Suit called peril to school funds; filers challenging oil, gas taxes

— A group of 13 school districts said it will collect more than $9 million this year from taxes levied on mineral rights.

That revenue could be lost if a lawsuit succeeds in halting the taxes.

The suit, filed by a dozen property owners, asks White County Circuit Judge Thomas H. Hughes to declare unconstitutional ad valorem taxes collected on oil and gas mineral interests on their properties.

Ad valorem taxes are those charged against the value of a property. When property owners lease their mineral rights to a third party, ad valorem taxes on those rights are assessed through a formula that factors in royalties awarded to the propertyowners for oil and gas collected on the land.

The suit called the taxes illegal because property owners also pay income taxes on the royalties, and owners ofmineral-rich land without active wells are not taxed in a similar manner.

“The real way to do this, if they had done it properly, would be to assess the value of the gas under the ground” rather than assessing profits collected after it is captured, said Richard Mays, a Heber Springs attorney representing the property owners. “But that’s hard to do.”

In an amended complaint filed Oct. 7, the property owners - from White, Faulkner, Conway, Van Buren and Cleburne counties - asked Hughes to halt collection of the taxes and refund those collected in past years.

The plaintiffs, who seek class-action status on behalf of all landowners who lease mineral rights on their properties, name county assessors in any of Arkansas’ 75 counties with oil- and gas-producing properties as defendants.

“We’re talking about a great deal of money here, an overwhelming amountof which goes to fund our schools,” said Jason Owens, an attorney representing White County and its officials, one of the defendant groups in the case.

“When you talk about all 75 counties, you’re talking about virtually every school in the state.”

Property taxes, assessed at a county level, are a primary source of revenue for public school districts.

Hot Springs attorney Ralph Ohm, defending a group of counties, filed a motion to dismiss the case Tuesday, four days after a group of 13 school districts sought to intervene.

He says the case’s outcome could drastically affect the school districts’ fiscal futures.

The districts, each in a county containing wells connected to the mineral-rich Fayetteville Shale formation, estimated they would receive in 2010 a combined total of more than $9 million fromtaxes assessed on the mineral rights in 2009.

“The time is ripe for us to get in,” said Malcolm Bobo, an attorney representing the districts that want to become a party in the case. “If they don’t receive the money, it will have a drastically adverse effect on their budgets.”

Judges in past cases haverefused to strike down taxes as illegal exactions, although the method of assessing them was found to be flawed, he said.

Hughes previously struck down Owens’ motion to dismiss, in which the attorney claimed property owners hadn’t followed legal protocol by taking their concerns about their property assessments to their county equalization boards.

While the ad valorem taxeson mineral rights have been collected for years, there’s a renewed interest in their assessment in the Fayetteville Shale formation, which has boosted jobs and revenue through natural gas production in recent years, Owens said.

“What was previously worthless because nobody knew how to get it out of the ground has now become worth a great deal of money to a great deal of folks,” he said.

Northwest Arkansas, Pages 7 on 10/28/2010

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