The Colorado Supreme Court heard oral arguments Thursday in Kinder Morgan’s tax case against Montezuma County.

The nine-year battle stems from a 2008 dispute over the company’s reported assessed values of carbon dioxide production, and whether Kinder Morgan is a related party of the Cortez Pipeline, which would disqualify a tariff deduction.

Millions of dollars in county tax revenues hang in the balance in the landmark case. The court has not said when it would make a ruling.

Lawyers from both sides were given a half-hour to make their case, and the oral arguments were live-streamed on the Colorado Supreme Court’s website.

Kinder Morgan, the nation’s fourth largest energy company, was represented by lawyer Alan Poe. Montezuma County was represented by attorney Nathan Keever of the firm Dufford, Waldeck, Milburn and Crohn and lawyers with the Colorado Attorney General’s Office. As of last year, the county had spent $138,000 on the case.

Judges posed technical legal questions to both sides and asked more questions of the lawyers representing Montezuma County.

Much of the back and forth centered on whether Kinder Morgan is a legal “related party” to the Cortez Pipeline, what property is allowed to be retroactively assessed and the legal distinctions between underreported property values and omitted property values.

In 2008, then-county assessor Mark Vanderpool denied Kinder Morgan a transportation tariff deduction, which boosted the company’s overall assessed valuation on carbon dioxide production by $56.7 million. Kinder Morgan extracts and processes carbon dioxide from Montezuma County and transports it through the Cortez Pipeline to the Permian Basin in West Texas, where it is used in enhanced oil recovery.

As a result of the lost deduction, the company owed an additional $2 million in property taxes in 2008.

It paid in protest then challenged the calculation in the courts.

The Montezuma County Board of Assessment Appeals upheld the assessed valuation, and the Colorado Court of Appeals affirmed the county’s calculation. Kinder Morgan appealed to the state Supreme Court.

Kinder Morgan argued Thursday that the county assessor did not appropriately apply state statute to the company’s assessed valuation.

“The statute does not authorize retroactive assessment,” Poe said.

Justice Richard L. Gabriel interjected and asked Poe whether Kinder Morgan was fighting its assessed valuation because “equities were not going your client’s way” and they want to “get a $2 million tax benefit.”

Proving that you’re not a related party “is an uphill battle,” Gabriel said.

Poe responded that Kinder Morgan is in a “partnership” with the Cortez Pipeline and falls into the “unrelated party” category that allows for the disputed tariff deduction.

He said the retroactive assessment was inappropriate because the courts “made clear that undervaluation is not omitted property.”

“If there’s an inequity here, under the court of appeals decision, oil and gas is the only one they can go back (and retroactively assess), which creates problems for the oil and gas taxpayers,” Poe said. “The assessor takes a separate interpretation on related party. Partnership is not sufficient to disqualify the operator,” from the tariff deduction.

In its half-hour, Montezuma County asserted that Kinder Morgan is a majority owner in the Cortez Pipeline, and therefore does not qualify for the tariff deduction.

Lawyer Nathan Keever argued that statutes allow the county to audit Kinder Morgan on past tax filings to discover if property was omitted. Under the law, it can then retroactively assess taxes based on new values.

Keever said auditors hired by the county discovered the company took the tariff deduction, and the county denied it, saying it did not qualify.

“They can still take a deduction, but it must be the appropriate deduction,” he said.

Keever said that Cortez Pipeline is a service provider for Kinder Morgan, and that it would be unfair for Kinder Morgan to get the tariff deduction.

“The reason it is unfair is the company was paying the service provider 22 cents but getting 11 cents back,” Keever said.

He said the purpose of the tax system is to allow the county to impose taxes on real property equally.

“Kinder Morgan is seeking a windfall to the detriment of Montezuma County taxpayers,” Keever said. “To get the result, it is asking the court to disrupt a functioning tax system that covers the unique oil and gas property interest. The assessment is clear and sensible and should not be disturbed by this court.”

If the county prevails, Montezuma County Assessor Scott Davis said, Kinder Morgan could owe back taxes to the county that could be in the millions of dollars.

“A lot of money is hanging on this case,” Davis said. “If we lose, taxing entities will have to pay back what was collected from that year with interest.”

In 2008, county taxing districts reaped the windfall of the additional Kinder Morgan tax revenues. But the districts were instructed to hold the money pending the outcome of the case because they may have to pay it back if the county loses the case.

The largest beneficiary of the increased tax collection was the Re-1 School District, which reaped $942,000 in 2008.

Other significant amounts went to the county general fund ($513,000), the road and bridge fund ($129,000), the Montezuma County Sheriff’s Office ($71,000), social services ($64,000) and Southwest Memorial Hospital ($50,000). The rest was spread out among smaller districts, including local fire departments and cemetery districts.

To view an archived video of the Supreme Court oral arguments, visit http://bit.ly/2lMh6VL and click on the archive tab.

jmimiaga@the-journal.com