October 13, 1949 

Hon. Dorman Nickels 

County Attorney 

Wharton county 

Wharton, Texas 

Opinion No. V-93 5. 

Re: Correct method of assessing 

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 on the following question: 

“Where landowners have executed mineral leases 

with pooling agents and the 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 In two school 

districts 7 a 

In connection with your lettkr request you subm&ed a 

brief in which you give us the following facts: 

“The Chicago Corporation is now the operator of 

a unitized oil, gas and mineral production unit in Wharton County, said operator holding said sev’eral leases 

from various land owners. This unit comprises 3693.42 

acres. The pooling clause in the various leases is here 

quoted: 

‘Lessee is hereby given the right and power 

to pool or combine the land covered by this 

lease or any portion thereof with any other 

land. lease or leases when in lessee’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. If production is found OP the pooled acreage, it shall 

be treated as if production is had from this 

lease, whether the well or wells be located 

on the premises covered by this lease or not. 

In lieu of the royalty elsewhere herein specified. lessors shall receive on production 
4404 

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

from a unit so pooled only such portion of 

the royalty stipulated herein as the amount 

of his acreage placed in the unit or his royalty in&rest therein bears to the total acreage so pooled in the particular unit involved.’ 

“The unit lies partly in Hungerford Common 

School District No. 25 and partly in the East Bernard 

Independent School District. The acreage of the lease 

is split between the two districts in.the following percentagesi 35% thereof lies in the East Bernard District 

and 65% thereof lies in the Hungerford District. One 

dry hole has been drilled on a portion of said unit lying 

in the East Bernard Independent School District and 

three producing gas wells have been brought in on that 

portion of the unit lease lying in Hungerford Common 

School District No. 25. These three producing gas wells 

have been valued for ad valorem taxation purposes by 

petroleum engineers employed bye Wharton County and 

the value fixed on the unitized lease has been fixed at 

approximately $100,000.00. The Tax Assessor and Collector of Wharton County in assessing and collecting 

taxes for common school districts has levied and assessed taxes on the unit as a whole and has apportioned 

65% thereof to the Hungerford School District which is 

the percentage of acreage lying in that district. The 

Tax Assessor and Collector of the East Bernard School 

District has not heretofore levied and assessed any 

taxes on said unit, but is attempting to do so for tax 

year 1949. The Tax Assessor and Collector of Wharton County, Texas, arrives at the tax on each individual tract in the unit by first arriving at the value of the 

individual tract by determining the proportion of the 

total value for the unit allocable to the particular tract, 

the value fixed thereon being a value determined by the 

proportion the tract’s acreage bears to the acreage of 

the whole unit. He then levies and assesses taxes for 

the Hungerford District against each tract on the basis 

of 65% of the value of each tract.” 

Article 7146, V.C.S., provides: 

“Real property for the purpose of taxation, shall 

be construed to include the land itself, whether laid out 

in town lots or otherwise, and all buildings. structures 

and improvements, or other fixtures of whatsoever kind 

thereon, and all the rights and privileges belonging or 

in anywise appertaining thereto. and all mines, minerals, quarries and fossils in and under the same.” 
Hon. Dorman Nickels, Page 3 (V-935) 

It has been settled by the decisions of this 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): 

It is fundamental that the jurisdiction of a 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 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 of 

making the individual royalty owners joint owners of all 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 of two or more tracts of land owned in sever&By, 

with provision for pooling or sharing, on the basis of 

acreage, the royalties from oil or gas produced anywhere on the leasrd land, has the effect of vesting all of 

the lessors, at least during the life of the lea;se. ‘with 

joint ownership of the 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 to each of the other lessors of 

an undivided interest in.the royalties. Lusk v. Green, 

114 Okl. 113. 245 P. 636. The joint ownership of the 

royalty inter&t in all of the land included in such lease 

is created by the action of the several land owners in 

joining in the execution of the lease.” Citing French v. 

George, 159 S.W.2d 556 (Tex. Civ. App. 1942, errorref.). 

Although a taxpayer may own adjoining tracts of land, or 

interests therein, the tracts ,or interests in the 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) . Stat e v. 

Baker, 49 Tex. 763 (1878). 

It follows from the above authorities that after unitiaation each royalty owner within the unitized block owns an undivided 

royalty interest in each and every tract within the block in the proportion that the number of acres contained in the land he owned in 

fee bears to the total acreage ,in the entire unit, and that each royalty owner should be separately assessed for ad valorem taxes on 
Hun. 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 unit aggregating 2,400 

acres. 1,600 acres lie within the boundaries of Common School District No. 1. 800 acres lie within the boundaries of X Independent 

School District. Landowner A owns 600 acres of land within such 

unit, 200 acres of which lie within the X Independent School District 

and 400 acres of which lie within the boundaries of Common School 

District No. 1. Landowner B owns 600 acres which lie within the 

boundaries of X Independent School District. Landowner C owns 1,200 

acres which lie wholly within the boundaries of Common School Distrlct No; 1. Landowner A after the formation of the pooling unit becomas the owner of l/4 of the l/8 royalty interest in each tract contained .In the unit. This interest would amount to a l/32 royalty interest. The X Independent School District Tax Assessor should assess against A his interest in the 200 acres which lie within the 

boundaries of the X Independent School District, which intere#t would 

include his l/32 undivided royalty interest and would 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 in the 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 the boundaries of such independent school district. Likewise, the county tax assessor and 

collector shoald assess against landowner A in behalf of Common 

School District No. 1 the interest of A in the 400 acres of the 600- 

acre tract owned by landowner A which lie within the boundaries of 

such school district, and should assess under a separate assessment 

the undivided l/32 royalty interest of A in the 1,200-acre tract owned 

by landowner C. Such county tax collector should lihewise then separately assess against landowners B and C in behalf of such Common School District No. 1 their respective interests in the 400 and 

1,200 acre tracts which lie within the boundaries of such district. 

Such county tax collector, in behalf of the county and then other taxing units, if any (other than the schnol districts). should then lihewise separately assess against landowners A, B and C their respective interests in each of the tracts within such production unit. 

~During the life of such leases and production unit, it necessarily follows that the royalty interest per acre under each and 

every tract within such unit will be of the 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, if the full l/8 royalty 

interest in the 2.400-acre unit is of the taxable value of $72.000.00, 

then each royalty acre (the full l/8 royalty in one acre) would be of 

the value of $30.00. Landowner Afs l/32 royalty interest in the 200 

acres in X Independent School District would amount to 50 royalty 
Hon. Dorman Nickels, Page 5 (V-935) 

acres and have a value of $1.500.00. Likewise A’s l/32 royalty 

interest in the 600-acre tract owned by landowner B would have a 

value of $4.500.00, and A’s l/32 royalty interest in the 1,200-acre 

tract owned by landowner C would have a value of $9.000.00. Likewise, A’s l/32 royalty interest in the 400 acres of his 600-acre 

tract lying within Common School District No. 1 would have a value of $3,000.00. Also, according to our example, landowner B would 

own an undivided l/32 royalty interest in each tract within such pool. 

Landowner C would own an undivided 2/32 royalty interest in each 

tract in such pool. 

In our example given above, if landowners A. B, and C. 

or any one or more of them, render to the various taxing authorities 

their royalty interests in the pool as a whole, then the tax assessor 

would have the authority to assess against such taxpayers as a whole 

their entire royalty interests lying within the boundaries of the taxing authority. For example, if taxpayer 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 in the 800 acres of such pool that lie within the boundaries of X 

Independent School District, then the tax assessor for such district 

could make a valid 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 in the 2.400-acre unit as a whole; and such tax 

collector then could make a valid assessment for all taxing units, 

by assessing in behalf of Common School District No. 1 the 1,600 

acres that lie within the boundaries thereof and then assessing in 

behalf of the county and the other taxing authorities for which he assesses and collects taxes, the undivided l/32 royalty interest of A 

in the 2.400 acres as a whole. 

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 of making the individual royalty owners joint owners of all the royalty in such unit. 

Veal v. Thomason. 138 Tex. 341, 349, 159 S.W.2d 472, 

g/b. The jurisdiction of a school district to tax real 

estate is limited to the property lying within its boundaries. 40 Tex. Jur. 39, Taxation. Sec. 23. Each royalty owner in a 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 S . W . 2d 645 . 

Yours very truly 

ATTORNEY GENERALOF TEXAS 

BY 

W. V. Geppert 

Assistatit 

W VG/mwb 

IRST ASSISTANT 

ATTORNEY GENERAL