- .



### Tae AITORNEY GENERAL
OF TEXAS

AUST~I 1,. Texas

A

Honorable Sam0. 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 uponthe question contained in your letter of June 

### 6,reading aa followr:

“I amenclosing herewith a certified copy of the contract between Florence Arnold Zart and Standard Oil Companyof Texan, which rhowl the intererta of the partier thereto in andto the mineral rights of certain land, therein dercrlbed, in Brook8 County, Texan.

“The Brdokr CountyTax Collector andAmerror 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 Companyof Zexar with the remaining Interest in andto the mlneralr.

WI. Eart no%maintain1 that ehe owneno interqrt in ruch &era1 right8 but liar rold It to Standsrd~Oil do. for the’conridrration of a certain amountof moneyto be paid by Standard Oil Co. out of the procordr whm and if production ir obtained. Onthe other handthe 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

“Wewould appreciate your opinion anto Ifhether Mrr. East le liable for anytaxer on thir mineral interert.” II

Tobe conridered in connection with our opinion you aleo eubmit a copy of an agreement between the Standard Oil Companyof Texan, the preeent holder of certain lea6e6, andMre. Florence Arnold Eant, joined pro forme by her husband, EdB. East, assignora of asid learrea. Wedonot consider it neceorary for the purpose of thin opinion to analyze this agreement in detail. It lr eufficient to naythat ita apparent purpoee weeto bring the matter down to date ae between the parties presently interested lneofar as applicable to the operation of the leaees andthe amounts and method6 of payment from the operatIon thereof. It eeeme clear that thie agreement was not intended toHonorable SamG. Reams, page ? (0-6073)

and ha6not accomplished the purpose of divesting Mrs. East of her mineral interest. Oil payment.6a8 provl.ded. 1,nthe agreement mayresult in a reduction of the value of her mineral i,n,?ereat from time to time, but we‘donot construe such payment.6to be merely a di,sh~.rge of the purchase price of a determinable fee in the mineral6 coneidered only f.nthe light of providing a method of Becurity for the payment of the purchase price of such mineral interest. We makeno effort to apportion or designate the past or present mineral interest ownedby the Standard Oil Companyar.dEra. Eaet.arising under their past or present agreements; but thi.8 in,the lt.ght of our holding maybe more easily done by the parties themselves an,?.t,heoffi,c:ale charged under the lawwith the aseesament and.col:Lectl.on of the t,axes dueby themupon their respective interest, a8 such interest exiet.e o.nthe 1st day of January of the year or yeara in question.

With the foregofng etatement 88 a premiee weproceed to state what
weconeider to be the :Law perUrent t.oyour inquiry. That a mineral interest constitutee 89 interest in realty subject to taxation ae euch has been 80long and definitely settled i.nthis State wehardly deemit 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 makesno 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 SupremeCourt, through Judge Smedley, Commissioner, held that the holder and owner of an oil payment ownedan 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 Landitself, 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, andall the right8 andprivil.eges bel,ongl.ng or in anywi.se appertaining thereto, and all mines, minera:.ei ;iu.arrLeeand foes116 in andunder the lane.”

In addition to the two items apecLfically mentioned above, namely, the one-eighth royalty ueua1l.y retain4 by the learor (which weuse for convenisaca, and of course it maybe more or lens according to the contract of the parties), andthe reservatiac of an oil payment out of productiozi, if such ir provided for in the lease i,naddi.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.nland againat the leslor or hie aesigne, there 16alao 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 ataxable interest in land againrt the lensee or his alrignn.Honorable SamG. 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 moneyor 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 a8they are produced, subject to the limitation that the right ceases whena certain humhas been realized from the proceeds thereof, is not of a8 great value a8would 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 80Umited, assuming continued production, will decrease each year. Theee facts muetbe 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 hadbeen resewed without limitation; and it ia further apparent., still assuming continued production, that the leasehold e&ate will become morevaluable each year a8the time approaches whenthe 7132 interest will. vest in the lessee. Andthese facte mustbe taken into consid.erati.on in valuing the leaeehold eetate for taxation. Whenthis 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 uponthe lessor’s reserved and limited 7132 i,nkerest, together wl.ththe increased valuation placed uponthe leasehold estate by reason of the limitation and the provieion for the vesti.ng of the intereat in the lessee uponthe satisfaction of the limitation,

“The record diacloeea that whenrendering the leaeehold estate in the four thousand acree for taxati,on for 

### 1936, Quintana Petroleum Companyin ite written rendition, after th,e dercription of the land, thun deecri,bed the.leaaehold estate: ?Theabove 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 andthe 7132 of the minerala aa if the 7132 interert, like the l/8 royalty l.ntereet, were ownedby the let3eor without the limitation andwithout the provieion for the venting of the 7132 in the leaeee upon the ratirfaction of the limitation. (Quintana Petroleum Companyhadtheretofore aeeigned intereata aggregating l/32 out of ite leasehold eetata). The owner of the leasehold estate hamnot only the right to take and dirpone of 20/32 of the mlneralr, but he in at the nameti.meand prenently the owner of the additional right to have, take and dic.poBe of 7132 of the mineral6Honorable SamG. 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 maybe, as webelieve it is, BPintegral part of t~helessee76 property, maynot escape taxation by the taxpayers6 volunt,ary exclusion thereof from his rendition &eel. 

### 194. Victory v0 Rinson, 129Tex. 

### 30,, 102 S. W. 2d If such addi-tional right ~88 ix fact excluded by the lessee in making ite rendition, itmaybe aseessed for taxation at its fair value in the .mannerprovided by the etatutes."
Having reached the cocclueion, 88wehave, that the agreement eubmitted.by you does not have t:he effect to completely diveat Mre. Eaet of all mineral interest i:nthe,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 weare of the op!nl,on C,hatthe Standard Oil Companyand 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.

ofthe agreement; **with** rcepec't to Oilpayments provided in the agreement a8 artdtihenactual:ly made, keeping :.nmindthat the value a8 of January 1 shall constitute the legal baal,a for the:,:.rreBpeCtiVerenditions.

This wehope ~f.11 eerve as a fair %nterpretation of whatweconceive 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

OFTEXAS ATTORNEY GENERAL

OFTEXAS

Ry /0/ L. P. Lollar

L. P. Lollar Aesietant



### LPL:AMM:IM