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                                                               No. 99-078

                          IN THE SUPREME COURT OF THE STATE OF MONTANA

                                                              2000 MT 125

                                                             299 Mont. 477

                                                               2 P. 3d 245


                                                  DECKER COAL COMPANY,

                                                      Petitioner and Appellant,

                                                                      v.

                                      THE DEPARTMENT OF REVENUE OF THE

                                     STATE OF MONTANA and THE STATE TAX

                                 APPEAL BOARD OF THE STATE OF MONTANA,

                                                  Respondents and Respondents.



                         APPEAL FROM: District Court of the Thirteenth Judicial District,

                                               In and for the County of Big Horn,

                                      The Honorable Susan Watters, Judge presiding.



                                                     COUNSEL OF RECORD:

                                                             For Appellant:

                             Joseph E. Jones (argued) and Lon A. Licata; Fraser, Stryker,


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                              Vaughn, Meusey, Olson, Boyer & Bloch, Omaha, Nebraska

                            Terry Cosgrove; Crowley, Haughey, Hanson, Toole & Dietrich,

                                                            Helena, Montana

                                                            For Respondents:

David W. Woodgerd, Chief Tax Counsel, Milo M. Vukelich, Lawrence G. Allen (argued) Tax Counsel,
                     Special Assistant Attorneys General, Helena, Montana



                                                    Submitted: October 22, 1999

                                                         Decided: May 9, 2000

                                                                    Filed:

                                    __________________________________________

                                                                    Clerk

Justice W. William Leaphart delivered the Opinion of the Court.

¶1 This is an appeal from the December 1, 1998 order of the Montana Thirteenth Judicial
District Court, Big Horn County, on a Petition for Judicial Review, affirming the State
Tax Appeal Board's order assessing additional coal taxes against Decker Coal Company
(Decker). We reverse the order of the District Court.

                                                    Procedural Background

¶2 The Department of Revenue of the State of Montana (DOR) conducted three separate
audits and assessments of Decker for the years 1987 through 1992. On April 17, 1992,
DOR assessed additional taxes and interest against Decker for coal taxes for the years
1987 through 1988. Decker timely filed an objection to the assessment before the DOR
Division Administrator. On April 14, 1994, DOR assessed additional taxes and interest
against Decker for coal taxes for the years 1989 through 1990. Both assessments were
consolidated before the DOR Division Administrator. The DOR Division Administrator

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denied Decker's appeal from the 1987-1990 tax assessments. Decker appealed that
decision to the DOR Director. The Director denied the appeal. Decker then appealed the
Director's decision to the State Tax Appeal Board (STAB). Decker also filed an
interlocutory appeal requesting the District Court to define "market value" and "arm's
length agreement." On January 25, 1996, Judge Baugh issued an order defining "market
value," for purposes of § 15-35-107(1) and (3), MCA, as the price a willing buyer would
pay to a willing seller under the market and economic conditions at the time of the sale.
Neither Decker nor DOR appealed from that decision.

¶3 On April 30, 1996, DOR assessed additional taxes and interest for coal taxes for the
years 1991-92. Decker appealed this assessment. That appeal was also denied. Decker
then appealed the 1991-92 coal tax assessments to STAB. The appeals from the 1987-90
assessment and the 1991-92 assessment were consolidated. The parties filed cross-motions
for summary judgment before STAB. STAB denied Decker's motion for summary
judgment and granted DOR's motion. Decker filed a petition for judicial review of STAB's
decision. The District Court determined that STAB had not included Findings of Fact and
Conclusions of Law in the manner and form required and remanded to STAB for such
findings and conclusions.

¶4 On September 15, 1997, STAB issued Findings of Fact, Conclusions of Law, and an
Order. Again concluding that STAB had failed to include Findings of Fact and
Conclusions of Law as required, the District Court remanded to STAB once more for
appropriate Findings of Fact and Conclusions of Law. On February 6, 1998, STAB issued
Findings of Fact and Conclusions of Law and an Order affirming DOR's assessment of
additional coal taxes against Decker. Decker petitioned for judicial review. On December
1, 1998, Judge Watters entered an Order and Memorandum affirming STAB's Third
Order. Decker appeals from that decision.

                                                       Factual Background

¶5 The following are undisputed facts as set forth by the parties in their respective briefs.
Decker owns and operates a coal mine in Montana (hereinafter referred to as the Decker
mine). Decker, Black Butte Coal Company (Black Butte) and Big Horn Coal Company
(Big Horn) all entered into contracts in the mid-1970s with Commonwealth Edison
(ComEd) for the long-term delivery of coal. Under the terms of those contracts, each of
these entities was to supply ComEd with coal at a base price that would be adjusted over
time by a predetermined escalator. During the audit period of 1987-1992, the base price


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plus escalators on the Decker/ComEd contract computed to a price of roughly $24-$28 per
ton.

¶6 Three contracts for the sale of coal are at issue in this appeal: (1) a contract entered
into on December 31, 1986 between Decker (seller) and Big Horn (buyer) for the sale of
coal by Decker during 1987; (2) a contract entered into on December 31, 1987 between
Decker (seller) and Big Horn (buyer) for the sale of coal from 1988 through 1992; and (3)
a contract entered into on January 1, 1988 between Decker (seller) and Black Butte
(buyer) for the sale of coal during the years 1988 through 1992 (collectively referenced
herein as the Montana Contracts).

¶7 The price of coal sold by Decker to Big Horn and Black Butte for the relevant audit
years 1987 through 1992 under the Montana Contracts ranged from approximately $7.50
per ton to $10.42 per ton. For the coal that Decker sold to Black Butte and Big Horn under
the Montana Contracts, Decker timely reported and paid to the State of Montana $8.5
million in coal taxes on the full contract price.

¶8 The Montana Contracts followed from the decision of Black Butte and Big Horn, both
Wyoming entities, to exercise their rights under separate coal purchase contracts,
negotiated between themselves and ComEd in the 1970s (hereafter the Wyoming
Contracts). Black Butte and Big Horn apparently had the contractual right under the
Wyoming Contracts to buy or "outsource" coal from an alternate source rather than mine
the coal themselves. Exercising their right to outsource the coal, Black Butte and Big Horn
contracted to purchase coal from Decker on the condition that ComEd contemporaneously
purchase that coal from them. The coal purchased by Big Horn and Black Butte from
Decker was shipped by Decker to ComEd to fulfill the contractual obligations of Big Horn
and Black Butte under the Wyoming Contracts. Decker did not receive any additional
money or other consideration of any nature from Big Horn or Black Butte for the coal
when it was resold to ComEd under these separate Wyoming Contracts.

¶9 At the time of the Montana Contracts, Peter Kiewit Sons', Inc. (Kiewit) directly or
indirectly through its subsidiary Kiewit Mining Group (KMG), had ownership in Decker,
Big Horn and Black Butte. Decker was a 50/50 Montana joint venture between KMG and
Western Minerals, Inc., a wholly separate entity owned by Nerco, Inc. (NERCO). Black
Butte was a 50/50 Wyoming joint venture between KMG and Bitter Creek Coal Company,
a wholly separate entity owned by Union Pacific Corporation. Big Horn was a Wyoming
Corporation and wholly owned subsidiary of Kiewit.


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¶10 Negotiation of the Montana Contracts between Decker and Big Horn and Decker and
Black Butte took place principally between Donald Sturm of Kiewit (on behalf of Big
Horn and Black Butte) and Gerald Drummond of NERCO (on behalf of Decker).

¶11 A majority of Decker's management committee, comprised of an equal number of
persons designated by Kiewit and NERCO, must authorize sales of coal made by Decker.
NERCO, Kiewit's partner in Decker, was a competitor of Kiewit and knowledgeable about
the coal market conditions from 1986 through 1988.

¶12 DOR has audited all major coal producers in the state of Montana from 1987 through
1990, but is unaware of any prices paid to Montana coal producers under coal contracts
entered into from 1987 through 1990 that exceeded the approximately $7.50 to $10.42 per
ton that Decker received from Big Horn and Black Butte under the Montana Contracts.
The prices paid to other coal producers for contracts negotiated and entered between 1986
and 1989 ranged from $5.13 per ton to $8.70 per ton.

¶13 The following are comparable long term coal contracts that were negotiated and
entered into during much the same time period as the Montana Contracts at issue:

        Date Seller Buyer Selling price $/ton

        04/89 ARCO LCRA $5.25

        11/87 Spring Creek Detroit Edison $6.51

        01/88 Western Energy Wisconsin P&L $8.70

        08/89 Peabody Rochelle LCRA $5.00


¶14 DOR did not conduct a market value study nor did it determine the market value of
coal for contracts entered into from 1986 through 1988. Rather, DOR imputed a price of
roughly $24 to $28 per ton to the Montana Contracts based solely upon prices negotiated
under a contract entered into on June 20, 1974 between Decker (seller), and ComEd
(buyer), a Chicago, Illinois-based electric utility (hereafter the 1974 ComEd Contract).
The coal prices under the 1974 ComEd Contract (as adjusted by predetermined escalators)
for coal sold during the audit period were not intended to and did not follow market value
prices.
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Standard of Review

¶15 The parties do not dispute the Findings of Fact in STAB's order of February 6, 1998.
Rather, they dispute the application of those facts to the law as set forth in § 15-35-107,
MCA, and in Judge Baugh's Interlocutory Order of January, 1996. Decker appeals from
the District Court's conclusion that STAB and DOR correctly interpreted the law in
imputing market value to the coal contracts in question. Thus, resolution of this appeal
involves questions of law that are to be reviewed for correctness rather than the clearly
erroneous standard applicable to an agency's finding of fact. See Steer, Inc. v. Dept. of
Revenue (1990), 245 Mont. 470, 474-75, 803 P.2d 601, 603.

                                                           Issues Presented

¶16 Pursuant to § 15-35-107, MCA, DOR may impute a value to coal sales rather than
relying on contract prices if (1) it determines the contract price does not represent an arm's-
length agreement; and (2) the imputed value approximates market value. Thus, the
questions presented for this appeal are:

¶17 1. Whether Decker has an arm's-length relationship with Wyoming coal producers,
Big Horn and Black Butte?

¶18 2. Whether the $24-$28 per ton value that DOR imputed to the contracts
approximates market value?

¶19 Since we determine that resolution of issue number two is dispositive, we do not
address issue number one.

Introduction

¶20 Section 15-35-107, MCA, provides as follows:

        When value of coal may be imputed -- procedure. (1) The department may or
        shall at the request of the taxpayer impute a value to the coal which approximates
        market value f.o.b. mine in a case where:

                  ...


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        (c) a person sells coal under a contract which is not an arm's-length agreement[.]

        ¶21 In order to impute a value to coal sales under § 15-35-107(1)(c), MCA, DOR
        must meet a two-part standard: it must determine that the contract price does not
        represent an arm's-length agreement and that the transaction is less than market
        value. The two criteria are stated in the conjunctive. Thus, if DOR fails to satisfy
        either standard, DOR may not impute a value to the coal sales in question. Since we
        determine that Decker has shown that DOR's imputed value does not "approximate"
        market value under the market and economic conditions pertaining in 1986-1988,
        we need not address the question of whether the sales were arm's-length.

¶22 In his interlocutory order, Judge Baugh defined "market value" as follows:

        The term "market value" as set forth in Sec. 15-35-107(1) and (3), M.C.A., means
        the price that a willing buyer would pay to a willing seller under the market and
        economic conditions at the time of sale.

Department of Revenue's Contentions:

¶23 DOR contends that there was no need to conduct a market value study; rather, the best
indicators of value for the coal at issue are the actual sales of coal mined by Decker in the
1980s and sold to ComEd pursuant to the 1974 contract between ComEd and Decker. The
record contains examples of such sales that occurred between Decker and ComEd, Black
Butte and ComEd, and Big Horn and ComEd at prices between roughly $24 and $28 per
ton.

¶24 DOR argues that in imputing value, § 15-35-107(3), MCA, allows DOR to apply
factors used by the federal government under 26 U.S.C. § 613 and 26 C.F.R. § 1.613-41,
including the taxpayer's sales of ores or minerals of like kind and grade. DOR may also
consider any other additional criteria it considers appropriate.

¶25 DOR contends that, when applying the factors from the above IRS regulation, the
representative market price is established by the coal sold to ComEd under the 1974
ComEd Contract. The assessments of Decker were appropriately based upon that 1974
arm's-length contract.

¶26 In summary, DOR contends that this appeal involves Decker coal that is mined at
Decker, loaded on the train at Decker, shipped directly to ComEd, and never touched by

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Black Butte or Big Horn. As characterized by DOR, when the coal comes down the
conveyor belt at the Decker mine, it is purchased by Big Horn and Black Butte and resold
to ComEd before it hits the railroad car. DOR posits that Decker cannot use this "paper
sham" transaction to contract away its tax obligation on coal that is mined in the state of
Montana.

Decker's Contentions:

¶27 Decker contends that DOR's imputed price of $24-$28 per ton, based upon the 1974
ComEd Contract, has no reasonable relationship to the undisputed market price of coal
during the period when the Montana Contracts were negotiated. The 1974 ComEd
Contract was negotiated over a decade earlier under very different market and economic
conditions. Decker produced and sold all of the coal it was allowed to sell to ComEd
under the 1974 contract and paid the State of Montana all coal taxes due based on these
prices. Decker argues that DOR made no attempt to support its position with evidence that
there were any contracts negotiated under the "market and economic" conditions existing
in 1986-1988 at prices higher than what Decker received under the Montana Contracts.
Absent Decker's sales of coal to Big Horn and Black Butte under the Montana Contracts,
the coal in question would have been sold in the same market at the same or lower prices
to another consumer, or perhaps it would have remained in the ground for lack of another
buyer.

¶28 Decker argues that STAB failed to make any factual findings to support DOR's
imputed price of $24-$28 per ton as "market value" under the legal standard established by
Judge Baugh. To the contrary, Decker asserts it had no opportunity, during the period in
question, to sell this coal for the $24-$28 per ton prices that DOR has imputed.

The District Court's Conclusions:

¶29 After determining that substantial evidence supported DOR's decision that the
transactions were not arm's-length, the District Court concluded that

        The only market for Decker's coal was Commonwealth Edison. Commonwealth
        Edison was the only relevant market because the "Wyoming Contracts" sales were
        contingent upon the contemporaneous sale of Decker's coal to Commonwealth
        Edison. The contracts did not permit either Black Butte or Big Horn to sell coal to
        anyone other than Commonwealth Edison. This closed market (Commonwealth


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        Edison) was the market condition at the time of sale. . . . Therefore, the market value
        of coal was approximately $24-$27 a ton, the price of the coal under the
        Commonwealth Edison contracts. [Citations omitted.]

                                                               Discussion

¶30 Under § 15-35-107, MCA, DOR may impute a value to coal sales rather than rely on
contract prices if: (1) it determines the contract price does not represent an arm's-length
agreement, and (2) the imputed value approximates market value. Judge Baugh, in his
interlocutory order, defined market value as: "The term 'market value' as set forth in Sec.
15-35-107(1) and (3), M.C.A., means the price that a willing buyer would pay to a willing
seller under the market and economic conditions at the time of the sale." This definition,
which is not disputed, by its terms requires a determination of what a willing buyer would
pay to a willing seller under a contract negotiated under the market and economic
conditions prevailing as of 1986-1988.

¶31 The only evidence presented as to what a willing buyer would pay to a willing seller
pursuant to a contract negotiated in 1986-1988 was in the Sansom Report prepared by
Decker's expert, Dr. Robert L. Sansom. The Sansom Report documents transactions and
bids for coal comparable in quality and in time to the Montana Contracts. The Sansom
Report shows that coal sales in Decker's market area, which reflected the market and
economic conditions prevailing at the time of the sale, ranged from $3.77 to $7.61 per ton.
The Sansom Report took into account both short term (spot market) contracts and long
term contracts negotiated in the same time frame as Decker's 1986-1988 contracts with
Big Horn and Black Butte. Although DOR did not agree with Dr. Sansom's conclusion
that the Montana Contracts were at market value, it does not disagree with any of the data
or other factual recitations contained in the report as to what coal was selling for from
1986 to 1988. Further, DOR did not present any evidence that coal contracts were entered
into from 1986 to 1988 at prices that differed from those enumerated in the Sansom
Report. The coal prices ($7.50 to $10.42 per ton) under the Decker/Black Butte and
Decker/Big Horn contracts were equal to or greater than the coal prices set forth in the
Sansom Report ($3.77 to $7.61 per ton). There being no evidence to the contrary, we
conclude that the prices paid to Decker by Black Butte and Big Horn under the Montana
Contracts met or exceeded market value, in other words, the price that a willing buyer
would pay to a willing seller under market and economic conditions at the time of the sale.

¶32 The District Court concluded that the only relevant market was ComEd. However, the


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agreed upon definition of "market value" does not distinguish between an open and a
closed market. Rather, the plain language of the definition refers to the price that a willing
buyer would pay to a willing seller under the market and economic conditions at the time
of the sale. We conclude that market value is established by the Sansom Report's
undisputed documentation of coal sales from 1986 to 1988. Secondly, the fact that the
parties made the sale of coal under the "Montana Contracts" contingent upon the
contemporaneous sale of the coal to ComEd does not change the fact (shown by the
Sansom Report) that there was a market for the sale of coal to buyers other than Black
Butte or Big Horn. This was not a "closed market" situation where the customers (Black
Butte and Big Horn) could not turn elsewhere to purchase or outsource the coal. Compare
Palmer v. Columbia Gas of Ohio, Inc. (6th Cir. 1973), 479 F.2d 153, 163 (recognizing
"closed market[s] where the customer cannot turn elsewhere to purchase the services or
products offered"). The fact that ComEd was bound to purchase coal from Black Butte and
Big Horn was attributable to ComEd's 1974 contracts, not to the 1980s Montana
Contracts. We conclude that the District Court erred in concluding that ComEd's 1974
contracts defined the relevant market for the purpose of determining market value with
regard to the Montana Contracts. ComEd's obligations under the 1974 contracts do not
define "market and economic conditions at the time of sale" for willing buyers and sellers
of coal in Montana during the 1980s.

¶33 Moreover, the $24-$28 per ton price imputed by DOR ignores the temporal
component of the market value definition. DOR's imputed price is erroneously pegged to
the 1974 ComEd contracts rather than to any market factors extant "at the time of the
sale." The fallacy of DOR's position is apparent from the expert report submitted by
DOR's expert, Dr. Ronald Johnson, whose report was not a market value study but rather
an overview of long-term coal contracting. Dr. Johnson recognized that the market and
economic conditions existing when the 1974 ComEd Contract was negotiated differed
from the market and economic conditions between 1986 and 1988 when the Montana
Contracts were negotiated. He also recognized that the coal prices that Decker received
from ComEd from 1986 to 1988 were based upon price escalators pre-determined back in
1974 and that those escalators "did not do a very good job of tracking new contract prices
of the mid and late 1980s" and "were not design[ed] to closely follow changes in the
market price for coal, however defined."

¶34 Dr. Johnson's observations are borne out by the Stagg Report, which was
commissioned by the State of Montana's Department of Commerce. Stagg Engineering
was retained by the Department of Commerce to conduct a study and assessment of the

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future market demand for Montana coal production and related topics. The results of the
study were published in January, 1996 for the Montana Department of Commerce and the
Office of the Governor, Economic Development Office. The report provides, in part:

        The Decker mine is facing several critical issues related to sales to both Detroit
        Edison and Commonwealth Edison. . . . Of much greater economic importance to
        Decker profitability and future State tax revenues, however, are the prices embodied
        in the long-term contracts for both utilities. The Consultant's analysis, as well as
        abundant anecdotal evidence and observations by utility industry analysts, indicate
        that the current contract prices are significantly above market, by a factor of 50% in
        the case of Detroit Edison and as much as 300% for Commonwealth Edison.

        ¶35 The 1996 Stagg Report does not specifically reference the 1986-1988 time
        frame at issue here. Nonetheless, it graphically illustrates the fact that contract
        prices based upon pre-determined escalators, which were negotiated years ago in
        long-term contracts, do not accurately reflect present-day market value.

¶36 As Decker points out, the illogic of DOR's position is further illustrated by reversing
the price differential between the 1970s and 1980s contracts at issue. Had coal prices
increased from the 1970s time period instead of decreasing, the coal prices under the
1980s contracts would exceed the prices from the 1970s contracts. Under DOR's rationale,
DOR would ignore the higher negotiated market price in the 1980s and assess taxes based
upon the lower prices negotiated in the 1970s. This would unfairly and illogically deprive
the State of tax revenue by freezing tax assessments at 1970s levels. When coal prices
decrease, as they did in the 1980s, it is equally illogical to assess the 1980s production of
coal at the higher 1970s prices. Both logic and law dictate that the assessment be based
upon market value at the time of the sale.

¶37 We find unpersuasive DOR's arguments that Decker's 1974 contract with ComEd
should determine the market value of coal sold under the Montana Contracts. DOR
contends that the 1974 ComEd Contract is relevant to the determination of market value
for the Montana Contracts because the price of coal under that contract could not be
determined until the coal was actually sold by Decker in the 1980s. That is, the price at
which coal is sold under the long-term contracts is determined at or near the time of sale.
This is true. However, this contention ignores the fact that the price paid for coal in the
1980s pursuant to long-term contracts is determined, not by reference to market and
economic conditions extant in the 1980s, but by reference to escalators pre-determined in
the 1970s that were not designed to track current market value. DOR's contention that the
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1970s long-term contract prices, when implemented in the 1980s according to
predetermined escalators, are "at the time of sale," is untenable.

¶38 DOR further argues that its reliance upon the 1974 ComEd Contract is compelled
because that contract establishes the price for the same coal being shipped to ComEd on
the same train as the Decker/Big Horn and Decker/Black Butte coal in dispute. Thus,
posits DOR, it was comparing "apples to apples." This argument ignores the fact that coal,
like apples, can be an interchangeable commodity in the sense that one train load may
contain a sufficient quantity of coal to satisfy numerous contracts entered into at different
times and for different prices. Decker did not use the coal mined pursuant to the Black
Butte and Big Horn contracts to satisfy Decker's 1974 contract obligation to ComEd. As
Decker points out, the Black Butte and Big Horn coal, although transported on the same
train as the Decker/ComEd coal, was "new coal." That is, Decker had already satisfied its
contract with ComEd. The Black Butte and Big Horn contracts thus represent coal that
Decker was mining above and beyond any coal that Decker needed to satisfy its ComEd
contract. The fact that it was the "same coal" in terms of quality and source does not mean
that it was the same coal that was being shipped to satisfy the 1974 ComEd Contract, nor
does it mean that Decker was somehow precluded from negotiating new sales of that coal
at different prices reflecting the market and economic conditions "at the time of the sale."

¶39 In support of its reliance on the 1974 ComEd Contract, DOR invokes § 15-35-107(3),
MCA, which states:

        (3) When imputing value, the department may apply the factors used by the federal
        government under 26 U.S.C. 613, or that provision as it may be labeled or amended,
        in determining gross income from mining or the department may apply any other or
        additional criteria it considers appropriate.

        ¶40 In turn, the federal regulation interpreting 26 U.S.C. § 613 provides as follows:

Sales or purchases, including the taxpayer's, of ores or minerals of like kind and grade as
the taxpayer's, will be taken into consideration in determining the representative market or
field price for the taxpayer's ore or mineral only if those sales or purchases are the result of
competitive transactions.

26 C.F.R. § 1.613-4(c)(3) (1972).

¶41 Thus, DOR contends, it had leeway to consider Decker's "own actual sales prices for

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ores or minerals of like kind and grade." Although the above regulation clearly allows
consideration of the taxpayer's own sales of ores of like kind and grade, it does not suggest
that the taxpayer's own actual sales, regardless of date and price, shall be determinative of
current market value. Rather, the regulation is couched in terms of ascertaining a
"representative" market. For purposes of resolving the issue under consideration, a
"representative" market is one that reflects market value "at the time of the sale."

¶42 Decker's sale of coal to ComEd pursuant to a 1974 contract with pre-determined
escalators is not representative of the market and economic conditions at the time of the
sale and thus does not meet the controlling definition of market value.

¶43 DOR and STAB's conclusion that the 1974 ComEd Contract price represents the price
that a willing buyer would pay to a willing seller under the market and economic
conditions at the time of the 1980s sales is incorrect. We conclude that Decker has shown
that DOR's imputed value of $24-$28 per ton does not "approximate[ ] market value f.o.b.
mine," § 15-35-107(1), MCA, under the market and economic conditions pertaining in
1986-1988.

¶44 The decision of the District Court, affirming STAB, is reversed and DOR's assessment
based upon the imputed value of $24-$28 per ton is hereby dismissed.

/S/ W. WILLIAM LEAPHART



We concur:

/S/ J. A. TURNAGE

/S/ JAMES C. NELSON

/S/ KARLA M. GRAY

/S/ JIM REGNIER

Justice William E. Hunt, Sr., dissenting:

¶45 The majority has elevated form over substance in accepting Decker's contentions. As

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the DOR ironically frames the question presented: How can this coal be worth the values
of $7 to $10/ton claimed by Decker and its expert when it is simultaneously sold to
Commonwealth for $24 to $29/ton? The plain answer to that question is that it can only be
attributed the lesser value, as the majority has done here, by ignoring the economic
realities of the transactions at issue. I dissent because I agree with the DOR that artificial
prices between companies that share common management and ownership do not
accurately reflect the true value of coal upon which coal production taxes are based.
Rather, the best indicator of value for Montana coal production tax purposes is the actual
prices paid for the coal in question, as determined by the long-term contracts underlying
the transactions. As discussed below, I conclude that the DOR has satisfied both prongs of
the conjunctive test for imputing a taxable value to coal sales and, therefore, that the
DOR's assessments should be affirmed.

                   1. The Montana Contracts Were Not Arms-Length Transactions

¶46 The majority does not address whether the Montana Contracts were arms-length
transactions. It is crucial to address this prong, however, because the DOR's imputed value
follows entirely from this starting premise. As defined by Judge Baugh, an "arms-length"
transaction is an agreement (1) between independent (2) non-controlled parties (3) with
opposing economic interests. Looking at the record as a whole, it is clear that the Montana
Contracts were not arms-length. Being non-arms-length, the contract prices paid to Decker
by Big Horn and Black Butte simply were not representative of "market value" as
contemplated by Montana law.

¶47 First, the Kiewit Companies were not independent of one another. Kiewit owned all or
part of Decker, Big Horn, and Black Butte. Decker claims that notwithstanding Kiewit's
ownership interests in all three subsidiary companies, the Montana Contracts were arms-
length by virtue of the fact that the agreements were negotiated by a representative of
Kiewit on behalf of Big Horn and Black Butte and by a representative of NERCO on
behalf of Decker. However, as the Department argues and as STAB found, such
"negotiation" is insufficient to render the Montana Contracts arms-length, since the
respective "negotiators" were shown to both be members of the Decker Management
Committee. In other words, a member of the Decker Management Committee "negotiated"
with another member of the Decker Management Committee to sell Decker coal. These
"negotiations" were nothing more than Decker negotiating with itself for the sale of
Decker coal with Decker approving what was "negotiated."



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¶48 Second, the Kiewit Companies were jointly controlled. Not only is Kiewit's
overlapping ownership of all three subsidiary entities strongly indicative of control, see
Creme Mfg. Co. v. United States (5th Cir. 1974), 492 F.2d 515, 520, but the record shows
that Kiewit controlled the day-to-day management and operational responsibilities of
Decker, Big Horn, and Black Butte. Additionally, Kiewit filed a combined Montana
Corporation License Tax return for all three subsidiary entities indicating that they were
engaged in a unitary business. See Allied-Signal, Inc. v. Director, Div. of Taxation (1992),
504 U.S. 768, 781, 112 S.Ct. 2251, 2260, 119 L.Ed.2d 533, 548 (indicating that objective
indicia of a "unitary business" are (1) functional integration, (2) centralization of
management, and (3) economies of scale). Kiewit's filing of a unitary tax return is, by
itself, an admission that Decker, Big Horn, and Black Butte were jointly controlled.

¶49 Third, the Kiewit Companies did not have opposing economic interests. Although
Decker claims that NERCO's participation in the negotiation of the Montana Contracts
ensured that Decker received the highest price for its coal, this fact does not magically
render the transactions the result of opposing economic interests. It is too simple a point to
belabor here, but all of the parties to the Montana Contracts, including NERCO, had the
same economic interest of selling more Decker coal. Put simply, everyone stood to profit
by the Montana Contracts. This was especially true of Kiewit: not only would ComEd pay
Kiewit under the lucrative long-term Big Horn and Black Butte contracts without
diminution by the Wyoming coal severance tax, but Kiewit would also be paid for the
additional Decker coal that was mined with Decker, as it turns out, being taxed only on the
lower face value of the Montana Contracts.

                2. The Value Imputed to the Montana Contracts Was Market Value

¶50 As the DOR discovered in auditing Decker, the obligations of Big Horn and Black
Butte to purchase Decker coal under the Montana Contracts were totally contingent upon
two things: first, Big Horn and Black Butte had no right to purchase Decker coal under the
Montana Contracts until Decker had satisfied its monthly delivery obligations to ComEd
pursuant to the 1974 contract; and second, Big Horn and Black Butte had no obligation to
purchase Decker coal under the Montana Contracts unless ComEd was purchasing coal
pursuant to the Wyoming Contracts.

¶51 In other words, the Montana Contracts were clearly ancillary to and contingent upon
the preexisting long-term contracts. While the Montana Contracts were not arms-length, it
is undisputed that the 1970s long-term contracts between ComEd and the Kiewit


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Companies were arms-length agreements negotiated between a willing buyer and seller.
Therefore, nothing should prevent the DOR from piercing the sham Montana Contracts
and reaching the true value of the underlying, arms-length transactions.

¶52 The DOR is permitted to impute a value to coal when a party (1) sells coal under a
contract which is not an arms-length agreement, and (2) the contract price is below market
value. See §§ 42.25.512 (1)(b) and 42.25.1708 (1)(b), ARM. Here, having determined that
the Montana Contracts were not arms-length agreements, the DOR then correctly
determined that the sham contract prices were below "market value" as determined by the
price provisions of the underlying long-term contracts at the time of sale.

¶53 The DOR satisfied all three requirements implicit in Judge Baugh's definition of
market value: (1) that the price a "willing buyer" (ComEd) would pay a "willing
seller" (Kiewit) was $24-$28/ton; (2) that the "market and economic conditions" for the
Decker coal at issue were defined by the 1970s long-term contracts between the Kiewit
Companies and ComEd; and (3) that the price provisions (base price + escalators) of the
long-term contracts determined the price "at the time of sale" for Decker coal sold to
ComEd during the 1980s.

¶54 First, the DOR's imputed value of $24-$28/ton was equivalent to the actual prices paid
for Decker coal by ComEd under arms-length agreements. In implementing its broad
authority under § 15-35-107(3), MCA, the DOR did not, contrary to Decker's suggestions,
rely solely on the 1974 long-term contract between Decker and ComEd as the basis for its
imputation. While the DOR did initially look to that contract in defining the relevant
market value for Decker coal, which it is entirely justified in doing under 26 U.S.C. § 613
and 26 C.F.R. § 1.1613-4, the DOR went further and compared the value of Decker coal
sold under the 1974 contract with the value of Decker coal sold under the Wyoming
Contracts to verify the accuracy of its imputed value.

¶55 This inquiry showed that Decker, Big Horn, and Black Butte were each selling Decker
coal to ComEd during the audit period at substantially similar prices as determined by the
arms-length long-term contracts: Decker was receiving $26.79 to $28.04/ton under its
1974 contract, while Big Horn and Black Butte were receiving $23.71 to $29.47/ton under
the 1976 Wyoming Contracts. Therefore, the DOR's imputed value of approximately $24-
28/ton was obviously based on the prices paid to the Kiewit Companies by ComEd under
all three long-term contracts, not just the 1974 Decker/ComEd contract. This methodology
was an entirely appropriate use of the DOR's authority, under § 15-35-107, MCA, to


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utilize "other criteria" in arriving at an imputed value. See § 15-35-107(3), MCA
(specifying that the DOR may utilize the factors enumerated in 26 U.S.C. § 613 or "may
apply any other or additional criteria it considers appropriate").

¶56 Given that the DOR's imputed value of $24-$28/ton represents the actual prices paid
by ComEd during the audit period for the Decker coal at issue, Decker cannot refute the
DOR's imputation. Decker has simply failed to sustain its burden of proving that the
imputed value for the coal at issue does not approximate market value. See § 15-35-107
(3), MCA. Since the underlying long-term contracts were arms-length, those contract
prices therefore represent the amounts a willing buyer would pay a willing seller for the
Decker coal at issue.

¶57 Second, the 1970s contracts defined the "market and economic conditions" for the sale
of Decker coal during the audit period. Decker contends, and the majority accepts, that
coal is an entirely fungible substance. The majority goes awry by assuming, erroneously,
that there is a single market value for coal and, consequently, that the value of long-term
coal contracts negotiated under markedly different market conditions can be judged
according to current market conditions for coal contracting. Not only does this position
fail to acknowledge the public policy underlying Montana's coal severance tax, but it leads
to an absurd legal result.

¶58 As the DOR suggests, the primary legislative purpose underlying Montana's coal
severance tax was to establish "categories of taxation which recognize the unique
character of coal as well as the variations found within the coal industry." Section 15-35-
101(2)(d), MCA (emphasis added). In enacting the coal severance tax, the Montana
Legislature found that "while coal is extracted from the earth like metal minerals, there are
differences between coal and metal minerals" justifying different treatment for taxation
purposes. Section 15-35-101(1), MCA. These differences, as expressly found by the
legislature, include the fact that "coal is the only mineral which is so often marketed
through sales contracts of many years' duration" (§ 15-35-101(1)(b), MCA); that "coal,
unlike most minerals, varies widely in composition and consequent value when
marketed" (§ 15-35-101(1)(c), MCA); and that different types of coal "in Montana have
sufficiently different markets and value and therefore require different production
taxes" (§ 15-35-101(1)(e), MCA) (emphases added).

¶59 As a general rule, the public policy of this state is set by the Montana Legislature
through its enactment of statutes. Duck Inn, Inc. v. Montana State Univ. (1997), 285


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Mont. 519, 523-24, 949 P.2d 1179, 1182. The public policy underlying Montana's coal
severance tax recognizes the unique character of coal as a mineral substance, the different
markets and values which exist for different types of coal, and the prevalence of long-term
contracting in the coal industry as a means of ensuring a coal supply of a particular grade
or quality. If the Montana Legislature has expressly recognized variations in coal quality
and consequent value, and the prevalence of long-term contracting in the coal industry
because of these variations, nothing should prevent the DOR from recognizing the same
and imputing a value to a long-term contract based upon actual sales prices where, as here,
that contract specifies coal of a particular quality and provides for a price at the time of
sale.

¶60 Decker's sale and delivery of coal was, by the very terms of the Montana Contracts,
contingent upon Black Butte and Big Horn being able to "contemporaneously sell and
deliver" an identical quantity of Decker coal to ComEd pursuant to the Wyoming
Contracts; and that coal had to be of a specific quality under the terms of the Montana
Contracts (contractually specified BTU, ash fusion temperatures, and specific percentages
of moisture, volatile matter, fixed carbon, ash, sulphur, and sodium), which identically
parallel the highly specific coal quality provisions of the 1974 Decker/ComEd contract.
Although the Wyoming Contracts themselves are not in the record, they presumably
contain the identical coal quality provisions. Indeed, the Johnson Report suggests that one
of the reasons for the Montana Contracts was because Big Horn and Black Butte were
having trouble supplying coal of the particular quality mandated by the Wyoming
Contracts at a reasonable extraction cost.

¶61 Notably, Decker cites no sales of Decker coal (by Decker, Big Horn, or Black Butte)
during the audit period other than the sham sales made to its companion Kiewit companies
under the Montana Contracts. Decker's hypothetical argument that it could have sold its
coal to other willing buyers under market conditions in the 1980s begs the question: What
reasonable coal company would undercut its profit potential by selling on the open market
when it could enter into an intra corporation sale which is tied to preexisting long-term
contracts with higher prices? Put simply, it strains good faith to assume that Decker would
be a "willing seller" on the open market when it already had a "willing buyer" in ComEd
who would pay significantly higher prices than dictated by existing market conditions.
The District Court was correct in determining that this was, in effect, a "closed market"
situation.

¶62 In that respect, the Sansrom Report, upon which the majority relies, is simply

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irrelevant. The Sansrom Report is a description of the 1980s market for spot contracts and
new long-term contracts, however, it cites no sales of Decker coal during the audit period.
In essence, what Decker is arguing by relying on the Sansrom Report is that evidence of
other 1980s prices for coal not mined from Decker and not sold to ComEd provides better
evidence of the value of the Decker coal at issue than the actual value of Decker coal sold
to ComEd during the audit period. This is an absurd position.

¶63 Contrary to the majority's reasoning, judging sales of Decker coal under the Montana
Contracts by sales of coal of other quality and value suffers, as the DOR justifiably
asserts, from an "apples-to-oranges" comparison. The Johnson Report clearly articulated
that, "coal is not a homogeneous commodity" since it "varies greatly in terms of its BTU
content and other physical properties, and power plants are designed to burn certain types
of coal." Remember that the value of coal, unlike other minerals, varies dependent upon its
composition. Section 15-35-101(1)(c), MCA. Therefore, as compelled by the federal
Clean Air Act, a major factor underlying the prevalence of long-term contracting between
a utility company like ComEd and a low-sulphur western mine like Decker is, in fact, the
heterogeneous nature of coal. The majority's simplistic analysis on the basis of the
Sansrom Report is fallacious because, as the Johnson Report stated, it "completely ignores
the economic rationale for long-term contracts between coal suppliers and utilities, a
dominant feature of the coal market, especially in the Western United States during the
1970s and 1980s."

¶64 Furthermore, the apparent "illogic" of the DOR's position, as suggested by Decker and
accepted by the majority, is an obvious red herring. The inverse situation would never
arise. Keep in mind that the underlying long-term contracts here were arms-length and that
the DOR's imputation flows from the fact that the surface Montana Contracts were not
arms-length. Therefore, assuming that the long-term contract is an arms-length agreement,
as here, the DOR would never be in a position to impute a different value to that contract
under the conjunctive test for approximating market value. Without any evidence that the
agreement was non-arms-length, the contract sales price would be determinative of the
taxable value of that coal even if the contract price were significantly below current
market value. See §§ 15-35-102(7), 15-35-103(2), and 15-35-107(1)(c), MCA. However,
where, as here, the contract price is non-arms-length and totally contingent upon
contemporaneous sales of the same coal under a lucrative long-term contract, the DOR
should be entitled to pierce the sham contract price and tax the true value of the underlying
transaction.



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¶65 Third, the long-term contracts specify a contemporary sales price according to a base
price and predetermined escalators which are calculated "at the time of sale." That these
contracts were not designed to closely follow changes in the price of spot market and new
long-term contracts is immaterial unless one ignores coal's variability in composition and
market value, and the economic rationale for long-term coal contracts. Pursuant to the
price provisions of the underlying long-term Decker/ComEd contract, the base price
together with the price adjustments under the predetermined escalators constitute the
" 'current price' or 'current per ton price.' " If that were not sufficient evidence that the
underlying long-term contracts contain a temporal dimension sufficient to satisfy the
definition of market value, Kiewit itself represented to the United States Securities and
Exchange Commission that "[t]he price at which coal is sold under the Company's long-
term contracts is determined at or near the time of sale . . . ." Plainly, the time of "sale"
occurred during the 1980s when Decker coal was loaded on the train f.o.b. at the Decker
mine for delivery to ComEd, not in the 1970s when the long-term contracts were entered
into.

¶66 Given the legislative findings on the purpose of taxing coal differently from other
minerals (i.e., because of variations in coal quality, value, and markets) and the DOR's
broad authority in imputing value, nothing under Montana law prohibits the DOR from
recognizing that long-term contracts strictly specifying coal of a particular quality and
providing for a contract price determined at the time of sale, such as here, are directly
representative of the relevant market value for that particular coal. Indeed, the DOR's
assessments not only approximate market value; they constitute market value. I would
affirm because there is no better approximation of market value than the actual prices paid
for the coal at issue.

                                                       Concluding Remarks

¶67 The law is supposed to respect substance above form. Section 1-3-219, MCA. After
today, however, other vertically integrated mining companies that hold lucrative long-term
coal contracts and do business in Montana now possess, thanks to Kiewit's ingenious legal
shell game and the majority's formalistic holding, a paradigm for avoiding being taxed on
the true value of their long-term contracts. By simply arranging for a sham spot market or
new long-term coal contract between subsidiaries at prices slightly above current market
value, a parent company, like Kiewit, can reap massive profits on underlying long-term
coal contracts while paying relatively minimal taxes on the mock value of the surface
contract. Provided that such a transaction is structured to be at least equivalent to current

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market value for spot market and new long-term coal contracts, the transaction will only
be taxable at the contract sales price regardless of whether the agreement was non-arms-
length.

¶68 In short, the majority has accepted Decker's following argument, and its absurd
consequences, lock-stock-and-smoking-barrel: "[The] ownership interests of Kiewit
potentially affects only whether the Montana Contracts were arm's length agreements.
Even if these agreements are determined not to be arm's length agreements, Montana law
does not allow the Department to impute a price above the market price for coal." The
majority, by treating coal as an entirely fungible substance with a single market value, has
effectively reduced the two-pronged test for approximating market value to a single
inquiry: Does the new contract price, irrespective of whether it is tied to existing long-
term contracts with substantially higher prices, match or exceed current market value for
other new contracts? If so, then the DOR cannot impute a different value to that contract,
even where, as here, the contract price is plainly the product of a sham, intracorporation
transaction. I dissent; today's absurd decision dupes the State of Montana and its citizens
out of over $50 million in rightful tax revenues and that may be only the beginning.


/S/ WILLIAM E. HUNT, SR.

Justice Terry N. Trieweiler concurs in the foregoing dissent.



/S/ TERRY N. TRIEWEILER




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