Destec v. Freestone Cent. Appr. Dist.

• Decision Date: 31 August 1999
• Docket Number: No. 10-98-033-CV,10-98-033-CV
• Citation: 6 S.W.3d 601
• Parties: (Tex.App.-Waco 1999) DESTEC PROPERTIES LIMITED PARTNERSHIP, Appellant v. FREESTONE CENTRAL APPRAISAL DISTRICT, ET AL., Appellees
• Court: Texas Court of Appeals

Page 601

6 S.W.3d 601 (Tex.App.-Waco 1999)

DESTEC PROPERTIES LIMITED PARTNERSHIP, Appellant v. FREESTONE CENTRAL APPRAISAL DISTRICT, ET AL., Appellees

No. 10-98-033-CV

IN THE TENTH COURT OF APPEALS

Aug. 31, 1999.

Rehearing Overruled Nov. 24, 1999.

From the 87th District Court Freestone County, Texas Trial Court # 92-373-B

Before Chief Justice Davis, Justice Vance, and Justice Cummings (Retired)

O P I N I O N

VANCE, Justice.

This ad valorem tax appeal presents two issues: whether the trial judge followed the "law of the case," and whether the tax code allows an overriding royalty interest to be valued as an "income stream."

Four parties make up the list of players:

* Destec Properties, L.P. (Destec), the appellant, owner of an overriding royalty interest in certain acreage in Freestone County;

* the Freestone County Central Appraisal District (District), an appellee, a governmental body created by the tax code with the responsibility of determining the taxability and valuation of property in Freestone County;¹

* Houston Lighting & Power Company (HL&P), an appellee, owner of an overriding royalty interest in substantially the same acreage as that owned by Destec; and

* Northwestern Resources Company (NWR), an appellee, operator of the lignite mine that includes part of the acreage in which Destec and HL&P own overriding royalty interests.

HISTORY OF THE LITIGATION

In the late 1970s, Dow Chemical Company acquired rights to coal and lignite in approximately 12,000 acres in Freestone and Leon Counties. In August 1979, it assigned certain coal and lignite leases to Houston Lighting & Power Company (HL&P). Destec succeeded to Dow's rights under the assignment.

For several years, the District assessed ad valorem taxes on the property against Utility Fuels, Inc. (UFI), an entity affiliated with HL&P to which HL&P had assigned certain mining rights. In 1992, HL&P contested the District's appraisal method, and as a result the District assessed the taxable interest to Destec. Destec objected to the assessment and, after it completed the administrative review process, filed suit in the District Court.² In 1993, the trial court granted Destec's motion for summary judgment, declaring that lignite is not a "mineral in place" and that Destec's interest was not taxable as real property or as an interest in real property. We reversed the court's determination that Destec had no taxable interest in the property. Freestone-Central Appraisal Dist. v. Destec Properties, L.P., 10-94-017-CV (Tex. App.-Waco June 29, 1994) (not designated for publication).

In October 1997, the case was tried to a jury which made determinations as to the extent of the mine and the value of the property both inside and outside of the mine. The court rendered judgment that:

(1)Destec was the owner of a taxable overriding royalty interest in the non-producing property and the producing property;

(2)HL&P's overriding royalty interest had no taxable value and was properly omitted from the District's appraisal roll.

Based on the jury's findings, the judgment declared the value of Destec's interest for all the tax years in question.

THE ISSUES

Destec brings two issues for review. First, whether the producing property is properly taxable to Destec. Second, whether HL&P's interest has no taxable value.

LAW OF THE CASE

As stated above, this is our second bite at the apple. In the first appeal by the District, we reversed a summary judgment in which the trial court had determined that Destec had no taxable interest in the property.³ See id. There, we stated that "[a]n overriding royalty interest is an interest in land." Id. slip op. at 9. We further stated:

[W]e cannot agree with the trial court that no interest in "real property" was reserved by Dow, Destec's predecessor. Because we find that Destec owns an estate or interest in land, we cannot affirm the summary judgment. See TEX. TAX CODE ANN. 1.04(2). . . . Having made an initial determination that the agreement reserved some interest in "real property," we need not reach the question of whether lignite is a "mineral in place" or whether Destec owns an interest in a "mine or quarry."

Id., slip op. at 9-10.

Destec quotes our opinion and argues that the "law of the case" mandates that its overriding royalty interest is an "interest in land" and therefore cannot be an interest in a mine or quarry under the Tax Code. TEX. TAX CODE ANN. 1.04(2) (Vernon 1992).⁴ It misinterprets our prior opinion. We did not reach the question of how the lignite should be classified under the Tax Code. Freestone-Central Appraisal Dist., 10-94-017-CV, slip op. at 9-10. Furthermore, on rehearing we specifically addressed Destec's misconception that our holding equated an "interest in land" with a "so-called 'fee tract.'" We explicitly stated: "The 'interest in land' Dow (Destec) reserved by the agreement is the overriding royalty interest in the lignite reserves." Freestone-Central Appraisal Dist. v. Destec Properties, L.P., 10-94-017-CV, slip. op. at 1 (Tex. App.-Waco September 21, 1994) (opinion on reh'g) (not designated for publication).

Our original opinion in Cause No. 10-94-017-CV rejected Destec's assertion that its overriding royalty interest in the lignite was a non-taxable "income stream." Freestone-Central Appraisal Dist, 10-94-017-CV, slip op. at 4-5. Although our words might have been more artfully chosen, we did not determine that Destec's interest was exclusively an "interest in land" under section 1.04(2)(a) of the Tax Code, so as to prevent the court and jury from determining that the interest was another type of taxable "real property." TEX. TAX CODE ANN. 1.04(2). Thus, we reject the proposition advanced by Destec's first issue.

VALUATION

Destec's second issue is more troublesome. It asserts the trial court erred in holding that HL&P's overriding royalty interest has no taxable value. It is undisputed that HL&P owns an overriding royalty interest in approximately the same acreage as Destec. Thus, based on our earlier decision, HL&P owns an interest in "real property" and, under the jury's findings, an interest in a mine. However, the court found that the interest has no taxable value. Destec questions whether this is permitted by the Tax Code.

The court's charge asked the jury to make several findings with respect to the lignite reserves in question. First, the jury was asked to find the extent of the lignite mine. The jury found that the mine consists of "the tonnage and acreage associated with the pits where lignite is being extracted, the land adjoining those pits which is being cleared and dewatered prior to lignite being extracted, and the area of reclamation after lignite has been extracted from the pits."

Next, the jury found the market value "of the lignite reserves under Northwestern's leases within the Jewett mine" for each tax year from 1992 to 1997. The jury found market values ranging from $11,357,000 in 1997 to $22,475,000 in 1993. The jury also found the value of "HL&P or Destec's interest in lignite reserves under the 'other' leases within the Jewett mine" for each relevant tax year.⁵ The values range from $12,607,000 in 1992 to $27,350,000 in 1997. The jury then determined, for the tax years in dispute, "the total market value of an acre of land in Freestone County that contains lignite in place and not being produced." The jury's answers ranged from $550 an acre in 1993 to $650 an acre in 1996. Finally, the jury found "the market value of an acre of lignite in place and not being produced" - $175 for each tax year from 1992 to 1997.

Both NWR and Destec moved for judgment on the verdict. NWR's motion sought judgment on the jury's findings as to the extent of the mine and the market value of the lignite reserves covered by NWR's leases. Because question number four asked the jury to determine the market value of HL&P's "or" Destec's interest, the verdict did not determine the allocation of market value between Destec and HL&P.

NWR introduced evidence at trial that HL&P's overriding royalty interest produces no net income to HL&P. NWR argued that, due to the absence of net income, HL&P's interest has no market value when the income method of appraisal is used. NWR's motion for judgment sought a declaration by the trial court that HL&P's royalty interest has no taxable value, and its motion included a proposed order granting the relief requested. The trial court, substantially adopting the language of NWR's proposed order, rendered judgment that HL&P's overriding royalty interest has no taxable value. It is undisputed that the trial court applied the "income method" of appraisal in so finding. It is also undisputed that, using the income approach, HL&P's overriding royalty interest has no taxable market value. Destec merely questions whether the tax code permits the use of the income approach to assess the value of HL&P's royalty interest.

All taxable property must be appraised at its fair market value. See TEX. TAX CODE ANN. 23.01 (Vernon 1992). Market value is defined as "the price which the property would bring when it is offered for sale by one who desires, but is not obliged to sell, and is bought by one who is under no necessity of buying it." Polk County v. Tenneco, Inc., 554 S.W.2d 918, 921 (Tex. 1977). This "comparable sales" method of valuing property becomes less accurate when applied to property interests such as an overriding royalty interest because of the absence of an open market and because the value of the interest lies primarily in its income-producing potential. See id. For this reason, taxing authorities and appraisers commonly turn to the "income approach" to value when assessing a property interest of this nature:

The income approach to value . . . proceeds on the premise that a buyer of income-producing property is primarily interested in the income which his property will generate. In simple terms, the approach involves estimating the future...