. - 

me A~~OENEY GENERAL 

OP ??EXAS 

PRICE DANIEL 

ATTORNEY GENERAL 

December 10, 1952 

Hon. W. A; Hadden 

County Attorney 

Pecos County 

Fort Stockton, Texas 

Opinion No. V-1550 

Re: Applicability of ad valorem taxes~ 

to oil royalties owned by Pecos 

County Water Improvement DisDear Mr. Hadden: trict No. 2. 

You request the opinion of this office on whether the 

royalty of 1/8th oi theof and gas produced tie+ a leame on land 

owned by the Pecos County Water Improvement District ‘No. 2 of 

Pecos County, Texas, is subject to ad valorem taxation against 

the District. Your request is based upon the following information which you have furnished us. 

The Pecos County Water Improvement District No. 2 

of Pecos County, Texas, is the owner of several tracts of land 

which the District has leased for oil and gas, and oil is now being 

produced and royalty paid from some of said tracts of land. The 

tracts of land in question were purchased by the District from 

prior owners and is property essential to the operation of the district.,, such as canals, reservoirs, etc. The money derived from 

this royalty is used in operating costs and maintenance of the system. The District was formerly a water district but changed to a 

conservation and’ reclamation district under Section 59 of Article 

XVI’ of the Constitution. 

Our State Constitution provides in part as follows: 

44 

. . . the legislature may, by general laws, 

exempt from taxation public property used for 

public 

P 

urposes . . .” (Tex. Const. Art. VIII, 

Sec. 2. 

Article 7150, Vernon’o Civil Sbtutes, was enacted pursuant to the authority granted to the Legislature by this constitutional provision, This article provideo in part: 

“The following property rhall be exempt 

from taxation, to-wit: 

Y 

. . . 
. 

Hon. W. A. Hadden, page 2 (V-1550) 

“4. All property, whether real or personal, 

belonging exclusively to thitlstate, or any political subdivision thereof .?. , I., 

In 1917, Section 59 of Article XVI was adopted as part 

of the Constitution of this State. It authorized the Legislature by 

appropriate legislation to conserve and develop water resources 

of the State. This section declares that the districts to be formed 

thereunder shall be regarded: as 

* 

. . . .governmental agencies, and bodies 

politic and corporate with such poweraof government and with the authority to exercise ‘$~uch rights;‘. 

privileges, and functions concerning the subject 

matter of this amendment,as may be conferred by 

law.” , 

That a water improvement distiict such as the one under consider,ation here is a political subdivision of the State and 

its property when used for a public purpose is exempt from taxation is confirmed in the case of Bexar-Medina-Atascosa Counties 

Water Improvement District No. 1 v. State, 21 S.m(Tex. 

~~.APP. l- ,,error re . , w c sacs law in this language: 

“The only issue in this cause is: Has tiedina 

County the power and authority to assess and collect taxes, state and county, on the dams, reservoirs, canals, ditches, and other property neaessary 

for the conservation and distribution of waters in the 

district? 

“It i 

tution of 4 provided by article 8, 8 2, of the Consti- 

,exag, that the Legfalature may by general 

laws exempt from taxation public property used for 

hthe tt 

ztt&ed, tht irzision is operative,to the extent of the 

ted exemption in Article 7150 is broader 

Legislature’s power, that is, to exempt such property when used 

for public purposes, City of Abllene v. State, 113 S.W.2d 631 (Tex. 

CivApp. 1937, error iR sm. , : 

,Subsection 4a of Article 7150, whichattempted to exact 

*payments in lieu of taxes” againbt dfstricts or’ganioed pursuant 

to Section 59. Article XVI of the Constitution. was held unconstituhemical Bank 61 
Hon. W. A. Hadden, page 3 (V-1550) 

public purposes, and in pursuance of that authority 

enacted Rev. St. 1925, art. 7150, in section 4,‘of 

which it is provided: ‘All property, whether ‘real 

or personal, belonging exclusively to this State, or 

any political division thereof,’ shall be exempt from 

taxation. The very statutory requirements for the 

creation:,and formation of water improvement districts would seem to stamp them as political divisions, ,‘ 

of the state, the county judge, the commissioners’ 

court. the election of directors, all these are governmental powers provided for in detail by law. The district is not an ordinary corporation organized for purposes of gain to its members, but is a public agency, 

using the money raised by taxation to advance the interests of the landowners within its jurisdiction. It is 

a political corporation or division of the state which 

has principally for its object the administration of the 

government, or to which the powers of government, or 

a part of such’pwers, have been delegated. . . .* 

Under the holding in the above case, the use of the land 

in question as a site for reservoirs, canals, etc., is a use for a 

public purpose, and if the property were being used exclusively 

for that purpose it would undoubtedly be exempt from taxation. The 

fact that the use, if a public one, results in the production of revenue does not deprive the property of its exempt status. Galveston 

Wharf Co. v. City of Galveston, 63 Tex. 14 (1884); A. & M. Consolmated Independent School Dlst. v. City of Bryan, 143 Tex. 346 184 

d 914 (1945) Lower Colorado River Authority v. Chemic61 

& Trust Go.: 144 Tex. 326, 190 S . W . 2d 48 (1945) . 

On the other hand, property owned by a governmental 

agency which is being used exclusively for a nonpublic purpose is 

not exempt from taxation, even though income derived from the 

property is devoted to the financing of the public functions of the 

agency. Att’y Gen. Ops. O-2506 (1940), V-1399 (1952). 

The extraction of oil and gas is not a public purpose 

within the contemplation of the Rowers conferred on waterdistricts; and if the property in question was being held and used 

solely for the purpose of leasing it for oil and gas development, 

it would not be exempt from taxation. However, under the facts 

you have stated, it appears that the property is being used primarily for carrying on the public fun.ctions of the district and 

that the leaeing for oil and gas production is only a secondary use. 

The question for decision 1~ whether the secondary use 

hf the property for a nonpublic purpose, which produces income to 
I . 

Hon. W. A. Hadden, page 4 (V-1550) 

the district, will prevent it from coming withfn the exemption provisions of Article 7150. 

In City of Abilene v. State, 113 S.W.td 631 (Tex. Civ. 

App. 1937, error dism.), after comparing the exemption provisions 

in Article XI, Section 9 of the Constitution (which exempts public 

property used exclusively for a public purpose) and in Article VIII, 

Section 2, the court said: 

l , 

. These considerations lead us to the conclusion hat as to the power of the Legislature, to 

exempt public property from taxation, all such property should be regarded as ‘used for public puspoaea’ when it is owned and held for public purpaea, 

but not owned or held exclusively for such purposes: 

and there has been no abandonment of such purposes. 

*No valid argument can be made, we think, that 

public property owned and held only for public pur,- 

poses is not beyond the power of the Legislature to 

tax. ,.a 

“But what about public property owned and held 

for public purposes but partly used for other purposes? Can there be any doubt that soch property is 

subject to taxation, unless its exemption is. in the first 

place, authorfeed by Constitution, art. 8, 8 2, and, in 

the next place, is provided for by a general law enacted 

by the Legislature? There can be no doubt of it, If it 

can be said that such property is used for public purposes. . . -” 

In view of this language, we are of the opinion that a 

secondary ume of a portion of the property for a nonpublic purpose 

would not sub ect the entire property to taxation. In Att’y Gen. Op. 

O-6486 (1945 j , it was held that a city hall did not become subject 

to taxation because a portion of the building was rented to private 

persons. So far as we can find, there has been no case decided in 

Texas in which the taxing authorities; while recognizing the exempt 

status of that portion of the property which is actually devoted to a 

public uee. have attempted to tax the portion which is used for a 

nonpublic purpose. However, we are of the opinion that the exemption extends to the property as a whole and no part of it is taxable 

where the portion which is used for a nonpublic purpose is not 

distfnct from the remainder of the property. 

In the present case, the exempt status of the surface eotafe is ‘not questioned, your inqufry relatind solely to ‘the. frdctional 
Hon. W. A. Hadden, page 5 (V-1550) 

part of the mineral estate which is owned by the district. The 

doctrine of severance of the estate created by the usual oil and 

gas lease in this State from the surface of real estate is too well 

established to require discussion. However, we can find no clear 

indication from the decisions that by the conveyance of 7/8ths of 

the’minerals to the lessee the 1/8th ownership which to retained 

by the lessor becomes severed from his ownership of the surface. 

To the contrary, a subsequent conveyance of, the land by the lessor 

would transfer his ownership in the mineral estate as well as the 

surface estate, in the absence of an express reservation or exceptfon of the mineral estate. Japhet v. McRae, 276 S.W. 669 (Tex. 

Comm.App. 1925); Bibb v. Rolan, 6 S W Zd 756 (Tex.Civ.App. 1928. 

error, ref.). Under the facts in Victoiy ,. Hinson, 129 Tex. 30. 102 

S.W.Zd 194 (1937). it was hel,d that the tax assessor could assess 

the lessor’s royalty interest separately from the surface estate, 

but the court declined to hold that there had been a severance of the 

lessor’s mineral and surface ownership. 

Under these holdings, the net result of the District’s 

leases was to retain l/&h of the minerals.combined wtth the surface in one ownership. Although the question is not free from doubt, 

we are ‘of the opinion that, the District’s. owdershfp in the mixiezal 

estate is not held separate.ly from the surface estate and, since the 

District is using the property primarily for a public purpose, it may 

not be taxed for any portion of its ownershfpip. Consequently, the ” 

royalty owned by the District under the oil and gas leases is not subt 

ject to taxation. This exemption, of course, does not extend to the 

.7/8ths mineral interest which the lessees acquired under the leases. 

The f/8 royalty interest owned hy S water 

improvement district uuder an of1 end gas: lease 

executed by the district is exempt frnm taxation 

where the di.strfrt owns and uses the la.nd for the 

primary purpose of matmtaintng reservoirs, canalso 

etc.. in connection with the performance of its governmental funcl$ons. E.c is plrope~rty cw.me!ti and used 

by the district for. a public pulPpoSe wit&m t.he meaning of Art. 7150, subd, 4, V.C.S. 

APPROVED: 

W. V. Geppert 

Taxation Divfston 

Mary K. WaYI 

,Reviewing Assistant . 

Charles D. Mathews 

First Assistant 

LPL:mw 

Yours very frulyE 

PRECE DAXXEL 

~ttorxrcy General 

BYLze W 

. 01lar 

Aeshntant