October 13, 1949

Hon. Dorman Nickels County Attorney Wharton county Wharton, Texas Opinion No. V-93 5.

Re: Correct method ofassessing taxes on royalty interests in
a unitized oil and gas production unit which is located in two school districts.

Dear Sir:

You request our opinion onthe following question:

“Where landowners have executed mineral leases with pooling agents andthe production unit has been subsequently formed and operated, what **is the**  **correct** way to assess for taxes the royalty interest, and the correct method to allocate the taxes amongschool districts where the production unit is located Intwo school districts 7a
Inconnection with your **lettkr** request you subm&ed a brief inwhich you give us the following facts:

“The Chicago Corporation is now the operator of
a unitized oil, gas and mineral production unit inWharton County, said operator holding said sev’eral leases from various land owners. This unit 

### comprises 3693.42
acres. The pooling clause inthe various leases is here quoted:

‘Lessee is hereby given the right and power topool or combine the land covered by this lease or any portion thereof with any other land. lease or leases when inlessee’s judgment it is necessary or advisable to do so in order to properly develop and operate said premises, provided that no unit so created shall exceed 3700 acres in area. Ifproduction is found OPthe pooled acreage, it shall be treated as ifproduction is had from this lease, whether the well or wells be located
onthe premises covered by this lease ornot. Inlieu ofthe royalty elsewhere herein specified. lessors shall receive on production

# 4404 Hon. Dorman Nickels. Page 2 (V-935)

from aunit so pooled only such portion of the **royalty** stipulated herein as the amount ofhis acreage placed inthe unit **or** his royalty in&rest therein bears to the total acreage so pooled inthe particular unit involved.’

“The unit lies partly in Hungerford Common School District No. 25 and partly inthe East Bernard Independent School District. The acreage ofthe lease is split between the two districts in.the following **per** centagesi 35% thereof lies inthe East Bernard District and 65% thereof lies in the Hungerford District. One dry hole has been drilled onaportion ofsaid unit lying inthe East Bernard Independent School District and three producing gas wells have been brought in onthat portion ofthe unit lease lying in Hungerford Common School District No. 25. These three producing gas wells have been valued for advalorem taxation purposes by petroleum engineers employed byeWharton County and the value fixed onthe unitized lease has been fixed at approximately $100,000.00. The Tax Assessor and Collector ofWharton County inassessing and collecting taxes for common school districts has levied and assessed taxes onthe unit as awhole and has apportioned 65% thereof to the Hungerford School District which is the percentage ofacreage lying inthat district. The Tax Assessor and Collector ofthe East Bernard School District has not heretofore levied and assessed any taxes onsaid unit, but is attempting todo so for tax year 1949. The Tax Assessor and Collector ofWharton County, Texas, arrives at the tax oneach individual tract inthe unit by first arriving at the value ofthe individual tract by determining the proportion ofthe total value for the unit allocable to the particular tract, the value fixed thereon being avalue determined by the proportion the tract’s acreage bears to the acreage of thewhole unit. Hethen levies and assesses taxes for the Hungerford District against each tract onthe basis of 65% ofthe value ofeach tract.”

Article 7146, V.C.S., provides:
“Real property for the purpose oftaxation, shall be construed to include the land itself, whether laid out intown lots **or** otherwise, and all buildings. structures and improvements, or other fixtures ofwhatsoever kind thereon, and all the rights and privileges belonging or inanywise appertaining thereto. and all mines, minerals, quarries and fossils inand under the same.”Hon. Dorman Nickels, Page 3 (V-935)

Ithas been settled by the decisions ofthis State that under an oil and gas lease contract reserving a **royalty** interest, both the leasehold estate and the reserved royalty interest constitute real property. Sheppard v. Stanolind Oil and Gas Co., 125 S.W. 2d 643 (Tex. Civ. App. 1939, error ref.); Sheffield v. Hogg, 124 Tex. 290. 77 S.W.2d 1021 (1934):

Itis fundamental that thejurisdiction ofa school district to tax real estate is limited to the property lying within its boundaries. -American Liberty Oil Co. v. State, 125 S.W.2d 1107 (Tex. Civ. App. 1939); 40 Tex. Jur. 39, Taxation, Sec. 23.

The execution ofoil and gas leases with a clause authorizing the lessees to form a unitized production unit and the subsequent creation by the lessees ofsuch unit have the legal effect of making the individual royalty owners joint owners ofall the royalty in such unit. As stated by the court in Brown v. Smith. 141 Tex. 425. 174 S.W.Zd 43, 46 (1943):

-An oil and gas lease jointly executed by the own,- **ers** oftwo or more tracts ofland owned in sever&By, with provision for pooling or sharing, onthe basis of acreage, the royalties from oil or gas produced anywhere onthe leasrdland, has the effect of**vesting** all of the lessors, at least during the life ofthe lea;se. ‘with joint ownership ofthe royalty earned from all the land in such block’

. Veal v. Thomason, 138 Tex. 341. 349, 159 S.W.2d 472.476. The lease so executed is a conveyance by each lessor toeach ofthe other lessors of
an undivided interest in.the royalties. Lusk v. Green, 114 Okl. 113. 245 P. 636. Thejoint ownership ofthe royalty inter&t inall ofthe land included in such lease is created by the action ofthe several land owners in joining inthe execution ofthe lease.” Citing French v. George, 159 S.W.2d 556 (Tex. Civ. App. 1942, errorref.). Although ataxpayer may own adjoining tracts of land, or interests therein, the tracts ,or interests inthe various tracts should be separately valued and assessed for,ad valorem taxation, when rendered as separate tracts by the taxpayer. Electra Independent School District v. Waggoner, 140 Tex. 428. 168 S.W.Zd 645 (1943)

. Statev. Baker, 49 Tex. 763 (1878).

Itfollows from the above authorities that after unitiaation each royalty owner within the unitized block owns anundivided royalty interest ineach and 

### every tract within the block in the proportion that the number ofacres contained inthe land he owned in fee bears tothe total acreage ,inthe entire unit, and that each royalty owner should be separately assessed for ad valorem taxes onHun. Dorman Nickels, Page 4 (W935)

the undivided royalty interest owned **by** him in each tract, when the **taxpayer** renders same in separate tracts.

For example. tie have a pooled unitaggregating 2,400
acres. 1,600 acres lie within the boundaries of Common School District No. 1. 800 acres lie within the boundaries ofX Independent School District. Landowner A owns 600 acres of land within such unit, 200 acres ofwhich lie within the X Independent School District and 400 **acres** ofwhich lie within the boundaries **of** Common School District No. 1. Landowner B owns 600 acres which lie within the boundaries ofX Independent School District. Landowner C owns 1,200
acres which lie wholly within the boundaries ofCommon School Distrlct No; 1. Landowner A after the formation ofthe pooling unit becomas the owner of l/4 ofthe l/8 royalty interest in each tract contained .Inthe unit. This interest would amount toa l/32 royalty interest. The X Independent School District Tax Assessor should assess against **A** his interest inthe 200 **acres** which lie within the boundaries ofthe X Independent School District, which intere#t would include his l/32 undivided royalty interest andwould exclude the 7/8 **working** interest and the other 3/32 royalty interests. Such tax
assessor should.then assess against A under a-separate assessment the l/32 royalty interest of landowner **A** inthe 600-acre tract owned **by** landowner B. Lihewise. such tax **assessor** should **separately** assess against landowners B and C all,their respective **interests in**  the 200 and 600 acre tracts that lie within theboundaries ofsuch independent school district. Likewise, the county tax assessor and collector shoald assess against landowner A inbehalf of Common School District No. 1the interest ofA inthe 400 **acres** ofthe 600-
acre tract owned by landowner A which lie within theboundaries of such school district, and should assess under a separate assessment the undivided l/32 royalty interest ofA inthe **1,200-acre** tract **owned** by landowner C. Such county tax collector should lihewise then separately assess against landowners B and C inbehalf ofsuch Common School District No. 1their respective interests inthe 400 and 1,200 acre tracts which lie within the boundaries ofsuch district. Such county tax collector, inbehalf ofthe county and thenother taxing units, ifany (other than the schnol districts). should then lihewise separately assess against landowners A, Band C their respective interests in each ofthe tracts within such production unit.

~During the life of such leases and production unit, it nec**essarily** follows that the royalty interest per **acre** under each and every tract within such unitwill be ofthe same value. even though
a dry hole is drilled on one or more tracts and production is had on the **others.** In our example as given above, ifthe full l/8 royalty interest inthe 2.400-acre unit is ofthe taxable value of $72.000.00, then each royalty **acre** (the full l/8 royalty in one **acre)** would be of thevalue of $30.00. Landowner Afs l/32 royalty interest inthe 200
**acres** inX Independent School District would amount to 50 royaltyHon. Dorman Nickels, Page 5 (V-935)

acres and have avalue of $1.500.00. Likewise A’s l/32 royalty interest inthe 600-acre tract owned by landowner Bwould have a value of $4.500.00, andA’s l/32 royalty interest inthe 1,200-acre tract owned by landowner C would have avalue of $9.000.00. Likewise, A’s l/32 royalty interest inthe 400 acres ofhis 600-acre tract lying within Common School District No. 1would have avalue of $3,000.00. Also, according to our example, landowner Bwould
own an undivided l/32 royalty interest in each tract within such pool. Landowner Cwould own an undivided 2/32 royalty interest in each tract in such pool.

Inour example given above, iflandowners A. B, and C.
or any one or more ofthem, render to the various taxing authorities their royalty interests inthe pool as awhole, then the tax assessor would have the authority to assess against such taxpayers as awhole their entire royalty interests lying within theboundaries ofthe taxing authority. For example, iftaxpayer A renders to the X Independent School District tax assessor his 200 acres that lie within X Independent School District, less the 8/8 mineral interest, and then renders to such tax assessor his undivided l/32 royalty interest inthe 800 acres of such pool that lie within theboundaries ofX Independent School District, then the tax assessor for such district could make avalid assessment accordingly. Likewise taxpayer A could render to the county tax assessor-collector his 600-acre tract, less the 8/8 mineral interest, and then render to him his undivided l/32 royalty interest inthe 2.400-acre unit as awhole; and such tax collector then could make avalid assessment for all taxing units, by assessing inbehalf of Common School District No. 1the 1,600
acres that lie within the boundaries thereof and then assessing in behalf ofthe county and the other taxing authorities for which he assesses and collects taxes, the undivided l/32 royalty interest ofA inthe 2.400 acres as awhole.

SUMMARY

The execution of oil and gas leases with a clause authorizing the lessees to form a unitized production unit and the subsequent creation by the lessees of such unit have the legal effect ofmaking the individual royalty owners joint owners ofall the royalty insuch unit. Veal v. Thomason. 138 Tex. 341, 349, 159 S.W.2d 472, g/b. Thejurisdiction ofa school district to tax real estate is limited to the property lying within its boundaries. 40 Tex. Jur. 39, Taxation. Sec. 23. Each **roy** alty owner ina unitized production block should be separately assessed for his undivided interest in each separate tract in such unit, when separately rendered.Hon. Dorman Nickels, Page 6 (V-935)

Electra Independent School Distiict v. Waggoner, 140 Tex. 463, 168 SW 2d 645

. . . Yours very truly

ATTORNEY GENERALOF TEXAS

BY W. V. Geppert

Assistatit

WVG/mwb

IRST ASSISTANT ATTORNEY GENERAL