THEATJTORNEY GENERAL

WILL WILSON AlTORNEY GENERAL OF %-EWAS

Ausnnr ~%‘J?ExAs

May 16, 1961

HonorableRobert S. Calvert Opinion No. wwe joo Comptroller of PublicAccounts Capitol Station Re: Propermethod of computing Austin, Texas inheritance taxes on royalty interest of life tenant Dear Mr. Calvert: under submitted facts.

We quote the following excerpt fromyour letter requesting the opinion of this office on the above captionedmatter:

"Winnie Craft Minchen Crlffls died testate on August 15, 1958, a resident of Harris County, Texas, seized and possessed of an estate valued at $723,525.32gross. The bulk of the estate of the deceased consists of a royalty interest in the Old Ocean Field in Brazoria County, Texas. The averagemonthly income from this royalty interest Is $6,300.OO~whlchwas valued on a 100month 100 X 6,300.oo equals %ay-outbasis. 630,000.00, the value of themineral Interest of the deceased."
The pertinentprovisions of the decedent'swill, which you have submitted to us, are the following:
"Item 4.

"Ihereby appoint theNational Bank of Commerce of Houston, Texas, a national banking association,executor under this will and of my Estate and direct thatno bond shallbe required of it. "With the exception of thehereinafter mentioned property,my Executor shallhave full power and authority to sell ormortgage any part or parts, real or personal, ofmy estate on such terms and for such conslderatlon or considerationsas itmay deem advisable. "My said Executor shallhave no authority fromme to sell or mortgagemy interest InHonorableRobert S. Calvert, Page 2 OpinionNO. 7~1058

what is known as the Old - Ccesn Oil Field In Brazoria County, Texas, except that, as a last resort, itmay mortgage the royalty and/or rental income frommy Interests in said oil field for thepurpose of paying the State InheritanceTaxes and the Federal Estate Taxes on my Estate.
"Item 5.

"I give and bequeath all ofmy personal property tomy legally adopted son, William France Minchen, tobe held by him as his separateproperty.
"Item 6.
"I give and devise all ofmy real property tomy legally adopted son,William France Minchen, for and duringhis natural life to have the use and benefit of same as his separateproperty and, upon his death, said real property shallpass to and vest in such of his issue as he may by his will appoint which power Is and shall be exercisableby him alone and in any event," Other provisions of thewill relate to the dispositionof the properties coveredby the last foregoingparagraph in the event of nor?-exercise of the newer of aopoi.ntment and provide, generally, that suchproperties shallbecome the property of the son's children or their descendants.
We quote further from your letter in connectionwith this request:
"We construe the provisions of the above

paragraph as passing the fullmonthly royaltypayments to the son of the deceased, and since the son has a life expectancy of 36.7 years, he will consume the entire royalty value in 100months. This constructiondoesnot conflictwith the terms of the will nor the provisions of Article 14.08,... .'I "Please advisewhether or not our construction is correct.".. .-

HonorableRobert S. Calvert, Page 3 OpinionNO. ~~-1058

Article 14.08, Ch. 14, Title 122-A, Tax.-Gen.,Vernon's Civil Statutes,reads as follows:

"If the propertypassing as aforesaid shallbe divided into two or more estates, as an estate for years or for life and a remainder, the tax shall be levied on each estate or Interest separately,according to the value of the same at the death of the decedent. The value of estates for years, estates for life,remainders and annuities, shallbe determinedby the 'ActuariesCombined Experience Tables,' at four per cent compound interest."
The taxpayer takes theposition that thisArticle is controlling as to the determinationof the tax. If thisbe correct, the value of the life estate would be computedby '. multiplying the value of the beneficial interestby 4s and this'product by the factor (presentvalue of $1.00) for the given age of the life tenant; the result is the value of the life estate. Subtract the value of the life estate (asascertainedabove) from the beneficial interest,and the amount leftwill be the value of the remainder estate."1
The general rule is that the life tenant is entitledq to all the profits or incomeaccruing during his life tenancy.
It is evident that the statutorymethod of computing the value of a life estate is predicated on the theory that the value of theproperty subject to the life estate will remain constant during the life of the life tenant. It is a workablemethod of valuing a life estate only if itmay be assumsdthat the value of the estate so devised, In this case the royalty interest,will remain the same. In other words, under Article 14.08 the valuation of a life interest serves two purposes. It servesas ameasure of the tax on the life interest and az8tk rnnr~sof determining the value of the remainder interest.

. Inheritance,Estate and Gift Taxes, 277, 278, Sec. 368, and auth&ities cited therein.
It is settled in this State that the 011 and gas beneath the soil are considereda,part of the realty. 31-A Tex.Jur. 27, Oil and Gas, Sec. 6. It is also settled that a life estate in lands extends to the unsevered 011 and gas beneath the surface. 31-A Tex.Jur. 38, Oil and Gas, Sec. 13. If, under the will

foregoing directions are contained in the Actuaries' Experience Tables. g Tzpl$ v. Medlin, 203 S.W.2d 635 (Civ.App.,error ref., 1947);

*J 6 59

. 3 , Life Estates, Sec. 7.HonorableRobert S. Calvert, Page 4 Opinion NO. w-1058

under consideration,the adopted son received only the r,ights of an ordinary life tenant in the royalty interest, the value of that which he received would be properly computedunder the provisions of Article 14.08, i.e., as therein directedupon the ascertainedvalue, rather thanupon the fullmonthly royalty payments.
We think that thewill, as a whole, evidences an intent on the part of the testatrix that the beneficiary is to receive the royaltypayments in their entirety (not just the income therefrom) for the duration of his natural life. The executorhas no authority to sell ormortgage the royalty and/or rental income involved except as a last resort for thepayment of death taxes. The royalty interest is coveredby theprovisions of Item 6, which devises all of the decedent'sreal property to her adopted son "for and duringhis natural life to have the use and benefit of ssme as his separateproperty... 11 (Emphasisadded.) The royalty interest involvedwas a prod&ing royalty interest at the date of the decedent'sdeath, and we think that the testatrix clearly intendedher adopted son to have the entire benefit thereof rather than only the income therefrom. The provisionwith regard to the exercise of thepower of appointment to his issue merely evidences an intention to endow him with the right to will any unpaid royalties to such of his issue as he might choose. The provisionspertaining to the non-exercise of the power of appointment are likewisedrawn for thepurpose of insuring that the son's issue receive any of the royalty interest thatmight remain at his death shouldhe fall to exercise thepower of appointment.
Our interpretationof the testatrix's intention is consistent with the common law rule and with the results reached by the Texas Courts that a life tenantmay continue to work or have operated oil wells that were open when his life interest commenced or to recover the royalties of such operations. 31-A Tex.Jur. 39, Oil and Gas, Sec. 13. At page 39 of the foregoing text, the following statement appears:

"The theory of the rules stated in the text is that where the oil producing operations are commencedbefore the life tenancy is created, they are a mere mode of use and enjoyment and to extract oil and gas is but to take the accruing benefits of the land. Higgins 011 and Fuel Co. v. Snow, (1902) 51 C.C.A. 267, 113 F. 433." Although the life tenant, as a general rule,may not open new wells or extract oil or gas from the land for his own benefit since such act would be an appropriationof a part of the corpus of the estate, there are exceptions to this general rule whichHonorable Robert S. Calvert, Page 5 OpinionNo. ~~-1058

give the life tenant a continuingright to benefit in wells drilled after the creation of the life tenancy. These exceptions arise by reason of some act by the original owner andmay be conferredb the instrument conveying to him such estate. 31-A Tex.Jur. i: 39- 0, Oil and Gas, Sec. 13. We have previously construed the will under considerationas evidencing such sn intention on the part of the original owner. Since we have concluded that the beneficiary life tenant in this case is entitled to the entire royalty interest during his lifetime -- not just the income therefrom,and sincehis life expectancy far exceeds the estimatedpay-out period, inheritance taxes shouldbe computed on the entire value of the royalty interest,rather than under theprovisions of Article 14.08. You are accordingly so advised.

SUMMARY

Under submitted facts, inheritance taxes shouldbe computed on the entire value of a life tenant'sroyalty interest rather than on the basis of a life estate in such royalty interest.
Yours very truly,
WILL WILSON Attorney General of Texas

By: Marietta MC Assistant MMP:cm
APPROVED:
OPINION COMMITTEE: W. V. Geppert, Chairman
Edward A. Cazares C. Dean Davis Harris Toler
REVIEWED FOR THE ATTORNEY GENERAL By: Morgan Nesbitt