. 

THEATTORNEY GENERAL 

OF TEXAS 

Honorable Robert S. Calvert Opinion No. ~~-668 

Comptroller of Pubiic Accounts 

Capitol Station Re: Taxability for inheritance 

Austin 11, Texas purposes of proceeds of 

National Service Life ,nsurance Policies and proper 

method of taxing partnership interest subject to a 

buy, and sell agreement beDear Mr. Calvert: tween the partners. 

You have requested that we advise you as to the 

taxability for inheritance tax purposes of two National Service 

Life Insurance policies on the life of Alex Goldstein, hereinafter referred to as the Decedent, in the total amount of 

$10,000, pay~able to his sister. The p.ertinent part of Article 

7117, Vernon's Civil Statutes, which levies the inheritance tax 

is the following: 

"All property withih the jurisdyiction of this 

State,. . . including the proceeds of li,,fe insurance 

to the extent of the amount receivable iby, the exocutor or ad:ministrator as insurance under policies 

t&en out by the decedent upon his own life, and to 

the extent of the excess over Party Thousand Dollars 

($40,000) of the amount receivable by, all other 

beneficiaries as insurance under policies tnken out 

by the decedent upon his own life,. y .shall, upon 

passing. .be subject to a tax for the benefit of 

the State's ;eneral Revenue Fund. . . *" 

The insurance in-solved is authorized by the National 

Service Life Insurance Act. 38 C.S.C.A., Sec. 801, et seq. At 

the time of the death of the Decedent, August 7, 1957, Section 

816 of the Act made Sec,kion k5Ga of the same Title (World War 

Veters.nsL Act, 192il) appl~icable to National Service Li,fe Insurance. The pertinent portion of Section 4543. is the followings 

"Payments of benefits due or to become due shall 

not be assignable, and such payments made to, or 

on account of, a beneficiary under any of the laws 

relating .to veterans shall be exempt from taxation, 

shall be exempt from the claims of creditors, and 

shall not be liable to attachment, levy, or seizure 
Hon. Robe,rt S. Calvert,'Page 2 (Opinion No. WW-668) 

by o&under any'legal or equitable process whatever, 

either before or after receipt by the, beneficiary. 

Such provisions shall not attach.to,claims of the 

'United States arising,under such laws nor shall the 

exemption herein.contained &sto taxation extend to, 

any: property purchasedGin part or wholly'out of 

such payments."., '. 

In'the brief which has been submitted in connection 

with your request, the attorneys ~for the estate take the position that this.exemption provlsion effectuates anexemption 

from State inheritance taxes. They cite the cases footnoted 

below in support of their position.1 

'The War Risk Insurance Act of September 2, 1914, and 

its amending acts provided for the insuranc,e by the United 

States of Ame,rican vessels, their cargoe's, and crews.against 

the risks of war. This Act was subsequently amended; and the 

Act of June 7, 192,4, known as the World War Veterans' Act of 

1924, made a new codificatio~n abolishing and repealing the 

previous acts,,with certain exceptions. There is a great body 

of case law involving the construction ~and:application of the 

old War Risk Insurance and the World War Veterans' Acts. As 

stated in 147 A.L.R:1185, in an Annotation entitled "National 

Service Life Insurance Act": "Because of the similarity in 

many~ respects between the older act's and the New National Ser-, 

vice Life Insurance Act, much,of this earlier case law is per-. 

tinent and valuable authority in the construction of the new 

act." 

The Federal exemption provision previou$'ly quoted was 

not incorporated into the World War Veterans' Act until 1935. 

However, under similar exemp,tion provisions, even prior to the 

enactment of the Act of 1935, veterans' benefits had been held 

1109); Watkins v. Hali, 

2 Wash. 

5iliii&. ISee 108 

; 876 (1929). See Rem Cram 

469, 267 P. 4ifr (1929), overruled on other 

A.L.R. 1110); Re Verchot, 4 Wash 2d 574, 104 P. 2d-(1940); 

Sorensonv. Security Bank, 121 Neb. 521, 237: N.W. 620 (1931), 

overruled on other grounds; Sorenson v. Horace State Ba~nk, 125 

Neb. 638, 251 N,.W. 119 (1933). 

. ,, 
Hon. Robert S. Calvert, Page 3 (Opinion No. WW-568) 

exempt, under the Pederai statutes, from taxation. See 

..' Kimbrough ,and IGlen on American Law of Veterans, 2d Ed., 1954, 

596, Sec. %kOl ?;r this reason, and for the reason stated in 

the A.L.R. Annotation above referred to, we recognize the pertinence of the decisions cited in the brief submitted in connection ,with .this request. There is, however ,, authori,ty to 

the contrary. 

The attorneys for ~the estate recognize that certain 

New. York cases ,denied an exemption for inheritance taxes.* 

They also recognize that the United States Supreme Court has 

held that the above quoted exemption does not preclude the ; 

inclusion of the proceeds of a War Risk Insurance policy in 

the deceased veteran's gross estate for estate tax purposes. 

United States Trust Co. v. Relvering, 307 U.S. 57. (Decided 

April 1/ 1939 : This case is still controlling for Pederal 

estate tkx purposes. See American Law of Veterans3 supra; * 

Rev. Rul. 55-622. However,' they urge that the difference in. 

the nature of inheritance taxes and, estate taxes justifies a 

different result under irheritance tax statutes. We cannot 

agree since we regard the Helvering case as controlling for 

Texas inheritance tax purposes~. 

In the Relvering case, the sole question was whether 

prrceeds of a War Risksurance policy payable to a deceased 

vetieran's widow were properly included in his gross estate 

fcr Federal esta+;o tax purposes. 

Sectinn 32 (g) Reva.nue Act of [Februa,ry 262.1926, 

as.amended, 26 U,S.C,A, Sec. 411 included in a decsdc<ntb s 

gross esta.ie the amount In ,excess of $4.0,000 received by 

"beneficiaries [other ;than his estate1 as insurance under 

policies taken out by the decedent upon his own life." lh.e 

vetersn"s total life insurance for; beneficiaries stker than 

his estate excee,led at death the statutory~ exemption 0:' 

$4C,OOO iE his Whr Risk insursance policy, WB.S i.n~l~ded. The 

Commissicner assessed an es~ta?.he t;ax meas?ured by this excess. 

The decedent:s executor contended the War Risk Insurance pol- 

, icy should riot b9? .inc.luded !.n the esi,ate because ?f Section 

22'of the Ws~ld War 7eteran:s ,A& /-;une 73, '1923, providing 

tkLat " such. irmdi 3n.e 
Ron. Robert S. Calv,ert, Page 4 (Opinion No. W-668) 

% 

The court reasoned that the proceeds of the War Risk 

Insurance policy should be.included in the decedent!s estate 

for the following reasons: 

The Revenue Acts from 1918 to 1934, the date of the 

veteran's death, manifest a consistent policy to tax the proceeds of all life insurance (not payable to an insured's estate) in excess of $40,000; and the Treasury Regulations expressly stated that the term "insurance" as used in the 

. 

statute refers to life insurance of every’ description. 

~With regard to the exemption provision, the court 

stated that the statutory immunity, of War Risk Insurance from 

taxation cloes not includy an immunity from excises upon the 

occasion oft shifts of economic interests brought about by the 

death of an insured. The court regarded as analogous the 

cases in which Federal bonds~ exempt by statute from all taxation have been subjected to both State and Federal death 

taxes. tiurdock v. Ward, 178 U.S. 139 (1900); Elummer v. 

Coler, l'(o U.S. 115 (1500). 

With the exception of Re Verchot, supra., all of the 

cases cited in footnote 1, as according exemption from death 

taxes, were decided prior to the decision in the Helvering 

case. Whether 'the jurisdictions in which these cases were 

decided would reach the same results in view of the Helvering 

decision is immaterial since we are bound to follow that case 

by, the decision in Blackman v. Hansen, ,140 Tex. 536, 169 S.W. 

2d 962 (1943). 

In the Rlackmsn case i,t was held that where community~ 

funds were used to pay premiums on a deceased~ husband's life t 

insurance policies only~ one half of the proceeds in excess of 

the $40,000, exemption were subject to inheritance taxes. The 

court pointd'ed out that prior to 1939, proceeds of life instirante payable to named beneficiaries were no 

3 

subject to a 

Texas inheritance tax. The 1939 amendement taxing such insurance proceeds was almost identical with the Federal statute 

taxing such proceeds. The court said that since the Texas 

Statute was literally taken from the Federal statute, the presumption is that the Texas Legisl,ature knew of the $onstruction 

given such statute at the time of its adoption and intended to 

adopt such statut,e as construed, by, the .Federal courts. Such 

statute, therefore, is to be considered by the cou~rts of this 

- -,- ,- 

3 H.B. 990,~ Acts 1939, 46th Leg., p. 646, was passed by, the 

House Mayo 9, 1939; by the Senate June 20, 1939, with amendments; 

the House concurred in Senate amendments June 20, 1939. H.B. 

990 became effective ninety days after addournme'nt. 
.; I 

Hon. Robert S.'Calvert, Page 5 (Opinion Nq. W-668) 

. 

state In ?;he light of’ suck c3t?StluCtlon~. Since the United 

Sttates 32premc3 Co7Jr-t had he13 that under the same fact situation as presented by, the B;a.o1nnon cese only rne half of tne 

proceeds of the insurance poiicy was includible in the deced 

dent's, gross estate'fr~: estate tar purposes, Lang v.C%!mis7 

sioner, 304 3.~~. 264 (1938), the %xas Slupreme court reached 

the conclusion above stated. ~/: 

In the instant case; the same principles are applicable; and it must therefone be presumed that the Legislature 

intended to .adopt the construction which had been placed upon 

the E'ederal statute ir? the Xelvering case. This being so, 

the pr'oceeds of the War Risk Insurance polibies..are not ex- 

'empt from inclusion, within Article 7117, V.C;S., for the purpose of,calculating inheritance taxes. 

You have also requeated'that we-advise you as to the 

,proper valtiition to be placed upon'the interest which Decedent had in a partnership at the time of ,hls death. The 

Decedent and C. M, McElhannon were partners fin a business 

known as the Bonded Warehouse Company~. In February of 1956, 

the partners entered into a contract and agreement which pecited that they' were equal partners in said business, that 

the value of said partnership was largely dependent upon their 

individual efforts, and that it was "the desire,,of the parties 

hereto,that in ~the event of the death of either of such part-, 

ners. . . the survivor succeed the partnershIp Csic_jf,in the 

ownership and operation of said business and relieve the estate of deceased of the hazards of the operation of such 

business and~leave unto the es tate of the deceased a sum 

certain." The remaining portion of the agreement reads as 

follows: 

"NOW, 33RE%ORZ, in consideration of the 

mutual benerits, covenants, promises and agreements of t'he parties hereto, to bfi kept and 

performed, the pz..r,t,ies hereto agree as fellows: 

*. "(1) That the survivor of said partners?J.p 

will within 3. ::?:;!sonable time zfte:r; the death of 

first dece?sed pay to t;he estate of deceased the 

full sum of Twenty-five Thousand,Dollars ($;S,OOO) 

cash, less all debts or overdrafts cf deceesc.1 due 

to partnership, an&assume e.11 pa,rtnership indebtedness of any ar.d all zature whatsoever. 

"(2) I2 consideration of performance by suyvivor; of t'he cond,itions o,? paragraph (1) hereof, 

each of the'partiea hereto does by these p:&sents 

bind the!,r heirs; assigns, execrators, adminlstra- 
Hon.. Roberta S. Calvert, Page 6 (Opinion No. WW-668) 

tors and estates, estates, that in the event he should 

prior decease decease the,other the,other partner, partner, that his executors, administrators administrators and estate will pass full 

legal title to all of the assets of said partner- partnership to the survivor. 

"(3)~ All expenses in connection with the 

transfers and assignments described in paragraphs 

(I) and (2) hereof shall be borne and paid by the 

survivor. 

"(4) Inthe.ev,ent of decease of survivor 

prior to full payment and performance of conditions of paragraph (1) hereof, the assets of said 

partnership shall pass share and share alike to 

the estate of said partner." 

In an affidavit submitted by, Clifford M. McElhannon 

in connection with the inheritance tax return, he states that 

he.and the deceased partner had entered into a verbal agreement that each partner would take out life insurance on his 

own life making the, co-partner the beneficiary. The amount of 

life insurance was to be increased from time to time according 

to the mutyal. desires of the partners, with the amount of insurance payable to each partner remaining at all times sub-, 

stantially the same. It was further orally agreed between.the 

partners that no change would be made in such life insurance 

without the, consent of the partner named as beneficiary,. Premiums on these policies were paid for by check issued on the 

partnership account. 

Subsequent to the death of the Decedent, Mr. McElhannon 

received $30,226.91 as beneficiary under various policies taken 

out by the Decedent,pursuant to the foregoing agreement.~ At 

the date of Decedent's death, the value of his partnership interest was $33,521.40. 

The attorneys for the estate have not reported the 

value~of thepartnership assets"but have 'repor,ted~ $25,00Cworth 

of insurance as the value of an asset which replaced it and are 

claiming a pro rata share of the $40,000 exemption! You ask 

whether the partnership interest should be reported as an intangible asset of the estate. 

The )attorneys for.the estate take the position that 

the Decedent's partnership interest should be,taxed in .accordante with the Federal rule which has been stated as follows: 

"Where the, stock of the,decedent in a close carporation or his interest in a business as partner 

. 
. 

I 

.Hon. Robert S. Calvert, Page 7 (Opinion No. WW-665) 

is subject at his death to an zgreemen~ cf sale sir 

to anotherm's legally binding option to purchase at 

a fixed pr'ice, the fair market vai,ue for Pederal 

tax purposes is Ilimited to such price, provided the 

price was f'ai.r nt the tim'e It was established and 

the decedent couid no t have disposed ,of the pro,; 

perty~ at any time prior to his death: Iielvering v. 

Sa.lv;?.ge, 297 V.S. 106 156 S.ct. 375. 8~ L.Ed. 

(1935); Wilson v. Bowers, 57 F.2d 682' dCA-2, 

Lcmb v. Sugden, 82 F.2d 166 (CCA-2 193 !; Claire C. 

Ho:fman, 2UT.;:: 115C (1943 ;‘Estate of iames H. 

Matthews, :3 T.C. 525 11944. I ." 1 Polisher, Estate 

Planning and Estate Tax Saving, 311. 

We agree With the attorneys for the estate that the 

buy and sell agreement in this case was a valii! and enforceable one. We think that the consideration was adequate and 

that the agreement was no,t intended asa substitute for testamentary dispositionor as a device to avoid estate taxes, 

The partners are unrelatezd, and there would have been no 

reason to consider either a natural object of the other's 

bounty. Even though the agreement does not specifically prohibit either partner selling his interest in the partnership 

prior to his death.'.we think that such prohibition should be 

implied In view ofthe forma lity of the agreement and the 

absolute natu?e,cf its provisions: See "Estate Tax Consequences of Agreements for the Sale of 3 Partnership Interest 

Effective at the Partner's Death--An Appraisal of the Law" by 

Wright Katthew3, 26 T.L.R. 729, for a discussion of the var- 

.* ious tests whi-'3 the cocrts have applied in determining the 

validity, and. effect of such partnership agreements. 

&& is -?his apeement binding on the State ',n determining the value of the ~decsd~ent's partnership interest at 

his dea.th? We think.nct. The transaction is ens which comes 

squarely, wi?;hin the provision of Artic,le 7177, ';,S.S., which 

imposes a t,ax upon transfers "by deed, grant, sale,- o'r gift 

made or intended to take effect in possession or enjoy~ment a5 

or after the death of the grantor or donor, . . .' (%lPh~3SiS 

supplied.) ConsiderTng the transfer in question as a b?ria 

fide sale of ,t?e pa rtnership interest, nevertheless, the previously stated, f'a.8zt.s p>sveal th.at it '~3s a sale for less t?ia~!l 

the full vaius of such il-iterest at the Decedent's death and 

does not reflect the true amount which the surviv,ing partner 

received~ 'by virl~~~.z of t;ie sale intended~ to take effect at the 

deaths of the Decedent. 

The ba.si: distinction between a tax in the natv;::e of 

an inheritance ta,x and a tax in the nature of an estate tax 
Hon. Robert S. Calve&, Page 8 (Opinion No. m-668) 

necessitates a,dif'ferent conclusion from that reached by the' 

Federal courts. 'The Federal rule is obviously' sound because 

the Federal tax is based upon the net taxable estate of the 

decedent at his death..~ Therefore, where the estate receives 

less than the full value of the partnership interest under a 

bona fide sales agreement,,only the amount actually received 

should be included in computing the estate tax. But our 

inheritance tax,statute looks not to,the net estate of a 

decedent but to the amount received by an individual by 

virtue of a taxable transfer. 

,4 

In Schroeder v. Zink, 7l'A.2d 321, the court in 

considerine: a similar fact situation reached the same result 

that we he:e reach. In this case the court pointed out,that 

in determining whether, a particular transfer is intended to 

take effect at, or after'the transferor's death, the important 

question is whether the vesting of possession and enjoyment 

is dependent upon the settler's death. There can be no doubt 

that the transfer of~the Dscedent's partnership interest took 

effect in possessionand enjoyment at or after the deceased 

partner's death.: 

The court also stated ,that obviously it was only 

when there was an adequate consideration substantially equal 

to the value ,of the property that sales intended to take 

effect at death are not taxable and that therefore to~the extent that consideratio? paid was inadequate,in value as compared to the value received, it is tantamount to a gift. It 

is, in effect, a substitute for a testamentary disposition, 

and taxable. 

Ar~ticle 713d,'V.C.S., provides for the appraisal of 

property for inheritance tax purposes '. . . at its actual 

market -value if it has a market value, and in case it has 

none, then its zeal value at the time of the death of the 

decedent, . . . In Calvert v. Kattar, 301 S.W.2d 318 (Tex. 

Civ.App., error ref., n.r.e.), the court held that market 

value for inheritance tax purposes was the following accepted 

definition as approved by the Supreme Court in Sta.te v. 

Carpenter;.'126 Tex. 604, 89 S.W.2d 979 (1936): ". . . The 

price the property will bring when offered for sale by one 

4 Cited and followed in Minoff v. Margetts, 81 A. 2d 369 

(Superior Ct,.. of N. J., ~mlj;, See In re Cowles' Estate, 

219 p. 2d '964 (Wash.Sup., 1950) for a discussion of the 

conf1icting solutions of the problem. 

. t. 

. ,. 
. 

Hon. Robert S. Calvert, Page 9 (Opinion No. WW-668) 

who desires to sell, but is not obligated to sell, and is 

bought by one who desires to buy, 

of buying." 

but is under no necessity 

. 

The New Jersey statu%e in the Schroeder case required an aopraisal at "fair market value," which term had 

been defined in the same terms as the above quoted definition. At page 327, the court states: 

"To ascord a binW.ng effect to the ante mortem 

value, set in.the agreement before u=ur 

necessarily oust the tax appraiser of his statutory duty to appraise the property transferred 

at its 'fair market value', R. S. 54:34-g, 

N.J.S.A. Such construction would open the. door 

to tax evasion and frustration of the clear 

legislative mandate. Cf. In re Hartford's 

Estate, supra, 

300." 

122 N.J. Eq. at page 498, 194 A. 

You are therefore advised that all the insurance 

received by the surviving partner should be taxed as insurance and accorded ,its pro rata share of,the allowable 

insurance exemption. You are further advised that the 

surviving partner owes, an additional tax on the value of 

the partnership assets as such in excess of the contract 

price. 

The proceeds of National Service 

Life Insurance policies are subject to,. 

inheritance taxes ,under Article 7117, V.C. 

S. Where partners entered.into agreement 

which provided that survivor would purchase deceased partner's interest for 

$25,000 and further verbally agreed that 

each partner would take out life insur - l 

ante on his own life naming co-partner as 

beneficiary,, the proceeds of all life insurance policies received bye the surviving 

partner are taxable as insurance and entitled to their pro rata share of exemption 

from inheritance taxes. The surviving 

partner also owes an ideritance tax on 

the value of the partnership assets to 
Hon. Robert .S. Calvert, Page 10 (Opinion No., W-668) 

the extentof,the value,in, excess of the 

c~cntra.ct price. 

: Verytruly yours, :' 

WILL-WILSON 

. 

: Attorney'GenerBl *, 

, 

., -i 

Assistant 

MMP:bct :: 

APPROVED:. 

OPINION~COMMITTEE: 

I?organ Nesbitt, Chairman ', 

Tom L.' l%Farlin'g' 

Howard Mays 

Lawrence Jones 

REVIEWED FOR TXE ATTORNEY GENERAL 

By: W. V. Geppert 

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