 .     -




                   me          A~~OENEY               GENERAL
                                     OP   ??EXAS

PRICE  DANIEL
ATTORNEYGENERAL
                                     December   10, 1952


           Hon. W. A; Hadden                Opinion No. V-1550
           County Attorney
           Pecos County                     Re:    Applicability of ad valorem taxes~
           Fort Stockton, Texas                    to oil royalties owned by Pecos
                                                   County Water Improvement Dis-
           Dear Mr.     Hadden:                    trict No. 2.

                        You request the opinion of this office on whether the
           royalty of 1/8th oi theof and gas produced tie+       a leame on land
           owned by the Pecos County Water Improvement District ‘No. 2 of
           Pecos County, Texas, is subject to ad valorem taxation against
           the District.   Your request is based upon the following informa-
           tion which you have furnished us.

                         The Pecos County Water Improvement District No. 2
           of Pecos County, Texas, is the owner of several tracts of land
           which the District has leased for oil and gas, and oil is now being
           produced and royalty paid from some of said tracts of land. The
           tracts of land in question were purchased by the District from
           prior owners and is property essential to the operation of the dis-
           trict.,, such as canals, reservoirs, etc. The money derived from
           this royalty is used in operating costs and maintenance of the sys-
           tem. The District was formerly a water district but changed to a
           conservation and’reclamation district under Section 59 of Article
           XVI’ of the Constitution.

                        Our State Constitution provides in part as follows:
                        44
                           . . . the legislature may, by general laws,
                   exempt from taxation public property used for
                   public urposes . . .” (Tex. Const. Art. VIII,
                   Sec. 2. P

                       Article 7150, Vernon’o Civil Sbtutes, was enacted pur-
           suant  to the authority granted to the Legislature by this constitu-
           tional provision, This article provideo in part:

                        “The following property rhall be exempt
                   from taxation, to-wit:
                         Y
                             . . .
.




    Hon. W. A. Hadden, page 2 (V-1550)



               “4. All property, whether real or personal,
          belonging exclusively to thitlstate, or any politi-
          cal subdivision thereof .?. ,            I.,

                In 1917, Section 59 of Article XVI was adopted as part
    of the Constitution of this State. It authorized the Legislature by
    appropriate legislation to conserve and develop water resources
    of the State. This section declares that the districts to be formed
    thereunder shall be regarded: as
               *
                  . . . .governmental agencies, and bodies
          politic and corporate with such poweraof govern-
          ment and with the authority to exercise ‘$~uchrights;‘.
          privileges, and functions concerning the subject
          matter of this amendment,as may be conferred by
                                     ,
          law.”

                That a water improvement distiict such as the one un-
    der consider,ation here is a political subdivision of the State and
    its property when used for a public purpose is exempt from taxa-
    tion is confirmed in the case of Bexar-Medina-Atascosa       Counties
    Water Improvement District No. 1 v. State, 21 S.m(Tex.
    ~~.APP.   l-   ,,error re . , w c sacs         law in this language:

                “The only issue in this cause is: Has tiedina
          County the power and authority to assess and col-
          lect taxes, state and county, on the dams, reser-
          voirs, canals, ditches, and other property neaessary
          for the conservation and distribution of waters in the
          district?

                “It i provided by article 8, 8 2, of the Consti-
                     4
          tution of ,exag, that the Legfalature may by general
          laws exempt from taxation public property used for


                   hthe tt     ted exemption in Article 7150 is broader
    ztt&ed,          tht irzision    is operative,to the extent of the
    Legislature’s power, that is, to exempt such property when used
    for public purposes, City of Abllene v. State, 113 S.W.2d 631 (Tex.
    CivApp. 1937, error iR sm. , :

               ,Subsection 4a of Article 7150, whichattempted to exact
    *payments in lieu of taxes” againbt dfstricts or’ganioed pursuant
    to Section 59. Article XVI of the Constitution. was held unconstitu-
                                                    hemical Bank 61
Hon. W. A. Hadden, page 3 (V-1550)



      public purposes, and in pursuance of that authority
      enacted Rev. St. 1925, art. 7150, in section 4,‘of
      which it is provided: ‘All property, whether ‘real
      or personal, belonging exclusively to this State, or
      any political division thereof,’ shall be exempt from
      taxation. The very statutory requirements for the
      creation:,and formation of water improvement dis-
      tricts would seem to stamp them as political divisions,         ,‘
      of the state, the county judge, the commissioners’
      court. the election of directors, all these are govern-
      mental powers provided for in detail by law. The dis-
      trict is not an ordinary corporation organized for pur-
      poses of gain to its members, but is a public agency,
      using the money raised by taxation to advance the in-
      terests  of the landowners within its jurisdiction.     It is
      a political corporation or division of the state which
      has principally for its object the administration of the
      government, or to which the powers of government, or
      a part of such’pwers,    have been delegated.    . . .*

            Under the holding in the above case, the use of the land
in question as a site for reservoirs,   canals, etc., is a use for a
public purpose, and if the property were being used exclusively
for that purpose it would undoubtedly be exempt from taxation. The
fact that the use, if a public one, results in the production of reve-
nue does not deprive the property of its exempt status.      Galveston
Wharf Co. v. City of Galveston, 63 Tex. 14 (1884); A. & M. Consol-
mated Independent School Dlst. v. City of Bryan, 143 Tex. 346 184
      d 914 (1945) Lower Colorado River Authority v. Chemic61
      & Trust Go.: 144 Tex. 326, 190 S . W . 2d 48 (1945) .

           On the other hand, property owned by a governmental
agency which is being used exclusively for a nonpublic purpose is
not exempt from taxation, even though income derived from the
property is devoted to the financing of the public functions of the
agency. Att’y Gen. Ops. O-2506 (1940), V-1399 (1952).

            The extraction of oil and gas is not a public purpose
within the contemplation of the Rowers conferred on waterdis-
tricts; and if the property in question was being held and used
solely for the purpose of leasing it for oil and gas development,
it would not be exempt from taxation. However, under the facts
you have stated, it appears that the property is being used pri-
marily for carrying on the public fun.ctions of the district and
that the leaeing for oil and gas production is only a secondary use.

           The question for decision 1~ whether the secondary use
hf the property for a nonpublic purpose, which produces income to
I   .




        Hon. W. A. Hadden, page 4 (V-1550)



        the district, will prevent it from coming withfn the exemption pro-
        visions of Article 7150.

                   In City of Abilene v. State, 113 S.W.td 631 (Tex. Civ.
        App. 1937, error dism.), after comparing the exemption provisions
        in Article XI, Section 9 of the Constitution (which exempts public
        property used exclusively for a public purpose) and in Article VIII,
        Section 2, the court said:

                        . These considerations lead us to the con-
                   l,



              clusion hat as to the power of the Legislature, to
              exempt public property from taxation, all such pro-
              perty should be regarded as ‘used for public pus-
              poaea’ when it is owned and held for public purpaea,
              but not owned or held exclusively for such purposes:
              and there has been no abandonment of such purposes.

                   *No valid argument can be made, we think, that
              public property owned and held only for public pur,-
              poses is not beyond the power of the Legislature to
              tax. ,.a

                   “But what about public property owned and held
              for public purposes but partly used for other pur-
              poses? Can there be any doubt that soch property is
              subject to taxation, unless its exemption is. in the first
              place, authorfeed by Constitution, art. 8, 8 2, and, in
              the next place, is provided for by a general law enacted
              by the Legislature?   There can be no doubt of it, If it
              can be said that such property is used for public pur-
              poses. . . -”

                    In view of this language, we are of the opinion that a
        secondary ume of a portion of the property for a nonpublic purpose
        would not sub ect the entire property to taxation. In Att’y Gen. Op.
        O-6486 (1945 j , it was held that a city hall did not become subject
        to taxation because a portion of the building was rented to private
        persons. So far as we can find, there has been no case decided in
        Texas in which the taxing authorities; while recognizing the exempt
        status of that portion of the property which is actually devoted to a
        public uee. have attempted to tax the portion which is used for a
        nonpublic purpose. However, we are of the opinion that the exemp-
        tion extends to the property as a whole and no part of it is taxable
        where the portion which is used for a nonpublic purpose is not
        distfnct from the remainder of the property.

                     In the present case, the exempt status of the surface eo-
        tafe is ‘not questioned, your inqufry relatind solely to ‘the.frdctional
Hon.   W. A. Hadden, page 5 (V-1550)



part of the mineral estate which is owned by the district. The
doctrine of severance of the estate created by the usual oil and
gas lease in this State from the surface of real estate is too well
established to require discussion.   However, we can find no clear
indication from the decisions that by the conveyance of 7/8ths of
the’minerals to the lessee the 1/8th ownership which to retained
by the lessor becomes severed from his ownership of the surface.
To the contrary, a subsequent conveyance of, the land by the lessor
would transfer his ownership in the mineral estate as well as the
surface estate, in the absence of an express reservation or excep-
tfon of the mineral estate. Japhet v. McRae, 276 S.W. 669 (Tex.
Comm.App.     1925); Bibb v. Rolan, 6 S W Zd 756 (Tex.Civ.App.   1928.
error, ref.). Under the facts in Victoiy ,. Hinson, 129 Tex. 30. 102
S.W.Zd 194 (1937). it was hel,d that the tax assessor could assess
the lessor’s royalty interest separately from the surface estate,
but the court declined to hold that there had been a severance of the
lessor’s mineral and surface ownership.

             Under these holdings, the net result of the District’s
leases was to retain l/&h of the minerals.combined       wtth the sur-
face in one ownership. Although the question is not free from doubt,
we are ‘of the opinion that, the District’s. owdershfp in the mixiezal
 estate is not held separate.ly from the surface estate and, since the
 District is using the property primarily for a public purpose, it may
 not be taxed for any portion of its ownershfpip. Consequently, the ”
 royalty owned by the District under the oil and gas leases is not subt
ject to taxation. This exemption, of course, does not extend to the
.7/8ths mineral interest which the lessees acquired under the leases.



            The   f/8 royalty interest owned hy S water
       improvement district uuder an of1 end gas: lease
       executed by the district is exempt frnm taxation
       where the di.strfrt owns and uses the la.nd for the
       primary purpose of matmtaintng reservoirs,      canalso
       etc.. in connection with the performance of its gov-
       ernmental funcl$ons. E.cis plrope~rtycw.me!tiand used
       by the district for. a public pulPpoSe wit&m t.he mean-
       ing of Art. 7150, subd, 4, V.C.S.

APPROVED:                              Yours very frulyE

W. V. Geppert                            PRECE DAXXEL
Taxation Divfston                      ~ttorxrcy General
Mary  K. WaYI
,Reviewing Assistant    .

Charles D. Mathews                     BYLze     W
                                             . 01lar
First Assistant
                                            Aeshntant
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