PRICE DASIEL 

AmORNEY GE)IERAL 

Hon. George H. Sheppard 

Comptroller of Public Account6 ..,” 

Austin, Texas Opinion No, V-555 

Re: Gas production tax liabilv 

ity on royalty interest 

owned by Dunn Estate 

under submitted facts. 

Dear Mr. 6heppard: 

It appears from your letter request that you have made 

a gas productien tax audit on the royalty interest of the Dunn Estate, covering the period from July, 1935, to January 1. 1948. The 

copy of your audit discloses that you have found additional taxes 

due from the Dunn Estate as follows: 

(1) For the period through the month of October 

1936, the sum of $704.19, accruing under the 1931 gas 

production tax act. 

(2) For the period through the month of April, 

1941, the sum of $2.395.52 accruing under the 1936 

amendment of said act. 

(3) For the period through the month of May, 

1945, the sum of $3,044.79 accruing under the 1941 

amendment of said act. 

(4) For the period through the month of December, 1947, the sum of $1,275.73 accruing under the 

1945 amendment of said act. 

It further appears that during all the time covered by the 

audit, the Dunn Estate paid production taxes based on one-eighth 

of the gross receipts of the lessee who sold the full production 

from the Dunn lease. 

The gas in question was produced under an oil and gas 

lease wherein the lessee agreed to purchase from the lessor all 

its Wpply of natural gas used in Nueces Ceunty and to pay lessor 

for Ohe gas produced under the lease, one-eighth of the amounts 

received by lesree from the sale of gas to parties using the same 

in Nueces County whether produced from lands covered by the 
. .~: ’ : ; f.‘,l, ,~ ,I 

Hon. George H. Sheppard, Page 2 (V-555) 

lease or from wells situated on lands not included in the lease. 

In 1930, this lease was by written contract amended, and, as 

amended, provided that, in lieu of the above-stated method of 

payment for the one-eighth royalty, the lessor was to pay lessee for one year on the basis of a minimum of 4,000,OOO cubic 

feet of gas per day and for the next twenty-one year6 on the 

basis of a minimum of 5,000,OOO cubic feet of gas per day. 

Such contract provided that the lessee would pay to lessor on 

the basis of the minimum stated whether that amount was produced from the leased premises or not. The only condition 

was that the total production from all leases held by lessee 

be sufficient to supply the minimum. There was a further 

proviso to the effect that if more than the minimum was produced from the leased premises, the lessee would pay lessor 

one-eighth of the additional proceeds received for such additional production. This contract aleo provided that lessor 

would be paid on the basis of the sale price per thousand cubic feet as set forth in a contract between lessee and the City 

of Corpus Christi, and that if such city contract terminated, 

then on the basis of the highest price received by lessee, but 

in PO event less than 5 cents per thousand cubic feet. Your 

summary of the gas audit discloses that the minimum amount 

of gas was never produced from the leased premises, and that 

during the months of May, June, and August through December, 

1939, and January through April, 1940, and May 1941 through 

December 1941, no gas was produced from the Dunn lease. 

The Dunn Estate contends that it does not owe the additional tax which is set up in the audit on the basis of the amount actually received for its one-eighth royalty for the following reasons: 

(1) That the 1931 act does not make a royalty 

owner a producer. 

(2) That the term “market value” a6 used in 

the 1931 act is to be given its ordinary meaning. 

(3) That the term “market value” as used in 

the 1936 amendment is to be given its ordinary 

meaning. 

(4) That under the 1945 amendment the definition given the term “market value” does not 

warrant basing the production tax on the actual 

amount received by a royalty owner producer. 

(5) That the amount received by the Dunns, 

under the amended contract, in addition to the 
. . 

Hon. George H. Sheppard, Page 3 (V-559) 

amount actually received by the lessee for the oneeighth royalty, was in consideration of the cancellatlon of a previous contract, and was not received 

by the Dunn6 for the sale to lessee of its one-eighth 

royalty. This last contention covers ~11 four taxing 

periods as set out in your audit. 

The rpplicablo provisions of.the 1931 Act, H. B. No, 547, 

Ch. 73, p. 111. Acts 42nd Leg., read, in part, as follows: 

Y 

. . . every person engaging or continuing within this State, in the business of producing and saving 

in paying quantities. for sale or for profit, any natural 

gas, including caoinghead gas, frem the .soil or waters 

of this State l . . . 

‘Are hereby declared to be ‘producers’ and engaged in the business of producing natural gas within this 

state. . . . 

“A tax shall be paid quarterly by each such producer on the amount of gas produced and saved within this 

State. . . upon the fiist sale thereof in intrastate commerce upon the following basis: A tax equivalent’to two 

(,2%) per cent of the market value of the total amount of 

gas produced and saved within this State. , .* 

The applicable provisions of the 1936 amendment, H. B. 

No. 8, Ch. 495, Acts 44th Leg., 3rd Called Session, read, in part, 

as follows: 

‘A tax shall be paid by each such producer on the 

amount of gas produced and saved within this State, s . . 

upon the following basis: A tax equivalent to three per 

cent (3%) of the market value of the total amount of gas 

produced and saved within this State, , I . at the actual 

market value thereof, as and when produced. . . 

“The purchaser of gas shall pay the tax on all gas 

purchased and deduct tax so paid from payment due 

producer or other interest holder. o . making such payments so deducted to the Comptroller of Public Accounts 

by legal tender or cashier ‘a check payable to the State 

Treasury. (Emphasis added). 

This 1936 amendment doer not define the term *market 

value.* 

The 1941 amendment, H. B. No. 8, ch. 184, p; 269, Acts 

47th Leg., reads, in part, as fellows: 
I . 

.’ 

. 

Hon. George H. Sheppard, Page 4 (V-555) 

‘A tax shall be paid by each producer en the 

amount of gas produced within this State. . , eguivalent te five and @vo tenUta~5.2) per cent of the market 

value of all gas including casinghead gas produced 

and saved within this State. , . 

“The market value of gas produced in this State 

shall be the value thereof plus any bonus, or premium, 

or anything of value paid therefor, or any sum of meney 

that such gas will reasonably bring if produced and sold 

in accordance with the laws, rules and regulations of 

this state. . . 

‘In case gas is sold for cash the tax shall be cemputed on the producers’ gross receipts of such sale; 

. . . 

“For the purpose of this Act ‘producer’ shall mean 

any person ownin 

P’ 

controlling, managing, or leasing 

any gas well and or any person who produces in any 

manner any gas by taking it from the earth or waters 

in this State, and shall include any person owning any 

royalty l r other interest in any g a s l r its value whether produced by him, or by some other person or. his 

behalf, either by lease, contract, or otherwise, , . 

‘Royalty owners shall mean and include all per EONS 

owning any mineral rights under any producing leasehold 

within this State, ether than the working interest, which 

working interest is that of the person having the manrgement and operation of the well.” 

The 1945 Amendment, H. B. No. 62g, Ch. 269, p. 423, Acts 

49th Leg., reads, in part, as follows: 

“There is hereby levied an occupation tax on the 

business l r occupation of producing gas within this 

State, computed as fallows: 

“‘A tax shall be paid by each producer on the 

ameunt of pas produced and saved within this Stare 

equivalent to five and two-tenths (5.2) per cent of 

the market value thereof .as and when produced. . . .’ 

“The market value of gas produced in this State 

shall be the value thereof at the mouth of the well; 

however, in case gas is sold for cash only, the tax 

shall be computed on the producer’s grass cash receipts. ~ . .” . 
Hrr. George H. Sheppard, Page 5 (V-555) 

The definition of ‘producer* as contained in the 1941 

un&ndment was not changed by the 1945 amendment. This gas 

production tax act, with amendments is codified aa Article 7047b, 

V.C.S. 

Your audit also discloses that you found additional tare8 

due by virtue of the amourtr paid lessor under the amended contract during those months in which there was no production, 

A determination of brrror% Bve ColltenMowa aa above 

aamrrmrimed will determine %c bu liabfllty of lossn fou tie additlonal tax as showm in your audit. We will discuss them ip the 

order stated. 

FIRST CONTENTION 

W.e have carefully read the 1931 act in its entirety and do 

not find any language therein which in our opinion makes a royalty 

ow8er a “producer.’ The Supreme Court of Texas in Canadfan 

River Gas Co. v. Bivirs. 153 S.W. (Zd) 432, in answering a certified question aa to the status of gas royalty holder under the act 

as amended in 1936, stated that *the gas royalty holder is an ‘interest holder’ within the meaning of this statute.” The 1931 Act 

did not contain the words “or other interest holder,” It is. therefore, our opinion that the Dunn Estate is not liable for the additional gas production tax in the amount of $704.19 for the period 

from July, 1935. through October, 1936. 

SECOND CONTENTION 

Our holding on the proposition prosentad by your first 

contention makes it unnecessary to diecuss this contention. 

THIRD CONTENTION 

We have read the 1936 Amendment in conjunction with 

the 1931 Act; and, in light of the opinion of the Supreme Court in 

W. R. Davis, Inc. v. State, 180 S.W. (td) 429 (which construed the 

term -market value” as defined in the 1941 amendment), have arrived at the conclusion that the term “market value” as used in 

the 1936 Amendment should be given its ordinary meaning. It is, 

therefore, our opinion that the Dunn Estate is not liable for the 

additional gas production tax in the amount of $2.395.52 for the 

period from November, 1936. through April, 1941. 

FOURTH CONTENTION 

The following excerpts from the 1945 Amendment, previously quoted in part, are relevant portions of the statutory definition of “market value “: 

. 
., . 

Hon. George H. Sheppard, Page 6 (V-555) 

“The market value of gas produced in this 

State shall be the value thereof at the mouth of 

the well; however, in case gas is sold for cash 

only, the tax shall be computed on the producer’s 

gross cash receipts. . . ,” 

The 1941 amendment, which was construed in the Davis 

case (supra), among others, gave the following definition: 

“In case pas is sold for cash the tax shall 

be computed on ahe producer’s gross receipts 

of such sale: . . .” 

Although the Supreme Court in the Davis case was primarily concerned with that part of the definition of “market value.~ which 

relates to cases in which the gas was processed for its liquid hydror 

carbon content, the following significant language appears: “When we 

view this Act as a whole, and especially when we consider the definition of ‘market value’ therein contained, we are convinced that it 

demonstrates a clear legislative intent to make the pood faith sale 

rice by the producer to the initial purchaser the standard of value 

5-c on w ich the purchaser’s liability to the State for taxes must be computed.” (Underscoring ours) 

The one-eighth royalty gas was sold to the lessee under the 

amended contract for cash only. It is, therefore, our opir:ion that 

the additional taxes demanded of the Dunn Estate covering *be periods after the 1941 and 1945 amendments, as set up in your audit 

are due and owing, unless the amount paid in cash, or a: least a 

part thereof, was not paid for the gas but for the coosidera:ior of 

the cancellation of a prior contract. This brings us to a cor.;ideratiqn of the fifth contention. 

FIFTH CONTENTION 

We do not agree with this contention. Lessor did not at 

any time sell or agree to sell anything to the lessee except its oneeighth of the gas produced, either under the first contract or the 

amended contract. Although the first agreement turned out to be 

“onerous” to the lessee, it was an agreement providing for a “good 

faith sale price” for the one-eighth royalty. When lessor azd lessee 

in their contract, provided that lessee was to pay to lessor fer his 

one-eighth royalty, in addition to the amount received therefer by 

lessee, one-eighth of the amount received by lessee from the sale 

of gas to parties using same in Nueces County from wells situated 

on lands not covered by the lease, they were contracting for the 

“sale price” of the Dunn’s one-eighth royalty. Likewise they contract for a “sale price” in the amended contract. The amended 

contract merely provided for a different method of computing the 

“sale price.” 
I . 

Hon. George H. Sheppard, Page 7 (V-555) 

As stated above, there was no actual production of gas 

from the leased premises from May, 1941, through December, 1941. 

The leroee paid the Dunn Estate during this period on the minimum 

basis according to the amended contract, It is true that before 

there can be a gas production tax, there must be gas produced; 

but these payments were made to lessor as additional consideration for gas that had been and was to be produced thereafter under 

the contract. This same question was considered in Attorney General’s Opinion O-6355, and we are enclosing a copy thereof. 

It is, therefore, our opinion that the Dunn Estate is liable for an additional gas production tax as set up in the Comptroller’s audit in the amount of $3,044.79 accruing under the 1941 

amendment to Article 7047b. V.C.S.. and is liable for the additional gas production tax as set up fn said audit in the amount of 

$1,275.73 accruing under the 1945 amendment to Article 7047b. 

V.C.S. 

SUMMARY 

Under the facts stated the Dunn Estate is not 

liable for the additional gas production taxes set 

up in the Comptroller’s Audit for the period of 

time from the beginning of the audit to the effective date of the 1941 amendment of Art. 7047b, V.C.S., 

but is liable for the additional gas production taxes 

as disclosed by such audit for the period of time 

since the effective date of said 1941 amendment. 

Yours very truly 

ATTORNEYGENERALOFTEXAS 

W. V. Geppert 

Assistant 

W VG/egt/lh/JCP 

APPROVED