1. Under Judicial Code § 238, before the Act of February 13,
1925, a decree of the district court in a suit wherein its
jurisdiction was based on the sole ground that substantial
constitutional questions were involved, was appealable directly to
this Court. P.
273 U. S.
116.
Page 273 U. S. 114
2. Where such a decree was appealed to the Circuit Court of
Appeals erroneously, but within the time allowed for direct appeal
to this Court, an appeal from a decree rendered therein by the
court of appeals will operate to transfer the case here, to be
treated as a direct appeal from the district court. P.
273 U. S.
116.
3. On direct appeal to this Court from the district court, where
the sole ground of the original jurisdiction was constitutional
questions, the decision may be limited to either state or federal
questions that dispose of the case. P.
273 U. S.
116.
4. Whether a royalty interest in an oil and gas lease is realty
or personalty is a question of local law. P.
273 U. S.
117.
5. Under the particular facts of this case, where lands in Texas
were demised for the sole purpose of drilling for gas and oil, the
lessee covenanting to deliver free of charge to the lessor
one-eighth of all oil or gas produced and to pay seven-eighths of
all increase of tax "by virtue of oil or gas," the interest of the
lessor is properly taxed as real property. P.
273 U. S.
118.
298 F. 818 affirmed.
Appeal from a decree of the circuit court of appeals, 3 F.2d
962, which affirmed a decree of the district court dismissing,
after trial, a bill to enjoin collection of a tax. The case is
treated as on direct appeal from the district court on transfer
from the circuit court of appeals.
MR. JUSTICE STONE delivered the opinion of the Court.
Appellants Waggoner, a citizen of Tarrant County, Texas, and the
Waggoner estate, domiciled in Texas, brought suit in the District
Court for Northern Texas against Wichita County, the members of the
board of equalization, and the tax collector of the county to
enjoin the collection of a tax stated to be illegally assessed. The
bill alleged that the tax contested as illegal
Page 273 U. S. 115
exceeded the jurisdictional amount; that Waggoner, at the time
of the assessment, January 1, 1923, was the owner of 12,000 acres
of oil producing land located in Wichita County; that the land
which was transferred after the assessment to appellant the
Waggoner estate was subject to certain oil leases under which
Waggoner, as lessor, was entitled to receive as royalties
one-eighth of all the oil produced; that the board of equalization,
in computing the tax upon the lessor's interest in the oil under
his leases, determined that the royalty in the daily production of
oil from the leased land, estimated as of January 1, 1923, would be
723 barrels per day, and that the total value of such oil was
$1,000 per barrel of daily production thus estimated or $723,000.
The bill assailed the tax assessed as illegal and in violation of
the due process and equal protection clauses of the Fourteenth
Amendment in that appellant's interest in the oil leases up to
$718,300 of the assessed value had been erroneously treated for
taxing purposes as real estate in Wichita County, instead of
personal property taxable in Tarrant County, where the lessor
resided; that, in valuing this interest, appellees had
intentionally and systematically applied a higher rate than upon
similar property in the county, thus denying appellants the equal
protection of the laws guaranteed by the Fourteenth Amendment.
The judgment of the district court, dismissing the bill after a
trial, 298 F. 818, was affirmed on appeal by the Court of Appeals
for the Fifth Circuit. 3 F.2d 962. Both courts held that the
interest taxed was realty, and hence subject to tax in Wichita
County, where the leased lands were situated. They held also that
the assessment was not discriminatory and did not violate the
provisions of the Fourteenth Amendment. Although the tax was
assessed on appellant at the rate of $1,000 per barrel on the
estimated daily production and the interests of the several lessees
in the oil under the various leases were
Page 273 U. S. 116
valued at $450 per barrel, it was held that there was
substantial basis for the difference in the rate, since the entire
expense and risk incident to production were borne by the
lessees.
The case comes here on appeal allowed by the circuit court of
appeals. The jurisdiction of the district court was invoked on the
sole ground that substantial constitutional questions were
involved. Hence, a direct appeal should have been taken from the
district court to this Court. Judicial Code, § 238, before amended.
Union & Planters' Bank v. Memphis, 189 U. S.
71,
189 U. S. 73;
Carolina Glass Co. v. Murray, 240 U.
S. 305,
240 U. S. 318;
Lemke v. Farmers' Grain Co., 258 U. S.
50,
258 U. S. 52.
Having been erroneously brought to the circuit court of appeals,
the case should have been transferred to this Court. Judicial Code,
§ 238(a), before the amendment of February 13, 1925. But, as the
appeal to the circuit court of appeals was allowed within three
months after the entry of judgment in the district court, the
present appeal will operate effectively to lodge the case in this
Court for its decision, without the needless ceremony of remanding
the case to the circuit court of appeals to enable that court to
transfer it back to us for a second consideration.
Wagner Co.
v. Lyndon, 262 U. S. 226;
McMillan Co. v. Abernathy, 263 U.
S. 438. Treating this as a direct appeal from the
district court in a case where the sole ground of its jurisdiction
was the construction or application of the Constitution of the
United States, we may limit our decision to either federal or state
questions which dispose of the case.
Davis v. Wallace,
257 U. S. 478,
257 U. S. 482;
Risty v. Chicago, R.I. & P. Ry., 270 U.
S. 378,
270 U. S.
387.
That there was a basis for discrimination in valuing the
lessor's and lessees' interests in the oil is not questioned here.
But appellants insist that it was erroneous to tax the lessor's
interest as realty in Wichita County, instead of personalty taxable
in Tarrant County, the residence of the taxpayer. As they rely on
the allegation in the bill
Page 273 U. S. 117
that the board intentionally and systematically exempted from
taxation other personal property in Wichita County, it is implicit
in this contention that the taxing authorities, by treating these
interests as realty instead of personalty, denied them the equal
protection of the laws. But we find it unnecessary to deal with the
constitutional aspect of the question, as we conclude that the
interest was properly taxable as realty.
Whether realty or personalty is a question of local law upon
which the local decisions and statutes control.
Edward Hines,
Trustees v. Martin, 268 U. S. 458,
268 U. S. 462.
Under Art. 7510, Complete Tex.Stat. 1920, all real estate is
taxable in the county where located.
It is the contention of appellants that, by the law of Texas,
minerals, including oil in place in the soil, may by appropriate
deed or conveyance be severed from the remainder of the land and
granted in full ownership; that Waggoner, by the several leases of
the lands in question, conveyed the entire interest in the oil to
the lessees; hence the royalty provisions in the leases are, at
most, contractual obligations of the lessees to deliver to the
lessor a part of the oil when removed from the earth, and that such
contractual rights are personalty, taxable in the county of the
domicile of the obligee.
Assuming, as appellants contend, that mineral rights may be thus
severed and conveyed,
Stephens County v. Mid-Kansas Oil &
Gas Co., 113 Tex. 160;
Texas Co. v. Daugherty, 107
Tex. 227, the question remains whether the present leases purport
to convey to the lessees all rights in the oil in the leased lands,
or whether they reserve in the lessor an undivided one-eighth
share. All the leases are in substantially the same form. They
recite that, in consideration of a money payment and the lessees'
covenants, the lessor leases the described lands "for the sole and
only purpose of drilling and mining for gas and oil." The lessees
covenant:
Page 273 U. S. 118
"To deliver to the lessor, free of charge, in the pipeline to
which said lease may be connected, the equal one-eighth part of all
the oil and gas produced on said premises, settlement to be made
not later than the tenth day of each month for the preceding
month."
"That the lessee will pay seven-eighths of all increase in
taxes, by virtue of gas and oil, or either, that may be assessed
against said premises."
It is to be noted that the leases contain no words of grant of
the minerals as such, but the lands are demised solely for the
purpose of drilling and mining. The lessees are in terms given
neither title, right of appropriation, nor power of disposition of
the share of the oil which is to be delivered to the lessor when
severed from the soil. The covenant of the lessees to pay
seven-eighths of all increase in tax "by virtue of gas and oil" is
inconsistent with the contention that the lessor retained no
interest in the minerals in place in the soil.
In the absence of controlling authority in the Texas courts, we
can find in the terms of the leases themselves no basis for the
contention that the lessor granted or conveyed away his entire
interest in the oil. The case of
Stephens County v. Mid-Kansas
Oil & Gas Co., supra, is relied upon by appellants, but in
that case, the lease, in other respects similar to those now under
consideration, provided that the lessee, at his option, should pay
the stipulated royalties in oil or cash. It thus conferred on the
lessee the essentials of ownership -- possession, with unrestricted
power of appropriation and disposition of the oil. The lessee was
therefore properly taxed as owner. The considerations which led to
that result lead to the conclusion here that the ownership of the
royalty oil remained in the lessor who retained the power of
disposition and the right to receive possession, and that his
interest was properly taxed as realty.
This conclusion is supported by the decision of the Texas courts
in
Japhet v. McRae, 276 S.W. 669, indicating
Page 273 U. S. 119
that the lessor's right to an oil lease royalty, although not
specifically mentioned, is embraced in a conveyance of the land by
the lessor, so that, upon the subdivision of the land, the
respective grantees acquire the right to the royalty in all oil
produced on the granted land.
Compare the decision of the
Texas courts in
Jones v. O'Brien, 251 S.W. 208, and
O'Brien v. Jones, 274 S.W. 242, for the application of the
statute of frauds to sales of the lessor's interest in leased
lands.
See also United States v. Noble, 237 U. S.
74,
237 U. S. 80;
Barnsdall v. Bradford Gas Co., 225 Pa. 338, 343.
Judgment affirmed.