Props. XV, Ltd. v. Waller Cnty. Appraisal Dist., 123 S.W.3d 859, 860-63 (Tex.
App.–Houston [1st Dist.] 2003, no pet.).
Key presented as its expert Trey Cobb, a licensed property tax consultant. He explained
that, prior to 2007, saltwater disposal wells were appraised as business personal property and the
only thing being appraised and assessed was the surface equipment. He stated that the cost
approach, and not the income approach, is used to value business personal property. He rejected
P&A‟s new method of appraising the wells, arguing that in order to appraise the wells, you
simply capture the value of the business personal property. Cobb asserted that the value of the
leasehold interest of #3 is subsumed within the value of the fee simple interest for the land,
which is owned by the Leggetts. He argued that for #3, the well bore value would not be
included in the appraisal of Key‟s property because the Leggetts own the well bore. He did not
include actual income or the sales price of #5. As explained above, the use of the land is a
separate interest from the fee. The record includes evidence supporting the trial court‟s
determination of the valuation of the wells. The fact that another methodology had previously
been used does not establish as a matter of law that the current method is invalid. The trial court
was free to disregard conflicting testimony. City of Keller, 168 S.W.3d at 819. Key did not
meet its burden to show as a matter of law that the trial court erred by refusing to reduce the
valuation of the two saltwater disposal wells. See Dow Chem. Co., 46 S.W.3d at 241. We
overrule Key‟s fifth issue.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
In its seventh issue, Key contends the trial court erred in failing to file findings of fact
and conclusions of law. Key argues that it timely filed a request for findings of fact and
18
conclusions of law and later a notice of past due findings and conclusions. Because the trial
judge stepped down from the bench before responding, Key argues that it is unable to
“effectively brief against the findings and conclusions that will now never come.” Key asserts
that injury is presumed and remand for a new trial is warranted.
A request for findings of fact and conclusions of law must be filed within twenty days
after the judgment is signed. TEX. R. CIV. P. 296. If none are filed by the court, the party
making the request shall file a notice of past due findings of fact and conclusions of law within
thirty days after filing the original request. TEX. R. CIV. P. 297.
The judgment was signed on December 21, 2012. Key‟s request for findings of fact and
conclusions of law was due on January 10, but filed on January 11, 2013. The notice of past due
findings of fact and conclusions of law was due on February 11,3 but filed on February 15, 2013.
Thus, because Key‟s request was not timely, the trial court was not required to file findings of
fact and conclusions of law. See Williams v. Kaufman, 275 S.W.3d 637, 642 (Tex. App.–
Beaumont 2009, no pet.). Furthermore, automatic reversal would not be warranted here even if
Key‟s requests had been timely. A trial court‟s failure to file findings and conclusions is not
harmful error if the record before the appellate court affirmatively shows that the complaining
party suffered no injury. Cherne Indus., Inc. v. Magallanes, 763 S.W.2d 768, 772 (Tex. 1989).
The error is harmful if it prevents an appellant from properly presenting a case to the appellate
court. Tenery v. Tenery, 932 S.W.2d 29, 30 (Tex. 1996). Thus, an appellant is harmed if it must
guess the reason or reasons the judge ruled against it. Holmes v. Williams, 355 S.W.3d 215, 222
(Tex. App.–Houston [1st Dist.] 2011, no pet.). On page 62 of its brief, Key asserts that it “is left
without the ability to effectively brief against the findings and conclusions that will now never
come.” However, this statement is not supported by argument. Key did not explain the
significance of findings that the trial court did not make and how they relate to some issue on
appeal. There is clearly ample evidence in the record showing the basis of the trial court‟s
ruling. Key‟s brief adequately covered the issues in the case. We overrule Key‟s seventh issue.
3
The thirtieth day after January 11 was Sunday, February 10. Therefore, notice was due February 11,
2013. TEX. R. CIV. P. 4.
19
CONCLUSION
The trial court did not have jurisdiction to consider Key‟s claims concerning the 2007 tax
year. SCAD provided adequate notice as to what was being taxed and properly categorized the
wells as an estate or interest in land. The trial court‟s letter to the parties did not constitute a
ruling on SCAD‟s motion for partial summary judgment. The trial court did not err in admitting
SCAD‟s expert‟s testimony, refusing to reduce the valuation of the wells, or by failing to file
findings of fact and conclusions of law. Accordingly, we affirm the trial court‟s judgment.
JAMES T. WORTHEN
Chief Justice
Opinion delivered January 15, 2014.
Panel consisted of Worthen, C.J., Griffith, J., and Hoyle, J.
(PUBLISH)
20
COURT OF APPEALS
TWELFTH COURT OF APPEALS DISTRICT OF TEXAS
JUDGMENT
JANUARY 15, 2014
NO. 12-13-00075-CV
KEY ENERGY SERVICES, LLC,
Appellant
V.
SHELBY COUNTY APPRAISAL DISTRICT,
Appellee
Appeal from the 123rd District Court
of Shelby County, Texas (Tr.Ct.No. 08CV30,196)
THIS CAUSE came to be heard on the oral arguments, appellate record and
briefs filed herein, and the same being considered, it is the opinion of this court that there was no
error in the judgment.
It is therefore ORDERED, ADJUDGED and DECREED that the judgment of
the court below be in all things affirmed; all costs of this appeal are hereby assessed against
Appellant, KEY ENERGY SERVICES, LLC, for which execution may issue; and that this
decision be certified to the court below for observance.
James T. Worthen, Chief Justice.
Panel consisted of Worthen, C.J., Griffith, J., and Hoyle, J.