.

THEATTORNEY GENERAL
OF TEXAS

Honorable Robert S. Calvert OpinionNo. ~~-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 taxingpartnership interest subject to a buy, and sell agreement beDear Mr. Calvert: tween the partners.

You have requested that we adviseyou as to the taxability for inheritance tax purposes of two National Service Life Insurancepolicies 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,.

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including the proceeds of li,,fe insurance to the extent of the amount receivableiby, the exocutor or ad:ministrator as insuranceunder policies t&en out by the decedentupon his own life, and to the extent of the excess over Party Thousand Dollars ($40,000)of the amount receivableby, all other beneficiariesas insuranceunder 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 ;eneralRevenue Fund.

. . *"
The insurance in-solved is authorizedby the National Service Life InsuranceAct. 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 (WorldWar Veters.nsL

Act, 192il)

appl~icable to National Service Li,feInsurance. The pertinent portion of Section 4543. is the followings
"Payments of benefits due or to become due shall not be assignable, and suchpaymentsmade to, or on account of, a beneficiaryunder any of the laws relating .to

veterans shallbe exempt from taxation, shall be exempt from the claims of creditors, and shallnot be liable to attachment, levy, or seizureHon. Robe,rtS. Calvert,'Page 2 (OpinionNo. WW-668)

by o&under any'legal or equitableprocess whatever, either before or after receipt by the, beneficiary. Such provisions shall not attach.to,claimsof the 'United States arising,under such laws nor shall the exemptionherein.contained&sto taxation extend to, any: propertypurchasedGinpart or wholly'out of suchpayments."., '.
In'the brief which has been submitted in connection with your request, the attorneys~forthe estate take the position that this.exemptionprovlsion effectuatesanexemption from State inheritance taxes. They cite the cases footnoted below in support of their position.1

'TheWar Risk InsuranceAct of September 2, 1914, and its amending actsprovided 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 subsequentlyamended; 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:applicationof 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 InsuranceAct": "Because of the similarity in many~respects between the older act's and the New National Ser-, vice Life InsuranceAct, much,of this earlier case law is per-. tinent and valuable authority in the constructionof the new act."
The Federal exemptionprovisionpreviou$'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'benefitshad been held

1109);Watkins v. Hali,

2 Wash. 5iliii&. ISee 108 ; 876 (1929). See RemCram 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; Sorensonv. Horace State Ba~nk,125 Neb. 638, 251 N,.W.119 (1933).

. ,,Hon. Robert S. Calvert, Page 3 (OpinionNo. WW-568)

exempt,under the Pederai statutes, from taxation. See ..' Kimbrough ,andIGlen 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.thisrequest. There is, however
,,authori,ty to the contrary.

The attorneys for~theestate recognize that certain New. York cases ,denied an exemption for inheritance taxes.* They also recognize that the United States Supreme Courthas held that the above quoted exemptiondoes not preclude the ; inclusion of the proceeds of a War Risk Insurancepolicy in the deceasedveteran'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 irheritancetax statutes. We cannot agree since we regard the Helvering case as controlling for Texas inheritance tax purposes~.

In the Relvering case, the sole questionwas 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 ,excessof $4.0,000 received by "beneficiaries [other ;thanhis estate1 as insuranceunder 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.Si.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 Insurancepol-

, icy should riotb9?.inc.luded !.nthe esi,ate

because ?f Section 22'of the Ws~ld War 7eteran:s ,A& /-;une 73, '1923,providing tkLat"such.

irmdi3n.eRon. Robert S. Calv,ert, Page 4 (OpinionNo. W-668)

% The court reasoned that the proceeds of the War Risk Insurancepolicy shouldbe.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 consistentpolicy to tax the proceeds of all life insurance (notpayable 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.

~Withregard to the exemptionprovision, the court stated that the statutory immunity, of War Risk Insurance from taxation cloes

not includy an immunity from excises upon the occasion oftshifts 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 decidedprior to the decision in the Helvering
case. Whether 'thejurisdictionsin 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, ,140Tex. 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 insurancepolicies only~ one half of the proceeds in excess of the $40,000,

exemptionwere subject to inheritance taxes. The courtpointd'ed

out that prior to 1939, proceeds of life instirante payable to named beneficiarieswere no3 subject to a Texas inheritance tax. The 1939 amendement taxing such insuranceproceeds was almost identicalwith the Federal statute taxing suchproceeds. The court said that since the Texas Statutewas 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 Mayo9, 1939; by the Senate June 20, 1939, with amendments; the House concurred in Senate amendments June 20, 1939. H.B. 990 became effectiveninety days after addournme'nt..; I

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

. state In ?;helight of’suck c3t?StluCtlon~. Since the United Sttates32premc3

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 insurancepoiicy 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 .adoptthe constructionwhich had been placed upon the E'ederalstatute ir?the Xelvering case. This being so, the pr'oceedsof the War Risk Insurancepolibies..are not ex- 'empt from inclusion, withinArticle 7117, V.C;S., for the purpose of,calculating inheritance taxes.

You have also requeated'thatwe-adviseyou as to the ,proper valtiitionto be placed upon'the interestwhich Decedent had in a partnership at the time of ,hlsdeath. The Decedent and C. M, McElhannon were partners fina 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 saidpartnership was largely dependentupon their individual efforts, and that it was "the desire,,of the parties hereto,that in ~theevent of the death of either of suchpart-,

ners.

. .the survivor succeed the partnershIpCsic_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~leaveunto the estate of the deceased a sum certain." The remainingportion of the agreement reads as follows:
"NOW, 33RE%ORZ, in considerationof 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 saidpartners?J.p will within 3.::?:;!sonable time zfte:r;

the death of first dece?sedpay to t;heestate 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 considerationof performance by suyvivor;of t'hecond,itions o,? paragraph (1)hereof, each of the'partiea hereto does by thesep:&sents bind the!,r

heirs; assigns, execrators, adminlstra-Hon.. RobertaS. Calvert, Page 6 (OpinionNo. WW-668)

tors and estates, that in the event he should

estates, decease the,otherpartner, prior decease the,otherpartner, that his executors, administratorsand estatewill pass full administrators partnerlegal title to all of the assets of saidpartner- ship to the survivor.
"(3)~ All expenses in connectionwith the transfers and assignmentsdescribed in paragraphs (I) and (2)hereof shall be borne and paid by the survivor.
"(4) Inthe.ev,entof decease of survivor prior to full payment and performance of conditions of paragraph (1)hereof, the assets of said partnership shallpass share and share alike to the estate of saidpartner."

In an affidavit submittedby,CliffordM. McElhannon in connectionwith the inheritance tax return, he states that he.and the deceasedpartner had entered into a verbal agreement that each partner would take out life insurance on his
own lifemaking the,co-partner the beneficiary. The amount of life insurancewas to be increased from time to time according to the mutyal.

desires of the partners, with the amount of insurancepayable to eachpartner 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 $30,226.91as beneficiaryunder various policies taken out by the Decedent,pursuantto the foregoingagreement.~At the date of Decedent's death, the value of his partnership interest was $33,521.40.

The attorneys for the estatehave not reported the value~of thepartnership assets"buthave '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 shouldbe reported as an intangible asset of the estate.

The )attorneysfor.the estate take the position that the Decedent'spartnership interest shouldbe,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 (OpinionNo. WW-665)

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

legallybinding option to purchase at a fixedpr'ice,

the fairmarket vai,uefor Pederal tax purposes is Ilimited to suchprice, provided the price was f'ai.r

nt the tim'eIt was establishedand the decedent couid not have disposed ,ofthe 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 ;‘Estateof 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 considerationwas adequate and that the agreement was no,tintended 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 specificallyprohibit either partner sellinghis interest in the partnership prior to his death.'.we think that suchprohibition should be implied In view ofthe formality of the agreement and the absolute natu?e,cf its provisions: See "EstateTax Consequences of Agreements for the Sale of 3 Partnership Interest Effective at the Partner'sDeath--An Appraisal of the Law" by Wright Katthew3, 26 T.L.R. 729, for a discussion of the var- .* ious tests whi-'3the cocrtshave applied in determining the validity,

and.effect of suchpartnership agreements.

&& is -?hisapeement binding on the State ',ndetermining the value of the ~decsd~ent's partnership interest at his dea.th? We think.nct. The transaction is ens which comes squarely,

wi?;hinthe 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

partnership interest,nevertheless, the previously stated,

f'a.8zt.s p>sveal

th.atit '~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;iesale intended~ to take effect at the deaths of the Decedent.
The ba.si:

distinctionbetween a tax in the natv;::e of
an inheritance ta,xand a tax in the nature of an estate taxHon. Robert S. Calve&, Page 8 (OpinionNo. m-668)

necessitates a,dif'ferent conclusion from that reached by the' Federal courts. 'TheFederal 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,,onlythe 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 individualby virtue of a taxable transfer. ,4

In Schroederv. 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 courtpointed out,that in determiningwhether, a particular transfer is intended to take effect at,or after'the transferor'sdeath, the important question is whether the vesting of possession and enjoyment is dependentupon the settler'sdeath. There can be no doubt that the transfer of~the Dscedent'spartnership interest took effect in possessionand enjoyment at or after the deceased partner's death.:

The court also stated ,thatobviously it was only when there was an adequate consideration substantiallyequal to the value ,ofthe property that sales intended to take effect at death are not taxable and that therefore to~the extent that consideratio?paid was inadequate,invalue as compared to the value received, it is tantamount to a gift. It is, in effect, a substitute for a testamentarydisposition, and taxable.

Ar~ticle

713d,'V.C.S.,provides for the appraisal of property for inheritance tax purposes '.

. . at its actual market -valueif 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 courtheld 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 (SuperiorCt,..

of N. J.,~mlj;, See In re Cowles' Estate, 219 p. 2d '964(Wash.Sup.,1950) for a discussion of the conf1icting solutionsof the problem.

. t.

. ,..

Hon. Robert S. Calvert, Page 9 (OpinionNo. 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 'fairmarket value', R. S. 54:34-g, N.J.S.A. Such constructionwould open the. door to tax evasion and frustration of the clear legislativemandate. 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 survivingpartner shouldbe taxed as insurance and accorded ,itspro rata share of,the allowable insurance exemption. You are further advised that the survivingpartner 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 Insurancepolicies are subject to,. inheritance taxes ,underArticle 7117, V.C. S. Where partners entered.intoagreement which provided that survivorwould purchase deceasedpartner's interest for $25,000 and furtherverbally agreed that eachpartner would take out life insur- l ante on his own life naming co-partner as beneficiary,,

the proceeds of all life insurancepolicies received byethe surviving partner are taxable as insuranceand 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 toHon. Robert .S.Calvert, Page 10 (OpinionNo., 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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