Untitled Texas Attorney General Opinion

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dbST,?XN 1lL. %?EtiS
WILL WILSON
ATTORNEY ORNERAE
June 22, 1960
Honorable R. L. Lattimore Opinion No. WW-863
Criminal District Attorney
Hidalgo County Re: Proper evaluation and
Edinburg, Texas assessment for ad valorem
tax purposes of gas pro-
ducing properties under a
contract presently sus-
pended by the Federal
Power Commissionspending
Dear Mr. Lattimore: further hearing.
Your request for an opinion concerns the proper valuation,
for ad valorem tax purposes, of certain gas producing properties.
You advise that the gas was originally being sold under a
contract establishing the price per MCF at 7-$ cents, but that
in 1954 a new contract setting the price at 12 cents per MCF
was negotiated. The price change was "suspended" by the
Federal Power Commission, acting under the authority of the
Natural Gas Act (15 U.S.C.A. 717), pending a determination as
to the lawfulness of the new rate. The Federal Power Commission
did not act upon the rate suspension within five months, where-
upon the producer, acting pursuant to the terms of Sec. 4(e)
of the Act, placed in effect and began collecting the new
contract price of 12 cents per MCF. The Commission then
required the producer to furnish a bond to refund, with interest,
the portion of the increased price which it might ultimately
find unjustified.
In reference to the foregoing facts you ask:
"1. How should this property fi.e., the
gas reservefl be evaluated and assessed?
"2 . What recourse does the taxing juris-
diction have if the property has been evaluated,
based on a 79 cent sales price and the F.P.C.
allows a higher figure? The taxable value is
directly related to the sales price.
“3. Can the holder be assessed the value
of the 'suspense' account?" flhe suspense
account represents the amount of the rate
increase collected by the producerJ
Honorable R. L. Lattimore, Page 2 Opinion No. WW-863
Article 7174, V.A.C.S., provides:
“Each separate parcel of real property
shall be valued at its true and full value
in money, excluding the value of crops
growing or ungathered thereon.
“In determining the true and full value
of real and personal property the assessor
shall not adopt a lower or different
standard of value because the same is to
serve as a basis of taxation, nor shall he
adopt as a criterion of value the price for
which such property would sell at auction
or a forced sale or in the aggregate with
all the property In his county; but he shall
value each tract or lot by Itself, and at
such sum and price as he believes the same
to be fairly worth in money at the time such
assessment is made.
11. . . .
“Money, whether in possession or on deposit,
or In the hands of any member of the family,
or any other person whatsoever, shall be
entered in the statement at the full amount
thereof,
“Every credit for a sum certain, payable
either In money or property of any kind, shall
be valued at the full value of the ssme so
payable. , . ,” (Emphasis added.)
Article 7149 states in part:
” ‘ValueI--The term, ‘true and full value’
wherever used shall be held to mean the
fair market value, in cash, at the place
where the property to which the term is
applied shall be at the time of assessment,
being the price which could be obtained
therefor at private sale, and no at forced
or auction sale.”
The term “fair market value, In cash,” Is generally held
to mean the price that the property would bring when It is
offered for sale by one who desires to sell but is not
obliged to sell, and is bought by one who desires to buy but
1
Honorable R. L. Lattimore, Page 3 Opinion No. WW-863
is under no obligation to buy. State v. Carpenter, et al,
89 S.W.2d 194 (Tex.Comm.App. 1936). Helms v. Day, 215 S W .2d
356 (Tex.Civ.App. 1948); Texas Pow& & Light Company v.'Hering,
224 S.W.2d 191 (Tex.Sup.Ct.
Company v. Kiel 227 S.W.2d
Pipe Line Company v. Hunt, 228
King v. McGuff, et ux.,
M.K.T. Railway Company v. Jaffee Cotton'Products Company, 193
S.W.2d 986 ITex.Civ.Aoo. 1946). Actual sales of comrJarable
property in the vicinity on ornear valuation date is the most
accurate indicla for determining market vlaue. However, all
elements which properly reflect upon the "fair market value"
can be taken into consideration. See Rowland v. City of Tyler,
et al., 5 S.W.2d 756 (Tex.Com.App. 1928); see also l'(T ur.,
Evidence, Section 162, page 439. Our courts have presc%bed
no definite or exact method by which property is to be valued.
It is only required that the system adopted result in a
valuation substantially the same as market value, City of
>53,
Arlington v. Cannon, 263 S.W.2d 299 (Tex.Civ.App. Fan-. rev'd.
in part on other grounds, 271 S.W.2d 414) and not be arbitrary,
discriminatory, or fraudulently induced. 40 Tex.Jur., Section
114, page 159. However, a valuation cannot be based wholly
on one factor alone. Port Arthur Independent School District
v. Baumer, 64 S.W.2d 412 (Tex.Civ.App. 1933).
Property is to be assessed for taxation at its value as
of January 1 of the taxing year. See Article 7151, V.A.C.S.;
Humble Oil & Refining Company v. State, 3 S.W.2d 559 (Tex.
Civ.App. 1928); Kirby v. Transcontinental Oil Company, 33 S.W.2d
471 (Tex.Civ.Aoo. 1930). Fluctuations in value or income
(either enhsnc%at or deoreciationj cannot be anticinated.
Humble Oil & Refining , supra; Kirby-v.
Transcontinental Oil am Republic Natural
Gas Company, 181 S.W. p. 1944, error ref.).
Earning capacity, or income, from a mineral estate is of
particular importance in estimating or assessing the value
of the estate, Electra Independent School District v. W. T.
Waggoner Estate, lb8 S.W.2d b45 (Tex.Civ.App. 1943) but in
the Instant case, the amount of income which ultimaiely will
be relaised from the suspended 12 cent contract price is
prospective, or speculative. It is within the province of
the Federal Power Commission to either grant the price increase,
refuse it, or, if it is deemed in the interest of the public
convenience and necessity, to reduce the price below the 73
cents established by the original contract. What the Federal
Power Commission will do, is, to a large extent, a matter of
surmise and conjecture. Therefore, it is obvious that only
the price that is certain as of January 1, i.e., 7$ cents
per MCF, can be considered as income from the gas property.
Honorable R. L. Lattimore, Page 4 Opinion No. WW-863
The fact that the suspended 12 cents per MCF price cannot
be considered as income does not mean that it must be altogether
excluded from consideration in evaluating the property. The
general rule on this point is stated in 51 Am.Jur., Sec. 706,
p. 656:
"It would seem upon principle that
prospective value cannot properly be made
the substantive basis for assessment,
although it may be considered to the extent
that it enters into or is reflected by
present value." (Emphasis added.)
To the same effect, see Lewis J. Summers v. City of Meridan,
119 Conn. 5, 174 A. 184 (19341. McCardles Estate v. City of
Jackson, 61 So. 2d 44, (Miss.Su;.Ct. ated
at.L.R. 649 and 95 A.L.R. 434. Texai ~pe~%e~oC~e in
accord with this line of reasoning. At 40 Tex.Jur., Sec.
108, p. 149, it is stated:
"Prospective value, in the sense of
value at some future time, cannot
legitimately be made the basis of a
determination of present value. On the
other hand prospective value in the sense
of potential future use, so far as it
affects present market value, is undoubtedly
a factor that may be considered."
Therefore, it appears that the fact that a hearing to determine
whether a rate increase should be allowed is pending before
the F.P.C. can be considered to the extent that such fact
affects the market value of the subject property as of January
1. It cannot be said that a person desiring to buy the property
would not take this factor into consideration. A buyer might
offer a higher price because of the expectancy of a price
increase; it is also possible that he would be induced to offer
a lower price because the rate increase might be disallowed,
which would necessitate refund of the money held in suspense
and payment of six per cent interest thereon.
The influence of this factor upon market value is fraught
with surmise and open to conjecture. This, however, does not
affect its status as a proper element for consideration; the
same is more or less true of many elements which may be properly
considered on the issue of value. As pointed out in Allen v.
Rmery Indeoendent School District, 283 S.W. 674 (Tex.Civ.App.
1926):
Honorable R. L. Lattimore, Page 5 Opinion No. W-863
"There are numerous elements and
tests of value. It is generally a matter
of estimate or opinion, at best, as of
time and distances and the like, and about
which witnesses the most competent to
know often widely differ in particular
instances according to personal determina-
tion of the primary facts which support
their conclusion. The constitutional pro-
vision is manifestly founded upon such
recognized situations. Therefore, the
conclusiveness of valuation must rest with
such tax officers or tribunals 'as may be
provided by law.' A presumption of correct
action will attend what they do and give
prima facie support to their conclusion when
apparently warranted by law, but this proposi-
tion is not conclusive in any case. A merely
and purely arbitrary or capricious valuation
made by such tribunal disproportionate to the
property's value is ground for objection and
cause for interfering with its action."
Because of the conjectural nature of this particular element of
value, it is incumbent upon the taxing authority to use prudent
judgment in considering it, and to receive all testimony
regarding its influence upon the actual market value of the
gas property. As was pointed out in State v. Illinois C. R.
Company, 27 Ill. 64, 79 Am.Dec. 396 (1861):
I, .We are not prepared to say that
an assessor, making yearly valuations of property
for taxation, can or ought to take into considera-
tion anything more than the value of the prop-
erty at the time he is called upon to value it,
since, if it does increase in value in the
process of time, advantage can be taken of it
in future valuations, as they may be periodically
made, but if he can and does look to the future
for the purpose of ascertaining the present
value of property, he should do it with extreme
caution." (Emphasis added)
From the foregoing discussion, it appears that the answer
to your first question is that in assessing the property
consideration should be given to all relevant and proper
factors regarding value as of Januuary 1. Income is an
important element to be considered but cannot act as the
sole criterion. Only 74 cents per MCF can be considered as
Honorable R. L. Lattimore, Page 6 Opinion No. ww-863
the income from the property in question until otherwise
changed by order of the Federal Power Commission.
The fact that there is pending before the Federal Power
Commission a hearing to determine whetherthe price of the
gas produced from the property should be increased may be
considered, but only to the extent that it actually influences
or affects market value as of January 1.
In answer to your second question, you are advised that
the county must assess the property in accordance with the
foregoing rules. There obviously would be no recourse to
reassess the property and consider the income at 12 cents
per MCF should the F.P.C. allow the higher figure.
Your third question is whether the holder can be assessed
the value of the suspense account. If the suspense account
is represented by cash, either in the possession of the holder
or on deposit in a bank, it is to be assessed as personalty.
If the holder is a domiciliary of Texas and the suspense account
is on deposit outside the State, the county of domicile may
assess the account. See Article 7147, V.A;C.S., and First-
Trust Joint Stock Land Bank of Chicago v. City of Dallas,
167 S.W.2d 783 (Tex.Civ.App. 1942, error ref.).
In cases where no money is actually collected and held
in suspense, a different result obtains. Debts due a person
over and above his indebtedness are taxable as personalty.
See Article 7147, V.A.C.S., and Fielder, The Texas Tax
Structure, Vol. 20, page XV, V.A.C.S. If the producer carries
the suspense account as a potential asset without actually
collecting the money, no tax liability arises because there is
no actual debt due until such time as the F.P.C. acts upon
the suspended rate. Further, the potential asset would be
offset by a potential liability on the books of the producer;
therefore, there would be no debt due the producer "over and
above his indebtedness".
SUMMARY
In evaluating property for ad valorem
taxation, a taxing authority may notconsider
as income from gas property a price which
has been "suspended" by the F.P.C., but can
consider only the price in effect prior to
the suspended rate change. However, the fact
that there is pending a hearing to determine
whether the rate increase should be granted
can be considered to the extent that such
Honorable R. L. Lattimore, Page 7 Opinion No. ww-863
fact influences the market value of the
property as of January 1.
The suspense account representing the
money collected under the price increase
can be taxed as personalty. However, if
such price increase is not actually collected,
it cannot be assessed for taxation because
it is not a debt due the taxpayer over and
above his indebtedness.
Yours very truly,
WILL WILSON
Attorney General of Texas
j&k N. Price
Assistant
JNP:cm
APPROVED:
OPINION COMMITTEE:
W. V. Geppert, Chairman
James R. Irion
Jot Hodges
J. Arthur Sandlin
:Virgil Pullium
REVIEWEDFOR THE ATTORNEYGENERAL
By: Leonard Passmore