Mobil Oil Corp. v. Calvert , 1969 Tex. App. LEXIS 2449 ( 1969 )

HUGHES, Justice

(dissenting).

I respectfully dissent from the Court’s disposition of appellant’s first point. It is my opinion that only one taxable sale of gas occurred and that the amount received from that sale is the sole taxable figure and that the tax on this sale price should be prorated between all interested persons.

It was stipulated that under the leases held by appellant that royalty under them is paid in cash and that royalty owners are not entitled to take a portion of the gas in kind.

It was also stipulated that the agreement on the part of appellant to pay all the processing cost of the gas was “conceded as an inducement to the royalty owners in consideration for their executing the Royalty Owners’ Agreements.” These agreements were unitization agreements. Thus it appears highly questionable that the consideration for the agreement was the sale of gas. The same financial result could have been achieved by appellant granting its royalty owners a larger proportion of the gas produced. Under the base example set out in the Court’s opinion if the royalty paid to the landowner was increased from 54 to 54 these would be the results:

‘Value of gas after processing 0\ o o

Cost of processing OO o o

Market value at the well $ 800

Royalty owner gets 54 of $800 $ 200

Rate of tax 7%

Tax on royalty owner’s 54 interest $ 14

Mobil’s ¾ interest of $800 $ 600

Rate of tax _7%

Tax on Mobil s ¾ interest $ 42

Royalty Owner’s tax 14

Total tax due State $ 56 ”

There would seem to be no question under this hypothetical case but that the tax would be only $56. To hold as the Court does here is to prefer form over substance.

My real basis for dissent is, as stated, that only one sale of gas has occurred. That sale was made by appellant and it was a sale of all the gas it produced and it produced all of the gas. It is true that a royalty owner is classified as a producer of gas for tax purposes but as plainly stated in Art. 3.04, Title 122A, Sec. (1) Taxation-General,¹ a “producer” is a “producer” whether gas is produced by him or by his lessee. The royalty owners here produced no gas. It was all produced by appellant.

Art. 3.01, Sec. (1), provides that a tax “shall be paid by each producer on the amount of gas produced and saved,” and Art. 3.04 Sec. (11) provides:

“ ‘Production’ or ‘total gas produced’ shall mean the total gross amount of gas produced including all royalty or other interest; that is, the amount for the purpose of the tax imposed by this Article shall be measured or determined by meter readings showing one hundred per cent (100%) of the full volume expressed in cubic feet.”

Art. 3.03(1) provides that the tax shall be a liability of the producer of gas and makes it the duty of each such producer to keep accurate records of “all gas produced.”

Obviously, it is the lessee, not the owner of royalty, upon whom the legislature has imposed the burden of keeping accurate records of the 100% of the full volume of the gas produced and saved, including royalty.

Thus, it seems to me, that the statutes themselves refute the contention that the royalty owner and the owner of the working interest are two separate and independent taxable entities. Rather, the statutes contemplate a tax on the value of the entire production stream and a prorating of that tax. according to the interests owned therein. If this were not true and there were two separate and distinct taxable entities, then there would be no occasion to provide that the total tax should be borne rat-ably by all interested parties, including royalty interests. Art. 3.03(5), copied in majority opinion.

I believe the incidence of this tax is settled by a proper construction of the statutes as above indicated and that this should settle this portion of this case. I am also of the opinion that the owner of gas royalty has no gas to sell, he having parted with title, defeasible title, to the gas when he (lessor) executed the gas lease. I will not discuss or attempt to explain all of the authorities bearing on this question for the reason that, to me, they are inexplicable.

I know that the royalty interest retained by a lessor in production of oil and gas is a valuable right and that it is subject to taxation as realty. Sheffield v. Hogg, 124 Tex. 290, 77 S.W.2d 1021. I also know that the physical characteristics of oil and gas are different; that under an ordinary oil and gas lease it is feasible and contractually proper for a lessor to demand and receive his portion of the oil produced. I know just the opposite concerning gas. In the oil and gas industry royalty owners sign division orders as to oil; they sign none as to gas. The reason for this obviously is that royalty owners own their proportion of the oil produced and must give their consent to its sale. As to gas, they do not own any portion of the gas produced, hence there is no need for obtaining their consent to its sale. The following cases support my conclusion that the gas produced by appellant was wholly owned by it. It follows that since the royalty owners after execution of the leases involved in this case had no gas to sell, they sold none to appellant. They did have a taxable interest in the gas produced and sold by appellant.

Phillips Petroleum Company v. Bynum, 155 F.2d 196 (5th Cir. 1946); Tidewater Associated Oil Company v. Clemens, 123 S.W.2d 780 (Texarkana Tex.Civ.App.1938) no writ; Stephens County v. Mid-Kansas Oil and Gas Co., 113 Tex. 160, 254 S.W. 290 (1923); Hager v. Stakes, 116 Tex. 453, 294 S.W. 835 (1927); 7 Tex.Law Review 1, “Property Interests Created by a Lease,” A. W. Walker, Jr. (1928); Phillips Petroleum Co. v. Ochsner, 146 F.2d 138 (5th Cir. 1944); Phillips Petroleum Co. v. Johnson, 155 F.2d 185 (5th Cir. 1946); Maddox v. Texas Co., 150 F.Supp. 175 (E.D.Tex.1957); Southland Royalty Co. v. Pan American Petroleum Corp., 354 S.W.2d 184, Tex.Civ.App.El Paso (1962) reversed on other grounds, 378 S.W.2d 50.

Reverting to the base example set out in the majority opinion, the wellhead value of all the gas produced is conclusively shown to be $800, the statutory tax on which is 7%, or $56, which has been paid. Why should the State recover a tax of $63 or a tax of 7.875% of the wellhead value? I can find no valid reason for doing this.

I concur in the majority opinion in its disposition of the second and third points. I would reverse and render judgment as to point one.

1 . All statutory references are to this Title.