                   THEATJTORNEY                 GENERAL

                               OF      %-EWAS
                              Ausnnr    ~%‘J?ExAs

   WILL    WILSON
AlTORNEY      GENERAL
                                  May 16, 1961

    Honorable Robert S. Calvert              Opinion No. wwe       joo
    Comptroller of Public Accounts
    Capitol Station                          Re:    Proper method of computing
    Austin, Texas                                   inheritance taxes on royalty
                                                    interest of life tenant
    Dear Mr. Calvert:                               under submitted facts.

         We quote the following excerpt from your letter requesting
    the opinion of this office on the above captioned matter:
                  "Winnie Craft Minchen Crlffls died
                testate on August 15, 1958, a resident of
                Harris County, Texas, seized and possessed
                of an estate valued at $723,525.32 gross.
                The bulk of the estate of the deceased
                consists of a royalty interest in the Old
                Ocean Field in Brazoria County, Texas.
                The average monthly income from this
                royalty interest Is $6,300.OO~whlch was
                valued on a 100 month ay-out basis.
                100 X 6,300.oo equals % 630,000.00, the
                value of the mineral Interest of the
                deceased."
         The pertinent provisions of the decedent's will, which you
    have submitted to us, are the following:
                                    "Item 4.
                  "I hereby appoint the National Bank of
                Commerce of Houston, Texas, a national
                banking association, executor under this
                will and of my Estate and direct that no
                bond shall be required of it.
                  "With the exception of the hereinafter
                mentioned property, my Executor shall have
                full power and authority to sell or mortgage
                any part or parts, real or personal, of my
                estate on such terms and for such consldera-
                tlon or considerations as it may deem advisable.
                   "My said Executor shall have no authority
                 from me to sell or mortgage my interest In
Honorable Robert S. Calvert, Page 2     Opinion NO. 7~1058


        what is known as the
                         -   Old Ccesn Oil Field In
        Brazoria County, Texas, except that, as
        a last resort, it may mortgage the royalty
        and/or rental income from my Interests in
        said oil field for the purpose of paying
        the State Inheritance Taxes and the Federal
        Estate Taxes on my Estate.
                          "Item 5.
          "I give and bequeath all of my personal
        property to my legally adopted son, William
        France Minchen, to be held by him as his
        separate property.
                          "Item 6.
          "I give and devise all of my real property
        to my legally adopted son, William France
        Minchen, for and during his natural life to
        have the use and benefit of same as his
        separate property and, upon his death, said
        real property shall pass to and vest in such
        of his issue as he may by his will appoint
        which power Is and shall be exercisable by
        him alone and in any event,"
     Other provisions of the will relate to the disposition of
the properties covered by the last foregoing paragraph in the
event of nor?-exerciseof the newer of aopoi.ntmentand provide,
generally, that such properties shall become the property of the
son's children or their descendants.
     We quote further from your letter in connection with this
request:
            "We construe the provisions of the above
         paragraph as passing the full monthly
         royalty payments 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 100 months. This con-
         struction does not conflict with the terms
         of the will nor the provisions of Article
         14.08,...   .'I
           "Please advise whether or not our con-
         struction is correct."
..   .-




          Honorable Robert S. Calvert, Page 3        Opinion NO. ~~-1058


               Article 14.08, Ch. 14, Title 122-A, Tax.-Gen., Vernon's
          Civil Statutes, reads as follows:
                      "If the property passing as aforesaid
                    shall be 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, accord-
                    ing to the value of the same at the death
                    of the decedent. The value of estates for
                    years, estates for life, remainders and
                    annuities, shall be determined by the
                    'Actuaries Combined Experience Tables,'
                    at four per cent compound interest."
               The taxpayer takes the position that this Article is con-
          trolling as to the determination of the tax. If this be correct,
          the value of the life estate would be computed by '.     multiply-
          ing the value of the beneficial interest by 4s and this'product
          by the factor (present value of $1.00) for the given age of the
          life tenant; the result is the value of the life estate. Subtract
          the value of the life estate (as ascertained above) from the
          beneficial interest, and the amount left will be the value of
          the remainder estate."1
               The general rule is that the life tenant is entitled q
          to all the profits or income accruing during his life tenancy.
               It is evident that the statutory method of computing the
          value of a life estate is predicated on the theory that the value
          of the property subject to the life estate will remain constant
          during the life of the life tenant. It is a workable method of
          valuing a life estate only if it may be assumsdthat the value of
          the estate so devised, In this case the royalty interest, will
          remain the same. In other words, under Article 14.08 the valuation
          of a life interest serves two purposes. It serves as a measure of
          the tax on the life interest and az8tk rnnr~sof determining the
          value of the remainder interest.       .      Inheritance, Estate
          and Gift Taxes, 277, 278, Sec. 368, and auth&ities cited therein.
               It is settled in this State that the 011 and gas beneath
          the soil are considered a,part of the realty. 31-A Tex.Jur. 27,
          Oil and Gas, Sec. 6. It is also settled that a life estate in
          lands extends to the unsevered 011 and gas beneath the surface.
          31-A Tex.Jur. 38, Oil and Gas, Sec. 13. If, under the will
                     foregoing directions are contained in the Actuaries'
                      Experience Tables.
          g   Tzpl$      v. Medlin, 203 S.W.2d 635 (Civ.App., error ref., 1947);
                 * J   .   6 3 59 , Life Estates, Sec. 7.
Honorable Robert 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 computed under the
provisions of Article 14.08, i.e., as therein directed upon
the ascertained value, rather than upon the full monthly royalty
payments.
     We think that the will, as a whole, evidences an intent on
the part of the testatrix that the beneficiary is to receive the
royalty payments in their entirety (not just the income therefrom)
for the duration of his natural life.
                                    The    executor has no
authority to sell or mortgage the royalty and/or rental income
involved except as a last resort for the payment of death taxes.
The royalty interest is covered by the provisions of Item 6,
which devises all of the decedent's real property to her adopted
son "for and during his natural life to have the use and benefit
of ssme as his separate property...   11 (Emphasis added.) The
royalty interest involved was a prod&ing royalty interest at
the date of the decedent's death, and we think that the testatrix
clearly intended her adopted son to have the entire benefit thereof
rather than only the income therefrom. The provision with regard
to the exercise of the power 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
provisions pertaining to the non-exercise of the power of appoint-
ment are likewise drawn for the purpose of insuring that the
son's issue receive any of the royalty interest that might remain
at his death should he fall to exercise the power of appointment.
     Our interpretation of the testatrix's intention is consistent
with the common law rule and with the results reached by the
Texas Courts that a life tenant may 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 commenced before 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 appropriation of a part of the corpus
of the estate, there are exceptions to this general rule which
Honorable Robert S. Calvert, Page 5       Opinion No. ~~-1058


give the life tenant a continuing right to benefit in wells drilled
after the creation of the life tenancy. These exceptions arise by
reason of some act by the original owner and may be conferred b
the instrument conveying to him such estate. 31-A Tex.Jur. 39-i:0,
Oil and Gas, Sec. 13. We have previously construed the will
under consideration as 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 since his life
expectancy far exceeds the estimated pay-out period, inheritance
taxes should be computed on the entire value of the royalty
interest, rather than under the provisions of Article 14.08. You
are accordingly so advised.

                          SUMMARY

              Under submitted facts, inheritance
         taxes should be computed on the entire
         value of a life tenant's royalty 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
MMP:cm                               Assistant
APPROVED:
OPINION COMMITTEE:
W. V. Geppert, Chairman
Edward A. Cazares
C. Dean Davis
Harris Toler
REVIEWED FOR THE ATTORNEY GENERAL
By: Morgan Nesbitt
