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 Es-
       tate, 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 Decem-
            ber, 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 les-
see 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 pro-
duced 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 pro-
duced from the leased premises, the lessee would pay lessor
one-eighth of the additional proceeds received for such addi-
tional production. This contract aleo provided that lessor
would be paid on the basis of the sale price per thousand cu-
bic 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 ad-
ditional tax which is set up in the audit on the basis of the a-
mount actually received for its one-eighth royalty for the fol-
lowing 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 defi-
     nition 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 one-
    eighth royalty, was in consideration of the cancella-
    tlon 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 with-
    in 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 engag-
    ed in the business of producing natural gas within this
    state. . . .

         “A tax shall be paid quarterly by each such produc-
    er on the amount of gas produced and saved within this
    State. . . upon the fiist sale thereof in intrastate com-
    merce 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 pay-
    ments 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. . , eguiva-
    lent 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 cem-
    puted on the producers’ gross receipts of such sale;
    . . .

         “For the purpose of this Act ‘producer’ shall mean
    any person ownin     controlling, managing, or leasing
    any gas well and P’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 wheth-
    er 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 manrge-
    ment 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 re-
                                                                          .
     ceipts. ~ . .”
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 con-
tract 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 ad-
ditlonal 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 certi-
fied question aa to the status of gas royalty holder under the act
as amended in 1936, stated that *the gas royalty holder is an ‘in-
terest holder’ within the meaning of this statute.” The 1931 Act
did not contain the words “or other interest holder,” It is. there-
fore, our opinion that the Dunn Estate is not liable for the addi-
tional 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 ar-
rived 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, pre-
viously quoted in part, are relevant portions of the statutory def-
inition of “market value “:
                                  .
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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 primar-
ily 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 defi-
nition 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
on w ich the purchaser’s liability to the State for taxes must be com-
5-c
puted.” (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 pe-
riods 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.;idera-
tiqn 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 one-
eighth 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 con-
tract 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 considera-
tion for gas that had been and was to be produced thereafter under
the contract. This same question was considered in Attorney Gen-
eral’s Opinion O-6355, and we are enclosing a copy thereof.

          It is, therefore, our opinion that the Dunn Estate is lia-
ble for an additional gas production tax as set up in the Comptrol-
ler’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 addi-
tional 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 effec-
        tive 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
