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Volume 4 - Opinions of Counsel SBEA No. 77

Opinions of Counsel index

Assessment, separate (leasehold interests) (minerals) (oil and gas rights) - Real Property Tax Law, §§ 102(12)(a), 502:

Minerals in place are real property and oil and gas rights are regarded as real property for taxation purposes. Oil and gas rights in the name of a lessee may be assessed separately from the assessment of the land with which the rights are connected and the property (rights) may be validly sold for nonpayment of taxes. An assessor cannot be compelled to make such separate assessments.

Our opinion has been requested concerning the assessment of mineral rights for real property tax purposes.

Mineral leases have been entered into granting mineral rights, in about 40,000 acres of land located in a town. On some of this land, mineral rights have been leased to one person down to a depth of 2,500 feet with mineral rights below 2,500 feet leased to another.

A problem has developed in the town because the county has enforced the tax delinquencies of some lands (2,000 acres) which are subject to mineral leases by selling tax deeds. In these instances, of course, the mineral rights held under leases are cut off and a fee simple absolute title is conveyed to the purchaser at the tax sale.

The specific problem concerns the legal right of an assessor to assess mineral rights in the State of New York separate and apart from the land.

A distinction must be made between solid minerals (such as coal or copper) and nonsolid minerals (such as oil and gas).

New York State has an “in rem” concept of real property taxation. Under this concept, tax assessments are against the “real property” itself which is liable to sale for unpaid taxes (Real Property Tax Law, § 304).

For taxation purposes, the term “real property” includes the land itself and the mines, minerals, quarries and fossils in and under the land (Real Property Tax Law, § 102(12)(a)). Minerals in place are expressly made subject to assessment and taxation as real property. When the surface land and minerals in place are owned by the same person, the minerals are included in the assessment of the land. Solid minerals in place may be conveyed so that fee title to the surface land may be vested in one person and fee title to the minerals in another (Marvin v. The Brewster Iron Mining Co., 55 N.Y. 538; Ryckman v. Gillis, 57 N.Y. 68).

Although rock oil and natural gas are minerals, under New York law they are subject to special rules of property distinguishable from the law applicable to solid materials. Apparently, New York has adopted what is generally referred to as the “Rule of Capture.” Under this rule, oil and gas in place cannot be blocked out and conveyed separately because of their wandering or fugitive nature (Buck v. Cleveland, 143 App.Div. 874, 128 N.Y.S. 864). A landowner’s property right in the underlying oil and gas consists of his right to remove the products which does not ripen into absolute ownership until the oil and gas are brought to the surface. It is this right, rather than a part of the fee, which is subject to conveyance to one other than the owner of the land (Wagner v. Mallory, 169 N.Y. 501, 62 N.E. 584; 1948, Op.Atty.Gen. 194).

The Legislature has recognized this distinction by treating the taxation of oil and gas rights differently from solid mineral rights. Section 39 of the General Construction Law provides as follows:

Oil wells and all fixtures connected therewith, situate on lands leased for oil purposes and oil interests, and rights held under and by virtue of any lease or contract or other right or license to operate for or produce petroleum oil, shall be deemed personal property for all purposes except taxation.

This provision has been construed to mean that for the purposes of taxation, the property described in the statute shall be regarded as real property (In re Hazelwood Oil Co., 195 App.Div. 73, 185 N.Y.S. 809). The property described includes “rights held under and by virtue of any lease or contract or other right or license to operate for or produce petroleum oil.”

Technically, the oil and gas rights, not the lease, are assessed. Under our in rem system of real property assessment and taxation, the assessor cannot be compelled to separately assess land on the one hand and improvements, minerals or oil and gas rights, etc., on the other which are owned by one other than the landowner (Doughty v. Loomis, 9 App.Div.2d 574, 189 N.Y.S.2d 413, aff’d, 8 N.Y.2d 722, 167 N.E.2d 643, 201 N.Y.S.2d 100). However, cases indicate that the assessor may do so at his option (Smith v. Mayor, 68 N.Y. 552; People ex rel. Van Nest v. Commrs. of Taxation, 80 N.Y. 573). (For an example of the assessment of minerals in place separately from the surface land, see, Case v. W. H. Loomis Talc Corp., 265 App.Div. 296, 38 N.Y.S.2d 746.) In this event, the validity of the separate assessment and of any subsequent tax sale for nonpayment of taxes, depends upon whether the description is sufficiently accurate to identify the property assessed.

For example, an assessment of oil and gas rights would in our opinion meet this requirement if the description is in substance as follows:

Oil and gas rights in [description of parcel] to a depth of 2,500 feet [or “below a depth of 2,500 feet”, if that is the case].

It is also essential to show clearly that oil and gas rights have not been included in the assessment of the land parcel (i.e., add the term “exclusive of oil and gas rights” after the description of the land).

Our conclusion is, therefore, that the assessment of oil and gas rights in the name of the lessee separately from the assessment of the land with which the rights are connected is valid and that a valid sale of the property (the rights) for nonpayment of taxes can be made.

Whether or not oil and gas rights should be separately assessed is another matter.

Generally we recommend that improvements should be assessed with the land on which they are located in the name of the owner of the land. However, we understand that localities in areas containing large numbers of producing wells and oil and gas leases have for years separately assessed them (see, Moore v. Reeland, 257 App. Div. 1025, 13 N.Y.S.2d 700). There are reasons both for and against.

The reasons against separate assessment are essentially two: (1) the valuation problem, and (2) tax collection difficulties.

As to the valuation, the assessor will have the added burden of equitably valuing and assessing the oil and gas rights as severed from the land. Then the land must be valued without mineral rights. In doing this, the assessor is in effect determining the relative tax liabilities of the mineral right owner and landowner.

In so-called “unproved prospective lands” (those which are not known to contain oil or gas), rights have little more than nominal value. On the other hand, such rights in “proved lands”, lands which are either producing or are proved to contain oil or gas but which are as yet undeveloped, may have considerable value. The value in either case might be estimated on the basis of several objective criteria. One would be the purchase price being paid per acre in the area for oil and gas rights if such rights are being bought and sold by oil and gas companies. Another method might be capitalization of the amount paid the owners of the land for the rights.

The enforcement problem arises because separate assessment complicates the collection of taxes. To begin with, assessment as a whole encourages both the landowner and the mineral right owner to see that taxes are paid (just as mortgagees as a rule assure that taxes are paid). Secondly, separate assessment increases possible difficulties in enforcing collection of tax deficiencies by tax sale. It is generally easier to find a purchaser of the whole than of the several parts.

The reason for assessing mineral rights separate from the land parcel is to accommodate the respective owners. The assessor runs a risk not present in an apportionment of the assessed value made after the levy of taxes under section 932 of the Real Property Tax Law. Under section 932, the tax collection officer is required to receive the tax on part of a parcel provided the person offering to pay furnishes a particular specification of such part “including an apportionment of the assessment thereof made by the assessor after due notice to the parties affected.” In apportioning the assessment, the assessor has no authority to reduce or change in any way, the assessment (19 Op.State Compt. 65). Namely, the board of assessment review or a court might reduce one of the assessments, even though the sum of the two assessments results in an equitable assessment of the whole.

March 12, 1974