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## 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 advalorem taxes~ to oil royalties owned by Pecos County Water Improvement DisDear **Mr.** Hadden: trict No. 2.

You **request** the opinion of this office onwhether the royalty of 1/8th oi theof and gas produced tie+ a leame onland ownedby the Pecos **County Water**  Improvement District ‘No. 2 of Pecos County, Texas, is subject to advalorem taxation against the District. **Your** request is based uponthe following information which youhave 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 nowbeing produced and royalty paid from some of said tracts of land. The tracts of land inquestion **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 awater district but changed to a conservation and’reclamation district under Section 59 of Article XVI’ ofthe 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 pur**suant** 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 ofArticle XVI was adopted as part of the Constitution of this State. It authorized the Legislature by appropriate legislation to conserve anddevelop water resources of the State. This section declares that the districts tobe formed thereunder shall be regarded: as

*

. . ..governmental agencies, andbodies politic and corporate with such poweraof government andwith the authority to exercise ‘$~uch rights;‘

. privileges, andfunctions concerning the subject matter of this amendment,as may be conferred by law.” , That awater 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 ofBexar-Medina-Atascosa Counties **Water** Improvement District No. 1v. 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 andauthority to assess and collect taxes, state and county, on thedams, reservoirs, canals, ditches, andother property neaessary for the conservation anddistribution ofwaters in the district?

“It i tutionof

# 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 inArticle 7150 is broader Legislature’s power, that is, to exempt such property when used for public purposes, City ofAbllene v. State, 113 S.W.2d 631 (Tex. CivApp. 1937, error iRsm. , :

,Subsection 4a ofArticle 7150, whichattempted to exact *payments in lieu oftaxes” againbt dfstricts or’ganioed pursuant toSection 59. Article XVI of the Constitution. was held unconstituhemical Bank 61Hon. W. A. Hadden, page 3 (V-1550)

public purposes, and in pursuance of thatauthority 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 ofwater improvement districts would seem to stamp them as political divisions, ,‘ ofthe state, the countyjudge, the commissioners’ court. the election of directors, all these are governmental powers provided for in detail by law. The district is notan ordinary corporation organized for purposes of gain to its members, but is a public agency, using the money raised by taxation to advance the in**terests** of the landowners within itsjurisdiction. It is a political corporation or division of the state which has principally for its object the administration of the government, or towhich the powers of government, or a part of such’pwers, have been delegated.

. . .* Under theholding in the above case, the use of the land inquestion 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 itwould 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 ofGalveston, 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 SW

. .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 thoughincome 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 onwaterdistricts; and if the property in question was being held and used solely for the purpose of leasing it for oil and gas development, itwould 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 andgas production is only a secondary **use.**

The question for decision 1~whether the secondary use hfthe property for anonpublic purpose, which produces income toI

.

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

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

In City ofAbilene v. State, 113S.W.td 631(Tex. Civ. App. 1937, error dism.), after comparing the exemption provisions inArticle XI, Section 9of the Constitution (which exempts public property used exclusively for a public purpose) and inArticle VIII, Section 2, the **court** said:

l,

. These considerations lead us to the conclusion hat as tothe 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 andheld for public purpaea, but notowned or held exclusively for such purposes: and there has been no abandonment of such purposes. *No valid argument canbe made, we think, that public property owned andheld only for public pur,- poses is notbeyond thepower of theLegislature 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 thatsoch property is subject totaxation, unless its exemption is. in thefirst place, authorfeed by Constitution, art. 8, 8 2, and, in thenext place, is provided for by a general law enacted by the Legislature? There canbe nodoubt of it, If it can be said that such property is used **for** public purposes. . . -” Inview of this language, we are of the opinion thata secondary **ume** of a portion oftheproperty for a nonpublic purpose would not sub ect the entire property to taxation. InAtt’y Gen. Op. O-6486 (1945

j,it was held thata city hall did notbecome subject totaxation because a portion of thebuilding was rented to private persons. So far as we can find, there has been no case decided in Texas inwhich 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 theopinion thatthe exemption extends to the property as awhole and no part ofit 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, theexempt status of the surface eotafe is ‘notquestioned, 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 canfind no clear indication from the decisions thatby 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 thelessor would transfer his ownership in the mineral estate as well as the surface estate, in the absence ofan express reservation or exceptfon of the mineral estate. Japhetv. McRae, 276 S.W. 669 (Tex. Comm.App. 1925); Bibb v. Rolan, 6S WZd756 (Tex.Civ.App. 1928. error, ref.). Under **the facts**  **in** Victoiy ,. Hinson, 129 Tex. 30. 102 S.W.Zd 194 (1937). it was hel,dthat the tax **assessor** could assess the lessor’s royalty interest separately from the surface estate, but **the court**  declined tohold thatthere 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 wtththe surface in one ownership. Although the question is notfree from doubt, we are ‘ofthe 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 notbe 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 ownedhy Swater improvement district uuder an of1end gas:lease executed by the district is **exempt frnm**  **taxation where**  the di.strfrt owns anduses the la.ndfor the primary purpose of matmtaintngreservoirs, 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 pulPpoSewit&m t.hemeaning ofArt. 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