- . 

Tae AITORNEY GENERAL 

OF TEXAS 

AUST~I 1,. Texas 

A 

Honorable Sam 0. Reama 

County Attorney 

Brook8 County 

Felfurriae, Texas 

Dear Mr. Reame: 

Opinion No. 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 between 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, areereed Mrr. 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’conridrration 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 neceorary 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 Becurity 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 :Law perUrent 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 authority. 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 reeervation, 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, Commissioner, 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 defined in Article 7146, R. C. S., 1925, readi.ng ae followa: 

“Real property for the purpoee of taxation, shall be conatrued 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 convenisaca, 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 interests 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 property, 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 production, a8 here, the right to a part of the minerals a8 they are produced, subject to the limitation that the right ceases when a certain 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 under 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 eetate 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 valuation 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 EeemII to 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 aggregating 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 reaervation. 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. 

194. 

Victory v0 Rinson, 129 Tex. 30,, 102 S. W. 2d 

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 eubmitted.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 therein, 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 agreement 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 

APPROVED JUL 7, 19% 

/a/ Geo. P. Blackburn 

(Acting) ATTORNEY GENERAL OF TEXAS 

ATTORNEY GENERAL OF TEXAS 

Ry /0/ L. P. Lollar 

L. P. Lollar 

Aesietant 

LPL:AMM:IM