Office of the Elttornep QBeneral
Wate of IEexae
DAN MORALES January 28.1992
ATTORNEY
GENERAL
Honorable Burton B. LeTulle Opinion No. DM-78
Chairman, Board of Directors
Lower Colorado River Authority Re: Whether “working interests” owned
P. 0. Box 220 by the Lower Colorado River Authority
Austin, Texas 78767 in oil and gas wells in Fayette County
are subject to ad valorem taxation
(RQ-2163)
Dear Mr. LcTulle:
You have requested our opinion as to whether “working interests” owned by
the Lower Colorado River Authority (hereinafter LCRA) in oil and gas wells in
Fayette County are subject to ad valorem taxation. You explain that a “working
interest” is “generally synonymous with the term leasehold interest. The working
interest (or leasehold) owner has the exclusive right to exploit the minerals on the
land.” You indicate that LCRA purchased these leasehold interests in 1989, and
currently owns interests varying between 24 and 100 percent in several oil and gas
wells in Fayette County. You contend that this property is exempt from ad valorem
taxation, a position which is challenged both by the Fayette County Appraisal
District and the LaGrange Independent School District.
Section 2(a) of article 8 of the Texas Constitution provides that “the
legislature may, by general laws, exempt from taxation public property used for
public purposes.” Pursuant to that constitutional authority, the legislature has
enacted section 11.11(a) of the Tax Code, which provides:
(a) Except as provided by Subsections (b) and (c) of this
section, property owned by this state,or a political subdivision of
this state is exempt from taxation if the property is used for
public purposes.
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Honorable Burton B. LeTulle - Page 2 (DM-78)
Article XI, section 9, of the Texas Constitution specifies that “property devoted
exclusively to the use and benefit of the public shall be exempt from . . . taxation.“’
In 1945, the Texas Supreme Court ruled directly on the status of LCRA for
purposes of exemption from taxation under the constitution. In Lower CoZorudo
River Auth. v. Chemical Bank & TrustCo., 190 S.W.2d 48,SO (T’ex. 1945). the court
declared:
It thus appears . . . that LCRA is a governmental agency
serving a public purpose in controlling and storing the flood
waters of the Colorado River and that all benefits derived from
its efforts are public benefits. Hence, its property is public
property devoted exclusively to public use and is exempt from
taxation under Art. XI, Sec. 9, of the Constitution.
This case does not end our inquiry, however. The LCRA case did not consider the
type of facts at issue here. See State v. Universityof Houston, ,264 S.W.2d 153, 155
(Tex. Civ. App.--Galveston 1954, writ refd n.r.e.) (court held that it was
“uncontroverted” that certain mineral interests in land held by the University of
Houston were “devoted exclusively to the use and benefit of the public”).
Finally, in recent years the courts have emphasized the significance of the
“used for public purposes” portion of the test.* For example, two courts have
ftAttomey General Opinion JM-523 (19%) found that the ‘used for public purposes” test of
article VIII, section 2, and the “devoted exclusively to the use and benefit of the public” test of artide
XI, section 9, are equivalent. In both cases the constitution requires more than that the property be
merely owned by a public body it must also be used forpublicpwpmes.
%cctioo 11.11(d) of the Tax Code provides:
(d) Property owned by the state that is not used for public purposes is
taxable. Property owned by a state agency or institution is not used for public
purposes if the property is rented or leased for compensation to a private
business enterprise to be used by it for a pwposc not related to the
performance of the duties and functions of the state agency.
P- 391
Honorable Burton B. LeTulle - Page 3 (DM-78)
declared that a medical office building owned by a political subdivision but leased to
private physicians was not tax-exempt, even though the income from the property
was used exclusively for public purposes. In Gmnd Prairie Hosp. Auk v. Tamnt
Apptial D&Z, 707 S.W.2d 281, 284 (Tex. App.--Ft. Worth 1986, writ refd n.r.e.),
the court said that when a hospital authority owned a medical building that it leased
in part to physicians for their own commercial purposes, the building was not being
used exclusively for the use and benefit of the public, and therefore, it was not
entitled to a tax exemption; see alro Satterlee v. Gulf Coart Waste DisposalAuth, 576
S.W.2d 773 (Tex. 1978); Grand PrairieHosp. Auth. v. Dallas County Appraisal Dist.,
730 S.W.2d 849 (Tex. App.-Dallas 1987, writ refd, n.r.e.).
In the situation you present, LCRA uses a relatively small portion of the gas
it extracts for use in its power plants, and sells the remainder of the gas, and all of
the oil, on the open market. LCRA uses the revenue obtained from these sales to
purchase fuel for its power plants “and to off-set expenses incurred by LCRA in the
generation and distribution of electricity.” Because these circumstances are
sufficiently similar to those at issue in the two cases involving Grand Prairie
Hospital Authority, supru, the taxing entities have challenged LCRA’s claim to an
exemption. Such challenge fails to consider the crucial difference between land, on
the one hand, and an oil and gas leasehold interest, on the other.3
An oil and gas lease, despite its name, is a sale or conveyance of real
property, and it operates to transfer the oil and gas in place to the lessee. Lockhurt
Apparently, tbis particular test is applicable only to state agencies and institutions rather than
to ali public bodies. However, the principk of section 11.11(d) is recognized as applicable, in the
GmndBubie cases, to other kinds of public entities.
3LaGraage Independent School District contends that LCFtA’s pun3asc.s of leasehold
interests in oil and gas wells exceed its constitutional and statutory authority, and that such leasehold
interests constitute “investments” which no political subdivision in Texas is authorized to make. We
decline to comment on this position, except to note that se&on 2(e) of the statote creating LCRA
authorizes the distrid ‘to acquire by purchase, lease, gift or in any other manner provided by law and to
maiataio, use and operate any and all property of any kind, real, personal or mixed, or any interest
therein . . . oecessary or convenient to the exercise of the powrs, rights, privileges and fimctioas
coderred upon it by this Act.’ Acts 1934,43d Leg., 4tb C.S., cl~ 7,O 2, at 20-21 (act creating LCRA);
Acts 1975,64th Leg., ch. 74, P 1, at 180 (current language of section 2 of the ad). Section 2(g) thereof
authorizes LCRA to “sell or othenvisz dispose of any property of any kind, real, personal or mbaxl, or
any interest therein, which &all not be necessary to the canyiag on of the business of the District.’
Ads 1934, supm, at 21; Acts 1975, supm, at 181.
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Honorable Burton B. LeTulle - Page 4 (DM-78)
v. Williomr, 192 S.W.2d 146 (Tex. 1946); Gulf Oil Corp. v. Mamthon Oil Co., 152
S.W.2d 711 (Tex. 1941). A lessor in an oil and gas lease, ie. the owner of the
surface estate, and the lessee, ie the owner of the mineral estate, are cotenants.
Shell Oil Co. v. Howth, 159 S.W.2d 483 (Tex. 1942). The lessee has the right to
develop his mineral estate, including the right to an easement in the surface estate
for purposes of the mineral grant. Getty Gil Co. v. Jones, 470 S.W.2d 618 (Tex.
1971). In the case before us, LCRA is the owner of mineral estate, and the lessee
under the terms of the oil and gas lease.
The second Grund Prairiecase instructs that the test for determining whether
public property is exempt from taxation is “whether the property in question is held
only for public purposes and is devoted exclusively to the use and benefit of the
public.” 730 S.W.2d at 851. For the reasons stated above, we believe that the facts
of the Gmnd Pr&ie cases are distinguishable from the facts of the situation at issue
here. Furthermore, the GrMd Prairie cases turned on the fact that public property
was used for the purposes of private business. Therefore, the cases reasoned, the
property was not devoted exclusively to the use and benefit of the public. It is not
readily apparent in the case at hand that public property is similarly being put to
private use, Thus, we conclude that the holdings of the Gmnd Pruirie cases do not
dictate that the LCRA’s mineral interests are subject to taxation as a matter of law.
The determination as to whether the LCRA holds its mineral interests only
for public purposes and devotes those interests exclusively to the use and benefit of
the public involves questions of fact that cannot be resolved in the opinion process.
To make such a determination, a finder of fact would likely consider such factors as
the extent to which private entities are involved in the various stages of operation of
the wells at issue, how and by whom the oil and gas is sold on the open market, and
how the revenues from the sale of oil and gas are used. As we cannot inquire into
these issues in the opinion process, we are unable to ultimately determine whether
the LCRA’s mineral interests are tax exempt.
Whether leasehold interests owned by the Lower Colorado
River Authority in oil and gas wells in Fayette County are
exempt from ad valorem taxation raises questions of fact that
cannot be resolved in the opinion process. The holdings of the
Gmnd Prairie cases do not dictate that the LCRA’s mineral
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Honorable Burton B. LeTulle - Page 5 (DM-78)
interests are subject to taxation as a matter of law. If the LCRA
holds its working interests in oil and gas wells exclusively for the
use and benefit of the public, those interests are exempt from ad
valorem taxation.
,DAN MORALES
Attorney General of Texas
WILL PRYOR
First Assistant Attorney General
MARY KELLER
Deputy Assistant Attorney General
JUDGE ZOLLJE STEAKLEY (Ret.)
Special Assistant Attorney General
RENEA HICKS
Special Assistant Attorney General
MADELEINE B. JOHNSON
Chair, Opinion Committee
Prepared by Rick Gilpin
Assistant Attorney General
p. 394