                            '   No.    90-632
          IN THE SUPREME COURT OF THE STATE OF MONTANA
                                      1991


GARY DRILLING COMPANY,
           Plaintiff and Respondent,


THE STATE OF MONTANA DEPARTMENT
OF REVENUE; THE STATE OF MONTANA;
THE COUNTY OF YELLOWSTONE;
TREASURER OF YELLOWSTONE COUNTY;
and ASSESSOR OF YELLOWSTONE
COUNTY,
           Defendants and Appellants.



APPEAL FROM:   District Court of the Thirteenth Judicial District,
               In and for the County of Yellowstone,
               The Honorable G. Todd Baugh, Judge presiding.


COUNSEL OF RECORD:
          For Appellants:
               Paul Van Tricht (argued), Montana Department
               of Revenue, Helena, Montana; Dennis Paxinos,
               Yellowstone County Attorney, Billings, Montana;
               David W. Hoefer, Deputy County Attorney,
               Billings, Montana
         For Respondent:
               Raymond K. Peete (argued), Attorney at Law,
               Billings, Montana


                                             Submitted:   September 18, 1991
                                               Decided:   November 8, 1991
Filed:
Justice Terry N. Trieweiler delivered the opinion of the Court.
     Respondent Gary Drilling Company (Gary) filed a complaint for
declaratory judgment in the Thirteenth Judicial District Court in
Yellowstone County, requesting the District Court to declare that
the oil produced from certain wells should be taxed as "new
productionu rather than old or existing production.            The District
Court entered judgment in favor of Gary.             The Department of
Revenue, the County of Yellowstone, and the Treasurer and Assessor
of Yellowstone County appeal from the District Court's decision.
We affirm.
     The issue presented is whether the District Court erred in
determining that the oil produced from respondent's wells should
                               under 1 15-23-601(2), MCA (1985).
be assessed as "new produ~tion'~
     The    oil   wells   in   question   are   located   on   Section   3,
Township 6N, Range 32E, Yellowstone County. The mineral interests
in and under Section 3 are owned an undivided 50 percent each by
Ralph and Sarah Botts, husband and wife, and by the estate of Inola
Botts   .
     In 1980, Inola Botts granted an oil and gas lease covering her
mineral interests in and under all of Section 3.          This lease was
later assigned to Beartooth Oil     &   Gas Company, et al. (Beartooth).
In November 1984, Ralph and Sarah Botts granted an oil and gas
lease to respondent.       This lease covers all of their mineral
interest in and under all of Section 3, i.e., the same surface
description as Beartooth's lease.
     In December 1984, Beartooth began drilling a well known as
Botts No. 1 in the SE4 of the NE4 of Section 3.       This well was
completed in the Amsden formation in May 1985.          Botts No. 1
produced oil, in limited quantities, between January 1985 and
January 1986, when it was abandoned.      A total of 1258 barrels of
oil were produced from Botts No. 1. Beartooth stated that the cost
of drilling and operating Botts No. 1 was more than $375,000; the
value of that production was in the order of about $32,000.
     In early 1985, Beartooth petitioned the Montana Board of Oil
and Gas conservation to determine that the portion of Section 3
containing Beartooth's well was an appropriate well-spacing unit
for oil production under 5 82-11-201, et sea., MCA.     In order to
prevent waste of oil or gas, the Board is authorized to establish
well-spacing units for any pool of oil or gas.       Generally, the
order establishing well-spacing units directs that only one well
may be drilled and produced from the common source of supply on a
spacing unit.   Section 82-11-201, MCA.   The Board ordered that all
mineral interests in the Amsden formation underlying the E3 of the
NE& of Section 3 were to be pooled.

     Pooling is intended to provide for an equitable sharing of the
oil or gas produced and the expenses of production among the
persons owning interests in the pool.     If an owner refuses to pay
his share of the costs of a well, the Board can order his share to
be paid, but only out of the production from the well.       Section
82-11-202, MCA.   Gary refused to pay its share of the costs from
Beartooth's Botts No. 1. Gary did not bear any of the expenses of
Beartooth's well, except for those costs Beartooth could recover
from Gary's share of the oil produced from Botts No. 1.
     Gary contested the Board's pooling order. By late 1985, after
it had become clear that Beartooth's Botts No. 1 well was not
producing much oil, Beartooth agreed that Gary could drill an
additional   well    in    the    spacing unit,    and   supported Gary's
application for a modification of the pooling order.            The Board
granted Gary's application to drill an additional well in the
spacing unit.
     In December 1985, Gary began drilling a well known as Botts
No. 2-3 in the NE4 of the NE4 of Section 3, about 1340 feet away
from Beartooth's well.           Botts No. 2-3 began producing oil in
January 1986, producing more than 80,000 barrels of oil in 1986
and over 50,000 barrels in 1987.
     In June 1986, Gary began drilling another well, Botts No. 1-3,
in the NW4 of the NEJ of Section 3                ( e . , not within the
well-spacing unit).       This well only produced 246 barrels of oil in
1986 and 4039 barrels in 1987.          Both of Gary's wells, like the
Beartooth well, produced in the Amsden formation.
     During the 1985 legislative session, the legislature amended
the statutes governing the oil and gas net proceeds tax.             1985
Mont. Laws 695.     "New production,I' as defined in 5 15-23-601 (2),
MCA (1985), received favorable treatment, being taxed at seven
percent of net proceeds.         Section 15-23-607 (2)(a), MCA (1985).
     Gary believed that the production from its Botts Nos. 2-3 and
1-3 should be       taxed as      "new production."      Appellants, tax
collectors for Yellowstone County and the State of Montana, thought
otherwise, and classified the production from Botts Nos. 2-3 and
1-3 as existing or old production.         Gary paid the net proceeds
taxes to Yellowstone County under protest.
     In January 1988, Gary filed a complaint for declaratory relief
in the Thirteenth Judicial District Court.        Gary requested the
District Court to declare that the production attributable to the
Ralph and Sarah Botts lease from Botts Nos. 2-3 and 1-3 was "new
productiontgunder   §   15-23-601(2), MCA (1985), and that the taxes
be reduced accordingly.
     On September 5, 1990, the District Court entered judgment in
Gary's favor.   Appellants appeal from this order.
     The issue in this appeal is whether the District Court erred
in determining that the oil produced from Gary's wells constitutes
                within the meaning of 3 15-23-601(2), MCA (1985).
Itnewproductiongt
     The statute states:
     The term Ifnewproductiontgmeans the production of natural
     gas, petroleum, or other crude or mineral oil from any
     lease that has not produced natural gas, petroleum, or
     other crude or mineral oil during the 5 years immediately
     preceding the first month of qualified new production.
     [Emphasis added.]
     The dispute centers around the meaning of the term tglease.lt
Appellants contend that ggleasegg
                               means 'a tract of land."
                                      l                            The
Department of   Revenue     so   defined   the word   "leasew in   its
Administrative Regulations, e.g., 42.25.1001(1), ARM (1985). Under
the Department of Revenuegsinterpretation, Gary's production would
not be Ifnewproduction," because Beartooth produced oil from the
same tract of land within the pr ceding five years.
                                   5
     Gary contends, and the District Court agreed, that ttleasetf
means       contract or legal arrangementtl'under which Gary was
permitted to go on the land and drill for oil. By this definition,
Garyts production was "new productionIt because Gary drilled its
wells under a separate contractual agreement.
     We are persuaded that the word ItleaseItt used in this
                                             as
statute, refers to the contract or legal arrangement giving the
driller the right to go on the land and drill for oil.   The ttleaselt
is not ItthelandIt'
                  but is a separate interest.    This definition is
consistent with customary usage in the oil and gas industry.
Williamst and Meyerst Manual of Oil and Gas Terms defines lease as:
"(1) The conveyance of a nonfreehold interest in land.       (2) The
instrument by which a leasehold or working interest is created in
minerals.t1 8 Williams and Meyers, Oil and Gas Law 503-04 (1987).
Further, by so construing the word "leaseI1 in the instant case, we
effectuate the legislaturets public policy of encouraging new
production on newly leased lands.
     Alternatively, the Department of Revenue contends that the
prior production from Beartoothtswell should be attributed to Gary
by virtue of the pooling order issued by the Board of Oil and Gas
Conservation. As authority for this contention, the Department of
Revenue cites three sections of Title 82, ch. 11, MCA (Oil and Gas
Conservation), fifi 82-11-202(1), -211(1), and -212, MCA.   We note,
however, that these statutes are specifically concerned with oil
and gas conservation and the prevention of waste, rather than
taxation.   The portions of the statutes cited by the Department of
Revenue were all enacted several years before the 1985 amendments
of 5    15-23-601 (2) , MCA, distinguishing "new productionw from
existing production, and it does not appear that the earlier
conservation statutes were drafted in contemplation of a later
statute containing a new classification of oil production for tax
purposes.    We conclude that the cited statutes are not helpful in
construing the tax statute at issue in this case.
       Gary contends, and we agree, that it is unfair to penalize
Gary economically for Beartooth's production since Gary did not
receive any benefit from Beartooth's production, and in fact,
refused to participate in it.          Beartooth's Botts No. 1 well was
drilled by a different operator under a separate contractual
agreement, executed several years before Gary's lease agreement.
Gary had no right or ability to control Beartooth's operations.
Gary did not join in drilling Beartooth's well, and received no
economic benefit from it.          Gary was the sole operator of its own
wells under a separate lease.          We agree with the District Court
that Beartooth's production should not be charged to Gary. The oil
produced from Gary's Botts Nos. 2-3 and 1-3 wells was production
from a new lease which had not produced during the first preceding
five years.         The District Court correctly determined that the
production from Gary's wells constituted "new productionw under
  15-23-601(2), MCA (1985)     .
       Af firmed.
W e concur:



L_C     ,   ,.
      ~ h r e fJ ' u s t i c e
4
Justice R. C. McDonough re'spectfully dissents.
     The general oil and gas net proceeds tax, which is involved
here, is in lieu of a year-to-year ad valorem property tax on the
oil and gas in the ground.        The actual tax is arrived at by
applying the applicable local millage against 100% of the net
proceeds value of the produced oil and gas. The specific sections
involved were an exception to the application of the general net
proceeds tax and provided that net proceeds for new production
would be considered as the equivalent of the gross sale proceeds,
and instead of applying the local millage rate to the net proceeds
value, however defined, levied a straight seven percent tax against
the gross sale proceeds.     See     §   15-23-607, MCA   (1985).   The
taxation of Ifnew production" is an exception to the general law
taxing net proceeds of oil and gas.        See the first sentences of
8 8 15-23-602 and-603, MCA (1985).
     The statute at issue,    §   15-23-601, MCA    (1985), reads as
follows:
     (2) The term "new productionI1 means the production of
     natural gas, petroleum, or other crude or mineral oil
     from any lease that has not produced natural gas,
     petroleum, or other crude or mineral oil during the 5
     years immediately preceding the first month of qualified
     new production.- (Emphasis added.)
Websterfs Seventh New Colleqiate Dictionary, p. 480 states:
     lease \'les\n 1 : a contract by which one conveys real
     estate for a term of years or at will usu. for a
     specified rent; also : the act of such conveyance or the
     term for which it is made 2 : a piece of land or property
     that is leased.
     We    have previously said that when a taxing statute is
susceptible to two constructi~ns and legislative intent is in
doubt, relative to exemptions and deductions, the construction is
to be against the taxpayer and in favor of the taxing power.           See,
State ex rel. Anderson v. State Board of Equalization (1957), 133
Mont. 8, 13, 319 P.2d 221; Anaconda Co. v. Dept. of Revenue (1978),
178 Mont. 254, 258, 583 P.2d 421, citing Anderson.
     I realize that we are dealing with an exception and not a
deduction or an exemption, but it is, in essence, the same because
it is a net reduction of the general net proceeds tax.         The maxim:
"Where the reason is the same, the rule should be the sameIvv
applies here.     See 5 1-3-202, MCA.
     If there is a doubt as to legislative intent then this being
an   exception,    such   words   should    be   construed   against   the
taxpayer. Specifically, what is not clear is the meaning of the
word ttleaseu one looks at it in isolation but when used in the
             if
context of vtproduction natural gas, petroleum, or other crude or
                      of
mineral oil from any leasev1it becomes clear.           The word tgfromvl
refers to the source.     Oil and gas are produced from a place, real
property and premises.      For an example, the oil and gas leases
involved herein and agreements of the lessees herein, provide in
their text for oil and gas produced and saved from the premises.
Oil and gas are not produced from a written instrument or lease; if
it were to be from a written lease, it would be production under or
by virtue of a lease.
     The effect of the majority's          construction is to give tax
reductions on new production to those who have multiple written
leases with production coming from the same place.   For example, if
minerals in the ground in a piece of land are owned by ten
different owners as co-tenants, each gives a different written
lease to a lessee or even the same lessee, such lessees then
complete nine different additional development wells for each
written lease adjacent to a producing well from the same vertical
formation and pool. The nine wells would have the advantage of the
tax reduction.    However, a lessee who has one written lease
covering two pieces of land, with a well on each, one five miles
away from the other on an entirely different geological structure,
would not receive the tax reduction even though the second well
would be geologically considered new production and the second well
would be an expensive exploratory wildcat well and would open up a
new field. Rules of construction and logic support the reversal of
the District Court.




Chief Justice J. A. Turnage:
     I concur in the dissent of Justice McDonough.

                                        nn
                                         <                             fl
