                                                                                        10/05/2017
               IN THE COURT OF APPEALS OF TENNESSEE
                          AT KNOXVILLE
                               August 10, 2017 Session

 THE COAL CREEK COMPANY v. ANDERSON COUNTY, TENNESSEE,
                        ET AL.

                 Appeal from the Chancery Court for Knox County
                   No. 190298-1    John F. Weaver, Chancellor


                            No. E2017-00661-COA-R3-CV


This appeal concerns whether a tax on certain property containing oil and gas deposits
constitutes an unlawful additional severance tax. The Coal Creek Company (“Coal
Creek”) appealed the tax assessments of various county property assessors (“Assessors”).
After administrative proceedings and appeals, the Tennessee Assessment Appeals
Commission reinstated the original assessments. Coal Creek filed suit in the Chancery
Court for Knox County (“the Trial Court”) seeking judicial review of the Appeals
Commission’s decision. Following a bench trial, the Trial Court entered an order
dismissing Coal Creek’s complaint. Coal Creek appeals to this Court. We hold, inter
alia, that the taxes assessed upon Coal Creek’s property relative to oil and gas remaining
in the ground are property taxes, not a severance tax. We affirm the judgment of the
Trial Court.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed;
                                 Case Remanded

D. MICHAEL SWINEY, C.J., delivered the opinion of the court, in which JOHN W.
MCCLARTY and THOMAS R. FRIERSON, II, JJ., joined.

Lewis S. Howard, Jr. and Erin J. Wallen, Knoxville, Tennessee, for the appellant, The
Coal Creek Company.

Robert T. Lee, Mt. Juliet, Tennessee, for the appellee, Anderson County, Tennessee.

Joseph G. Coker, Jacksboro, Tennessee, for the appellee, Campbell County, Tennessee.

Andrew N. Hall, Wartburg, Tennessee, for the appellee, Morgan County, Tennessee.
John Sharpe, Assistant General Counsel for the appellee, Tennessee Division of Property
Assessments.

Herbert H. Slatery, III, Attorney General and Reporter, Andrée Sophia Blumstein,
Solicitor General, and, Mary Ellen Knack, Senior Counsel, for the appellees, State Board
of Equalization and Assessment Appeals Commission.

                                      OPINION

                                     Background

        Coal Creek owns the subject real property in Anderson, Campbell, and Morgan
Counties. This property contains oil and natural gas deposits, which Coal Creek also
owns in fee simple. The majority of Coal Creek’s oil and gas operations are centered in
Anderson County, Tennessee. Coal Creek receives royalty payments from lessees who
remove the oil and gas. This case has its origin in a 2009 change in how the Coal Creek
property was classified for tax purposes. Before 2009, Coal Creek’s property had been
classified as farm property and assessed at a 25% rate. Beginning in 2009, the Assessors
assessed the property’s mineral value at the industrial or commercial rate of 40%. From
2009 through 2014, Coal Creek paid these additional taxes to Anderson County in the
amount of $122,742.59; Morgan County in the amount of $27,408; and, Campbell
County in the amount of $1,662. The Tennessee Division of Property Assessments
assisted the Assessors in their work valuing the mineral interests. An income approach
was utilized in the valuations.

      Coal Creek appealed the assessments to the State Board of Equalization. In
October 2013, Coal Creek filed a motion for summary judgment. In January 2014, the
Administrative Judge entered an initial decision and order granting Coal Creek’s motion
for summary judgment. In finding for Coal Creek, the Administrative Judge stated in
part:

             The Administrative Judge finds that the Assessors’ methodology for
      estimating the contributory value of the oil and gas reserves does not
      comport with Tenn. Code Ann. § 67-5-602(a) insofar as the dictates of the
      Assessment Manual have been ignored. For example, the portions of the
      depositions summarized or quoted above make clear that the Assessors
      have no knowledge of, and make no meaningful attempt to obtain,
      information concerning the quantity of the reserves and the remaining
      economic life of the reserves. Moreover, no attempt is made to obtain
      information from the operator concerning its plans, income from royalties
      etc.
                                          -2-
                                                   ***

        The Assessors have absolutely no information to support the assumption
        that the prior year’s production is a reliable indicator of future production.
        Indeed, if a producer chooses to cease production for a year in hopes that
        the price of oil and gas will increase, the Assessors would assign no value
        to the oil and gas reserves for the current year because of no production the
        prior year. This valuation method quite clearly results in nothing more than
        an additional severance tax on oil and gas production that is purported to be
        an ad valorem tax on property containing oil and gas reserves.
        Consequently, the Assessors’ methodology for valuing the mineral
        component of subject parcels violates the prohibition in Tenn. Code Ann. §
        60-1-301 against taxing oil and gas removed from the ground except for a
        severance tax as set forth in that statutory provision.1

       (Footnote added). In February 2014, the Tennessee Division of Property
Assessments, acting on behalf of the counties, appealed the Administrative Judge’s
decision to the Tennessee Assessment Appeals Commission. In April 2015, a hearing
was conducted before the Appeals Comission.

      Keith Gibson, an area supervisor for the Tennessee Division of Property
Assessments, testified regarding the methodology used in valuing mineral interests:

        I’ve been with the Division for 32, 33 years, started doing the mineral
        valuation probably in 2006 or 7. I had done it previously years ago as a
        young staff member that basically just plugged in a few numbers but just
        kind of took over this aspect of it in 2007 or 8. Since that time, I have been
        promoted up to supervisor, the current position that I’m in. I have not been
        directly involved with these appraisals, but I oversee each and every one of
        them. Therefore, I have the most knowledge.
               But what we’re trying to do is, we contend that it’s not a severance
        tax, that all we’re doing is just valuing an income stream. If you take two
        like properties, exactly like Mr. Howard suggested awhile ago, where you
        have a property that does not have a known mineral reserve and then you
        have another one that does, all we’re doing is just looking at the royalty that
        they received from that one year and then projecting a lifetime in saying,
        you know, what is that income stream worth over a period of time. If you

1
  Ad valorem is Latin for “according to the value,” or as meant specifically in this instance, “proportional
to the value of the thing taxed.” Black’s Law Dictionary 53 (7th ed. 1999).
                                                    -3-
receive $5,000.00 one year and you’re expecting to receive that for an
additional five or six years, what is that worth today? So that’s all we’re
trying to do as far as valuing an income stream. It’s not a severance tax.
It’s just saying that if you have two exact properties and both were up for
sale, you know, what would you prefer to have, one that you’re going to
receive a royalty check for the next duration period of time or would you
rather have the other one that you don’t have a known reserve?
        We’re very conservative whenever we make all these estimates. On
coal, we receive the Office of Surface Mining Permit which has not only
reserve studies, but they have projections on what they’re to receive each
year. We look at that. We only put an economic life up to their legal use.
In other words, if that permit even said that they had a 20-year life on it,
they don’t have a legal use to permit it for 20 years. They only give a five-
year permit; so we’re very conservative on coal by using only that legal use
of the property.
        On oil and gas, there is no reserve studies. It’s kind of a run-by-
wildcat operation. It’s a lot simpler for them to go out and do a test hold
just to tap and see if there’s any oil and gas. Even if there were reserve
studies, it’s very unreliable. I mean, you know, you may do different kinds
of tests to try to find out what kind of oil and gas you have down there, but
it doesn’t mean it’s feasible to get out. So we have a very conservative
approach with that.
        In 2014, the Division had a meeting with several members of the oil
and gas members. There were attorneys, purchasers, producers. We had a
meeting with them and they had the same thought process on why we use a
five-year life and we don’t reduce it each and every year, we just keep the
five.

On cross-examination, Gibson testified as follows:

Q. So when you are taking the estimate of cash value annually of oil and
gas reserves in the ground, that’s just pure speculation, is it not?
A. Repeat the question.
Q. You don’t have any idea what the reserves are that you’re talking about,
do you?
A. The remaining reserves?
Q. Yes, sir.
A. No, sir. We do not have a reserve study to follow.
Q. And the manuals don’t allow you to assess based on speculation, do
they?

                                     -4-
      A. The Mineral Manual that we have in this section details different
      observations that you have to make; so I feel like I’ve applied everything
      that I can. Yes, sir.
      Q. Well, what have you applied? What have you done to determine the
      mineral reserves?
      A. There’s nothing that I can do without a mineral reserve study; so I guess
      I did everything that I could do to make an assumption, which you make
      assumptions all the time in an appraisal.

       In June 2015, the Appeals Commission issued its final decision and order wherein
it reinstated the original assessments. In its final decision and order, the Appeals
Commission stated in part:

      The tax here was duly levied by the counties as an ad valorem tax based on
      the determined value of the property, and demonstrated error in the value
      determination does not convert the levy to another form of tax. The boards
      of equalization may reject the value as unduly speculative, or just plain
      wrong, but the boards do not thereby avoid their duty to determine value
      using the most persuasive evidence available. In this case, as in the coal
      cases decided in years past, the only evidence came from the assessing
      authority. The owner of the mineral interest offered no measure of actual
      depletion for these properties, in fact no evidence at all pertinent to the
      properties’ value.
             The assessors offered the testimony of Keith Gibson, a staff
      appraiser employed by the Tennessee Division of Property Assessments,
      who explained there were no reserve studies available to the Division or
      taxing authorities, just annual data on production for oil and gas. He stated
      the implicit assumption of a five year remaining life for these interests is
      conservative based on their historic production which typically exceeds five
      years. Projecting the coming year production will equal the prior year is a
      neutral assumption, not unlike any income projection for commercial
      properties, and the assessor invites more accurate information from the
      property owners who are better positioned to estimate future production.
      Lacking more accurate information would not excuse the assessor from the
      responsibility of assessing the contributory value of proven mineral
      reserves.
             Disproving the assessors’ assumptions, or raising the likelihood that
      a more accurate value is possible, did not render the tax levy void, and did
      not meet the property owner’s burden to establish a more credible value.
      Accordingly, the Commission finds and concludes the original assessments

                                           -5-
      for these properties should be reinstated subject to the owners’ rights of
      further appeal.

       In September 2015, Coal Creek filed a complaint in the Trial Court seeking
judicial review of the Appeals Commission’s decision. This matter was tried in January
2017. William S. Lyon, III (“Lyon”), executive vice president for Coal Creek, testified.
Lyon testified, in pertinent part, as follows:

      Q. When did -- well, how much property does The Coal Creek Company
      own and where is it located?
      A. We own 72,000 acres across four counties, being Campbell, Morgan,
      Anderson, and Blount.
      Q. And where are the majority of the gas and oil operations located?
      A. Anderson County.
      Q. And when was the first time that you, on behalf of The Coal Creek
      Company, became aware of the taxation of these mineral interests that
      we’ve been talking about here today?
      A. 2009.
      Q. And how did that -- how did you become aware of that taxation?
      A. Well, we received tax notices that -- in the past, we always received tax
      notices on the value of the land. And then in 2009, there was a tax notice
      on the mineral interests.
      Q. Was it a separate tax notice?
      A. Yes.
      Q. Did the valuation of the land change in regard to -- well, did the
      valuation of the land change when you started receiving these separate
      mineral notices?
      A. No. It probably increased just a tad because of the reappraisal period, but
      no appreciable change.
      Q. And has the same process been followed from 2009 through 2016?
      A. Yes.
      Q. Have you had any conversations with any of the assessors for Morgan,
      Campbell, or Anderson counties regarding any sort of allocation of how
      these taxes are allocated across the various parcels of property?
      A. No.
      Q. Have you received any information from the counties that there is any
      sort of allocation?
      A. No, I have not.
      Q. Okay. When you first began -- well, when was the -- when was the last
      time an oil or gas well was dug on any of Coal Creek’s property?
      A. It would probably be early 2009.
                                           -6-
Q. And how many oil and gas lessees are there?
A. Three.
Q. And have there generally always been three?
A. Since I’ve been there, just three.
Q. And who are those three?
A. Knoxville Energy, Atlas America, and Vinland Energy.
Q. How many -- beginning back in 2009 when this taxation process started,
how many oil and gas wells were in existence and operating on Coal Creek
property?
A. There was approximately 414. Approximately.
Q. And how many are there today?
A. There are 344.
Q. Have any of the operators gone out of business or restructured, as far as
you know?
A. Yes, two of our lessees have gone through bankruptcy in the last two
years.
Q. And who were those?
A. Atlas and Vineyard.
Q. Now, at the time these assessments began or prior to the time these
assessments on the oil and gas minerals started, did anyone from the State
or any of the counties contact you on behalf of Coal Creek to get any
information?
A. No.
Q. Does Coal Creek maintain information on the production of oil and gas
wells?
A. Yes.
Q. And what records are maintained?
A. We get a monthly royalty report from each lessee. And we post those by
month, by well, to production schedules, and we keep those up to date.

                                    ***

Q. Based on your knowledge of the production records of the oil and gas
wells on the property, did the production vary from year to year?
A. Yes.
Q. Are the variations large, small?
A. Well, some of them are pretty large. For example, the oil production for
2015, compared to 2016, decreased on one lessee by 60 percent and on
another lessee it decreased by 30 percent.
       The gas has a smaller decline rate. It decreased on one lessee 16
percent from ’16 to ’15 and 10 percent on another one from ’16 to ’15.
                                    -7-
Q. Based on your knowledge of the production records from Coal Creek,
would production from a prior year be a reasonable indicator of production
for the subsequent year?
A. I don’t believe so. It’s so -- it’s so up and down that I don’t think it’d be
a reasonable estimate.
Q. Does Coal Creek have any reserve studies of oil and gas deposits on its
property?
A. No.
Q. Has Coal Creek ever received any information regarding reserve studies
that may have been conducted?
A. I have not seen any.
Q. Are you aware of any methodology for determining the amount of oil or
gas deposits that may be contained in underlying fee property?
A. No.
Q. Did Coal Creek keep on its books or any of its records a valuation of the
oil and gas mineral interests existing on its properties?
A. No.
Q. Has it ever?
A. Not to my knowledge. And I’ve been here ten years, and I have not seen
a segregation of that asset.

On cross-examination, Lyon testified as follows:

Q. Mr. Lyon, you are a CPA by trade; is that correct?
A. Yes.
Q. And in your professional practice you’re familiar with the use of the
income method for value for leases, for example?
A. Yes.
Q. So you understand that that is in fact a standard method, acceptable
method, by which valuations are done?
A. Yes.

                                      ***

Q. All right. And finally, have you -- have you ever taken any information
to the Campbell County Property Assessor’s Office which you asked -- in
which you were asking them to consider making an adjustment in the
mineral valuation of the Campbell County part of the property?
A. No, I’ve never taken any production information or anything. The only
thing I have done is appear before the Board of Equalization and put forth
our appeal as to severance tax and the apportionment factor.
                                      -8-
      Q. And I want to be clear about what I’m asking you here. You understand
      that at any time you can take information to a property assessor’s office?
      A. I understand that.
      Q. Have you ever done that as far as the Campbell County Property
      Assessor’s Office, asking for an adjustment to be made?
      A. No.
      Q. And never provided them with any further information?
      A. No, I have not.

                                          ***

      THE COURT: Let me ask before you step down, Mr. Lyon. Have you
      provided any information to any of the counties involved in this case, the
      Boards of Equalization, for an adjustment on the tax?
      THE WITNESS: No, I have not.

       In February 2017, the Trial Court entered its detailed final judgment in which it
dismissed Coal Creek’s complaint. The Trial Court found that Coal Creek failed to meet
its burden of proof, stating as follows:

             This case is before the Court on the complaint of The Coal Creek
      Company (“taxpayer”) for judicial review of a decision from the Tennessee
      State Board of Equalization and Tennessee Assessment Appeals
      Commission (collectively “the Board”), reversing the decision of the
      Administrative Law Judge and reinstating the valuations and assessments
      of the property assessors for the Tennessee counties of Anderson,
      Campbell, and Morgan.           The complaint addresses the values and
      assessments for the oil and gas reserves owned by the taxpayer in its real
      property. The taxpayer argues that the income approach utilized by the
      assessors results in an additional severance tax in violation of Tenn. Code
      Ann. § 60-1-301; that the taxation, as industrial and commercial, of the oil
      and gas reserves (mineral interests) was not apportioned with the taxation,
      as farmland, of the surface of the property in violation of Tenn. Code Ann.
      § 67-5-801(b); and that any attempted apportionment would further violate
      Tenn. Code Ann. § 67-5-801(b) because the State Board of Equalization
      had never established guidelines, for apportionment, as mandated by Tenn.
      Code Ann. § 67-5-801(b).
             The taxpayer has not produced any proof regarding the value of its
      oil and gas interests or its fee interests. The taxpayer has instead pointed
      out deficiencies in the income-approach used by the assessors and that the
      surface land and mineral interests assessments have not been apportioned.
                                          -9-
The taxpayer has presented no evidence to support any alternative value or
any alternative apportionment.
       The taxpayer’s lack of proof is problematic for its case. The Court
agrees with the Board’s pretrial brief filed January 23, 2017:

      In accordance with the foregoing authorities, the taxpayer
      bears the burden of proving that the tax assessments are
      erroneous. Dooley, 2013 WL 179962, at * 5, Spring Hill,
      2003 WL 23099679, at *5 (citing Edmondson Mgmt. Serv.,
      Inc. v. Woods, 603 S.W.2d 716, 717 (Tenn. 1980)). The
      taxpayer cannot meet this burden merely by criticizing the
      taxing authority’s method of assessment or computation of
      tax amounts. Edmondson, 603 S.W.2d at 718. To meet its
      burden, the taxpayer additionally must offer “evidence of the
      amount of taxes owed.” Id.

      As the Supreme Court explained in Edmondson, “[v]ague
      allegations by the taxpayer to the effect that the . . . method of
      ascertaining the taxes due from him was incorrect are not
      sufficient to carry the taxpayer’s burden.” Id. In upholding
      the assessment in that case, the Court reasoned that

             [the taxpayer] has failed to produce an audit,
             actual books and records, or summaries thereof,
             or other evidence to establish that it owes less
             taxes than the amount assessed by the
             Department of Revenue. The taxpayer has done
             no more than to make allegations to the effect
             that the State’s audit method was incorrect,
             inapplicable or constitutes only an estimate; this
             is wholly insufficient to support a judgment in
             favor of the taxpayer.

      Id.

      In this case, Coal Creek elected not to present any proof
      regarding the value of its oil and gas interests. (A.R. I, 93).
      Instead, Coal Creek focused its efforts on criticizing the
      methodology used by the Assessors and DPA [Tennessee
      Division of Property Assessments] to value the interests.
      (A.R. I, 63-88). Coal Creek suggested that the Assessors
                                    -10-
      should have used the comparable sales (market) approach, but
      it presented no evidence that would have supported any type
      of valuation using this approach. (A.R. I, 63 & 93). And it
      criticized the speculative nature of the DPA’s valuation of the
      interests using the income approach and, in particular, the
      DPA’s assumption of a five year well life, but it presented no
      evidence as to the average life of Coal Creek’s wells, and it
      presented no evidence to support an alternative value using
      either the income approach or any other approach. (A.R. I, 83
      & 93).

STATE BOARD OF EQUALIZATION’S AND ASSESSMENT
APPEALS COMMISSION’S PRE-TRIAL BRIEF IN OPPOSITION TO
PLAINTIFF’S COMPLAINT SEEKING JUDICIAL REVIEW, pp. 12-13.

        The Board’s above comments relate to the proceedings before it;
however, the same comments apply to the proceeding before this Court.
The taxpayer put forth no alternative valuation or apportionment before the
Board or this Court.
        The context of a case involving ad valorem assessments of property
containing mineral interests is set out in Richardson v. Assessment Appeals
Com’n, 828 S.W.2d 403 (Tenn. Ct. App. 1991). The Court of Appeals
states:

      As observed by appellant’s counsel, a brief statement
      regarding ad valorem assessments of property containing
      mineral reserves is helpful in order to put the issues at hand in
      perspective.    Generally, for purposes of tax appraisal,
      assessments are made differently on real property owned in
      fee and having mineral content. Separate assessments are
      made for the “surface” values of the property and the
      “mineral” values of the property. In keeping with the
      Constitution of The State, the surface assessment, as
      noncommercial property, is twenty-five percent of the fair
      market value and the underlying mineral is assessed at forty
      percent of the fair market value as commercial property.
      Generally stated, surface values are to be established pursuant
      to T.C.A § 67-5-601, et seq.

      T.C.A. § 67-5-601(a) and T.C.A. § 67-5-602 provide
      respectively in pertinent part as follows:
                                    -11-
             67-5-601. General Policy.—(a) The value of all
             property shall be ascertained from the evidence
             of its sound, intrinsic and immediate value, for
             purposes of sale between a willing seller and a
             willing buyer without consideration of
             speculative values ...
             67-5-602. Assessment guided by manuals—
             Factors    for     consideration.—(a)   ...   in
             determining the value of all property of every
             kind, the assessor shall be guided by, and
             follow the instructions of the appropriate
             assessment manuals issued by the division of
             property assessments and approved by the state
             board of equalization.....
             (b) For determining the value of real property,
             such manuals shall provide for consideration of
             the following factors:

                                   ***

             (7) Natural productivity of the soil, except that
             the value of growing crops shall not be added to
             the value of the land. As used in this
             subdivision, “crops” include trees; and ...

      [3] Thus, in general terms, surface values are determined
      without regard to mineral value and without regard to the
      value of growing crops, which by statutory mandate, include
      trees. The mineral value must then be determined and the
      surface value must, then, in order to obtain true equalization,
      be further reduced by the value of the underlying minerals.
      Common sense dictates that, under ordinary circumstances,
      the combined market value of the surface and underlying
      minerals do not and cannot exceed the market value of the
      fee.

Richardson, at 407.

      The taxpayer provided no alternative values whatsoever for its
mineral interests. Even on its original appeal forms to the State Board of
                                   -12-
Equalization, the taxpayer conspicuously failed to complete the sections of
the forms asking for the taxpayer’s belief as to the fair market value of the
property (mineral interests). The Court is unable to find that the assessors’
use of the discounted income approach has resulted in any erroneous
valuations or that a different valuation would be correct. As to
apportionment, in addition to producing no evidence as to the value of the
mineral interests, the taxpayer gave no value on its appeal forms for the fee
and presented no evidence as to the value of the fee (the value of the land
with consideration of the mineral interests). The taxpayer has raised no
issue as to the assessors’ valuation of its surface land. The assessor valued
the taxpayer’s surface land without consideration of the mineral interests.
The taxpayer produced no evidence of the value of its mineral interests or
the fee.
        The “property appealed” is only the taxpayer’s mineral interests. In
completing portions of the appeal forms to the Board, the taxpayer gave
information from the assessors’ records as to the assessors’ valuations of
the taxpayer’s mineral interests and surface land. The taxpayer also
attached various property tax notices and records from the assessors.
However, as mentioned above, the taxpayer gave no value for the
taxpayer’s mineral interests or fee. The taxpayer produced no such
evidence, and the record is devoid of any evidence whatsoever as to the
value of the fee. With no evidence produced as to the value of the fee, the
Court cannot determine that the apportionment made is inaccurate or that
the assessors’ values for the mineral interests and surface land exceed the
value of the fee.
        Finally, the taxation, at issue in this case, is not a tax on oil and gas
removed from land owned by the taxpayer, but upon the oil and gas
remaining in the land. The use of the discounted income approach, which
utilizes the prior year’s production as a measure of income, does not
transform the tax from an ad valorem tax upon the oil and gas reserves
remaining in the property. The prohibition against an additional severance
tax, in Tenn. Code Ann. § 60-1-301, does not apply to taxes upon the oil
and gas reserves remaining but only to the oil and gas removed. The tax
imposed in this case is not for the same year as the severance tax imposed
upon the oil and gas removed but for the next year upon the oil and gas
reserves remaining. The taxpayer produced no evidence to show that any
different amount of tax would result from using a different methodology as
opposed to the discounted income approach used by the assessors in this
case. Likewise, as with methodology, the taxpayer has failed to show that
the imposition of formal guidelines would result in any different valuation
or apportionment.
                                      -13-
            The taxpayer has failed to meet its burden of proof in this case. The
      complaint will be dismissed with the costs taxed to the plaintiff taxpayer.

Coal Creek timely appealed to this Court.

                                        Discussion

      Although not stated exactly as such, Coal Creek raises one issue on appeal:
whether the Trial Court erred in dismissing Coal Creek’s complaint for failure to meet its
burden of proof.

       “[J]udicial review of a Board of Equalization decision clearly falls under the
Uniform Administrative Procedures Act (“UAPA”) . . . courts are to apply the narrow,
statutorily defined standard contained in [Tenn. Code Ann.] § 4-5-322(h) rather than the
broad standard of review used in other civil appeals.” Spring Hill, L.P. v. Tennessee
State Bd. of Equalization, No. M2001-02683-COA-R3-CV, 2003 WL 23099679, at *4
(Tenn. Ct. App. Dec. 31, 2003), no appl. perm. appeal filed (citations and quotation
marks omitted). We review the trial court’s factual findings de novo with a presumption
of correctness, unless the evidence preponderates otherwise. Tenn. R. App. P. 13(d);
Richardson v. Assessment Appeals Com’n, 828 S.W.2d 403, 407 (Tenn. Ct. App. 1991).
We review the trial court’s conclusions of law de novo with no presumption of
correctness. Id. Tenn. Code Ann. § 4-5-322(h) (2015) states, in relevant part, that a court
reviewing the board’s decision may:

      reverse or modify the decision if the rights of the petitioner have been
      prejudiced because the administrative findings, inferences, conclusions or
      decisions are:

      (1) In violation of constitutional or statutory provisions;

      (2) In excess of the statutory authority of the agency;

      (3) Made upon unlawful procedure;

      (4) Arbitrary or capricious or characterized by abuse of discretion or clearly
      unwarranted exercise of discretion; or

      (5)(A) Unsupported by evidence that is both substantial and material in the
      light of the entire record.



                                            -14-
       (B) In determining the substantiality of evidence, the court shall take into
       account whatever in the record fairly detracts from its weight, but the court
       shall not substitute its judgment for that of the agency as to the weight of
       the evidence on questions of fact.

       “Upon appeal of a decision taken by an administrative agency following a
contested case proceeding, the standard of review in this court is the same as it is in the
chancery court.” Terminix Intern. Co., L.P. v. Tennessee Dept. of Labor, 77 S.W.3d 185,
191 (Tenn. Ct. App. 2001).

       This case touches, in part, upon appraisal methodology. There are at least “three
generally recognized approaches: the comparable sales approach, income approach, and
cost approach.” Knoxville Community Development Corp. v. Bailey, No. E2004-01659-
COA-R3-CV, 2005 WL 1457750, at *2 (Tenn. Ct. App. June 21, 2005), no appl. perm.
appeal filed. The Assessors in the present case utilized the income approach, which has
been described as follows:

       [T]he “income approach” appraisal method . . . is designed to determine the
       value of income-producing property by reducing to present value the
       anticipated future net earnings stream of the property. The income
       approach begins with a calculation of gross income. This gross income
       figure is then reduced by expenses. The resulting net income figure is then
       capitalized at an appropriate rate to arrive at the value of the income-
       producing property.

Seaton v. State Bd. of Equalization, No. E1998-00880-COA-R3-CV, 2000 WL 852123,
at *1 (Tenn. Ct. App. June 28, 2000), Rule 11 perm. app. denied Feb 20, 2001. (Footnote
omitted).

        “[T]he burden is on the taxpayer to prove that [tax assessments] are erroneous.”
Edmondson Mgmt. Serv., Inc. v. Woods, 603 S.W.2d 716, 717 (Tenn. 1980) (quoting
Howard v. United States, 566 S.W.2d 521, 528 (Tenn. 1978)). On the other hand,
“[t]axation statutes must be liberally construed in favor of the taxpayer and strictly
construed against the taxing authority.” Covington Pike Toyota, Inc. v. Cardwell, 829
S.W.2d 132, 135 (Tenn. 1992). Article II, § 28 of the Tennessee Constitution provides
for the classification and taxing of property as follows:

       In accordance with the following provisions, all property real, personal or
       mixed shall be subject to taxation, but the Legislature may except such as
       may be held by the State, by Counties, Cities or Towns, and used
       exclusively for public or corporation purposes, and such as may be held and
                                           -15-
      used for purposes purely religious, charitable, scientific, literary or
      educational, and shall except the direct product of the soil in the hands of
      the producer, and his immediate vendee, and the entire amount of money
      deposited in an individual’s personal or family checking or savings
      accounts. For purposes of taxation, property shall be classified into three
      classes, to wit: Real Property, Tangible Personal Property and Intangible
      Personal Property.

      Real Property shall be classified into four (4) subclassifications and
      assessed as follows:

      (a) Public Utility Property, to be assessed at fifty-five (55%) percent of its
      value;

      (b) Industrial and Commercial Property, to be assessed at forty (40%)
      percent of its value;

      (c) Residential Property, to be assessed at twenty-five (25%) percent of its
      value, provided that residential property containing two (2) or more rental
      units is hereby defined as industrial and commercial property; and

      (d) Farm Property, to be assessed at twenty-five (25%) percent of its value.

       Tenn. Code Ann. § 60-1-301 provides for a severance tax on oil and gas removed
from the ground in Tennessee:

      (a) There is levied a severance tax on all gas and oil removed from the
      ground in Tennessee. The measure of the tax for such gas and oil shall be
      three percent (3%) of the sale price of such gas and oil. Every person
      actually engaged in severing oil or gas, or actually operating oil or gas
      property under contracts or agreements requiring direct payments to the
      owners of any royalty interest, excess royalty or working interest, either in
      money or otherwise, shall be liable for the tax imposed by this section and
      shall, prior to making any such payments, withhold from any quantity or
      amount due the amount of tax due pursuant to this section.

      (b) The tax shall be levied for the use and benefit of the state, as well as the
      county governments and one third ( 1/3 ) of all revenues collected from the
      tax shall be allocated to the county which was the site of the wellhead for
      that gas or oil. The remaining two thirds ( 2/3 ) of such revenues shall be

                                           -16-
      deposited to the credit of the state treasurer as a part of the general funds of
      the state.

      (c) No other tax shall be imposed on such gas and oil by the state, counties
      or any other political subdivision of the state; provided, however, that:

      (1) Free gas used by the property owner or tenant under the terms of the
      lease, unless it be in lieu of cash payment; and

      (2) Gas which has been injected into the ground for underground storage
      and thereafter withdrawn shall not be subject to this, or any taxation.

      Tenn. Code. Ann. § 60-1-301 (2013). Regarding classification of property
according to use for tax purposes, Tenn. Code Ann. § 67-5-801 provides:

      (a) For the purposes of taxation, all real property, except vacant or unused
      property or property held for use, shall be classified according to use and
      assessed as provided in this section:

      (1) Public Utility Property. Public utility property shall be assessed at fifty-
      five percent (55%) of its value;

      (2) Industrial and Commercial Property. Industrial and commercial
      property shall be assessed at forty percent (40%) of its value;

      (3) Residential Property. Residential property shall be assessed at twenty-
      five percent (25%) of its value; and

      (4) Farm Property. Farm property shall be assessed at twenty-five percent
      (25%) of its value.

      (b) Where a parcel of real property is used for more than one (1) purpose,
      which would result in different subclassifications and different assessment
      percentages, then it shall be apportioned among the subclasses according to
      guidelines established by rules and regulations of the state board of
      equalization.

Tenn. Code Ann. § 67-5-801 (a)-(b)(2013).

       Coal Creek argues on appeal that the tax assessments on its mineral interest
constitute an unlawful additional severance tax above what is provided for exclusively by
                                           -17-
Tenn. Code Ann. § 60-1-301. Coal Creek argues further that the Board of Equalization’s
failure to promulgate and abide by guidelines as contemplated by Tenn. Code Ann. § 67-
5-801 precludes the “layering” of taxes on Coal Creek’s property according to different
uses.

       It is undisputed that Coal Creek’s property contains oil and gas deposits which,
when extracted, produce income for the company. It is a logical and unsurprising
proposition that a property producing a stream of income—in this case from oil and
gas—is more valuable than an otherwise comparable property that cannot provide any
such income stream. Even though reserve studies as to the gas and oil are not available,
the Assessors did not have to blind themselves to the reality of the property’s use. The
Tennessee Constitution provides for the classification of property and levying of tax
according to use. It is clear from the record that Coal Creek’s property is not merely farm
land, however long previously it had been classified solely as such.

       The tax assessments at issue are on oil and gas remaining in the ground. A
severance tax, by contrast, taxes those minerals that are extracted. Accounting for and
taxing the value of the oil and gas deposits on Coal Creek’s property is not identical to
imposing an unlawful additional severance tax.

       Coal Creeks points to the lack of guidelines contemplated by Tenn. Code Ann. §
67-5-801. We do not know why the Board has failed, at least as of the disposition of this
case below, to promulgate guidelines regarding apportionment and sub-classifications.
However, we do not believe that failure to promulgate guidelines to date means the
Assessors were required to ignore the fact that Coal Creek’s property contains oil and gas
deposits that produce a stream of income for the company, a relevant consideration in
valuation. Under the Tennessee Constitution, Coal Creek’s property, including its
mineral interest, is subject to taxation. The Assessors in this case went about appraising
the mineral interest of the property using a method they regarded as appropriate, even
“conservative” vis-à-vis Coal Creek’s interests. In the absence of guidelines, we find that
the Assessors sufficiently exercised their duty under the Tennessee Constitution and other
applicable law.2

       The Assessors utilized the income approach appraisal method. The evidence in
the record reflects that the income approach is a viable and widely accepted means of
arriving at value, depending upon the circumstances. Tennessee case law also supports
this proposition. Coal Creek asserts that the Assessors did not correctly perform an
2
  Under the facts of the present case, we find that the classifications and tax assessments at issue were
rendered properly notwithstanding the absence of formal guidelines. The better practice, and one likely to
reduce or eliminate similar questions going forward, would be for the State Board of Equalization to
establish formal guidelines by rules and regulations as contemplated by statute.
                                                  -18-
income approach appraisal method because no reliable studies are available to establish
the oil and gas reserves. Nevertheless, again, in our judgment, this does not relieve Coal
Creek from being subject to taxation of its mineral interest. It is undisputed that the
property contains oil and gas deposits and that these produce a stream of income for Coal
Creek. Coal Creek’s position appears to be that, because production varies from year to
year and no reserve studies are available, the Assessors have no available means of
valuing the mineral interest, and therefore its mineral interest is immune from property
taxation. For the reasons already discussed, we disagree and instead agree with the Trial
Court.

       Lastly, there is the issue of Coal Creek’s failure to put forward an alternative value
for the mineral interest. As found by the Trial Court, Coal Creek produced no “evidence
whatsoever as to the value of the fee [including the mineral interests].”
Instead, Coal Creek argues that “the assessments at issue are legally invalid on their face”
and “Coal Creek should not be charged with the burden of proving what essentially is a
double negative. . . .” We already have rejected Coal Creek’s argument that the tax
assessments were invalid on their face. With the tax assessments not being invalid on
their face and Coal Creek having produced no evidence as to the value of its mineral
interests, there is no basis under our standard of review to modify the assessors’ values.

       We find and hold, as did the Trial Court, that the Appeals Commission’s decision
to reinstate the original assessments is supported by substantial and material evidence,
and we find no other basis under the applicable standard of review to reverse or modify
the Appeals Commission’s decision. We affirm the judgment of the Trial Court.

                                        Conclusion

       The judgment of the Trial Court is affirmed, and this cause is remanded to the
Trial Court for assessment of the costs below. The costs on appeal are assessed against
the Appellant, The Coal Creek Company, and its surety, if any.

                                          ____________________________________
                                          D. MICHAEL SWINEY, CHIEF JUDGE




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