CHAPTER 7 APPLICABILITY OF SIX-YEAR FEDERAL CONTRACT STATUTE OF LIMITATIONS TO DEPARTMENT OF INTERIOR'S FEDERAL AND INDIAN ROYALTY AUDIT AND COLLECTION PROCEDURES
| Jurisdiction | United States |
(May 1989)
APPLICABILITY OF SIX-YEAR FEDERAL CONTRACT STATUTE OF LIMITATIONS TO DEPARTMENT OF INTERIOR'S FEDERAL AND INDIAN ROYALTY AUDIT AND COLLECTION PROCEDURES
Conoco Inc.
Houston, Texas
TABLE OF CONTENTS
Page
I. INTRODUCTION
II. BACKGROUND
A. Statutory Auditing Authority
B. General Audit Practices and Procedures
C. Summary of OIG Audit Practices and Procedures
D. Summary of MMS Audit Practices and Procedures
E. Summary of Agency Appeal Procedures
F. USGS Audit Procedures Relative to Statute of Limitations
G. Linowes Commission Position Regarding Statute of Limitations
H. General Accounting Office's ("GAO") Position Implicitly Approving USGS' Six-Year Audit Cycle
I. OIG's Position Regarding Statute of Limitations
J. MMS' Audit Policy Expressed in 1986 to Congress
K. MMS' New Audit Strategy
L. Audit Notices Exceeding Six Years
M. Negotiations Between Audit Task Force and DOI Regarding MMS' Audit Practices and Procedures
N. Document Production Orders
O. Settlement Agreement Concerning MMS Audit Notices and Document Production Orders
P. Document Production Requirements Agreement
Q. Phillips Litigation
R. Audit Closure Letter Controversy
S. Audit Closure Policy for All Lessees
T. Industry's Concerns
III. RELEVANT STATUTES
A. 28 U.S.C. §§ 2415 and 2416
B. The FOGRMA
IV. LEGISLATIVE HISTORY OF 28 U.S.C. §§ 2415 and 2426 ; COMMENTARY APPLYING POLICY BEHIND STATUTE TO ROYALTY CONTEXT
A. Attorney General's Proposal
B. The DOI's Position on Proposed Limitations Legislation
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C. Commentary on DOI's Position
D. Controller General on Proposed Limitations Legislation
E. Commentary on Comptroller General's Position
F. Assistant Attorney General's Testimony on Enacting Statute of Limitations; Commentary on Applicability to Royalty Context
G. Assistant Attorney General's Further Statement
H. Letters of Attorney General and Assistant Comptroller General
I. House Report
J. Senate Report
V. APPLICABLE LEGISLATIVE HISTORY UNDER FOGRMA AND CONSTRUCTION BY AGENCY OF RECORDKEEPING REQUIREMENTS IMPOSED BY FOGRMA
VI. AGENCY PRACTICES, PROCEDURES, AND POLICIES
A. USGS Practices and Procedures
B. MMS Audit Practices and Procedures
C. DOI Solicitor's Opinions Interpreting Section 2415(a) as being applicable to Federal Royalty Claims
D. Past Interpretation of § 2416(b) by Solicitor's Office; Exclusion of Periods During Which Facts of Material to Right of Action are Not Known and Reasonably Could Not Be Known
E. Recent DOI Policy
F. Director's Decisions
G. IBLA Decisions
H. Recent Practice
VII. CASE LAW CONSTRUING FEDERAL STATUTE OF LIMITATIONS
A. Introduction
B. Issues
C. When Does the Government's Right of Action Accrue?
D. Whether, under Section 2416(c), the Six-Year Period provided in Section 2415(a) is Suspended until the Government has Completed an Audit?
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E. Whether MMS can Pursue a Claim for Alleged Underpaid Royalties through an Administrative Assessment, even Though it Would be Barred from Pursuing the Same Claim in a Judicial Action?
F. What Administrative Proceedings Will Toll Statute?
G. Whether MMS is Required to Follow its Own Procedures?
VIII. PRACTICAL AND LEGAL ISSUES RAISED BY CURRENT AUDIT AND COLLECTION PROCEDURES
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I. INTRODUCTION
This paper addresses the United States Department of the Interior's ("DOI") current audit strategy for federal and Indian leases.
Historically, the DOI adhered to the federal six-year statute of limitations applicable to contract actions in auditing and making claims for royalties allegedly due.
Recently, however, the DOI departed from its past practice of auditing leases within six years such that claims for alleged royalty underpayments could be asserted in accordance with the statute of limitations. In March 1988, thirteen lessees, who account for more than 80% of all royalties paid to the government, received audit notices covering federal offshore, onshore, and Indian leases for the period 1980-1986. The DOI is also routinely issuing self-audit orders and making claims for royalties allegedly due for periods dating back more than six years.
These new practices, which render the six-year statute of limitations meaningless, have far reaching implications for the DOI and lessees.
This paper examines relevant statutes, their legislative history, and the DOI's past and current royalty audit policies and procedures in regard to the six-year federal contract statute of limitations. It also discusses the recent negotiations between certain companies and the DOI regarding
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its audit strategy and procedures. Finally, it addresses the case law and practical and legal issues raised by the DOI's audit strategy.
A recent decision was rendered by the U.S. District Court for the Western District of Oklahoma, United States v. Jim Cox Oil, Co., Civ. No. 88-1456 (W.D. Oklahoma, filed Aug. 23, 1988) which may impact on this issue. At the time this paper was prepared, the case was not available through any reporter services but will be commented upon at the Seminar.
II. BACKGROUND
A. Statutory Auditing Authority
The DOI's statutory royalty management responsibilities include auditing and reconciling, to the extent practical, all current and past federal and Indian lease accounts to ensure that royalties due and payable have been properly and timely paid. The DOI is also responsible for collecting any additional royalties due. 30 U.S.C. § 1711(c).
These responsibilities are carried out within the DOI by Minerals Management Service ("MMS") which was created in January 1982, and the Office of Inspector General ("OIG"). See U.S. DOI Office of the Secretary, Order No. 3071 (Jan. 19, 1982) and Office of Inspector General Act of 1978, 5 U.S.C. App. 3.
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Prior to the establishment of MMS, the Conservation Division of the U.S. Geological Survey ("USGS") within the DOI was responsible for same.
Any state (or Indian tribe) may also audit federal leases located within said state (or Indian leases within its reservation) if it has entered into a cooperative agreement with MMS pursuant to the Federal Oil and Gas Royalty Management Act ("FOGRMA"), 30 U.S.C. § 1732. With the permission of the affected Indian tribe, MMS and a state may also enter into such a cooperative agreement covering Indian leases within the state. See 30 C.F.R. Part 228 (1988). MMS is required to coordinate these audits.
The MMS also has the authority to delegate all or any part of its audit and investigative activities to any state as to the federal oil and gas leases within that state. (30 U.S.C. § 1735). The written consent of any affected Indian tribe or allottee is required to support such a delegation to a state as to Indian lands within the state. See 30 C.F.R. Part 229 (1988).
The OIG may contract its audit function to independent certified public accountants. [30 U.S.C. § 1711(c)(2) ].
Thus, the OIG, the MMS, a state with delegated authority or a cooperative agreement, and/or an Indian tribe pursuant to a cooperative agreement, have the authority to audit federal or Indian, as applicable, oil and gas leases.
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B. General Audit Practices and Procedures
The DOI has not promulgated any audit regulations. The following informal procedures, which are only outlined in summary form, are followed:
o Normally, lessees are notified in advance of an audit.
o Records are requested as needed, though issues are not necessarily identified.
o Records are audited.
C. Summary of OIG Audit Practices and Procedures
o If the audit is initiated by the OIG, a draft audit report is issued by the OIG or its contract auditors at or near completion of the audit.
o The draft audit report is submitted to the lessee for review and comment.
o A final audit report is issued thereafter, recommending that MMS assess, not assess, or review further identified issues.
o There is no appeal by a lessee to a final audit report.
o The final audit report may be released to the public under the Freedom of Information Act.
o MMS conducts any further audit activities.
o The potential for inconsistent audit findings does exist between the OIG and the MMS as noted by the Assistant Inspector General for Auditing:
"We do not disagree that the potential for inconsistent agency audit procedures exists. The risk of inconsistency is a
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disadvantage which an organization accepts in return for the advantages achieved by segregating related duties organizationally and geographically. However, both the OIG and MMS follow procedures which are intended to minimize the risk of inconsistencies."
Letter from Robert W. Beuley, Assistant Inspector General for Auditing, United States Department of the Interior, to Stephen W. Comiskey, Miller & Chevalier, dated December 13, 1982. See "Natural Resources Law Section Task Force Report on Federal Oil and Gas Royalty Matters," 15 Nat. Resources Law. 821 (1983).
D. Summary of MMS Audit Practices and Procedures
o MMS is conducting resident audits of a number of large royalty payors. Resident auditors are assigned to a particular company and are located in the company's offices.
o Non-resident audits are being conducted of smaller royalty payors.
o Upon or near completion of an audit, MMS, the state, or tribe, as applicable, will issue a preliminary royalty underpayment determination setting forth the amount allegedly due and the basis, with accounting back-up, for the assessment.
o A 30-day comment period is allowed for the lessee which may be extended upon request.
o Thereafter, a final royalty underpayment determination, subject to appeal, is issued by the MMS Area Compliance Office with jurisdiction.
E. Summary of Agency Appeal Procedures
o The final royalty underpayment determination ("Order") must be appealed to the Director of MMS through the office...
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