- .
Tae AITORNEY GENERAL
OF TEXAS
AUST~I 1,. Texas
A
Honorable Sam 0. Reama
County Attorney
Brook8 County
Felfurriae, Texas
Dear Mr. Reame:
OpinionNo. o-6073
Re: Lie.blllty for ad valorem tax
on mineral lnterent.
You requset the opinion of thin Department upon the question contained
in your letter of June 6, reading aa followr:
“I am enclosing herewith a certified copy of the contract be-
tween Florence Arnold Zart and Standard Oil Company of Texan, which
rhowl the intererta of the partier thereto in and to the mineral
rights of certain land, therein dercrlbed, in Brook8 County, Texan.
“The Brdokr County Tax Collector and Amerror bar in the part,
for tax purpoaet3, areereedMrr. Eart with an l/&h interert in and
to the mineral rightr and bar arreered the Standard 011 Company of
Zexar with the remaining Interest in and to the mlneralr.
WI. Eart no% maintain1 that ehe owne no interqrt in ruch
&era1 right8 but liar rold It to Standsrd~Oil do. for the’conrid-
rration of a certain amount of money to be paid by Standard Oil Co.
out of the procordr whm and if production ir obtained. On the
other hand the Stuuhrd Oil Cmpaay contendr that Mm. East own1 an
overriding royalty in and to the mlneralr and ir conrequently l,FFblr
for her pox-Lion of the taxer.
l5y
“We would appreciate your opinion an to Ifhether Mrr. East le
liable for any taxer on thir mineral interert.” II
To be conridered in connection with our opinion you aleo eubmit a
copy of an agreement between the Standard Oil Company of Texan, the preeent
holder of certain lea6e6, and Mre. Florence Arnold Eant, joined pro forme by
her husband, Ed B. East, assignora of asid learrea. We do not consider it nec-
eorary for the purpose of thin opinion to analyze this agreement in detail.
It lr eufficient to nay that ita apparent purpoee wee to bring the matter down
to date ae between the parties presently interested lneofar as applicable to
the operation of the leaees and the amounts and method6 of payment from the
operat Ion thereof. It eeeme clear that thie agreement was not intended to
Honorable Sam G. Reams, page ? (0-6073)
and ha6 not accomplished the purpose of divesting Mrs. East of her mineral
interest. Oil payment.6 a8 provl.ded. 1,n the agreement may result in a reduction
of the value of her mineral i,n,?ereat from time to time, but we ‘do not construe
such payment.6 to be merely a di,sh~.rge of the purchase price of a determinable
fee in the mineral6 coneidered only f.n the light of providing a method of Be-
curity for the payment of the purchase price of such mineral interest. We
make no effort to apportion or designate the past or present mineral interest
owned by the Standard Oil Company ar.d Era. Eaet. arising under their past or
present agreements; but thi.8 in, the lt.ght of our holding may be more easily
done by the parties themselves an,?. t,he offi,c:ale charged under the law with
the aseesament and. col:Lectl.on of the t,axes due by them upon their respective
interest, a8 such interest exiet.e o.n the 1st day of January of the year or
yeara in question.
With the foregofng etatement 88 a premiee we proceed to state what
we coneider to be the :LawperUrent t.o your inquiry. That a mineral interest
constitutee 89 interest in realty subject to taxation ae euch has been 80 long
and definitely settled i.n this State we hardly deem it neceesary to cite au-
thority. Such has undoubtedly been. the settled law of this State since the
case of Texas Co. v. Daugherty, (Supreme Court) 176 S.W. 717. It makes no
difference whether such mineral l.ntereat arises by a direct grant or by a ree-
ervation, the result is the same. State v. Quintana Petroleum Co., (Supreme
Court) 133 S. W. (2d) 112.
In thia latter case the Supreme Court, through Judge Smedley, Com-
missioner, held that the holder and owner of an oil payment owned an interest
in land, eubject to ad valorem taxoa, to the extent of the fair market value
thereof; that the usual. one-‘el,ghth of.1 and gas royalty reeerved In most leaeee
is an intereet in land, also sub?ect to ad valorem tax, this for the reason
that it in a right and a privl,lege bel,onging or appertaining thereto, as de-
fined in Article 7146, R. C. S., 1925, readi.ng ae followa:
“Real property for the purpoee of taxation, shall be con-
atrued to include the Land itself, whether laid out in town lots
or otherwise, and all bui,l.dl,nge, etructu.rer and improvementa, or
other fixture8 of whatsoever kind. thereon, and all the right8
and privil.eges bel,ongl.ng or in any wi.se appertaining thereto,
and all mines, minera:.ei ;iu.arrLee and foes116 in and under the
lane.”
In addition to the two items apecLfically mentioned above, namely,
the one-eighth royalty ueua1l.y retain4 by the learor (which we use for con-
venisaca, and of course it may be more or lens according to the contract of
the parties), and the reservatiac of an oil payment out of productiozi, if such
ir provided for in the lease i,n addi.ti.oa. to, and eeparate and apart from the
usual royalty, both accruing to the ‘benefit of the lerrror or hie aesignr, and
which conrrtituten a taxable lriterest i.n land againat the leslor or hie aesigne,
there 16 alao the usual leasehold e&ate or the working intereat of aeven-eighta
(niore or lean, according to the contract of the partier) owing by the lesree,
which in likewiae a taxable interest in land againrt the lensee or his alrignn.
Honorable Sam G. Reams, page 3 (0-6073)
There, of course, arises the problem of the valuation of these respective in-
terests for taxation under Article 7174, R. C. S. of 1925. Judge Smedley in
the caee of State v. Quintana Petroleum Co., supra, has given us a valuable
guide in the following language:
“It la provided in substance by Article 7174, Revised Civil
Statutes of 1925, that real property, or an intereet in real prop-
erty, shall be valued for taxation at what it is fairly worth in
money or at such price a8 it would bring at a fair voluntary eale
for cash. It is apparent that, where there is subetantial produc-
tion, a8 here, the right to a part of the minerals a8 they are pro-
duced, subject to the limitation that the right ceases when a cer-
tain hum has been realized from the proceeds thereof, is not of a8
great value a8 would be the r,lght to an equal part of the minerale
not subject to limitation; and it is further apparent that the value
of the lessor’s right or i,nterest 80 Umited, assuming continued
production, will decrease each year. Theee facts muet be taken into
consideration in valuing euch interest for taxation. Likewiee it ie
apparent that the leasehold estate under this leaee haa a greater
value on account of the Umitation imposed upon the reserved T/32
interest, with the provision that upon the termination of title un-
der the reservation the T/32 shall vest in the leeeee, than it would
have if the 7132 interest had been resewed without limitation; and
it ia further apparent., still assuming continued production, that
the leasehold e&ate will become more valuable each year a8 the time
approaches when the 7132 interest will. vest in the lessee. And these
facte must be taken into consid.erati.on in valuing the leaeehold ee-
tate for taxation. When this method of valuing the property ie used
no part of the 7132 of the minerala eecapes taxation. Ita value for
taxation is represented by the val,uation. placed upon the lessor’s
reserved and limited 7132 i,nkerest, together wl.th the increased valua-
tion placed upon the leasehold estate by reason of the limitation and
the provieion for the vesti.ng of the intereat in the lessee upon the
satisfaction of the limitation,
“The record diacloeea that when rendering the leaeehold estate
in the four thousand acree for taxati,on for 1936,Quintana Petroleum
Company in ite written rendition, after th,e dercription of the land,
thun deecri,bed the.leaaehold estate: ?The above being the leasehold
e&ate covering 20132 of minerals.’ Thin rendl,tl,on EeemIIto indicate
that the taxpayer voluntarily undertook to exclude from ita rendition
both the l/8 royalty intereat and the 7132 of the minerala aa if the
7132 interert, like the l/8 royalty l.ntereet, were owned by the let3eor
without the limitation and without the provieion for the venting of
the 7132 in the leaeee upon the ratirfaction of the limitation.
(Quintana Petroleum Company had theretofore aeeigned intereata aggre-
gating l/32 out of ite leasehold eetata). The owner of the leasehold
estate ham not only the right to take and dirpone of 20/32 of the
mlneralr, but he in at the name ti.me and prenently the owner of the
additional right to have, take and dic.poBe of 7132 of the mineral6
Honorable Sam G. Reams, page 4 co-6~73)
upon terminati.on of the lessurP6 right ttereto :nd.er tb.e reaerva-
tion. Such addIti.onal rFghtt; even though it may be, as we believe
it is, BP integral part of t~he lessee76 property, may not escape
taxation by the taxpayers6 volunt,ary exclusion thereof from his
rendition &eel. Victory v0 Rinson, 129 Tex. 30,,102 S. W. 2d
194. If such addi-tional right ~88 ix fact excluded by the lessee
in making ite rendition, it may be aseessed for taxation at its
fair value in the .manner provided by the etatutes."
Having reached the cocclueion, 88 we have, that the agreement eub-
mitted.by you does not have t:he effect to completely diveat Mre. Eaet of all
mineral interest i:n the,lan.d involve~d, ard thlla relieve her of liability for
the payment of taxes therecn because no longer the OJner of any Interest there-
in, it follows that we are of the op!nl,on C,hat the Standard Oil Company and
Mm. Eaet should render their respectrve mineral interesta for taxation, 88
provided in Article 7174,supra, ?,keir respective intererts to be determined
by such changes in values aa result from the application and operation of the
proViEion.of the agreement; with rcepec't to Oil payments provided in the agree-
ment a8 artd tihen actual:ly made, keeping :.n mind that the value a8 of January 1
shall constitute the legal baal,a for the:,:.r reBpeCtiVe renditions.
This we hope ~f.11 eerve as a fair %nterpretation of what we conceive
to be the law applicable to the quefit:.on, presented by you.
Youre very truly
JUL 7, 19%
APPROVED ATTORNEY
GENERAL
OF TEXAS
/a/ Geo. P. Blackburn
(Acting) ATTORNEY
GENERAL
OF TEXAS Ry /0/ L. P. Lollar
L. P. Lollar
Aesietant
LPL:AMM:IM