Which Texas school district taxes a pooled gas well's royalties, the one with the well or the one where the land is?

TX AG Opinion DM-0490: Which school district taxes pooled gas royalties?

Plain-English summary

A 640-acre tract in Wheeler County was under a pooling agreement, so all the royalty owners shared the income from the tract's one producing gas well. Half the tract, including the well, lay in school district A; the other half lay in school district B. Even so, school district A had been collecting all the ad valorem taxes on the royalty interests in the entire tract, on the theory that the well bore was within district A. The Wheeler County Attorney (whose duties the District Attorney for the 31st and 223rd Judicial Districts had assumed) asked the Attorney General whether a school district taxes royalty interests in a pooled gas unit based on where the well is or based on where the land the royalty interests appertain to is located.

The Attorney General concluded the answer is the location of the real property to which the royalty interest appertains, not the location of the well. In Texas, a royalty interest in oil, gas, or other minerals is taxable as real property, and the Tax Code says real property is taxable by a taxing unit if it is located in the unit on January 1. Courts have long held that a royalty interest is taxable as real estate in the county (and, by extension, the taxing unit) where the land it appertains to is located, not where the owner lives. So a school district may tax royalty interests appertaining to land in the district and may not tax interests appertaining to land outside it. Applying that, both districts are entitled to tax the royalty income from the well: district A taxes the interests appertaining to land in district A, and district B taxes the interests appertaining to land in district B.

How the districts actually bill the owners depends on the pooling agreement. As a default, pooling makes all the participants joint owners (joint tenants) of all the royalty interests in the pooled block, in proportion to acreage. If the owners are joint tenants, each school district would tax half of the income on all the royalty interests and send a tax bill to every royalty owner. If they are not joint tenants, each district would tax all of the income only on the interests located within it and bill only those owners. Whether the owners are joint tenants turns on the terms of the pooling agreement, and the Attorney General does not make fact findings or construe contracts, so that piece is outside the opinion process.

Currency note

This opinion was issued in 1998. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The Tax Code provisions on real-property situs and the Natural Resources Code pooling provisions cited here have been amended since 1998. Confirm the current statutes, and consult a lawyer about the specific pooling agreement, before relying on any rule about taxing royalty interests.

Who this opinion affected (as of 1998)

School districts (and other taxing units) with pooled mineral units crossing their boundaries: The opinion told them to tax royalty interests by the location of the land each interest appertains to, not by where the well sits, so a district could not capture all the royalty taxes just because the well was inside it.

Royalty owners in pooled units: The opinion meant their royalty interests were taxable where the underlying land was located, and whether they received bills from one district or two depended on the pooling agreement.

Wheeler County and the two affected districts: The opinion indicated district A had likely been over-collecting by taxing interests appertaining to land in district B.

Common questions

Does the school district with the well get to tax all the pooled royalties?
No. The opinion concluded that royalty interests are taxed based on where the land they appertain to is located, not where the well is, so a district with the well cannot tax royalty interests tied to land in another district.

Why is a royalty interest taxed where the land is?
The opinion explained that a royalty interest in minerals is taxable as real property, and the Tax Code taxes real property where it is located on January 1. Courts have treated royalty interests as interests in the land they appertain to.

Will every royalty owner get a bill from both districts?
It depends on the pooling agreement. The opinion said that if pooling made the owners joint tenants of all the royalties, each district taxes half and bills every owner; if not, each district taxes and bills only the owners whose interests are within it.

Can the Attorney General decide how this particular pooling agreement works?
No. The opinion noted that whether the owners are joint tenants depends on the agreement's terms, and the Attorney General does not make fact findings or construe contracts.

Background and statutory framework

A royalty interest in oil, gas, or other minerals is taxable as real property in Texas (Sheffield v. Hogg, 77 S.W.2d 1021 (Tex. 1934); Tax Code § 1.04(2), defining "real property" to include an estate or interest in land or a mineral in place). The Tax Code fixes the taxable situs of real property by location: real property is taxable by a taxing unit if located in the unit on January 1 (Tax Code § 21.01), and property partly inside and partly outside a unit is listed separately for the portion inside (§ 25.17). Courts have held that because a royalty interest is taxable as an interest in land, it is taxable as real estate where the land it appertains to is located, not where the owner resides (Jeff v. Kahn, 273 S.W.2d 431 (Tex. Civ. App.-Beaumont 1954, writ ref'd n.r.e.); Wilcox v. Hull-Daisetta Indep. Sch. Dist., 95 S.W.2d 490 (Tex. Civ. App.-Beaumont 1936, writ ref'd)). It follows that a school district may tax royalty interests appertaining to land in the district and not those appertaining to land outside it, so both districts here may tax the well's royalty income according to where the underlying land lies.

The billing question turns on the pooling agreement. Absent a contrary stipulation, pooling constitutes all participants joint owners (joint tenants) of all royalty interests in the pooled block, in proportion to each tract's acreage (56 Tex. Jur. 3d Oil and Gas § 496 (1987); Brown v. Smith, 174 S.W.2d 43 (Tex. 1943); see also Montgomery v. Rittersbacher, 424 S.W.2d 210 (Tex. 1968); Veal v. Thomason, 159 S.W.2d 472 (Tex. 1942); Kelln v. Brownlee, 517 S.W.2d 568 (Tex. Civ. App.-Amarillo 1974, writ ref'd n.r.e.)). If the owners are joint tenants, each district taxes half the income on all interests and bills every owner; if not, each district taxes all the income on only the interests within it and bills only those owners. Because the allocation of pooled-unit interests can be set by statute and modified by the Texas Railroad Commission (Natural Resources Code § 102.051) or controlled by a private contract, and because the Attorney General does not make fact findings or construe contracts (Attorney General Opinions DM-383 (1996), DM-192 (1992), JM-697 (1987)), the opinion left the joint-ownership determination to be resolved from the agreement. The opinion assumed the owners had not filed a request for joint taxation (Tax Code § 25.12) and did not address the separate, unbriefed question of whether district B could recover improperly collected taxes from district A.

Citations

Statutes:

• Tex. Tax Code §§ 1.04(2), 21.01, 25.12, 25.17
• Tex. Nat. Res. Code § 102.051

Cases:

• Sheffield v. Hogg, 77 S.W.2d 1021 (Tex. 1934)
• Jeff v. Kahn, 273 S.W.2d 431 (Tex. Civ. App.-Beaumont 1954, writ ref'd n.r.e.)
• Wilcox v. Hull-Daisetta Indep. Sch. Dist., 95 S.W.2d 490 (Tex. Civ. App.-Beaumont 1936, writ ref'd)
• Brown v. Smith, 174 S.W.2d 43 (Tex. 1943)
• Montgomery v. Rittersbacher, 424 S.W.2d 210 (Tex. 1968)
• Veal v. Thomason, 159 S.W.2d 472 (Tex. 1942)
• Kelln v. Brownlee, 517 S.W.2d 568 (Tex. Civ. App.-Amarillo 1974, writ ref'd n.r.e.)

Prior Attorney General opinions:

• Attorney General Opinions DM-383 (1996), DM-192 (1992), JM-697 (1987)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0490
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1998/dm0490.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General, State of Texas

DAN MORALES, ATTORNEY GENERAL

November 12, 1998

The Honorable John Mann
District Attorney
31st & 223rd Judicial Districts of Texas
P.O. Box 24
Shamrock, Texas 79079-0024

Opinion No. DM-490

Re: Whether a school district is entitled to assess ad valorem taxes against royalty interests in a pooled gas unit based upon the location of the well or based upon the location of the real property to which the royalty interests appertain (RQ-1140)

Dear Mr. Mann:

The former Wheeler County Attorney [Footnote: We have received a letter from your office stating that the "District Attorney's Office for the 31st and 223rd Judicial Districts of Texas is now acting in the capacity of County Attorney for Wheeler County" and that the "office of the Wheeler County Attorney continues to be interested in obtaining the opinion previously requested in reference to Request #995." We assume you intend to refer to RQ-1140 rather than RQ-995, as the latter request is no longer pending in this office. We received an opinion request, which we assigned RQ-995, from the former Wheeler County Attorney in July 1997, and soon thereafter asked him to brief the legal questions presented in the request. We kept RQ-995 open awaiting a legal brief until this winter when we closed it by a letter dated February 17, 1998. We received a letter brief from the former Wheeler County Attorney in May 1998, which we treated as a new request, RQ-1140.] submitted an opinion request to this office asking about the distribution of ad valorem taxes on royalty interests in gas between two school districts when the well is located in school district A but the royalty interests sharing royalty income from the well appertain to land located in both school districts A and B. He described the following situation: A 640 acre tract of land in Wheeler County is the subject of a pooling agreement "whereby all royalty owners in the . . . tract receive royalty income from" the one producing gas well on the tract. Half of the tract is located in school district A and the other half is located in school district B. The tract's one producing gas well is located in school district A. Although the royalty owners of the half of the tract located in school district B receive royalties, school district A "is receiving all ad valorem taxes assessed against the royalty estates in the entire 640 acre tract since the . . . well bore is within this school district."

Wheeler County asks, in essence, whether a school district is entitled to assess ad valorem taxes against royalty interests based upon the location of the well or based upon the location of real property to which the royalty interests appertain. We conclude that a school district is entitled to assess ad valorem taxes against a royalty interest based upon the location of the real property to which the royalty interest appertains. We have not been able to locate any court decision or attorney general opinion addressing the particular situation at issue. Case law and statutes, however, provide the basis for our conclusion.

It is well established in this state that a royalty interest in oil, gas or other minerals is taxable as real property. [Footnote: See Sheffield v. Hogg, 77 S.W.2d 1021, 1030 (Tex. 1934); Tax Code § 1.04(2) (defining the term "real property" to include "an estate or interest" in land or a mineral in place).] The Tax Code governs the taxable situs of real property as follows: "Real property is taxable by a taxing unit if located in the unit on January 1." [Footnote: Tax Code § 21.01; see also id. § 25.17 ("If real property is located partially outside and partially inside a taxing unit's boundaries, the portion inside the unit's boundaries shall be listed separately from the remaining portion.").] Courts have held that because a royalty interest is taxable as an interest in land, it is taxable as real estate in the county where the land to which it appertains is located, rather than in the county where the owner of the interest resides. [Footnote: Jeff v. Kahn, 273 S.W.2d 431, 433 (Tex. Civ. App.--Beaumont 1954, writ ref'd n.r.e.) ("royalties are 'rights and privileges belonging . . . or . . . appertaining' to the land leased . . . and are therefore assessable as real property by the defendant county and school district . . . ."); Wilcox v. Hull-Daisetta Indep. Sch. Dist., 95 S.W.2d 490, 493 (Tex. Civ. App.--Beaumont 1936, writ ref'd) (concluding that "said 3 per cent royalty or interest is an interest in the 300 acres of land and so taxable as real estate in the county where the land is located" and rejecting argument that royalty interest payable only in money was interest in personal property taxable only in interest owner's county of residence).] In other words, the taxable situs of a royalty interest is the location of the real property to which the royalty interest appertains. We believe it follows from these principles that a school district may tax royalty interests that appertain to real property located in the school district and may not tax royalty interests that pertain to real property located outside the school district.

Based upon the foregoing, we believe that in the situation presented both school districts are entitled to tax the royalty income generated by the well located in school district A. School district A may tax the royalty income on royalty interests that appertain to real property located in school district A, and school district B may tax the royalty income on royalty interests that appertain to real property located in school district B. As we explain below, however, the terms of the pooling agreement will determine whether the school districts send tax bills to all or only some of the royalty interest owners. [Footnote: We assume for purposes of this opinion that the royalty interest owners have not filed a request for joint taxation. See Tax Code § 25.12.]

In the absence of a stipulation to the contrary, "the legal effect of pooling . . . is to constitute all of the participants joint owners or joint tenants of all royalty interests in the pooled . . . block, the ownership being in the proportion that the acreage in each tract bears to the total acreage in the block." [Footnote: 56 Tex. Jur. 3d Oil and Gas § 496 at 283 (1987). See Brown v. Smith, 174 S.W.2d 43, 46 (Tex. 1943) ("An oil and gas lease jointly executed by the owners of two or more tracts of land owned in severalty, with provision for pooling or sharing, on the basis of acreage, the royalties from oil or gas produced anywhere on the leased land, has the effect of vesting all of the lessors, at least during the life of the lease, 'with joint ownership of the royalty earned from all the land in such block.' The lease so executed is a conveyance by each lessor to each of the other lessors of an undivided interest in the royalties. The joint ownership of the royalty interest 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."); see also Montgomery v. Rittersbacher, 424 S.W.2d 210, 213 (Tex. 1968); Veal v. Thomason, 159 S.W.2d 472, 476 (Tex. 1942); Kelln v. Brownlee, 517 S.W.2d 568, 571 (Tex. Civ. App.--Amarillo 1974, writ ref'd n.r.e.).]

Under the terms of the pooling agreement, the royalty interests in the 640 acre tract may be jointly owned by all of the royalty interest owners. In that case, the two school districts would each tax half of the income on all the royalty interests, and each school district would send a tax bill to each royalty interest owner. If, however, the royalty interest owners are not joint tenants, then each school district would tax all of the income on only those royalty interests located in the school district and would send a tax bill only to those royalty interest owners. Because the determination whether the royalty interest owners' interests are jointly owned depends upon the terms of the pooling agreement, [Footnote: We have no information about the pooled gas unit at issue. The allocation of interests in the production of some pooled units is governed by statute and may be modified by the Texas Railroad Commission. See, e.g., Nat. Res. Code § 102.051. In other cases, the allocation of interests in the production of a pooled unit is controlled by contract. Here, the owners of mineral interests in the 640 acre tract may have entered into a private pooling agreement.] its resolution is beyond the scope of an attorney general opinion. [Footnote: This office cannot make findings of fact and does not construe contracts. See Attorney General Opinions DM-383 (1996) at 2 (interpretation of contract not appropriate function for opinion process), DM-192 (1992) at 10 ("This office, in the exercise of its authority to issue legal opinions, does not construe contracts."), JM-697 (1987) at 6 ("review of contracts is not an appropriate function for the opinion process").]

In sum, a school district is entitled to assess ad valorem taxes against royalty interests in a pooled gas unit based upon the location of the real property to which the royalty interests appertain as opposed to the location of the well. Whether the school districts in the situation you present will send tax bills to all or some of the royalty interest owners will depend upon the terms of the pooling agreement. [Footnote: The first opinion request, RQ-995, asked whether school district B is entitled to recover from school district A any improperly collected taxes. In his May 1998 letter, however, the former Wheeler County Attorney neither raised nor briefed this issue and we do not address it here. See note 1 supra.]

SUMMARY

A school district is entitled to assess ad valorem taxes against royalty interests in a pooled gas unit based upon the location of the real property to which the royalty interests appertain as opposed to the location of the well.

DAN MORALES
Attorney General of Texas

JORGE VEGA
First Assistant Attorney General

SARAH J. SHIRLEY
Chair, Opinion Committee

Prepared by Mary R. Crouter
Assistant Attorney General