E


### F S

WILL WILSON **ATTORNEY** ORNERAE dbST,?XN 1lL. %?EtiS

June 22, 

### 1960

HonorableR. L. Lattimore Opinion No. WW-863 CriminalDistrict Attorney Hidalgo County Re: Proper evaluationand Edinburg, Texas assessment for ad valorem tax purposes of gas producingpropertiesunder a contractpresently suspended by the Federal Power Commissions

pending Dear Mr. Lattimore: furtherhearing.
Your request for an opinion concerns the proper valuation, for ad valorem tax purposes, of certain gas producingproperties. You advise that the gas was originallybeing soldunder a contract establishing the price per MCF at 7-$cents,but that in 1954 a new contract setting the price at 12 centsper MCF was negotiated. The price changewas "suspended"by the Federal Power Commission,acting under the authority of the Natural Gas Act (15 U.S.C.A. 717), pending a determinationas to the lawfulness of the new rate. The Federal Power Commission did not act upon the rate suspensionwithin fivemonths, whereupon the producer,

### acting pursuant to the terms of Sec. 4(e) of the Act, placed 

### in effect and began collecting the new contractprice of 12 centsper MCF. The Commission then required the producer to furnish a bond to refund, with interest, the portion of the increasedprice which itmight ultimately find unjustified.
In reference to the foregoing facts you ask: "1. How should this property fi.e., the gas reservefl be evaluated and assessed?
"2

. What recourse does the taxing jurisdictionhave if the propertyhas been evaluated, based on a 79 cent 

### sales price and the F.P.C. allows a higher figure? The taxable value is directly related to the salesprice. “3. Can the holder be assessed the value of the 'suspense'account?" flhe suspense account represents the amount of the rate increase collectedby the producerJHonorableR. L. Lattimore, Page 2 OpinionNo. 

### WW-863

Article 7174,V.A.C.S., provides:
“Each separateparcel of real property shallbe valued at its true and full value inmoney, excluding the value of crops growing or ungathered thereon.
“In determining the true and full value of real and personal property the

### assessor shall not adopt a lower or different standard of value because the same is to serve as a basis of taxation,

### nor shallhe adopt as a criterion of value the price for which suchproperty would sell at auction or a forced sale or in the aggregatewith all the property In his county;but he shall value each tract or lot by Itself,and at such sum and price as he believes the same to be fairlyworth inmoney at the time such assessment ismade. 11

. . . . “Money,whether in possession or on deposit, or In the hands of any member of the family, or any other person whatsoever, shall be entered in the statementat the full amount thereof, “Every credit for a sum certain,payable either Inmoney or property of any kind, shall be valued at the full value of the ssme so payable. , . ,” (Emphasisadded.) Article 7149 states in part:
”‘Value

I--The term, ‘trueand full value’ wherever used shall be held tomean the fairmarket value, in cash, at the place where the property to which the term is applied shall be at the time of assessment, being the price which could be obtained therefor at private sale, and no at forced or auction sale.” The term “fairmarket value, In cash,” Is generallyheld to mean the price that the propertywould bring when It is offered for sale by one who desires to sellbut is not obliged to sell, and is bought by 

### one who desires to buy but1

HonorableR. L. Lattimore, Page 3 OpinionNo. WW-863

is under no obligation to buy. State v. Carpenter,et al, 89 S.W.2d 194 (Tex.Comm.App.1936). Helms v. Day, 215 S W 356 (Tex.Civ.App.1948); Texas Pow& & Light C .2d 224 S.W.2d 191 (Tex.Sup.Ct. ompany v.'Hering, Company v. Kiel 227 S.W.2d Pipe Line Company v. Hunt, 228 King v. McGuff, et ux., M.K.T. Railway Company v. Jaffee Cotton' Products Company, 193 S.W.2d 986 ITex.Civ.Aoo.1946). Actual sales of comrJarable property in the vicinity on ornear valuationdate is themost accurate indicla for determiningmarket vlaue. However, all elements which properly reflect upon the "fairmarket value" can be taken into consideration. See Rowland v. City of Tyler, et al., 5 S.W.2d 756 (Tex.Com.App.1928); see also l'( T ur., Evidence, Section 162, page 439. Our courtshave presc%bed no definite or exactmethod by which property is to be valued. It is only required that the system adopted result in a valuation substantially the same as market value, City of Arlington v. Cannon, 263 S.W.2d 299 (Tex.Civ.App.Fan-. >53, rev'd. in part on other grounds, 271 S.W.2d 414) and not be arbitrary, discriminatory,or fraudulently induced. 40 Tex.Jur., Section 114, page 159. However, a valuation cannotbe based wholly on one factor alone. Port Arthur Independent SchoolDistrict v. Baumer, 64 S.W.2d 412 (Tex.Civ.App.1933). Property is to be assessed for taxation at its value as of January 1 of the taxing year. See Article 7151,V.A.C.S.; Humble Oil & Refining Company v. State, 3 S.W.2d 559 (Tex. Civ.App. 1928);Kirby v. TranscontinentalOil Company, 33 S.W.2d 471 (Tex.Civ.Aoo.1930). Fluctuations in value or income (eitherenhsnc%at or deoreciationj cannot be anticinated. Humble Oil & Refining , supra;Kirby-v. TranscontinentalOil am RepublicNatural Gas Company, 181 S.W. p. 1944, error ref.). Earning capacity, or income, from amineral estate is of particular importance in estimating or assessing the value of the estate, Electra IndependentSchool District v. W. T. Waggoner Estate, lb8 S.W.2d b45 (Tex.Civ.App.1943) but in the Instant case, the amount of incomewhich ultimaielywill be relaised from the suspended 12 cent contractprice is prospective, or speculative. It is within the province of the Federal Power Commission to either grant the price increase, refuse it, or, if it is deemed in the interest of the public convenienceand necessity, to reduce the price below the 73 cents establishedby the original contract. What the Federal Power Commissionwill do, is, to a large extent, a matter of surmise and conjecture. Therefore, it is obvious that only the price that is certain as of January 1, i.e., 7$ cents per MCF, can be considered as income from the gas property.Honorable R. L. Lattimore, Page 4 OpinionNo. 

### WW-863

The fact that the suspended 12 centsper MCF price cannot be consideredas income does not 

### mean that itmust be altogether excluded from consideration in evaluating the property. The general rule on thispoint is stated in 51 Am.Jur., Sec. 

### 706, p. 

### 656:
"Itwould seem upon principle that

prospectivevalue cannotproperly be made the substantivebasis for assessment, although itmay be considered to the extent that it enters into or is reflectedby present value." (Emphasisadded.)
To the same effect, see Lewis J. Summersv. City of Meridan, 119 Conn. 5, 174

### A. 184 (19341.McCardles Estate v. City of Jackson, 

### 61 So.2d 

### 44, (Miss.Su;.Ct. ated at.L.R. 

### 649and 95 A.L.R. 

### 434. Texai ~pe~%e~oC~e in accord with this line of reasoning. 

### 108,p. 149, it is stated: At 40 Tex.Jur., Sec.

"Prospectivevalue, in the sense of value at some future time, cannot legitimatelybe made the basis of a determinationof present value. On the other hand prospectivevalue in the sense of potential future use, so far as it affectspresentmarket value, is undoubtedly a factor thatmay be considered." Therefore, it appears that the fact that a hearing to determine whether a rate increase shouldbe allowed is pending before the F.P.C. can be considered to the extent that such fact affects themarket value of the subjectproperty as of January 1. It cannot be said that a person desiring to buy the property would not take this factor into consideration. A buyer might offer a higher price because of the expectancy of a price increase; it is also possible thathe would be induced to offer a lower price because the rate increasemight be disallowed, which would necessitaterefund of themoney held in suspense and payment of six per cent interest thereon. The influenceof this factor uponmarket value is fraught with surmise and open to conjecture. This, however, does not affect its status as a proper element for consideration;the same ismore or less true ofmany elementswhich may be properly considered on the issue of value. As pointed out inAllen v. Rmery Indeoendent SchoolDistrict, 

### 283 S.W. 

### 674 (Tex.Civ.App. 

### 1926):Honorable R. L. Lattimore, Page 

### 5 OpinionNo. 

### W-863

"Thereare numerous elements and tests of value. It is generally a matter of estimate or opinion, at best, as of time and distances and the like, and about which witnesses the most competent to know often widely differ in particular instancesaccording to personal determination of the primary factswhich support their conclusion. The constitutionalprovision ismanifestly founded upon such recognized situations. Therefore, the conclusivenessof valuationmust rest with such tax officers or tribunals 'asmay be provided by law.' A presumption of correct action will attend what they do and give prima facie support to their conclusionwhen apparentlywarranted by law, but this proposition is not conclusive 

### in any case. A merely and purely arbitrary or capriciousvaluation made by such tribunal disproportionateto the property's value is ground for objection and cause for interferingwith its action."
Because of the conjecturalnature of thisparticular element of value, it is incumbentupon the taxing authority to use prudent judgment in considering it, and to receive all testimony regarding its influenceupon the actualmarket value of the gas property. As was pointed out in State v. Illinois C. R. Company, 27 Ill. 

### 64, 79 Am.Dec. 

### 396 (1861):

I, .Weare not prepared to say that an assessor,making yearly valuations of property for taxation, can or ought to take into considera

### tion anything

### more than the value of the property at the time he is called upon to value it, since, if it does increase in value in the process of time, advantage can be taken of it in future valuations,as theymay be periodically made, but if he can and does look to the future for the purpose of ascertaining the present value of property,he should do it with extreme caution." (Emphasisadded)
From the foregoing discussion, it appears that the answer to your first question is that in assessing the property consideration shouldbe given to all relevant and proper factors regarding value as of Januuary 1. Income is an important element 

### to be consideredbut cannot act as the sole criterion. Only 

### 74 centsper MCF can be consideredasHonorableR. L. Lattimore, Page 6 OpinionNo. ww-863

the income from the property in questionuntil otherwise changedby order of the Federal Power Commission. The fact that there is pending before the Federal Power 

### Commission a hearing to determinewhetherthe price of the gas produced from the property should be increasedmay be considered,but only to the extent that it actually influences or affectsmarket value as of January 1.
In answer to your second question,you are advised that the countymust assess the property in accordancewith the foregoing rules. There obviouslywould be no recourse to reassess the property and consider the income at 12 cents per MCF should the F.P.C. allow the higher figure.
Your third question iswhether the holder can be assessed the value of the suspense account. If the suspenseaccount is representedby cash, either in the possession of the holder or on deposit in a bank, it is to be assessed as personalty. If the holder is a domiciliaryof Texas and the suspense account is on deposit outside the State, the county of domicilemay assess the account. See Article 7147, V.A;C.S., and FirstTrust Joint Stock Land Bank of Chicagov. City of Dallas, 167 S.W.2d 783 (Tex.Civ.App.1942, error ref.).
In caseswhere no money is actually collectedand held in suspense, a differentresult obtains. Debts due a person over and above his indebtednessare taxable as personalty. See Article 7147, V.A.C.S., and Fielder, The Texas Tax Structure,Vol. 20, page XV, V.A.C.S. If the producer carries the suspense account as a potential asset without actually collecting themoney, no tax liability arises because there is no actual debt due until such time 

### as the F.P.C. acts 

### upon the suspendedrate. Further, the potential asset would be offset by a potential liability on the books of the producer; therefore, therewould be no debt due the producer "over and above his indebtedness".
SUMMARY
In evaluatingproperty for ad valorem taxation,a taxing authoritymay notconsider as income from gas property a price which has been "suspended"by the F.P.C., but can consider only the price in effect prior to the suspendedrate change. However, the fact that there is pending a hearing to determine whether the rate increase shouldbe granted can be considered to the 

### extent that suchHonorable R. L. Lattimore, Page 7 OpinionNo. ww-863

fact influences themarket 

### value of the property as of January 1. The suspense account representing the money collectedunder the price increase can be taxed as personalty. However, if such price increase is not actually collected, it cannotbe assessed for taxationbecause it is not a debt due the 

### taxpayer over and above his indebtedness.
Yours very truly,
WILL WILSON Attorney General of Texas

j&k N. Price Assistant
JNP:cm
APPROVED:
OPINION COMMITTEE: W. V. Geppert, Chairman
James R. Irion Jot Hodges J. Arthur Sandlin :VirgilPullium
REVIEWEDFOR THE ATTORNEYGENERAL By: Leonard Passmore