                    AUWI-IN,   TEXAS      78711

                          December 17, 1968


Honorable Gene Rumsell                 Opinion No. M-319
County Attorney
Burnet County Courthouse           Re:     Whether taxing authori-
Burnet, Texas 78611                        ties may assess and col-
                                           lect ad valorem taxes
                                           based upon the value of
                                           a leasehold in land
                                           against the lessor or
                                           lessee, and related
Rear Mr. Russell:                          questiona? RQ 337
      In your letter of November 12, 1968, you request
the opinion of this office as to (1) whether the taxing
authorities may assess and collect a tax based on the
value of a leasehold in land and (2) whether such assess-
ment may be made against the owner of the leasehold or
whether it must be made against the lessor.
      We have been advised by your letter of request and
sample representative copies of lease agreements that the
land involved is private land: the lease term is for a
period of 99 years; buildings, structures or other improve-
ments have been placed on the property; the terma of the
lease provide that the Lessee may place any buildings,
structures or other improvements and same shall remain the
property of the Lessee subject to a Landlord's Lien to
secure payment of the rental provided for in the lease
and, subject to said lien, may be removed at the expiration
of the lease agreement; and a fence may be erected at Lessee's
expense without any express provision for its removal.
      The pertinent constitutional provisions and statutory
enactmenta are as follows:
     Article VIII, Section 1, Constitution of Texas.
          "Taxation shall be equal and uniform,
     All property in this State, whether owned by
     natural perron or corporations, other than
     municipal, 8hall be taxed in proportion to its
     value, which shall be ascertained as may be
     provided by law. . . ."

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Hon. Gene Russell, Page 2, (M-319)

     Article VIII, Section 2, Constitution of Texas.
          "All occupation taxes shall be equal
     and uniform upon the same class of subjects
     within the limits of the authority levying
     the tax; but the legislature may, by general
     laws, exempt from taxation public property
     used for public purposes; actual places or
     [of] religious worship, *'* * places of
     burial not held for private or corporate
     profit; all buildings used exclusively
     and owned by persons or associations of
     persons for school purposes l l l and
     institutions of purely,public charity:
     and all laws exempting property from
     taxation other than the property above
     mentioned shall be null,and void."
     Article VIII, Section 17, Constitution of Texas.
          "The specification of the objects and
     subjects of taxation shall not deprive the
     Legislature of the power to require other
     subjects or objecta to be taxed in such
     manner as may be consistent with the prin-
     ciples of taxation fixed in this Constitution."
     Article 7145, Vernon's Civil Statutes.
           "All property, real, personal or
      mixed, except such as may be hereinafter
      expressly exempted, is subject to taxation,,
      and the same shall be rendered and listed
      as herein prescribed,"
      Article 7146, Vernon's Civil Statutes.
              "Real property for the purpose of
      taxation, shall be construed to include the
      land itself, whether laid out in town lots
      or otherwise, and all buildings, structures
      and improvements, or other fixtures of what-
      soever kind thereon, and all the rights and
      privileges belonging or in any wise apper-
      taining    thereto, and all mines, minerals,
      quarries and fossils in and under the same."

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     Hon. Gene Ruasell, Page 3, (R-319)


              Article 7149, Vernon's Civil Statutes.
                    ..
                         .   .   .

                    I’. . .

                   "Tract or lot."--The term, 'tract or
              lot,' and 'piece or parcel,' of real
              propert , and 'piece and parcel' of
              land, wt erever used in this title,
              shall each be held to mean any quan-
              tity of land in possession of;owned
              by or recorded as the property of the
              same claimant, person, company or
              corporation.”
                    h.       .   .

                   Walue, "--The term, 'true and full
              value,' wherever used shall be held to
              mean the fair market 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 not at forced or
              auction sale.
                   HPerson."--The term, 'person;'
              shall be conrtrued to include firm,
              company or conporation.,"
              Article 7173, Vernon's Civil Statutes.
                   "Property held under a lease for
              a texm of three years or more, or held
              under a contract for the purchase thereof,
              belonging to this State, or that is
              exempt by law from taxation in the hands
              of the owner thereof, mhall be considered
              for all the purpose8 of taxation, as the
              property of the person so holding the
              mame, exaept a8 otherwise specially pro-
              vided by Iaw . . .'



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x.


                                                    :
          )
Hon. Gene Russell, Page 4, (M-319)

     Article 7174, Vernon's Civil Statutes.
          "Each separate parcel of real prop-
     erty shall be valued at its true and
     full value in money, excluding the value
     of crops growing or ungathered thereon.
           II
            . . .
          "In determining the true and full
     value of real and peraonal property the
     assessor shall not adopt a lower or dif-
     ferent standard of value because the
     same is to serve as a basis of taxation,
     nor shall he adopt as a criterion of
     value the price for which such property
     would sell at auction or a forced sale
     or in the aggregate with all the prop-
     erty 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 fairly worth in money at
     the time such assessment is made.
           "Taxable leasehold estates shall
      be valued at such a price as they
      would bring at a fair voluntary sale
      for cash.
           "Personal property of every
      description shall be valued at its
      true and full value in money."


      Article 7319, Vernon's Civil   Statutes.


           "For the purpose of taxation, real
      property shall include all lands within
      this State, and all buildings and fixtures
      thereon and appertaining thereto, except
      such as are expressly exempted by law.
      Cur State Constitution and statutes provide that
certain described properties shall be exempt from ad
valorem taxes. See Article VIII, SSl and lb, Article


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Hon. Gene Russell, Page 5, (W-319)

XI, Sec. 9, Constitution of Texas, and, pursuant to
the authority of Article VIII, S2, Constitution of Texas,
Article 7150, Vernon’s Civil Statutes of Texas. There-
fore, all property in this State is subject to taxation
unless exempted by either the Constitution or the stat-
utes of this State.
       Being private in nature, this land and leaae-
hold are not exempt by reason of Article VIII, Sec. 2,
Article XI, Sec. 9, of the Constitution of Texas, or
Article 7150, Vernon's Civil Statutes. Neither is
the taxability of this real property, which is covered
by a lease for a term of more than three years, governed
by Article  7173, aupra, beaauae of its private nature.
A lessee would not be liable to pay taxes on the lease-
hold unless the lm so provides. If Artiale 7173 is
viewed as an exercise of Legislative power to tax the
leaaee under prescribed conditions, then it can be
stated tha,tthe Legislature has prwided that a leaae-
hold eetate is a taxable estate under those conditions.
      This Statute (formerly Article 4691, Revised
Civil Statutes of Texas) was ~construedby the Supreme
Court of this State in the case of Tramwell v. Faught,
74 Tex. 557, 12 S.W. 317 (18891, as applicable to the
leasehold estate and not to the crwnershipof the fee
in the following language which we quote from the opinion:
           II
            . . . If appellant had held the lands
      under an absolute lease for a period of
      three years or more, his leasehold estate
      would have been subject to taxation under
      such value as it would bring at a fair
      voluntary sale for cash, but he would not
      have been liable to taxes upon the value
      of the freehold estate in lands."
        Our research does not reveal that this ruling of
the Supreme Court has been departed from, but this lan-
guage is confined to the particular factual situation
therein   presented, i.e. "the lands" referred to are
tho8e "certain school lmda" leased from the State.
Article 7174, supra, provides how such leaaehold
estates shall be valued.


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Ron. Gene Russell, Page 6,' (M-319)

      The case of Daugherty v. Thompson, 71 Tex. 192,
9 S.W. 99 (1888), was cited by the court in the Tramwell
case as authority for the above quoted lanquaqe. The
case involved no private land but rather a-lease of
county school lands to a private individual for a period
in excess of three years and involved a construction of
what now are Articles 7173 and 7174. See also State v.
Taylor, 72 Tex. 297, 12 S.W. 176 (1888) and Bashara v.
Saratoga Independent School Diet., 139 Tex. 532
S.W.2d 631 (1942). The court in the Daugherty Aa\%3'
stated the law as follows:
          "All these statutory provisions
     must be construed in the light of the
     constitutional provisions applicable
     to taxation. Article 4673 [7150] waa
     doubtless enacted under the power
     expressly conferred on the legislature
     to exempt certain property from taxa-
     tion by section 2, art. 8, of the con-
     stitution. That section of the con-
     stitution seems to apply to property
     owned by persons or corporations in
     private right, but which, from the
     use to which it is applied, is, in a
     qualified sense,deemed public property.
     Leases of such property for a purpose
     not carrying the exemption from taxa-,
     tion would doubtless be embraced in
     article 4691, Rev.St., [71731 and
     therefore subject to taxation againat
     the holder of the leasehold, if it be
     for a term of three or more years.
non . Gene Russell, Page 7, (M-319)


      other than municipal, shall be taxed
      In proportion to its value.' While
      such property leased for a term of
      three or more years, for a purpose
      not carrying the exemption, would
      become subject to taxation at its
      full value, yet the legislature has
      parer to impose the tax, on the
      value of the leasehold, on the lessee;
      but in such case, in valuing the real
      estate for taxation against the wner,
      it would seem that the value of the
      leasehold should be deducted, for
      otherwise there would be double
      taxation, which, if permissible,
      will not be presumed to have been
      intended, in the absence of a law
      that will not bear any other rea-
      sonable construction. Property
      exempted frim taxation in the hands
      of its Owner while used for the
      purposes on account of which the
      exemption is given, will doubtless
      beaame subject to taxation if leased,
      for any period, to be used for a
      purpose whioh does not itself give
      the exemption, unless in cases in
      which the exemption is given by
      the constitution, or under a con-
      tract that would be impaired by




                       -1558-
Hon. Gene Russell, Page 8, (M-319)

     to the contrary, the Owner of the real
     estate must pay taxes on the entire
     value of the land, whether leased or not.
     In cases to which article 4691 I71731
     is applicable, it must be held that -
     it was the intention of the legislature
     only to impose on the lessee a tax
     based on the value of the 'taxable
     leasehold estate,' and not impose
     upon him a tax based on a sum equal to
     the full value of the real estate,
     to be ascertained as provided in sub-
     divisions 1, 2, 3, art. 4692, Rev.St.,
     [Subdivision 4 of 71741." (Rmphasis
     added)
      The Supreme Court in the case of City of Beaumont
v. Fertitta, 415 S.W.Zd 902 (1967), analyzed the problem
at page 912, as follows:
           "It was said at oaue 173 in the
      case of Big Lake Oil Co: v. Reagan County,
      217 S.W.2d 171, at 173 (Tex.Civ.App.
      1948, error refused):
          "It is deemed to be elementary
     that in order to warrant an assessment
     and collection of a tax the legal
     authority must be found in the
     Constitution or Statutes of the State."
           "The land is exempt in the handa




           II.. . Hwever., our state has a
      peculiar taxing syatem unlike any other
      state we have found in our research.
      Our Constitution requires all private


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    Hon Gene Russell, Page 9,    (M-319)

         property to be taxed except that
         which must be specifically exempt
         by the Constitution and that which
         the Legislature may or may not
         exempt. This leaves the power to
         authorize or not to authoriae taxa-
         tion of municioal orooertv with the
         Legislature. ?he legislaiure has
         seen fit not to authorise taxation
         of such municipal property, but has
         provided for the taxation of long
         term leaseholds on municipal prop-
         erty whereby taxes will be paid by
.
         the wner of the beneficial inter-
         est in the property. Bnphasis added)
              "The question still remains,
         is the 1935 amendment invalid for
         the reason that it amounts to an
         agreement for the commutation or
         exemption of taxes for which respond-
         ents may be liable on the leasehold
         estate? We say it is not invalid
         for two reasons:
         First, paragraph 9 of the 1928
         contract quoted above does not
         deal with taxes which may be assess-
         able against the leasehold. It only
         seals with taxes which mav be assess-
         able against the property covered by
         the lease. The respondents (lessees)
         would not be liable for any such taxes
         except by contract and, as stated anove,
         respondents could be relieved of this
         contractual obligation for a valid
         consideration, and we have held that
         there was such a consideration moving from
         the respondents to the petitioner. In
         the second place, if paragraph 9 of
         the 1928 contract=uld   be construed
         to cover taxes on the leasehold
         respondents' (lessees:) agreemeh
         to pay them furnished no part of the
         consideration for the 1928 contract
         because they were obligated by law
         to pay them. Consequently, the new


                         1560-



                         .
Hon. Gene Russell, Page 10, (M-319)

     consideration provided in the 1935
     amendment, being in lieu only of the
     consideration provided in the 1928
     contract, could not be for the
     remission of taxes which may be due
     against the leasehold estate." (Empha-
     sis added)
      In the case of Phillips Chemical Co. v. Dumas
Independent School District, 361 U.S. 316 80 S.Ct.
474, 4 L.Ed,2d 384, opinion conformed to 434 S.W.Zd
779, reh. denied 362 U.S. 937, 00 S.Ct. 749, 4 L.Rd.2d
751, the United States Supreme Court in dealing with
the problem of the State and subdivisions' right to
tax lessees of federal lands, held at page 380:
             "As construed by the Texas courts,
     Article 7173 is lesa burdenscme than
     Article    5240 in three respects. First,
     the measure of a tax under Article 7173
     is not the full value of leased tax-
     exempt premises, as it apparently is
     under Article 5248, but only the price
     the taxable leasehold would bring at
     a fair voluntary sale for cash--thee
     Article 7173 imposes no tax on a-
     lessee whose lease is for a term of
     less than three years. Finally, and
     crucial here, a lease for three years
     or longer but subject--like Phillips'
     --to termination at the lessor's
     option in the event of a sale is not
      Ia leaae for a term of three veara or
     more' for purposes of Article-7173.
                          , 74 Tex. 557, 12
                           re, because of the
     termination provisions in its lease,
     Phillips could not be taxed under
     Article 7173. (Emphasis added)
           "Although Article 7173 is, in
      terms, applicable to all ~leaseeswho
      hold tax-exempt property under a lease
      for a term of three years or more, it
      appears that only lessees of public

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Hon. Gene Russell, Page 11, (M-319)

      property fall within this class in
      Texas. Tax exemptions for real prop-
      erty owned by private organizations
      --charities, churches, and similar
      entities--do not survive a lease to
      a business lessee.
      In light of the above discussion in answer to
Question (11, it is the opinion of this office that
a leasehold estate is a "taxable estate" under Sub-
division 4 of Article 7174 and can have application
to no other leasehold estate than such as are made
taxable by Article 7173. See 54 Tex.Jur.2d p. 189,
Taxation 555. In all other cases, in absence of a
constitutional provision or statutory enactment
directing to the contrary, the wner of the real
estate must pay taxes on the entire value of the
land, whether leased or not. Article 7173 is not
an exemption statute, but one imposing a tax on
the value of the leasehold, on the lessee who, unless
the law so provided, would not be subject to such
tax.
      While the Legislature could subject leasehold
interests in non-exempt property to taxation if it so
chose, under the present plan of taxation in force in
this State the owner of the freehold of non-exempt
property is liable for taxes on the entire value of
the property even though it is under lease. 40 Tex.Jur.
98, Taxation, S66.
      The negative answer to your Question (1) would
render moot Question (2) but for the particular factual
situation herein presented. The fence would become
part of the freehold and be taxable as such, but the
contract entered into as to the character of all other
improvements requires further discussion as to their
nature for tax purposes. Attorney General Opinion No.
WW 691 (1959)
      Section 1 of the constitutional Article VIII,
supra, and Article 7145, supra, require that all prop-
erty be subject to taxation and provide for exemptions.
      Article 7146, supra, in defining real property
for the purpose of taxation, does not limit the defini-
tion of real,property to include only lands and buildings,

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Hon. Gene Russell, Page 12, (M-319)

but also includes structures and imprwements or other
fixtures of whatsoever kind. There can be no doubt
that this legislative definition is sufficiently broad
to cwer and include the value of an improvement on
land.
      Moreover, there is a general principle of law
that separate interests in realty are separately taxed
to the several owners, as is well stated in Ha er v.
Stakes, 116 Tex. 453, 294 S.W. 835 (19271, as
                                            ---3miGs:
            "Real estate is ordinarily taxed
     as a unit; yet, where there have been
     severances   by~conveyance, exception,
     or reservation, so that one nortion of
     the realty belongs to one person and
     other portions to others,   each owner
     should pay taxes under proper assess-
     ment against him of the portion owned
     by him." (at p. 842).
      The court cited State v, Downman, 134 s-w. 787
(Tex.Civ.App, 19111, which was affirmed by the United
States Supreme Court in Downman v. State of Texas, 231
U.S. 353 (1913). In its affirming opinion, the Supreme
Court said:
           YJsually real estate is taxed as
      a unit: but as different elements of
      the land are capable of being severed
      and separately owned, the statute may
      authorize a separate assessment against
      the owners of the severed parts. Accord-
      ingly, if the title has been severed,
      land may be taxed to one, timber to
      another, or land to one and coal to
      another. The state court held that
      such was the law of Texas, in view of
      the general language of the statute
      defining real estate as including not
      only the lend itself, but the buildings
      on the land and and the minerals under
      the land."


                        -1563-
.




    Hon. Gene Russell, Page 13, (M-319)

          The statute considered by both courts was Article
    5062, Sayles' Ann.Civ.St. 1897, which was in every respect
    pertinent the same as present Art. 7146, supra.
          However, in these types of freehold estates or
    interest of the same uniform kind in the same tract of
    land being a separate entity for purposes of taxation,
    the grant is more than the mere license to enter and
    use the property, it is a conveyance of the property
    itself. Except for the improvements, in the present
    case, no passage of title to severed elements and the
    creation of distinct taxable property exists. See 54
    Tex.Jur.Zd 188, Taxation, 955.
           There is no authority which permits the value of
    improvements erected by persons not owners of the land
    to be excluded fram an assessment on the imprwements
    against a different party except where the improvements
    have been severed from the land by contract or other-
    wise and are owned by sane person other than the Owner
    of the lot. Restated, the general rule is that improve-
    ments are fixtures and belong to the owner of the land
    as part of the realty unless made a chattel by some
    recognized act of severance , either actually or construc-
    tively. A contract   may operate as a constructive sev-
    erance.   See Wright v. MacDonnell, 88 Tex. 140, 30 S.W.
    907 (1895); Clayton v. Phillips, 159 S.W. 117 (Tex.Civ.
    App. 1913, no writ); Winchester Fire Ins. Co. v. Roan,
    215 S.W. 985 Tex.Civ.App. 1919, error ref.11 Edwards v.
    Thannisch, 254 S.W. 523 (Tex.Civ.App. 1923, no writ),;
    and Haverfield Co. v. Siegel, 366 S.W.Zd 790 (Tex.Civ.
    APP.7
          In Armstrong v. Mission Independent School Dist.,
    195 S.W. a95 (Tex.Civ.App. 1917 [reversed on other grounds
    in 222 S.W. 203 (Tex.Connn'n.App.1920, jdgmt. adopted)],
    the Court held that improvements placed upon the land
    of a railroad company by a lessee with an agreement that
    it was for the use of the lessee and with the further
    agreement that it could be remwed was personal prop-
    erty and not real estate.  The court said at page 896:
               "The property seised for the taxes
          of the Mission  Oil Company was personal
          propert and not real estate, because
          it oonsx sted of imprwements placed upon

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        Hon. Gene Russell, Page 14, (M-319)

              the land of a railroad cunpany by a
              lessee with an agreement that it was
              for the use of the lessee and with
              the further agreement that it could
              be removed. V.S.C.S. 7505; Wright
              v. Macdonnell, 00 Tex. 140, 30 S.W.
              907; Harkey v. Cain, 69 Tex. 146,
              6 S.W. 637; Moody v. Aiken, 50 Tex.
              65.
                  "If it were not personal prop-
              ertyand were real estate, it could
             not have been taxed as the property
             of the Mission Cotton Oil Company
             [Lesseel, but as the propert of
             the railroad company [LessorY that
             owned the land to which the improve-
             ments were affixed."
              Under the foregoing authorities, the intention
        and agreement of the parties respecting title to the
        improvements is given pre-eminence. See
        MacDonnell, supra; Edwards v. Thannisch,
        Hundred Main v. City of HOuAtOn, 1-W.
        Civ.App. 1941, dism., Judg. corrected); and R ers v.
        Ft. Worth Poultry & Egg Co., 185 S.W.Zd 165 7?ilm3x
        App. 1945 no writ); Attorney General Opinion No.
        M-298 (19&3).
              Therefore, under the present factual situation,
        the parties to the lease agreement expressly provided
        that any improvements, except the fence, placed on the
        land of the Lessor by the Lessee were to remain the
        latter's property and might be removed, subject to a
        Lessor's Lien for rents due, upon the termination of
        the lease.
              Thus, the subject property remaining that of the
        Lessee during the existence of the lease and thereafter,
        it is the opinion of this office in answer to Question
        (2) under the facts presented, that the Lessee is liable
        as owner for the taxes thereon. The improvements should
        be assessed for taxation against the Lessee as personal
        property wned by him and valued as provided for in
        Article 7174, supra. Attorney General opinion No. WW
        691 (1959).
                      .
                                -1565-
. .   .




          Hon. Gene   RUSSAll,   Page 15, (M-319)

                                   SUMMARY
                    Under the factual situation pre-
               sented, a leasehold estate is a "taxable
               estate" under Subdivision 4 of Article
               7174, V.C.S., and can have application
               to no other leasehold estate than such
               as are made taxable by Article 7173,~
               V.C.S. In all other cases, in absence
               of a constitutional provision or statu-
               tory enactment directing to the con-
               trary , the owner of the real estate must
               pay taxes on the entire value of the
               land, whether leased or not.
                    However, under the factual situation
               presented, the intention and agreement
               of the parties respecting title to the
               improvements, the Lessee is liable as
               owner for the taxes thereon as personal
               property owned by him and valued as
               provided for in Article 7174, V.C.S.
                                               A very truly,



                                                ney General of Texas
          Prepared by Alan H. Minter
          Assistant Attorney General
          APPROVED:
          OPINION COMIWITEE
          Kerns Taylor, Chairman
          James BrOadhUrSt
          Houghton Brcwnlee
          Linward ShiVerA
          Fisher Tyler
          A. J. CARUBBI, Jr.
          Executive ASSiStAnt




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