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Section 8-6-109 of Tennessee’s code requires the Tennessee Attorney General (AG) to give certain state officials, such as members of the general assembly, written legal opinions “on all matters submitted by them in the discharge of their official duties.”



On Dec. 2, 2014, in response to a request submitted by Sen. Ken Yager, the AG issued an opinion concluding that the income approach to determining the value of mineral interests is appropriate.

Sen. Yager questioned whether the taxation of mineral interests using the income approach results in the improper assessment of an income tax or an unauthorized severance tax.

Sen. Yager’s query presumably stems from Tennessee’s income tax prohibition. As reported after the November midterms, voters approved a constitutional amendment that prohibits a tax on income, though the state still taxes individual income in the form of interest and dividends. Tennessee imposes a three percent severance tax on the sale of oil and gas removed from the ground within the state’s borders, but prohibits any other taxes on this oil and gas.

Noting that mineral resources generate income and that “particularly productive mineral resources will generate more income and possess greater value than a less productive property,” the AG cited precedent holding that, even though net earnings determine the amount of the excise tax, that does not convert it to an income tax. The AG further reasoned that the use of the income approach results in the assessment of a property tax, and the consideration of the property’s income in this process does not change the basic nature of the tax being assessed.