    .




             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 ,n-
                                    surance Policies and proper
                                    method of taxing partner-
                                    ship interest subject to a
                                    buy,and sell agreement be-
Dear 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, herein-
after referred to as the Decedent, in the total amount of
$10,000, pay~ableto his sister. The p.ertinentpart of Article
7117, Vernon's Civil Statutes, which levies the inheritance tax
is the following:
            "All property withih the jurisdyictionof this
        State,. . .including the proceeds of li,,feinsurance
        to the extent of the amount receivable iby,the exoc-
        utor or ad:ministratoras 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-solvedis 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,kionk5Ga of the same Title (World War
Veters.nsLAct, 192il)appl~icable to National Service Li,feInsur-
ance. 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 .toveterans 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,rtS. 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 posi-
tion 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,eby the United
States of Ame,ricanvessels, 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~nabolishing 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 Insurance Act": "Because of the similarity in
many~respects between the older act'sand 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$'lyquoted was
not incorporated into the World War Veterans' Act until 1935.
However, under similar exemp,tionprovisions, even prior to the
enactment of the Act of 1935, veterans' benefits had been held




                                         1109); Watkins v. Hali,
                       ; 876 (1929).  See RemCram     2 Wash.
469, 267 P. 4ifr (1929), overruled on other          ISee 108
                                              5iliii&.
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 IGlenon 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 per-
      tinence of the decisions cited in the brief submitted in con-
      nection ,with.thisrequest. There is, however,, authori,tyto
      the contrary.
               The attorneys for ~the estate recognize that certain
      New. York cases ,deniedan 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
                      Risksurance
      prrceeds of a War                policy payable to a deceased
      vetieran'swidow were properly included in his gross estate
      fcr Federal esta+;otax purposes.
              Sectinn 32 (g) Reva.nueAct of [Februa,ry 262.1926,
    as.amended, 26 U,S.C,A, Sec. 411 included in a decsdc<ntbs
    gross esta.iethe amount In ,excessof $4.0,000received 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,ledat death the statutory~exemption 0:'
    $4C,OOO iE his Whr Risk insursancepolicy,WB.Si.n~l~ded. The
    Commissicner assessed an es~ta?.he
                                    t;axmeas?uredby this excess.
    The decedent:s executor contended the War Risk Insurance pol-
  , icy should riotb9?.inc.luded
                               !.nthe esi,atebecause ?f Section
    22'of the Ws~ld War 7eteran:s ,A& /-;une 73, '1923,providing
    tkLat" such.irmdi3n.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   pro-
ceeds of all life insurance (not payable to an insured's   es-
tate) in excess of $40,000; and the Treasury Regulations   ex-    .
pressly 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 cloesnot 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 taxa-
tion have been subjected to both State and Federal death
taxes. tiurdockv. Ward, 178 U.S. 139 (1900); Elummer v.
Coler, l'(oU.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,twas 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 instir-
ante payable to named beneficiaries were no subject to a
Texas inheritance tax. The 1939 amendement3 taxing such in-
surance 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 pre-
sumption is that the Texas Legisl,atureknew of the $onstruction
given such statute at the time of its adoption and intended to
adopt such statut,eas construed,by,the .Federalcourts. Such
statute, therefore, is to be considered by the cou~rtsof 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 effective ninety days after addournme'nt.
     .;   I




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

              .
 state In ?;helight of’suck c3t?StluCtlon~.Since the United
                      had he13 that under the same fact situa-
 Sttates32premc3Co7Jr-t
 tion 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 Slupremecourt reached
 the conclusion above stated.                    ~/:

           In the instant case;the same principles are appli-
 cable; and it must therefone be presumed that the Legislature
 intended to .adoptthe construction which had been placed upon
 the E'ederalstatute ir?the Xelvering case. This being so,
 the pr'oceedsof the War Risk Insurance polibies..arenot ex-
'empt from inclusion,within Article 7117, V.C;S., for the pur-
 pose of,calculating inheritance taxes.
          You have also requeated'that we-advise you as to the
 ,proper valtiitionto be placed upon'the interest which Dece-
 dent 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 pe-
 cited 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,,ofthe parties
 hereto,that in ~theevent 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 es-
 tate of deceased of the hazards of the operation of such
 business and~leave unto the estate 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 agree-
              ments of t'heparties hereto, to bfikept 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;heestate of deceased the
              full sum of Twenty-five Thousand,Dollars ($;S,OOO)
              cash, less all debts or overdrafts cf deceesc.1due
              to partnership, an&assume e.11pa,rtnershipindebt-
              edness of any ar.dall zature whatsoever.
                  "(2) I2 consideration of performance by suy-
              vivor;of t'hecond,itionso,?paragraph (1) hereof,
              each of the'partiea hereto does by these p:&sents
              bind the!,rheirs; assigns, execrators,adminlstra-
Hon..RobertaS. Calvert, Page 6     (Opinion No. WW-668)



     tors and estates, that in the event he should
     prior decease the,other partner, that his execu-
     tors, administrators and estate will pass full
     legal title to all of the assets of said partner-
     ship 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 condi-
     tions 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 agree-
ment 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 in-
surance 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,. Pre-
miums 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 in-
terest 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 in-
tangible asset of the estate.
         The )attorneysfor.the estate take the position that
the Decedent's partnership interest should be,taxed in .accord-
ante with the Federal rule which has been stated as follows:
     "Where the,stock of the,decedent in a close carp-
     oration 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'slegally binding option to purchase at
        a fixed pr'ice,the fair market vai,uefor Pederal
        tax purposes is Ilimitedto such price, provided the
        price was f'ai.r
                       nt the tim'eIt was established and
        the decedent couid not have disposed ,of the pro,;
        perty~at any time prior to his death: Iielveringv.
        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, :3T.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 enforce-
  able one. We think that the consideration was adequate and
  that the agreement was no,tintended asa substitute for tes-
  tamentary 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 pro-
  hibit either partner selling his interest in the partnership
  prior to his death.'.wethink that such prohibition should be
  implied In view ofthe formality of the agreement and the
  absolute natu?e,cf its provisions: See "Estate Tax Conse-
  quences 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-'3the cocrts have applied in determining the
  validity,and.effect of such partnership agreements.
          && is -?hisapeement binding on the State ',ndeter-
 mining 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,le7177, ';,S.S.,which
 imposes a t,axupon transfers "by deed, grant, sale,-o'rgift
 made or intended to take effect in possession or enjoy~menta5
 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?epartnership interest, nevertheless, the pre-
                      p>svealth.atit '~3sa sale for less t?ia~!l
 viously stated,f'a.8zt.s
 the full vaius of such il-iterest
                                 at the Decedent's death and
 does not reflect the true amount which the surviv,ingpartner
 received~'byvirl~~~.z
                    of t;iesale intended~to take effect at the
 deathsof the Decedent.
          The ba.si:distinction between a tax in the natv;::e
                                                            of
 an inheritance ta,xand a tax in the nature of an estate tax
Hon. Robert S. Calve&,   Page 8    (Opinion No. m-668)


necessitates a,dif'ferentconclusion 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,,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 ,ofthe property that sales intended to take
effect at death are not taxable and that therefore to~the ex-
tent that consideratio? paid was inadequate,in value as com-
pared to the value received, it is tantamount to a gift. It
is, in effect, a substitute for a testamentary disposition,
and taxable.
         Ar~ticle713d,'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.tev.
Carpenter;.'126Tex. 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, but is under no necessity
of buying."
                                     .
         The New Jersey statu%e in the Schroeder case re-
quired an aopraisal at "fair market value," which term had
been defined in the same terms as the above quoted defini-
tion. 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 stat-
       utory 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, 122 N.J. Eq. at page 498, 194 A.
       300."
         You are therefore advised that all the insurance
received by the surviving partner should be taxed as in-
surance 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 pur-
         chase 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 in-
         surance policies received bye the surviving
         partner are taxable as insurance and enti-
         tled 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?organNesbitt, Chairman                 ',
Tom L.'l%Farlin'g'
Howard Mays
Lawrence Jones
REVIEWED FOR TXE ATTORNEY GENERAL
By:           W. V. Geppert




              . .




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