                             October   13, 1949


Hon. Dorman Nickels                     Opinion No. V-93 5.
County Attorney
Wharton county                          Re:   Correct method of assessing
Wharton, Texas                                taxes on royalty interests  in
                                              a unitized oil and gas produc-
                                              tion unit which is located in
                                              two school districts.

Dear    Sir:

               You request   our opinion on the following     question:

                “Where landowners have executed mineral leases
        with pooling agents and the production unit has been
        subsequently   formed and operated, what is the correct
        way to assess   for taxes the royalty interest, and the
        correct method to allocate the taxes amongschool      dis-
        tricts where the production unit is located In two school
        districts 7 a

               In connection with your lettkr request     you subm&ed     a
brief   in which you give us the following facts:

                “The Chicago Corporation   is now the operator of
        a unitized oil, gas and mineral production unit in Whar-
        ton County, said operator holding said sev’eral leases
        from various land owners.     This unit comprises 3693.42
        acres.    The pooling clause in the various leases is here
        quoted:

               ‘Lessee   is hereby given the right and power
               to pool or combine the land covered by this
               lease or any portion thereof with any other
               land. lease or leases when in lessee’s        judg-
               ment it is necessary     or advisable   to do so
               in order to properly develop and operate said
               premises,    provided that no unit so created
               shall exceed 3700 acres in area.        If produc-
               tion is found OP the pooled acreage,       it shall
               be treated as if production is had from this
               lease, whether the well or wells be located
               on the premises     covered by this lease or not.
               In lieu of the royalty elsewhere      herein spec-
               ified. lessors   shall receive on production
4404
       Hon. Dorman     Nickels.   Page    2 (V-935)




                  from a unit so pooled only such portion of
                  the royalty  stipulated herein as the amount
                  of his acreage placed in the unit or his roy-
                  alty in&rest therein bears to the total acre-
                  age so pooled in the particular  unit involved.’

                    “The unit lies partly in Hungerford Common
            School District No. 25 and partly in the East Bernard
            Independent School District.       The acreage of the lease
            is split between the two districts      in.the following per-
            centagesi   35% thereof lies in the East Bernard District
            and 65% thereof lies in the Hungerford District.            One
            dry hole has been drilled on a portion of said unit lying
            in the East Bernard Independent School District and
            three producing gas wells have been brought in on that
            portion of the unit lease lying in Hungerford Common
            School District No. 25. These three producing gas wells
            have been valued for ad valorem taxation purposes by
            petroleum engineers     employed bye Wharton County and
            the value fixed on the unitized lease has been fixed at
            approximately    $100,000.00.     The Tax Assessor       and Col-
            lector of Wharton County in assessing         and collecting
            taxes for common school districts         has levied and as-
            sessed taxes on the unit as a whole and has apportioned
            65% thereof to the Hungerford School District which is
            the percentage   of acreage   lying in that district.      The
            Tax Assessor    and Collector     of the East Bernard School
            District has not heretofore     levied and assessed       any
            taxes on said unit, but is attempting to do so for tax
            year 1949.    The Tax Assessor       and Collector    of Whar-
            ton County, Texas, arrives at the tax on each individ-
            ual tract in the unit by first arriving at the value of the
            individual tract by determining       the proportion of the
            total value for the unit allocable     to the particular tract,
            the value fixed thereon being a value determined by the
            proportion the tract’s acreage bears to the acreage of
            the whole unit. He then levies and assesses          taxes for
            the Hungerford District against each tract on the basis
            of 65% of the value of each tract.”

                     Article   7146,   V.C.S.,   provides:

                   “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 whatsoever      kind
            thereon, and all the rights and privileges    belonging or
            in anywise appertaining    thereto. and all mines, miner-
            als, quarries and fossils   in and under the same.”
Hon. Dorman    Nickels,   Page 3 (V-935)




             It has been settled by the decisions   of this State that
under an oil and gas lease contract reserving     a royalty  interest,
both the leasehold estate and the reserved    royalty interest consti-
tute real property.   Sheppard v. Stanolind Oil and Gas Co., 125 S.W.
2d 643 (Tex. Civ. App. 1939, error ref.); Sheffield v. Hogg, 124 Tex.
290. 77 S.W.2d 1021 (1934):

             It is fundamental that the jurisdiction of a school dis-
trict to tax real estate is limited to the property lying within its
boundaries.   -American   Liberty Oil Co. v. State, 125 S.W.2d 1107
(Tex. Civ. App. 1939); 40 Tex. Jur. 39, Taxation, Sec. 23.

             The execution of oil and gas leases with a clause author-
izing the lessees to form a unitized production unit and the subse-
quent creation by the lessees  of such unit have the legal effect of
making the individual royalty owners joint owners of all the royalty
in such unit. As stated by the court in Brown v. Smith. 141 Tex. 425.
174 S.W.Zd 43, 46 (1943):

              -An oil and gas lease jointly executed by the own,-
      ers   of two or more tracts of land owned in sever&By,
      with provision for pooling or sharing, on the basis of
      acreage,    the royalties    from oil or gas produced any-
      where on the leasrd land, has the effect of vesting all of
      the lessors,    at least during the life of the lea;se. ‘with
      joint ownership of the royalty earned from all the land
      in such block’.     Veal v. Thomason,     138 Tex. 341. 349,
       159 S.W.2d 472.476.        The lease so executed is a con-
      veyance by each lessor to each of the other lessors          of
      an undivided interest in.the royalties.        Lusk v. Green,
       114 Okl. 113. 245 P. 636.       The joint ownership of the
      royalty inter&t      in all of the land included   in such lease
      is created by the action of the several land owners in
      joining in the execution of the lease.”       Citing French v.
      George,    159 S.W.2d 556 (Tex. Civ. App. 1942, errorref.).

              Although a taxpayer may own adjoining tracts of land, or
interests therein, the tracts ,or interests  in the various tracts should
be separately    valued and assessed  for,ad valorem    taxation, when ren-
dered as separate tracts by the taxpayer.      Electra Independent School
District v. Waggoner,    140 Tex. 428. 168 S.W.Zd 645 (1943) . Stat e v.
Baker, 49 Tex. 763 (1878).

             It follows from the above authorities   that after unitiaa-
tion each royalty owner within the unitized block owns an undivided
royalty interest in each and every tract within the block in the pro-
portion that the number of acres contained in the land he owned in
fee bears to the total acreage ,in the entire unit, and that each roy-
alty owner should be separately assessed     for ad valorem taxes on
Hun. Dorman    Nickels,   Page   4 (W935)




the undivided royalty interest owned by him in each tract,           when the
taxpayer  renders same in separate tracts.

               For example.    tie have a pooled unit aggregating       2,400
acres.    1,600 acres lie within the boundaries      of Common School Dis-
trict No. 1. 800 acres lie within the boundaries of X Independent
School District.     Landowner A owns 600 acres of land within such
unit, 200 acres of which lie within the X Independent School District
and 400 acres of which lie within the boundaries         of Common School
District No. 1. Landowner B owns 600 acres which lie within the
boundaries of X Independent School District.         Landowner C owns 1,200
acres which lie wholly within the boundaries        of Common School Dis-
trlct No; 1. Landowner A after the formation of the pooling unit be-
comas the owner of l/4 of the l/8 royalty interest in each tract con-
tained .In the unit. This interest would amount to a l/32 royalty in-
terest.   The X Independent School District       Tax Assessor      should as-
sess against A his interest in the 200 acres which lie within the
boundaries    of the X Independent School District,      which intere#t would
include his l/32 undivided royalty interest and would exclude the
 7/8 working interest and the other 3/32 royalty interests.            Such tax
assessor    should.then assess     against A under a-separate      assessment
the l/32 royalty interest of landowner A in the 600-acre           tract owned
by landowner B. Lihewise.         such tax assessor   should separately        as-
sess against landowners B and C all,their        respective    interests    in
the 200 and 600 acre tracts that lie within the boundaries          of such in-
dependent school district.       Likewise,  the county tax assessor       and
collector   shoald assess    against landowner A in behalf of Common
School District No. 1 the interest of A in the 400 acres of the 600-
acre tract owned by landowner A which lie within the boundaries                of
such school district,     and should assess    under a separate assessment
the undivided l/32 royalty interest of A in the 1,200-acre           tract owned
by landowner C. Such county tax collector should lihewise then sep-
arately assess against landowners         B and C in behalf of such Com-
mon School District No. 1 their respective        interests   in the 400 and
 1,200 acre tracts which lie within the boundaries        of such district.
Such county tax collector,      in behalf of the county and then other tax-
ing units, if any (other than the schnol districts).      should then lihe-
wise separately     assess   against landowners A, B and C their respec-
tive interests   in each of the tracts within such production unit.

              ~During the life of such leases and production unit, it nec-
essarily  follows that the royalty interest per acre under each and
every tract within such unit will be of the same value. even though
a dry hole is drilled on one or more tracts and production is had on
the others.    In our example as given above, if the full l/8 royalty
interest in the 2.400-acre    unit is of the taxable value of $72.000.00,
then each royalty acre (the full l/8 royalty in one acre) would be of
the value of $30.00.    Landowner Afs l/32 royalty interest in the 200
acres in X Independent School District      would amount to 50 royalty
Hon. Dorman     Nickels,   Page   5 (V-935)




acres and have a value of $1.500.00.      Likewise A’s l/32 royalty
interest in the 600-acre    tract owned by landowner B would have a
value of $4.500.00,    and A’s l/32 royalty interest in the 1,200-acre
tract owned by landowner C would have a value of $9.000.00.         Like-
wise, A’s l/32 royalty interest in the 400 acres of his 600-acre
tract lying within Common School District No. 1 would have a val-
ue of $3,000.00.    Also, according  to our example,  landowner B would
own an undivided l/32 royalty interest in each tract within such pool.
Landowner C would own an undivided 2/32 royalty interest in each
tract in such pool.

               In our example given above, if landowners A. B, and C.
or any one or more of them, render to the various taxing authorities
their royalty interests in the pool as a whole, then the tax assessor
would have the authority to assess        against such taxpayers as a whole
their entire royalty interests     lying within the boundaries     of the tax-
ing authority.     For example,   if taxpayer A renders to the X Inde-
pendent School District tax assessor        his 200 acres that lie within
X Independent School District,       less the 8/8 mineral interest, and
then renders to such tax assessor        his undivided l/32 royalty inter-
est in the 800 acres of such pool that lie within the boundaries         of X
Independent School District,     then the tax assessor     for such district
could make a valid assessment         accordingly.    Likewise taxpayer A
could render to the county tax assessor-collector          his 600-acre   tract,
less the 8/8 mineral interest,      and then render to him his undivided
 l/32 royalty interest in the 2.400-acre       unit as a whole; and such tax
collector   then could make a valid assessment        for all taxing units,
by assessing     in behalf of Common School District No. 1 the 1,600
acres that lie within the boundaries       thereof and then assessing     in
behalf of the county and the other taxing authorities        for which he as-
sesses    and collects taxes, the undivided l/32 royalty interest of A
in the 2.400 acres as a whole.

                                   SUMMARY

              The execution of oil and gas leases with a clause
       authorizing the lessees      to form a unitized production
       unit and the subsequent creation by the lessees        of such
       unit have the legal effect of making the individual roy-
       alty owners joint owners of all the royalty in such unit.
       Veal v. Thomason.       138 Tex. 341, 349, 159 S.W.2d 472,
       g/b.   The jurisdiction    of a school district to tax real
       estate is limited to the property lying within its bound-
       aries.   40 Tex. Jur. 39, Taxation. Sec. 23. Each roy-
       alty owner in a unitized production block should be sep-
       arately assessed     for his undivided interest in each sep-
       arate tract in such unit, when separately       rendered.
Hon. Dorman   Nickels,   Page   6 (V-935)




     Electra Independent School       Distiict     v. Waggoner,      140
     Tex. 463, 168 S . W . 2d 645 .

                                             Yours    very   truly

                                   ATTORNEY          GENERALOF             TEXAS




                                   BY
                                                 W. V. Geppert
                                                   Assistatit

W VG/mwb




                                   IRST ASSISTANT
                                  ATTORNEY    GENERAL
