               THEATTORNEYGENEBAL

                                 OFTEXAS




                                May 17, 1961

Honorable Robert S. Calvert                Opinion No. ~~-1060
Comptroller of Public Accounts
Capitol Station                            Re:   Taxability for inheritance
Austin, Texas                                    tax purposes of proceeds
                                                 of insurance policies taken
                                                 out by the decedent on his
                                                 life prior to the 1939
                                                 amendment to Article 7117,
                                                 V.C.S., and subsequently
                                                 assigned by the decedent
                                                 after the effective date
Dear Mr. Calve&:                                 of the 1939 amendment.
     You have advised us of the following facts, both orally
and in your written request, in connection with your request
for an opinion of this office on the above captioned matter.
Prior to the effective date of H. B. 990, Acts 1939, 46th Leg.,
p. 646, ch. 13, 8 1, which amended Article 7117, Revised Civil
Statutes of Texas, 1925, by adding a provision taxing life
insurance proceeds under certain conditions, the decedent had
taken out certain life insurance policies upon his own life.
The decedent's wife was named as beneficiary of these policies
and all premiums were paid from community funds. Subsequent
to the effective date of,the 1939 amendment, the decedent
assigned these policies without reservation to his wife. There-
after, he had no right to the cash surrender value of the policies,
or to pledge 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 the proceeds of Insurance policies which were assigned
without reservation prior to the effective date of the 1939
amendment, and in which the decedent never thereafter acquired
,aninterest, were not subject to an inheritance tax. The pertinent
provisions of Article 7117, V.C.S.l, are the following:
              "All property within the jurisdiction
            of this State,. . . and any interest there-
            in,. . . 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.
Honorable Robert S. Calvert, Page 2     Opinion No. ~~-1060


          receivable by the executor or adminis-
          trator as insurance under policies taken
          out by the decedent upon his own life,
          and to the extent of the excess over
          Forty Thousand ($40,000) Dollars of the
          amount receivable by all other benefici-
          aries as insurance under policies taken
          out by the decedent upon his own life,
                shall, upon passing,.     be subject
          to'a'tax for the benefit of the State's
          General Revenue Fund,. . .'
     Opinion No. 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
Legislature knew of the construction given such statute at the
time of its adoption, and intended to adopt such statute as
construed by the Federal Courts; and such statute is to be con-
sidered by the courts of this State in the light of such con-
struction." Since the Supreme Court of the United States in
Lewellyn v. Frick, 268 U.S. 238 (1925), had passed upon the
identical question presented by the Comptroller's request and
had concluded that under the facts the transfer was not subject
to Federal estate taxes, the transfer could not be deemed subject
to Texas inheritance taxes.
     The fact situation presented by your instant request is
entirely different from that considered in Attorney General's
Opinion No. O-5294 in that in the instant case the assignment
took place subsequent to the effective date of the 1939 amend-
ment. 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 assignment without reservation
takes the policies out of the purview of the statute even though
the premium payments are thereafter made from community funds.
     In De Coster v. Commissioner of Taxation, 11 N.W.2d 489
(Minn.Sup. 1943), the court held that the proceeds of life
insurance policies were subject to inheritance taxes in a case
in which the insured obtained the policy and held some of the
incidents of ownership at the time the statute went into effect,
and that the proceeds would have been subject to tax if he had died
immediately even though he made an assignment of the policy
prior to his death.
     The annotator in 73 A.L.R.2d questions the wisdom of this
decision pointing out that the Minnesota Supreme Court later held
in Diamond Poultry Farms, Inc. v. Commissioner of Taxation, 91
N.W.2d 595 (1958) that the assigned policy was not taxable where
_-




     Honorable Robert S. Calvert, Page 3     Opinion No. WW-


     the assignment occurred before the statute was amended; but
     declined to decide whether the De Caster case should be overruled
     since it was distinguishable in 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 incidents of'ownership, the
     person who applies for the insurance and holds all legal rights
     in the policy is the owner of the policy 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 could not constituionally levy an inheritance
     tax on life insurance proceeds since there is no taxable incident.
          In some jurisdictions, statutes relating to the taxation of
     life insurance proceeds seem broad enough in their terms to levy
     a tax on the proceeds of a policy even though the beneficiary
     owns the policy and pays the premiums. However, the courts have
     generally read into them a limitation to cases in which the
     insured owned the policy. See 73 A.L.R.2d 220. Such is not
     the case under our statute which expressly limits the taxing of
     proceeds of life insurance to amounts received as insurance under
     policies taken out by the decedent upon his own life.
          It is true that the insurance policies in question were
     originally taken out by the decedent upon his own life; but once
     the decedent assigned these policies without reservation, we
     think that that fact becomes immaterial since he thereafter had
     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, at most, to a gift to his wife of his
     one-half interest in the payments SO made. We do not view this
     as a gift to take effect at his death since the w~ifecould have,
     at any time, obtained the cash surrender value or pledged the
     policy for a loan or surrendered or cancelled the policy or
     obtained a loan on the policy from the insurer.
          We expressly limit our holding in this matter to cases in
     which no question of a transfer in contemplation of death is
     presented. In other words, if an assignment was 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 contemplation of death,
a different question would arise.

                          SUMMARY

                 The proceeds of life insurance
            policies taken out by the decedent upon
            his own life prior to the 1939 amendment
            of Article 7117, Vernon's Civil Statutes,
            which added a provision taxing life
            insurance proceeds under certain conditions,
            are not subject to inheritance taxes where
            the policies were subsequently assigned
            without reservation to the decedent's wife
            even though thereafter all premium payments
            were made 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
