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Dept. of Revenue v. Atlantic Richfield Co. (8/6/93), 858 P 2d 307
Notice: This is subject to formal correction before
publication in the Pacific Reporter. Readers are
requested to bring typographical or other formal errors
to the attention of the Clerk of the Appellate Courts,
303 K Street, Anchorage, Alaska 99501, in order that
corrections may be made prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
STATE OF ALASKA, )
DEPARTMENT OF REVENUE, ) Supreme Court No. S-4820
) Trial Court No.
v. ) 3AN-89-8262 Civil
ATLANTIC RICHFIELD COMPANY ) O P I N I O N
AND COMBINED SUBSIDIARIES, )
Appellee. ) [No. 3991 - August 6, 1993]
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Peter A. Michalski,
Appearances: Ellen Toll, Assistant
Attorney General, Anchorage, Charles E. Cole,
Attorney General, Juneau, for Appellant.
Robert E. McManus, Peter J. Turner, ARCO
Alaska, Inc., Anchorage, and William B.
Rozell, Mala J. Reges, Faulkner, Banfield,
Doogan & Holmes, Juneau, for Appellee.
Before: Moore, Chief Justice,
Rabinowitz, Burke, Matthews, and Compton,
RABINOWITZ, Justice, with whom MOORE,
Chief Justice, joins, dissenting in part.
This case concerns the tax liability of Atlantic
Richfield Company and Combined Subsidiaries ("ARCO") for the
years 1978-81 under two sections of AS 43.21, the Alaska Oil and
Gas Corporate Income Tax (repealed effective January 1, 1982).
Two distinct issues are presented on appeal. The first issue,
the Trans Alaska Pipeline System ("TAPS") interest issue,
involves the interpretation of AS 43.21.030, since repealed, and
15 AAC 21.350(b).1 The second issue, the entitlements issue,
concerns the interpretation of AS 43.21.020, since repealed, and
15 AAC 12.1202 and the valuation of Alaska North Slope ("ANS")
oil produced and refined by ARCO.
After a formal hearing before the Department of Revenue
("DOR"), the hearing officer concurred in the Oil and Gas
Division's interpretations of the statute and regulations, and
upheld the tax assessment against ARCO on both issues. ARCO
appealed to the superior court and the superior court reversed
DOR's decision, holding that the plain meaning of the statute and
regulations at issue precluded taxation of ARCO. DOR appealed.
We affirm in part and reverse in part.
A. Standard of review
As the superior court acted as an intermediate court of
appeal, this court owes "no deference . . . to the lower court's
decision,"but, rather, "independently scrutinize[s] directly the
merits of the administrative determination." Tesoro Alaska
Petroleum Co. v. Kenai Pipe Line Co., 746 P.2d 896, 903 (Alaska
1987). In this case, the court is examining an administrative
regulation and the agency's interpretation of that regulation.
Such an interpretation is a question of law. Borkowski v.
Snowden, 665 P.2d 22, 27 (Alaska 1983). This court has set forth
two standards of review applicable to questions of law: (1) the
rational basis standard under which the court defers to the
agency's interpretation unless it is unreasonable; and (2) the
substitution of judgment standard under which the court
interprets the statute and regulation independently. Tesoro, 746
P.2d at 903. The rational basis standard is used where the
questions of law involve agency expertise or where the agency's
specialized knowledge and experience would be particularly
probative as to the meaning of the statute. Union Oil Co. of
California v. State, 804 P.2d 62, 64 (Alaska 1990). The two
issues in this case center around the interpretation of a complex
tax statute and regulations that implicate the special expertise
of DOR. Therefore we apply the rational basis standard of
B. TAPS Interest Issue
The construction of the Trans Alaska Pipeline System
was completed in 1977. ARCO Pipe Line Company ("APLC"), a
subsidiary of ARCO, owned approximately 21% of TAPS during the
tax years at issue. In order to finance its share of TAPS
construction, APLC borrowed more than $1.8 billion dollars from
third parties. On its tax returns for 1978-81 ARCO claimed
interest deductions under AS 43.21.030(a) and 15 AAC 21.350(b) of
approximately $538 million for pipeline construction expense.
Alaska Statute 43.21.030 reads, in part:
Determination of income from oil
and gas pipeline transportation. (a) Except
as provided in (c) of this section, taxable
income attributable to the transportation of
oil in a pipeline engaged in interstate
commerce in Alaska shall be determined by the
department and shall be the amount reported
or that would be required to be reported to
the Federal Energy Regulatory Commission or
its successors as net operating income, less
those portions of interest and general
administrative expense attributable to the
pipeline transportation of oil in the state,
except that taxable income shall also include
taxes on or measured by income. The
department shall establish regulations
governing the determination of interest and
general administrative expense attributable
to pipeline transportation of oil in the
AS 43.21.030 (repealed eff. 1/1/82) (emphasis added).
In 1978 DOR promulgated 15 AAC 12.350(b) in accordance
with the legislative directive. The regulation, as amended in
1985, read, in part:
(b) In addition to the amounts
included in the [Federal Energy Regulatory
Commission] accounts listed in (a) of this
section, the operating expenses during a year
for an oil pipeline also include
(1) accruals to
third parties during that year, by
any member of the consolidated
business of which the taxpayer is a
part, for uncapitalized interest on
capital borrowed to acquire,
construct, or enlarge the
facilities of the pipeline . . . .
15 AAC 21.350(b)(1) (emphasis added).
The Oil and Gas Division of DOR employed an apportionment
formula to calculate ARCO's interest expense. The Division's
formula calculated allowable interest as a portion of ARCO's
ARCO's allowable = ARCO's total x ARCO's TAPS assets
interest expense interest expense ARCO's total
Under this formula the Division allowed only $181 million in
deductions. The disagreement between the parties centers on the
interpretation of the statute and regulation.
1. DOR's use of an apportionment formula to determine
allowable interest expense deductions under 15 AAC 21.350(b) is
inconsistent with the language of the regulation.
ARCO's basic argument is that the use of an
apportionment formula is contrary to the plain language of the
regulation promulgated by DOR.3 ARCO contends that the language
of 15 AAC 21.350(b)(1) requires only that (1) the principal be
borrowed from a third party, and (2) the funds be used to
acquire, construct, or enlarge TAPS. Since both parties agree
that ARCO met these requirements, ARCO argues that it is entitled
to the full deduction.
DOR does not directly address ARCO's plain language
argument. Rather, DOR states that an apportionment formula is
consistent with the statute and more accurately reflects the
substance of ARCO's TAPS loan transactions. DOR points out that
the debt incurred by APLC was not secured by the assets of APLC,
but by the assets of ARCO.4 In substance, then, the debt
incurred by APLC to construct TAPS was not fully "attributable to
the pipeline transportation of oil in the state"as required by
the statute, but was partially attributable to the assets of
ARCO. DOR thus reasoned that since the debt of APLC was secured
by the assets of ARCO as a whole, the interest paid on the debt
was attributable to the assets of ARCO as a whole. Therefore an
apportionment formula was appropriate.
DOR is correct in suggesting that the statutory
language "portions of interest . . . attributable to"allows the
use of an apportionment method. However, in emphasizing the
language of the statute, DOR does not effectively deal with the
plain language of the regulation: operating expenses include
"accruals . . . for uncapitalized interest on capital borrowed to
acquire, construct, or enlarge the facilities of the pipeline."
The regulation does not indicate that interest expense deductions
are limited in any way other than that the money be borrowed from
a third party for the purpose of constructing TAPS.
When DOR wrote the regulation, it was aware of the
debt/equity structure of the pipeline subsidiaries and the
financing incentives created by the consent decree.5 At that
time DOR could have written an apportionment regulation and
defended it as consistent with the statute. The regulation as
written, however, cannot be reasonably read to allow the use of
an apportionment formula.
We conclude that the language of 15 AAC 21.350
precludes the use of an apportionment formula by DOR to calculate
allowable interest expense for debt incurred to construct TAPS.
C. Entitlements Issue
The entitlements issue concerns the valuation and
taxation of Alaska North Slope ("ANS") oil from July 1979 to
April 1980 under AS 43.21.020 and 15 AAC 12.120. During this
period, a combination of federal price control programs worked to
place ANS oil in a unique situation. When ANS oil was first
produced in 1977, along with almost all domestic crude oils, it
was subject to federal price control regulations. These
regulations set maximum prices, "ceiling prices,"that could be
charged for the oil at the wellhead in order to keep domestic oil
acquisition costs low. Foreign oil, in contrast, was not subject
to price controls. Therefore refiners who had access to
primarily domestic crude oil had an advantage as they paid less
for their price-controlled oil. In order to address this
competitive disadvantage, at the same time it enacted price
controls the federal government enacted an entitlements program.
Essentially, the entitlements program required a refiner
processing price-controlled oil to pay an entitlements penalty
that was roughly equal to the price difference between price-
controlled oil and foreign oil.6
ANS oil's unique status resulted from the fact that
although it was price-controlled, it was not subject to an
entitlements burden. ANS oil was exempted from an entitlements
burden in order to encourage development of the North Slope and
to compensate for the high transportation costs of ANS oil to the
refineries. Until mid-1979 ANS oil wellhead value remained below
the ceiling price. As oil prices rose quickly in 1979 and 1980,
however, the wellhead value of ANS oil as calculated by the State
rose above the ceiling price. The market price of ANS oil,
however, was limited to the ceiling price. At this point, ANS
became unique. Although price controlled, no entitlements burden
was placed on a refiner who refined ANS oil. Under the federal
regulations, an integrated producer/refiner such as ARCO could
refine the oil and realize the full value of the ANS oil as it
did not have to pay any entitlements penalties.
1. The income ARCO realized due to the federal price
control structure reflects value inherent in ANS oil.
The first issue this court addresses is whether or not
the entitlements benefit ARCO received from internally transfer
ring and refining price-controlled ANS oil qualified as taxable
income under AS 43.21.020. The statute read, in part:
Determination of taxable income
from oil and gas production.
. . . .
(b) Gross income of a corporation
from oil and gas production shall be the
gross value at the point of production of oil
or gas produced from a lease or property in
the state. The department shall by
regulation determine a uniform method of
establishing the gross value at the point of
production. In making its determination the
department may use the actual prices or
values received for the oil or gas, the
posted prices for the oil or gas in the same
field, or the prevailing prices or values of
oil or gas in the same field.
AS 43.21.020(b) (repealed eff. 1/1/82) (emphasis added).
ARCO contends that any income derived as a result of
the entitlements program was attributable to the refining sector
of the company and was taxable under AS 43.21.040 as non-pipeline
income, not under AS 43.21.020 as production income. ARCO argues
that since the income could not be realized until the oil was
refined, and "all of the operating activity necessary to earn
[the entitlements] benefits was conducted at out-of-state
refineries," the income was downstream income, not production
income. ARCO additionally maintains that the value realized was
attributable to the federal price control programs, and was not
value inherent in the oil itself. ARCO points out that were it
not for the artificial price structure imposed by the federal
government, the entitlements benefit would not exist. Therefore,
ARCO concludes that the income was properly attributed to the
refining sector, and should be taxed as earned income in the
refining state rather than as production income in Alaska.
While ARCO's argument has some merit, we find DOR's
position more persuasive. DOR points out that the value was not
earned by the refinery; the refining process merely released the
value already present in the oil. Both common sense and our
decision in Atlantic Richfield Co. v. State, 705 P.2d 418 (Alaska
1985) ("ARCO"), support DOR's argument. In ARCO, this court
upheld the constitutionality of AS 43.21. Although that case did
not directly address this issue, the general reasoning of the
case supports DOR's argument. We acknowledged that oil must go
through various stages (transportation, refining, marketing)
before it is sold for value to consumers. Id. at 421-22. We
recognized that "[o]bviously, profits do not result from crab
fishing or oil production until the product is sold." Id. at
425. However the mere fact that goods must be sold "does not
negate the fact that profits generated by the sale are partly
attributable to the inherent value of the crab or oil at its
point of production." Id.
This language recognizes that oil has a value as it
comes out of the ground. The fact that the oil's sale price was
artificially limited by the federal government does not negate
the fact that the value of the oil was higher than its ceiling
price. In this case, ARCO was able to realize that value because
of the structure of the federal price programs. Intuitively, it
makes sense to reason that although ARCO recorded only the
ceiling price on its books as the value of the oil entering the
refinery, in reality the oil had a higher value as evidenced by
ARCO's high level of refinery profits. That amount reflected the
value of the oil as it came out of the wellhead, not value that
was created by the refining process. We conclude that the income
ARCO realized was due to value inherent in the oil at the point
of production and was therefore taxable under AS 43.21.020.
2. DOR's interpretation of 15 AAC 12.120 to allow
taxation of the entitlements benefit is consistent with the
language of the regulation.
ARCO contends that even if the income received from the
entitlements benefit was taxable as production income under AS
43.21.020, 15 AAC 12.120 precluded taxation. The regulation
provided, in part:
Value at the point of production. (a)
The value at the point of production for oil
or gas produced from a lease or property is
the sales price of that oil or gas, minus the
reasonable cost of transportation (if any)
from the point of production for that oil or
gas to the sales delivery point for that oil
or gas; except that in no event may the value
at the point of production for a taxpayer's
oil or gas exceed the ceiling price (if any)
that is applicable to that oil or gas under a
mandatory price control program.
(b) For purposes of this chapter,
(1) for a taxpayer's
oil and gas sold in a bona fide,
arm's length sale to a third party,
the cash value of the full
consideration given and received
for that oil and gas . . .
(2) for a taxpayer's
oil not sold in a bona fide, arm's
length sale to a third party, the
total acquisition cost for imported
oil of similar quality delivered
F.O.B. at the gate of the refinery
to which the taxpayer's oil is
ultimately delivered . . . .
15 AAC 12.120 (emphasis added).
ARCO does not dispute that under subsection (b)(2) the
sales price for the ANS oil internally transferred was the cost
for similar foreign oil. ARCO argues, however, that the regul
ation did not allow taxation on the full price, but only on the
amount equal to the ceiling price. ARCO points to the language
of section (a) of the regulation to support its argument. This
language states that the income to be taxed, the value at the
point of production, is the sales price, "except that in no event
may the value at the point of production for a taxpayer's oil or
gas exceed the ceiling price (if any) that is applicable to that
oil or gas under a mandatory price control program." ARCO rests
its argument on the phrase "in no event may the value . . .
exceed the ceiling price." As ANS oil was subject to a ceiling
price during this time period, ARCO contends that DOR is
precluded by the regulation from taxing any amount over the
DOR argues that ARCO's reading of the regulation fails
to take into account the language of the entire regulation. DOR
relies on the language providing that value may not "exceed the
ceiling price (if any) that is applicable." This language, DOR
contends, reflects the policy that if federal price ceilings
limit the amount of income received, the ceilings should also
limit taxes. In other words, if ARCO only realized income equal
to the ceiling price for its oil, then in all fairness it should
be taxed on only that amount. Due to the structure of the
federal price control program, however, ARCO realized income
equal to the market value of the ANS oil. Since ARCO's income
was not in fact limited by the ceiling price, DOR argues that
ARCO's taxes should not be limited either.
The dispute centers around the term "applicable." ARCO
argues that since the federal price regulations set a ceiling
price for ANS oil, there is an "applicable"ceiling price and the
value of the oil cannot exceed that price. DOR takes a more
realistic interpretation of "applicable,"and looks to see if, in
fact, a ceiling price applied and limited ARCO's income. DOR's
reading of the regulation is consistent with the language of the
regulation and supported by the policy behind the statute. Since
the ceiling price did not limit ARCO's income, it seems incorrect
to apply a ceiling price to limit taxes on that income.
To read the regulation as ARCO does would also be
inconsistent with the policy underlying the Oil and Gas Income
Tax statute. As this court noted in ARCO, the "primary purpose
of the Oil Tax was to rectify a perceived underestimation of oil
production and pipeline transportation income." ARCO, 705 P.2d
at 437. ARCO's interpretation of the regulation would result in
undertaxation of income earned from oil production in this state.
Therefore this court interprets 15 AAC 12.120 to allow taxation
of entitlements benefits received by ARCO.
We read the plain language of 15 AAC 21.350 to preclude
the use of an apportionment formula by DOR to calculate allowable
interest expense under AS 43.21.030 and therefore AFFIRM the
superior court on the TAPS interest issue. We interpret 15 AAC
12.120 to allow taxation of ARCO's entitlements benefits and
therefore REVERSE the superior court on the entitlements issue.
This case is REMANDED to the superior court for further action
consistent with this opinion.
RABINOWITZ, Justice, with whom MOORE, Chief Justice, joins,
dissenting in part.
I dissent from the majority's holding that 15 AAC
12.120 allows taxation of ANS price controlled crude oil at a
sales price greater than the applicable ceiling price of that
The controlling language in the production tax regula
tion is the following phrase in 15 AAC 12.120(a): "[I]n no event
may the value at the point of production for a taxpayer's oil or
gas exceed the ceiling price (if any) that is applicable to that
oil or gas under a mandatory price control program." The parties
do not dispute that there was a mandatory price control program
in effect; namely, the federal price ceilings imposed by the
Department of Energy (DOE). The DOR itself found as a matter of
fact that the DOE ceiling price did apply to ANS crude even where
the ANS crude was internally transferred. There is no dispute
that in 1977, DOE promulgated a rule which established that ANS
price-controlled oil would be treated as if it were uncontrolled
oil for purposes of the so-called "entitlements program."
Consequently, until this rule was changed in July of 1980, no
refiner of ANS crude oil was subject to an "entitlement burden"
on that oil. Also, there is no question that DOR understood the
implications of the DOE entitlements program at the time that it
drafted the regulation in question. It is evident that the
regulation was crafted to address the proper production tax
burden of the integrated producer-refiner, and to include
reference to the entitlements system. See 15 AAC 12.120(b)(2).
It is undisputed that DOR subsequently interpreted the
regulation in a manner which required all producers to report at
"full ceiling price," and which assessed all producers'
production values at a value no greater than the ceiling price.
In two production tax decisions issued during this period, the
Department affirmed that ceiling prices were a limitation on
value at the point of production. In the Matter of Mobil Oil
Corp., Rev. Dec. 83-17, (June 2, 1983); In the Matter of Getty
Oil Co., Rev. Dec. 82-57, at 199-200 (Dec. 6, 1982). Also,
memoranda produced by the Petroleum Revenue Division during this
period indicate that the Division held the view that any value
derived by refiners from the entitlements program was not
Despite this history, the state now asks this court
first, to read the key language of 15 AAC 12.120(a) as follows:
"[I]n no event may the value at the point of production . . .
exceed the ceiling price (if any) that is applicable. . . ."
This interpretation ignores the remainder of the sentence, which
continues: "under a mandatory price control program." The state
contends that the regulation should be read as committing the
applicability of the federal price control ceilings to its
discretion, rather than establishing a hard and fast rule. Given
that soaring oil prices coupled with the ANS entitlements
exclusion led to increased profits for ANS refiners, the state
argues, the ceiling price is not "applicable" to integrated
producers, since they can be expected to share in the revenues
received by their refinery counterpart. Thus, the so-called
"entitlements benefit"of an integrated refiner should be treated
as "production value"under 15 AAC 12.120(a).
This interpretation asks us to ignore a cardinal
principle of statutory interpretation: Language that is clear
and unambiguous in meaning should not be altered to create a new
act, or in this instance, a new regulation. The phrase "price
that is applicable" clearly and unambiguously refers to the
federal price control program, and the sentence cannot logically
Nonetheless, the state ignores any problems of syntax
and claims that its interpretation will vindicate the well-
accepted tax principle that form should not triumph over
substance. It claims that ARCO is using the "form" of the
production tax to evade being taxed on the entitlements benefit,
which it characterizes as value that was essentially "liberated"
at the wellhead or, in other words, inherent in the oil in its
natural state. In this regard, the state misapplies the so-
called "substance over form"doctrine in three respects.
First, a fundamental aspect of the substance over form
inquiry is whether the taxpayer has structured his transactions
to evade tax liability. See Gregory v. Helvering, 293 U.S. 465,
469 (1935). ARCO's integrated structure existed prior to
institution of the entitlements program.
Second, the proper inquiry as to the relationship
between substance and form relative to the "value" of the
entitlements benefit is this: Did the taxpayer receive something
of benefit without incurring any of the obligations normally
associated with that benefit? See, for example, Strick Corp. v.
United States, 714 F.2d 1194, 1206 (3d Cir. 1983), cert. denied,
466 U.S. 971 (1984). I conclude that ARCO incurred the
obligations normally associated with the benefit of production
income because it paid taxes on its production income pursuant to
15 AAC 12.120.
Third, the tension between substance and form is
inherent in the taxation of any natural resource. As we noted in
Atlantic Richfield Co. v. State, 705 P.2d 418, 425 (Alaska 1985):
"Before it is transported for sale, oil, like coal, has inherent
value, to which profits and income can properly be attributed."
The concept of "inherent value,"however, is intangible. Any
effort to allocate this "value"to different stages in the
production and processing of a natural resource through statutory
definitions is by its very nature an exercise of form, or
The mere existence of this tension is not a sufficient
reason to strike down a valid regulation. Through the provisions
of AS 43.21, our legislature directed DOR to craft a regulatory
structure that would recapture some portion of this "value" at
various points in the production and processing of the crude oil
resource. In other words, the legislature directed DOR to
provide its best estimate of the way in which the "form" of the
tax structure should approximate the "substance"of the inherent
value. DOR performed this task through 15 AAC 12.120. The
language of this regulation is clear. We can not now, under the
slogan of "substance over form,"champion a new standard, absent
ambiguity in the existing regulation.
If the issue is considered from the point of view of
refiners, it is clear that all refiners of ANS crude oil were
benefitted by the lack of an entitlements burden during the
period in question. This benefit, like the benefits from the
price controls, resulted in additional profits for ANS refiners.
ARCO's refinery profits are no more or less real than the profits
of a non-integrated refiner who refined ANS crude.
For the foregoing reasons I reject the state's
contentions that refinery profits of some, but not all, of these
refiners of ANS crude oil now may be taxed as production income,
despite the clear language of the applicable regulation.10
1 The regulation in its original form, 15 AAC 12.350, was
amended and recodified in 1985 to its current form, 15 AAC
21.350. The amended regulation applies to the tax years in
2 The regulation in its original form, 15 AAC 12.120, was
amended and recodified in 1985 to its current form, 15 AAC
21.120. The original regulation applied to the tax years in
3 ARCO also argues at length that DOR had a consistent and
longstanding record of construing the regulation to allow full
deduction of interest expenses claimed and that therefore DOR is
obliged to continue to follow that interpretation.
Even if ARCO established prior and longstanding inconsistent
interpretations of the regulation by DOR, DOR correctly points
out that it has the power to correct its mistakes retroactively.
This court recognized in Wien Air Alaska, Inc. v. Department of
Revenue, 647 P.2d 1087 (Alaska 1982), that DOR can "'correct
mistakes of law in the application of the tax laws . . . even
where a taxpayer may have relied to his detriment . . . .'" Id.
at 1095 (quoting Dixon v. United States, 381 U.S. 68, 72-73
(1965)). Thus ARCO's argument that DOR's current interpretation
of the regulation is inconsistent with, and precluded by, prior
4 DOR's argument is based on the substance of pipeline loan
transactions governed by a consent decree entered into in 1941 by
several large shipper-owned pipeline companies with the United
States Department of Justice resolving an antitrust suit. The
consent decree, among other things, limited the amount of the
annual dividend a pipeline was allowed to pay its shipper-parent
to 7% of the valuation of the pipeline. This limitation,
however, did not vary with the amount of equity capital of the
pipeline company. The decree also did not affect the ability of
the pipeline companies to pass through any and all interest
expense for debt incurred to finance the pipeline to their
shipper-parents. In combination, these two facts encouraged
parent companies to finance their pipeline subsidiaries
construction with debt rather than equity. Recognizing the
financial incentives the consent decree created, most parent oil
companies created high debt-equity ratios for their pipeline
subsidiaries. As a result of this structure, subsidiaries were
unable to obtain the high levels of debt they desired at
favorable interest rates without parent company guarantees of
repayment. This is, in fact, how APLC, with assets of
approximately $280 million, managed to borrow nearly $1.88
billion -- the principal and interest payments were guaranteed by
5 DOR has stated that the "intent of the regulation was to
prevent collusive sham transactions, entered into for the primary
purpose of tax reduction." In Re Amerada Hess Corp. & Amerada
Hess Pipeline Corp., Rev. Dec. No. 83-31 (1983). The
debt/equity structure of APLC, as noted above, was entered into
in order to gain financial benefits created by the consent
decree. However, this structure was in place before the statute
and regulation at issue were even written. Therefore there is no
allegation that ARCO created a "sham transaction" in order to
reduce its taxable income in Alaska.
6 Refiners earned fractions of entitlements for each barrel
of oil they refined, domestic or foreign. If the amount they
earned did not equal the amount required for the number of price-
controlled barrels they refined, the refiner was obligated to buy
extra credits from refiners who had a surplus. In this way, the
benefits of price-controlled oil were distributed among all
7 ARCO also contends, as in the TAPS interest issue, that
DOR had a previous and longstanding interpretation of the
regulation that precludes the present interpretation. In this
situation, as in the TAPS interest issue, there is insufficient
evidence supporting ARCO's contention. Furthermore, as noted
above, even if a prior interpretation were proven, DOR has the
right and duty to correct mistakes in application of the tax law.
Wien Air Alaska, Inc. v. Department of Revenue, 647 P.2d 1087,
1095 (Alaska 1982).
8. As a preliminary matter, I note that the independent
judgment standard of review is applicable, as the entitlement
question as it is framed in this appeal involves a question of
statutory interpretation not involving agency expertise. See
Nat'l Bank of Alaska v. State, Dep't of Revenue, 642 P.2d 811,
815 (Alaska 1982). Additionally, due to the marked inconsistency
between DOR's historical interpretation of production tax
valuation and its current position, the appropriate weight of the
agency's current interpretation is called into question. See
Earth Resources Co. v. State, Dep't of Revenue, 665 P.2d 960, 965
(Alaska 1983) (noting that the substitution of judgment test is
appropriate where the knowledge and experience of the agency is
of little guidance to the court). The standard of review,
however, is not dispositive on the entitlements question, as
DOR's interpretation is unreasonable.
9. The state responds that the Division's opinions were not
binding on DOR or, in the alternative, that the opinions were
"mistakes." To the extent that agency expertise is implicated in
this issue, however, the views of the Division are relevant to
our understanding of the entitlements issue.
10. ARCO raised several other arguments before the superior
court. While these arguments were not reached by the superior
court in its ruling, they may provide grounds for affirmance of
that ruling. See State v. Bering Strait Regional Educ.
Attendance Area, 658 P.2d 784, 786 (Alaska 1983) (issues raised
before lower court, though not reached in its ruling, may be
relied upon on appeal to affirm the ruling in question). ARCO's
arguments before the superior court included the following: That
to tax the revenue at issue results in double taxation, since the
entitlements benefits were taxed by the state as apportionable
income under AS 43.21.040; that such taxation denies ARCO due
process of law; that the state's arguments in this case
contradict its position before us in Atlantic Richfield Co. v.
State, 705 P.2d 418 (Alaska 1985), where the state argued that AS
43.21.020 excluded from gross production revenue all income from
"downstream" activities; that DOR's interpretation violates the
commerce clause, as it discriminates against out-of-state
companies; that DOR's interpretation deprives ARCO of equal
protection by treating some producers differently from others;
that DOR's attempt to tax ANS at decontrolled values violates the
supremacy clause by manipulating oil revenues in contradiction of
the federal price control program; and that the hearing process
did not provide ARCO with due process of law. Given my view that
the regulatory language is dispositive, I find it unnecessary to
address the merits of any of these claims.