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                       Tae      AITORNEY              GENERAL
                                     OF    TEXAS
                                     AUST~I   1,. Texas

A




Honorable Sam 0. Reama
County Attorney
Brook8 County
Felfurriae, Texas

Dear Mr. Reame:

                                              OpinionNo. o-6073
                                              Re: Lie.blllty for ad valorem tax
                                                   on mineral   lnterent.

           You requset the opinion    of thin Department upon the question    contained
in your letter of June 6, reading     aa followr:

           “I am enclosing herewith a certified   copy of the contract be-
     tween Florence Arnold Zart and Standard Oil Company of Texan, which
     rhowl the intererta   of the partier thereto in and to the mineral
     rights of certain land, therein dercrlbed,    in Brook8 County, Texan.

          “The Brdokr County Tax Collector  and Amerror bar in the part,
     for tax purpoaet3, areereedMrr. Eart with an l/&h  interert  in and
     to the mineral rightr and bar arreered the Standard 011 Company of
     Zexar with the remaining Interest in and to the mlneralr.

           WI.     Eart no% maintain1 that ehe owne no interqrt in ruch
     &era1     right8 but liar rold It to Standsrd~Oil do. for the’conrid-
     rration of a certain amount of money to be paid by Standard Oil Co.
     out of the procordr whm and if production ir obtained.      On the
     other hand the Stuuhrd Oil Cmpaay contendr that Mm. East own1 an
     overriding royalty in and to the mlneralr and ir conrequently      l,FFblr
     for her pox-Lion of the taxer.
                                                            l5y
              “We would appreciate your opinion an to Ifhether Mrr. East le
     liable     for any taxer on thir mineral interert.”            II

           To be conridered in connection with our opinion you aleo eubmit a
copy of an agreement between the Standard Oil Company of Texan, the preeent
holder of certain lea6e6, and Mre. Florence Arnold Eant, joined pro forme by
her husband, Ed B. East, assignora of asid learrea. We do not consider it nec-
eorary for the purpose of thin opinion to analyze this agreement in detail.
It lr eufficient    to nay that ita apparent purpoee wee to bring the matter down
to date ae between the parties presently interested    lneofar as applicable  to
the operation of the leaees and the amounts and method6 of payment from the
operat Ion thereof.    It eeeme clear that thie agreement was not intended to
Honorable Sam G. Reams, page ? (0-6073)



and ha6 not accomplished the purpose of divesting Mrs. East of her mineral
interest.   Oil payment.6 a8 provl.ded. 1,n the agreement may result in a reduction
of the value of her mineral i,n,?ereat from time to time, but we ‘do not construe
such payment.6 to be merely a di,sh~.rge of the purchase price of a determinable
fee in the mineral6 coneidered only f.n the light of providing a method of Be-
curity for the payment of the purchase price of such mineral interest.        We
make no effort to apportion or designate the past or present mineral interest
owned by the Standard Oil Company ar.d Era. Eaet. arising under their past or
present agreements; but thi.8 in, the lt.ght of our holding may be more easily
done by the parties themselves an,?. t,he offi,c:ale   charged under the law with
the aseesament and. col:Lectl.on of the t,axes due by them upon their respective
interest,  a8 such interest    exiet.e o.n the 1st day of January of the year or
yeara in question.

            With the foregofng etatement 88 a premiee we proceed to state what
we coneider to be the :LawperUrent t.o your inquiry.      That a mineral interest
constitutee    89 interest  in realty subject to taxation ae euch has been 80 long
and definitely    settled i.n this State we hardly deem it neceesary to cite au-
thority.    Such has undoubtedly been. the settled law of this State since the
case of Texas Co. v. Daugherty, (Supreme Court) 176 S.W. 717.       It makes no
difference   whether such mineral l.ntereat arises by a direct grant or by a ree-
ervation,   the result is the same. State v. Quintana Petroleum Co., (Supreme
Court) 133 S. W. (2d) 112.

            In thia latter case the Supreme Court, through Judge Smedley, Com-
missioner,   held that the holder and owner of an oil payment owned an interest
in land, eubject to ad valorem taxoa, to the extent of the fair market value
thereof;   that the usual. one-‘el,ghth of.1 and gas royalty reeerved In most leaeee
is an intereet    in land, also sub?ect to ad valorem tax, this for the reason
that it in a right and a privl,lege bel,onging or appertaining thereto,     as de-
fined in Article    7146, R. C. S., 1925, readi.ng ae followa:

            “Real property for the purpoee of taxation,      shall be con-
     atrued to include the Land itself,      whether laid out in town lots
     or otherwise,   and all bui,l.dl,nge, etructu.rer and improvementa, or
     other fixture8 of whatsoever kind. thereon, and all the right8
     and privil.eges  bel,ongl.ng or in any wi.se appertaining thereto,
     and all mines, minera:.ei ;iu.arrLee and foes116 in and under the
     lane.”

            In addition to the two items apecLfically    mentioned above, namely,
the one-eighth royalty ueua1l.y retain4     by the learor (which we use for con-
venisaca,   and of course it may be more or lens according to the contract of
the parties),   and the reservatiac  of an oil payment out of productiozi,   if such
ir provided for in the lease i,n addi.ti.oa. to, and eeparate and apart from the
usual royalty, both accruing to the ‘benefit of the lerrror or hie aesignr, and
which conrrtituten a taxable lriterest i.n land againat the leslor or hie aesigne,
there 16 alao the usual leasehold e&ate or the working intereat of aeven-eighta
(niore or lean, according to the contract of the partier)     owing by the lesree,
which in likewiae a taxable interest    in land againrt the lensee or his alrignn.
Honorable   Sam G. Reams, page 3 (0-6073)



There, of course, arises the problem of the valuation of these respective   in-
terests for taxation under Article 7174, R. C. S. of 1925.   Judge Smedley in
the caee of State v. Quintana Petroleum Co., supra, has given us a valuable
guide in the following  language:

            “It la provided in substance by Article 7174, Revised Civil
     Statutes of 1925, that real property,        or an intereet in real prop-
     erty, shall be valued for taxation at what it is fairly worth in
     money or at such price a8 it would bring at a fair voluntary eale
     for cash.     It is apparent that, where there is subetantial      produc-
     tion, a8 here, the right to a part of the minerals a8 they are pro-
     duced, subject to the limitation       that the right ceases when a cer-
     tain hum has been realized from the proceeds thereof,        is not of a8
     great value a8 would be the r,lght to an equal part of the minerale
     not subject to limitation;       and it is further apparent that the value
     of the lessor’s     right or i,nterest 80 Umited, assuming continued
     production,    will decrease each year.      Theee facts muet be taken into
     consideration     in valuing euch interest    for taxation.  Likewiee it ie
     apparent that the leasehold estate under this leaee haa a greater
     value on account of the Umitation         imposed upon the reserved T/32
     interest,    with the provision that upon the termination of title       un-
     der the reservation      the T/32 shall vest in the leeeee, than it would
     have if the 7132 interest had been resewed without limitation;           and
     it ia further apparent., still      assuming continued production,   that
     the leasehold e&ate will become more valuable each year a8 the time
     approaches when the 7132 interest will. vest in the lessee.         And these
     facte must be taken into consid.erati.on in valuing the leaeehold ee-
     tate for taxation.       When this method of valuing the property ie used
     no part of the 7132 of the minerala eecapes taxation.          Ita value for
     taxation is represented by the val,uation. placed upon the lessor’s
     reserved and limited 7132 i,nkerest, together wl.th the increased valua-
     tion placed upon the leasehold estate by reason of the limitation          and
     the provieion    for the vesti.ng of the intereat in the lessee upon the
     satisfaction    of the limitation,

           “The record diacloeea that when rendering the leaeehold estate
     in the four thousand acree for taxati,on for 1936,Quintana Petroleum
     Company in ite written rendition,     after th,e dercription  of the land,
     thun deecri,bed the.leaaehold   estate:    ?The above being the leasehold
     e&ate covering 20132 of minerals.’        Thin rendl,tl,on EeemIIto indicate
     that the taxpayer voluntarily    undertook to exclude from ita rendition
     both the l/8 royalty intereat and the 7132 of the minerala aa if the
     7132 interert,    like the l/8 royalty l.ntereet, were owned by the let3eor
     without the limitation    and without the provieion for the venting of
     the 7132 in the leaeee upon the ratirfaction      of the limitation.
     (Quintana Petroleum Company had theretofore      aeeigned intereata aggre-
     gating l/32 out of ite leasehold eetata).       The owner of the leasehold
     estate ham not only the right to take and dirpone of 20/32 of the
     mlneralr, but he in at the name ti.me and prenently the owner of the
     additional   right to have, take and dic.poBe of 7132 of the mineral6
 Honorable   Sam G. Reams, page 4 co-6~73)



        upon terminati.on of the lessurP6 right ttereto :nd.er tb.e reaerva-
        tion.    Such addIti.onal rFghtt; even though it may be, as we believe
        it is, BP integral part of t~he lessee76 property, may not escape
        taxation by the taxpayers6 volunt,ary exclusion thereof from his
        rendition   &eel.     Victory v0 Rinson, 129 Tex. 30,,102 S. W. 2d
        194. If such addi-tional right ~88 ix fact excluded by the lessee
        in making ite rendition,      it may be aseessed for taxation at its
        fair value in the .manner provided by the etatutes."

            Having reached the cocclueion,     88 we have, that the agreement eub-
 mitted.by you does not have t:he effect to completely diveat Mre. Eaet of all
 mineral interest   i:n the,lan.d involve~d, ard thlla relieve her of liability     for
 the payment of taxes therecn because no longer the OJner of any Interest there-
 in, it follows that we are of the op!nl,on C,hat the Standard Oil Company and
 Mm. Eaet should render their respectrve mineral interesta           for taxation,  88
 provided in Article 7174,supra, ?,keir respective        intererts   to be determined
 by such changes in values aa result from the application          and operation of the
 proViEion.of the agreement; with    rcepec't to Oil payments provided in the agree-
 ment a8 artd tihen actual:ly made, keeping :.n mind that the value a8 of January 1
 shall constitute   the legal baal,a for the:,:.r reBpeCtiVe renditions.

           This we hope ~f.11 eerve as a fair %nterpretation of what we conceive
 to be the law applicable  to the quefit:.on, presented by you.

                                                              Youre very truly

        JUL 7, 19%
 APPROVED                                               ATTORNEY
                                                               GENERAL
                                                                     OF TEXAS

 /a/   Geo. P. Blackburn

(Acting)   ATTORNEY
                  GENERAL
                        OF TEXAS                        Ry   /0/   L. P. Lollar
                                                                   L. P. Lollar
                                                                      Aesietant

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