Tax Law and Business Organization Strategy

Is There a Permanently Severable "Wind Estate" In Texas?

Lisa Chavarria’s article on The Severance of Wind Rights in Texas was recently published on the Dallas Bar Association’s website. The article recognizes that there are questions about whether there is a severable real property estate consisting of wind rights. Legislative guidance may be necessary, particularly if the Texas courts don’t address this issue soon.

I’m going to play devil’s advocate to some of the article’s conclusions. As I’ve noted elsewhere in my blog (See, Thoughts and Questions on the Tax Aspects of Wind Energy and Wind Energy Part 2 -- Assignment of the "Tree" or the Income the "Tree" Produces), the analogy of a wind estate to a mineral estate should not be taken as a given. So, I question the article’s reliance on an analogy of wind rights to a mineral estate. The wind estate may be more analogous to riparian rights than the mineral estate. Or the courts could simply “discover” a whole new set of common law rules to govern the property rights associated with wind energy. In Texas, riparian rights may be severable from the surface estate (See, Texas Co. v. Burkett, 117, Tex. 16, at 26.), but the Texas Supreme Court has ruled that a fairly specific description of the surface is necessary to permanently convey the rights to exploit surface water for energy production. See, Richter v. Granite Mfg. Co., 107 Tex. 58, at 63. If the riparian analogy is followed, there could be a wind estate, but failure to properly describe it’s attachment to the surface estate could defeat an attempted conveyance or retention of the estate. Reliance on the California decision of Contra Costa Water Dist. v. Vaquero Farms, Inc., (68 Cal. Rptr. 2d 272), which the article cites, regarding the existence of a wind estate is also risky, since that case interprets California law and not Texas law and involves a fact specific situation regarding eminent domain.

The article suggests that, under today’s uncertain state of law in Texas, severances should take the form of a conveyance of the right to receive a portion of the income stream from wind activities. This may be the prudent way to approach a severance from a state law standpoint, but is risky from a federal tax law standpoint. That is, if I make a gift of a portion of the income stream from wind leases, I may find myself being taxed on that income under assignment of income principles. Remember the fruit from the tree gets taxed to the owner of the tree and I can’t change this by giving ownership of the fruit without also giving ownership of the tree. Failure to shift the tax burden from the income attributable to rents and “royalties” usually constitutes the purpose of these types of gifts. So, it may come as a shock if the income tax burden stays with the surface owner. If the transfer is of a permanent right to income, then it may constitute property for federal tax law purposes. But whether a transfer of an income stream is permanent begs the question posed in the article: is there a severable real property estate in wind rights?

I happen to agree that the law will eventually sort itself out so that some sort of property right regarding wind energy can be permanently severed from the fee or surface estate. But anyone attempting to do so before the courts define the rights of the wind energy estate does so at their own risk.

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