The Denver-based federal appeals court became the latest on Monday to side against a collection of mineral rights owners in Montezuma County, in a 16-year dispute over a tax increase that has been twice litigated in state courts.

A three-judge panel of the U.S. Court of Appeals for the 10th Circuit concluded that while the plaintiff, CO2 Committee, Inc., had limited options for challenging its tax liability, bringing suit against the county directly was not one of them. Otherwise, explained Judge Richard E.N. Federico, anyone who owned any amount of mineral rights could follow suit.

“The Committee’s position has virtually no limiting principle. If the Committee’s lawsuit were to proceed in federal court, every fractional interest owner (no matter how small of a stake it holds) would be empowered to file a federal lawsuit and challenge the state taxes,” he wrote in the July 28 order. “That, in turn, could fracture Colorado’s (and its counties’) tax system, undermining state and county revenue and operations.”

The 10th Circuit’s decision rested on the intersection of two principles: Colorado’s “representative” taxation system for mineral rights, which makes operators of oil and gas units the sole point of contact for other entities with a stake in the well; and a key federal law that cautions courts against interfering in state tax collections.

The long-running dispute centers on the McElmo Dome Unit in southwestern Colorado. Operator Kinder Morgan extracts the carbon and transports it to Texas by pipeline. Montezuma County discovered in 2009 that Kinder Morgan had underreported the unit’s value for the prior tax year, and raised its valuation by $57 million after an audit. Kinder Morgan subsequently appealed the $2 million tax increase all the way to the Supreme Court, which deemed the retroactive valuation valid.

Kinder Morgan then passed along the increase to those who owned fractions of the McElmo Dome Unit. The CO2 Committee represented owners with a collective 11.2% stake in the unit, including “small share” owners charged approximately $500,000 for the retroactive increase. The committee attempted to challenge the assessment, but Montezuma County declined to recognize its status as a taxpayer who could legally file a protest.

In 2023, the state Supreme Court concluded Colorado’s representative oil and gas taxation system vested the unit operator, not individual rights owners, with the authority to protest a valuation. The court dismissed the lawsuit.

Seven months later, the CO2 Committee filed a complaint in federal court alleging the taxation system violated its constitutional right to due process because it had not received notice of the increase.

However, U.S. District Court Judge Charlotte N. Sweeney did not address that issue because a 1937 law, the Tax Injunction Act, forbids federal courts from interfering in state tax collections if there is a “plain, speedy and efficient remedy” in state court.

“Kinder Morgan challenged the retroactive assessment directly with the County before appealing up to the Colorado Supreme Court. After Kinder Morgan’s challenges failed, Plaintiff challenged the retroactive assessments,” she wrote. “The challenges brought by Kinder Morgan and Plaintiff to the retroactive assessment meets the requirement that the remedy provide an opportunity for a ‘full hearing and judicial determination’ of Plaintiff’s claims.”

The CO2 Committee appealed, arguing Kinder Morgan may have had the opportunity to properly challenge the tax increase, but the committee never did.

“Kinder Morgan’s litigation happened years prior and the committee wasn’t aware of it at the time,” attorney Brenton Gragg told the 10th Circuit judges at oral argument in May. 

“That seems hard to believe,” interjected Judge Gregory A. Phillips, that “this all happens with that kind of money and not a whisper is heard.”

“I’m not sure why this hasn’t already been answered by the Colorado Supreme Court,” added Federico. “If you prevail, we’re gonna have a system wherein in Colorado, only the unit operator can challenge a tax assessment before a Colorado state court, but the floodgates are just opening for every taxpayer that has any interest in this dome unit — which could be thousands of taxpayers — to bring federal claims.”

At the same time, Judge Robert E. Bacharach appeared more sympathetic to the committee’s claim that it would never get its day in court.

“So, Colorado can say, ‘OK, you don’t have a remedy, fellas. Only Kinder Morgan has a remedy?'” he asked.

Under Colorado’s representative taxation system, which is set up to promote efficiency, that is correct, responded attorney Nathan A. Keever.

Ultimately, the panel agreed the Tax Injunction Act barred the committee’s lawsuit. Federico noted the committee may still have a claim against the entity at the center of everything.

“Thus, we see nothing from the state proceedings that would foreclose the Committee from seeking relief against the party who collected the tax payment from it (as in, Kinder Morgan, not the County),” he wrote.

The case is CO2 Committee, Inc. v. Montezuma County et al.