Texas Co. v. Daugherty

• Citation: 176 S.W. 717
• Decision Date: 21 May 1915
• Docket Number: (No. 2637.)
• Parties: TEXAS CO. v. DAUGHERTY et al.
• Court: Supreme Court of Texas

Page 717

176 S.W. 717

TEXAS CO. v. DAUGHERTY et al.

(No. 2637.)

Supreme Court of Texas.

May 21, 1915.

Error to Court of Civil Appeals of Second Supreme Judicial District.

Action by the Texas Company against W. H. Daugherty and others. A judgment for defendants was affirmed by the Court of Appeals (160 S. W. 129), and plaintiff brings error. Affirmed.

Robt. A. John and Jas. L. Autry, both of Houston, Mathis & Kay, of Wichita Falls, and Theodore Mack, of Ft. Worth, for plaintiff in error. D. Edward Greer, of Beaumont, amicus curiæ. B. F. Looney, Atty. Gen., G. B. Smedley, Asst. Atty. Gen., and J. T. Montgomery, of Wichita Falls, for defendants in error.

PHILLIPS, J.

The question presented by the case for decision is whether the interests or rights conferred upon the Texas Company, in virtue of a number of so-called oil leases, constituted property subject to taxation in its hands.

The instruments in question were respectively executed by owners of lands in Wichita county as grantors, duly acknowledged and recorded; the wife joining where the property constituted any part of a homestead. In each instance the grantor, by the terms of the instrument, "granted, bargained, sold, and conveyed" to the Texas Company, as grantee, "all the oil, gas, coal, and other minerals in and under" the particular tract of land, which was fully described, for a valuable consideration, consisting of a stated amount acknowledged to have been paid (in the particular lease shown in the record as a form, and to which all of them substantially corresponded, $100), and certain stipulated royalties, together with the exclusive right of ingress and egress at all times for the purpose of drilling, mining, and operating for such minerals and the conduct of all operations, and the erection of appliances and structures in that connection, and for the laying of all pipe lines necessary for the production, mining, storing, and transportation thereof, with the privilege of renewing and removing all such structures at will. Each instrument contained the following habendum clause:

"To have and to hold, all and singular, the above-described premises, rights, properties and privileges, and all such as are hereinafter specified, under the said grantee, and the heirs, successors and assigns of such, forever, upon the following terms."

Under penalty of forfeiture of "the rights and estates hereby granted," it was provided that operations for the drilling of a well for oil or gas should be begun within one year from the time of the delivery of the instrument, the forfeiture to be saved, however, notwithstanding such operations should not be commenced within that period, by the payment by the grantee of $25 per quarter for a period not exceeding three years, with the further provision that the conveyance should be in full effect for 20 years from the discovery of oil, gas, or other minerals, and as much longer as they should be produced in paying quantities, in the event the grantee, or its successors or assigns, should sink a well or shaft and make such discovery within the limits of time, or the extension thereof stipulated. A concluding clause in each instrument was as follows:

"This lease is not intended as a mere franchise, but is intended as a conveyance of the property and privileges above described for the purposes herein mentioned, and it is so understood by all parties hereto."

The owners of the fee of all the land described in the several so-called leases had rendered them for taxation for the current year at their fair market value, subject to the rights and privileges conferred upon the grantee under such instruments. In assessing the value of the lands against the owners of the fee, their value as oil bearing, or prospective oil bearing, lands, as evidenced by the royalty interests of such owners, under the instruments, was considered, and taxes had been paid by such owners accordingly. In that valuation, however, the value of the rights and privileges conferred by these instruments upon the grantee therein was not included.

The question is to be resolved, in our opinion, by the determination of whether the instruments involved conferred upon the plaintiff in error an interest in the lands therein respectively described. If their effect, at most, was but the creation in its favor of a mere franchise or privilege to devote the land to a certain use, with the usufructuary right, as a part of its use and enjoyment, to appropriate a portion of such oil and gas as might be discovered, such franchise or privilege was taxable against the owner of the fee as a part of the land, just as any other such valuable right or privilege belonging to land is, unless otherwise distinctly provided by statute, so taxable under article 7504, which declares that:

"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 the buildings, structures and improvements, or other fixtures of whatsoever kind thereon, and all the rights and privileges belonging or in any wise appertaining thereto, and all mines, minerals, quarries and fossils in and under the same."

The rights and privileges belonging to land contribute in a very substantial way to its value. They largely cause it to yield its income, and it is the theory of our statute, therefore, that their value shall be included in the valuation of the land for taxation in the hands of the owner. They do not escape taxation by this method; on the contrary, they are subjected to its burden through the inclusion of their value in the assessment of the land; and they are taxed against the owner of the land because the Legislature has deemed it proper for him to bear the charge in view of their essential contribution to its value. This is plainly the effect of the decision in State v. Austin & Northwestern Railroad Co., 94 Tex. 530, 62 S. W. 1050, where, before the enactment of the statute providing for the taxation of intangible assets, attempt was made to tax the franchise of a railroad company separate from its real estate. After quoting present article 7504, Chief Justice Gaines, upon this question, said:

"It seems to us the plain purpose of the article last quoted to require that in assessing real estate for taxation, whether held by a natural person or a corporation, there shall not only be included in the valuation the value of the land itself merely as land together with the improvements thereon, but also all franchises and privileges appurtenant thereto and all the advantages for a profitable prosecution of the business to which it is appropriated. As a rule, the value of improved real estate is proportionate to the net income which it will yield. The value of a railroad is not the mere value of its right of way, roadbed and superstructure, its depot grounds and structures thereon, considered by themselves, but the value of all these as an operating, `going concern'; this value being in general determinable by the profits which result from its operation. The statute requires all property to be assessed `at its true and full value,' and in effect defines that value to be what it would probably sell for at a voluntary sale for cash. Persons proposing to sell or buy a railroad, in forming their opinion as to its value, would doubtless consider the condition of its physical properties, but would ultimately reach their conclusion upon the question by a careful estimate of the probable net income which its operation will produce. There are no special `rights and privileges belonging to or in any wise appertaining' to the great mass of the real property of the state, such as farming lands and town or city lots, but the terms are applicable to the real estate of railroad companies and suggest the thought that the Legislature had such property in mind when it inserted the provision, and that it was intended that, in valuing a railroad for taxation, the valuation should include every right and privilege which was exercised in producing its income, and that it was not intended to disassociate the soul from the body of the living concern and value by itself the lifeless remains."

We accordingly turn to an examination of the instruments for the purpose of determining their legal effect. It will be observed that they constitute no mere demise of the premises for a given period, as in the case of an ordinary leasehold. Nor do they amount simply to a grant of the right to prospect upon the land for oil or gas and reduce those substances to possession and ownership. They deal with the oil, gas, and other minerals "in and under" the land as property, in the ground, capable of ownership and subject to be conveyed, for, as such, in unmistakable terms they are "granted, sold, and conveyed" to the grantee for a stated consideration acknowledged to have been paid, valuable in itself and independent of the royalties stipulated as payable to the grantor in the event of the discovery of such minerals, or any obligation imposed upon the grantee to explore for them. For the purpose of making the exploration and producing all the oil, gas, and other minerals that might be within the ground, and the erection of all structures necessary thereto, as well as their storing and transportation, the possession of the land itself is likewise granted, with no limitation upon the number of wells or shafts that the grantee might sink, or the extent of its operations in that connection, and consequently no qualification of its right of possession to all such parts of the surface, except that no well should be drilled nearer than 200 feet from the house or barn on the premises without the consent of both parties, as might be necessary to its full use by the grantee for the purposes named. The rights of the grantee are made subject to forfeiture, if operations for the drilling of a well for oil or gas are not begun within one year from the delivery of...