Double Tax Trouble: Cross-Conveyances and Ad Valorem Tax Liability When Pooling Across County Lines
Texas
In two companion cases, Chambers v. San Augustine Cnty. Appraisal District [1] (“Chambers I”), and San Augustine Cty. Appraisal District v. Chambers [2] (“Chambers II”), the Tyler Court of Appeals was tasked with determining the effect of mineral interest pooling across county lines on ad valorem tax liability. Oliver Lane Chambers, et al. (the“Chambers”) own 652 acres of land in Shelby County, Texas. In 2007, the Chambers entered into various oil and gas leases that were later pooled into two production units that also included lands in San Augustine County. In 2013, the San Augustine County Appraisal District (“SCAD”) sent the Chambers notice of an appraised value for their fractional royalty interests in the two units. The Chambers duly filed a notice of protest asserting that SCAD did not have authority to tax their mineral interests because their interests were located and properly taxed in Shelby County. When the SCAD review board declined to withdraw its appraisal, the Chambers filed suit in the San Augustine County District Court.[3] In Chambers I, the plaintiffs requested that their mineral interest be removed from the SCAD tax roll. However, the trial court held that the Chambers had “cross-conveyed their mineral interests with other mineral owners, and [that they were] appropriately taxed in both San Augustine and Shelby Counties in proportion to the percentage of the unit lying within each county.” [4] On appeal, the Chambers conceded that their mineral interests were pooled into the two units but that their leases expressly prevented a cross-conveyance of interest. The Chambers also attempted to argue that SCAD had no authority under any circumstances to tax an interest located exclusively in Shelby County.[5]
boundaries, and the boundaries of a tax appraisal district are the same as the boundaries of its county. Tex. Tax Code Ann. § 6.02(a); see Oak v. Collin Cty. , 692 S.W.2d 454, 455 (Tex. 1985). However, when oil and gas interests are pooled in Texas, it ordinarily creates the presumption of a“cross-conveyance” of interests. This means that all the parties subject to a pooling agreement own an undivided interest in the pooled mineral interests in proportion their acreage contribution bears to the entire unitized area. Production anywhere on a pooled unit is treated as production on every tract in the pooled unit, and all royalty owners share in unit production regardless of where a well is drilled.[6] Thus, in many instances when a properly pooled and cross- conveyed unit straddles two counties, all royalty owners in the unit will owe ad valorem taxes in both counties in the proportion that the pooled lands lie within each county.[7] Here, the Chambers’ leases contained language that authorized pooling, but expressly prevented a cross-conveyance of their interests. Texas law has long upheld that parties may freely contract to include language in their leases that avoids cross- conveyancing. Thus, lease language specifying that pooling shall not“exchange or transfer any interest” is a permissible express rejection of the cross-conveyance of interests. Accordingly, the Tyler Court of Appeals in Chambers I held that the Chambers leases allowed pooling but prohibited a cross-conveyance of interests. The Chambers thus had no obligation to pay taxes in San Augustine County.[8] The case was remanded to the San Augustine County District Court to proceed under these guidelines. After the case was remanded, the trial court ruled that the Chambers’ royalty interests lie outside of SCAD’s boundaries, and that SCAD was not authorized to assess ad valorem taxes.[9] This time
Generally speaking, an appraisal district only has authority to tax property that lies within its
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G rowth T hrough E ducat i on - J uly / A ugus t / S ept ember 2022
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