THEATTORNEYGENEBAL OFTEXAS

May 17, 1961

HonorableRobert S. Calvert Comptroller of PublicAccounts Capitol Station Austin, Texas

Dear Mr. Calve&: OpinionNo. ~~-1060

Re: Taxability for inheritance tax purposes of proceeds of insurancepolicies taken out by the decedent on his lifeprior to the 1939 amendment to Article 7117, V.C.S., and subsequently assignedby the decedent after the effective date of the 1939 amendment.
You have advised us of the following facts, both orally and in your written request, in connectionwith your request for an opinion of this office on the above captionedmatter. Prior to the effectivedate of H. B. 990, Acts 1939, 46th Leg., p. 646, ch. 13, 8 1, which amendedArticle 7117, Revised Civil Statutes of Texas, 1925,by adding a provision taxing life insuranceproceeds under certain conditions, the decedent had taken out certain life insurancepolicies upon his own life. The decedent'swife was named as beneficiary of these policies and all premiums were paid from communityfunds. Subsequent to the effective date of,the 1939 amendment, the decedent assigned thesepolicies without reservation to his wife. Thereafter, he had no right to the cash surrendervalue of the policies, or topledge them for a loan, or to surrender or cancel same, or to change the beneficiary, or to obtain a loan on same from the insurer. Nevertheless, the premiums continued to be paid from community funds. You have called to our attention the fact that in Attorney General Opinion No. O-5294, this office held that theproceeds of Insurancepolicieswhich were assigned without reservationprior to the effective date of the 1939 amendment, and in which the decedentnever thereafteracquired ,aninterest,were not subject to an inheritance tax. The pertinent provisions of Article 7117, V.C.S.l, are the following:

"Allproperty within the jurisdiction of this State,.

. .and any interest therein,.

. . including the proceeds of life insurance to the extent of the amount

1 Codified as Article 14.01, ch. 14, Title 122A, Tax.-Gen., .c.s.HonorableRobert S. Calvert, Page 2 Opinion No. ~~-1060

receivableby the executor or administrator as insuranceunder policies taken out by the decedentupon his own life, and to the extent of the excess over Forty Thousand ($40,000)Dollars of the amount receivableby all otherbeneficiaries as insuranceunder policies taken out by the decedentupon his own life, shall,upon passing,. be subject to'a'tax for the benefit of the State's General Revenue Fund,.

. .' OpinionNo. O-5294 pointed out that in Hansen v. Blackmon, 142 Tex. 536, 169 S.W.2d 962 (194x),the Supreme Court stated that since the 1939 arffendment had been taken literally from the Federal statute, the presumption is that the Texas Legislatureknew of the constructiongiven such statute at the time of its adoption, and intended to adopt such statute as construedby the Federal Courts; and such statute is to be consideredby the courts of this State in the light of such construction." Since the Supreme Court of the United States in Lewellyn v. Frick, 268 U.S. 238 (1925),had passed upon the identical questionpresented by the Comptroller'srequest and had concluded that under the facts the transferwas not subject to Federal estate taxes, the transfer couldnot be deemed subject to Texas inheritancetaxes.
The fact situationpresentedby your instant request is entirely different from that considered inAttorney General's OpinionNo. O-5294 in that in the instant case the assignment took place subsequent to the effective date of the 1939 amendment. In other words, the assigned policy was within the provision of the taxing statute at the time the assignment occurred. The question, therefore, is whether an assignmentwithout reservation takes the policies out of the purview of the statuteeven though the premium payments are thereaftermade from community funds.

In De Coster v. Commissionerof Taxation, 11 N.W.2d 489 (Minn.Sup.1943), the courtheld that the proceeds of life insurancepolicies were subject to inheritance taxes in a case in which the insuredobtained the policy and held some of the incidents of ownership at the time the statutewent into effect, and that theproceeds would have been subject to tax if he had died immediatelyeven thoughhe made an assignmentof the policy prior to his death.
The annotator in 73 A.L.R.2d questions the wisdom of this decisionpointing out that theMinnesota Supreme Court laterheld in Diamond Poultry Farms, Inc. v. Commissionerof Taxation, 91 N.W.2d 595 (1958) that the assigned policy was not taxablewhere_-

HonorableRobert S. Calvert, Page 3 OpinionNo. WWthe assignment occurredbefore the statutewas amended; but declined to decide whether the De Caster case shouldbe overruled since it was distinguishablein that the assignment occurred after the amendment of the statute.
We, too, question the wisdom of the De Coster case and decline to follow it. The general rule is that inheritance tax liability is imposed only where the thing of value was the property of the decedent at the time of his death or at the time of the taxable transfer. In those cases in which the beneficiary,rather than the insured, applies for a policy of insurance,pays the premiums on it and retains all the incidentsof'ownership, the person who applies for the insuranceand holds all legal rights in the policy is the owner of thepolicy and its proceeds. The policy is not the property of the insured, and he does not transfer any property at or before his death, nor is the beneficiary liable for a succession tax on the death of the insured. The cases so holding are collected in 73 A.L.R.2d at page 219. In such instances, the State couldnot constituionallylevy an inheritance tax on life insuranceproceeds since there is no taxable incident.

In some jurisdictions,statutesrelating to the taxation of life insuranceproceeds seem broad enough in their terms to levy a tax on the proceeds of a policy even though the beneficiary owns thepolicy and pays the premiums. However, the courtshave generally read into them a limitation to cases inwhich the insured owned thepolicy. See 73 A.L.R.2d 220. Such is not the case under our statutewhich expressly limits the taxing of proceeds of life insurance to amounts received as insuranceunder policies taken out by the decedent upon his own life.

It is true that the insurancepolicies in questionwere originally taken out by the decedentupon his own life;but once the decedent assigned these policieswithout reservation,we think that thatfactbecomes immaterial since he thereafterhad no property rights in the policies. We also think that the fact that the decedent chose to continue to make the payments from community funds is of no significance since this fact did not operate in any way to create any rights of ownership in the decedent and amounted, atmost, to a gift to his wife of his one-half interest in the payments SOmade. We do not view this as a gift to take effect at his death since the w~ifecouldhave, at any time, obtained the cash surrendervalue or pledged the policy for a loan or surrenderedor cancelled the policy or obtained a loan on the policy from the insurer.

We expressly limit our holding in thismatter to cases in which no question of a transfer in contemplationof death is presented. In other words, if an assignmentwas made within the two year period prior to the death of the assignor,which Article-_ -

Honorable Robert S. Calvert, Page 4 Opinion No. ~~-1060

14.01 provides shall be the period within which such transfers shall be presumed to have been made in contemplationof death, a different questionwould arise.

SUMMARY

The proceeds of life insurance policies taken out by the decedentupon his own lifeprior to the 1939 amendment of Article 7117,Vernon's Civil Statutes, which added a provision taxing life insuranceproceeds under certain conditions, are not subject to inheritance taxeswhere the policieswere subsequentlyassigned without reservation to the decedent'swife even though thereafter all premium payments weremade from community funds.
Yours very truly,

WILL WILSON Attorney General of Texas

MMP:cm
APPROVED:
OPINION COMMITTEE: W. V. Geppert, Chairman
Iola Wilcox Robert T. Lewis Robert Rowland Sam R. igilson
REVIEWED FOR THE ATTORNEY GENERAL By: Morgan Nesbitt