Honorable Robert S. Calvert           Opinion No. c-42
Comptroller of Public Accounts
C&pit01 Station                      Re:   Taxability for inheri-
Austin, Texas                              tance tax purposes of
                                           United States (iovern-
                                           ment bonds of the co-
                                           ownership type in view
                                           of Free v. Bland.
Dear Mr. Calvert:
       Your letter requesting the opinion of this office on
the ~above captioned matter reads as follows:
             "We kindly ask that you revlew~
          Opinions No. O-6691, August 8, 1945;
          and No. O-7495, December 17, 1946,
          of your office and determined whether
          their rulings are correct In view of
          the decision In J. W. Free vs. James F.
          Bland, 82 S.Ct. 1089.”
       You have orally advised    us that since the decision in
the Free case, supra, numerous    taxpayers are asserting that
UnltitaStates Government bonds    of the co-ownership type are
not subject to any inheritance    ta?i.
      ,Oplnlon No. O-6691 held that one-half
                                         .   of
                                             _ the value',.of
U. S. bonds of the co-ownership type purchased with community
funds and payable to husband or wife was subject to an- lnherl-
tance tax upon the death of thf husband. The opinion quotes
the provision of Article 7117, Volume 20, Vernon's Annotated
Texas Statutes, which makes taxable transfers of property
passing by "deed, grant, sale or ,giftmade or Intended to take
effect in possession or enjoyment after the death of the ~~.
grantor or donor. . . ." The opinion state6 that the scope
of this particular provision la not limited by the legal de-
vice by which property passes at death, but that the tax Is
imposed on the right to receive or succeed to the possession
or enjoyment of the property after the death of the decedent,
and that the transfer Is within the purview of the statute
If such possession or enjoyment IS made contingent on, or
postponed until, the death of the grantor or danor. Bethea v.
Sheppard, 143 S.W.2d 997 (Tex.Clv.App. 1940, error ref.).


' Presently carried as Article 14.01, Ch. 14, Title 122A,
Taxation-General,.V.A.T.S.
                           -47-
Honorable Robert S. Calvert, Page 2             Opinion No.C-12


We quote the following excerpts from pages 3-6 of the opinion:'

            "The primary question in~the Instant
         case, therefore Is whether the wife re-
         ceived or succeeded to the possession
         or enjoyment of all or any part of these
         Series 'Et United States Government Bonds
         on the death of the husband. There is
         agreement that the bonds were purchased
         with community funds,and that, since the
         death of the husband, the wife is the
         sole owner of them.. It follows that at
         some time the interest of the husband
         passed to the wife and it must be deter-
         mined when and in what manner this
         change occurred.
            "These bonds represent a contract
         with the Government of the United States
         and the regulations of the Treasury
         Department are made a part of such con-
         tract by reference.
             "The first applicable regulation pro-
          vfdes:
             "'During the lives of both co-owners
          the bond will be paid to either co-owner
          upon his separate request, without re-
          qulring the signature of the other co-
          owner; and upon payment to either co-
          owner the other person shall cease to
          have any Interest in the bonds.' (Treas-
          ury Department Regulations, Subpart K,
          Section 315.32. Department Circular No.
          530, 5th Revision, June 1, 1942. (a)).
             "Obviously, this regulation is ln-
          tended to fix the liability of the
          United States Government in the contract.
          It makes possession of the bonds the
          incident of the right to cash them, and
          once the bonds are cashed, serves to
          relieve the United States from any
          further liability. However, it does
          not regulate the rights of the co-
          owners as between themselves in the
          bonds or in the proceeds from the bonds
          If they are cashed. This regulation is
          not, therefore, in conflict with the    ~
          community property law of Texas.
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Honorable Robert S. Calvert, Page 3            Opinion No.C-12


             II
                  .   .   .



             “In these co-ownership type of bonds,
          this regulation creates In each co-owner
          the right of survivorship. As stated,
          the regulation Is a part of the contract
          and It must be presumed that the parties
          to the contract Intended the effect of
          the regulation. It follows that in the
          present case, the husband and wife in-
          tended to create by contract the right
          of survivorship in each other. It is
          not believed that such a contract
          violates the community property law of
          Texas and It would appear that It should
          be given effect.
              11
               . . .
             “That the status of the parties in
          these co-ownership type bonds Is
          analogous to their status In a bank
          account has also been suggested. Such
          an analogy Is clear between these bonds
          and a ‘joint tenancy’ type of bank ac-
          count, wherein funds are deposited In
          the names of both spouses each having
          the right to withdraw any part or all
          of the funds and each succeeding to
          full ownership of the funds on the
          death of the other. In fact, It is
          not impossible to theorize that the
          status of co-owners In these bonds
          is one of joint tenancy which, although
          Impossible by operation of law (see
          Art. 2580, V.A.C.S.) may be created
          by contract (see Chandler v. Kountze,
          130 S.W.2d 327).
             ‘Whatever the theory or analogy here
          applicable, substantially the same re-
          sults will obtain. In having these
          bonds made payable to husband or wife,
          the decedent gave to his wife, ‘tenta-
          tively at least’, his community lnter-
          est therein. Although the gift was
          revocable or the right bestowed there-
          by was defeasible through the decedent’s

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Honorable Robert S. Calvert, Page 4            Opinion No. C-12


          cashing of the bonds prior to his death,
          the bonds were not so cashed and the
          wife 'received or succeeded to the pos-
          session or enjoyment' of the decedent's
          undivided one-half (l/2) interest in
          the bonds."
       Opinion No. O-7495 held that government bonds payable
to a named beneficiary were taxable at the death of the owner
of the bonds. The Opinion discussed the holding of Opinion
No. O-6691 and concluded that there appeared to be little
distinction between co-ownership bonds held by the husband
and wlfe purchased with community fuflds,and the beneficiary
type bonds, Insofar as inheritance taxes are concerned, and
concluded that there was a taxable transfer to the beneficiary
upon the death of the owner of the bonds. In so holding, the
Opinion also points out that the Comptroller, who is charged
with the duty of the administering the Inheritance tax statutes,
has construed the statute as imposing a tax upon the transfer
of an Interest in this type of asset ever since the bonds were
Issued; and in the absence of an authoritative court decision,
the departmental construction of the official charged with the
duty of collecting the tax is entitled to much weight,
       In Ricks v. Smith, 159 Tex. 280, 318 S.W.2d 439 (lgg),
the husband had purchased with community funds U. S. govern-
ment bonds of the "0~" type made payable to himself or his
wife. The husband left a wll,ldevising his entire estate In
trust for the benefit of his wife for life with remainder over
to two named legatees. After the wife's death, her heirs sued
to recover her one-half Interest In the bonds. The court held
that the wife became vested with the sole ownership of the
bonds upon the death of the husband, and that no Interest in
them passed to the legatees under the will. The court viewed
the purchase of the bonds as creating a property right under
the terms of the contract, not merely a convenient method of
payment to the Treasury Department. The Comptroller followed
this decision where applicable in distributing estates for
Inheritance tax purposes.
       In Hilley v. Hilley, 161 Tex. 569, 342 S.W.2d 565 (1961),
corporate stock h d been purchased with community funds and
Issued in the namzs of the husband and wife "as joint tenants
with right of survivorship and not as tenants in common". The
court held that the shares must be treated as community property,
that the survfvlng wife took no interest therein by virtue of
the survivorship agreement, but that the decedent's one-half
interest passed under the laws of descent and distribution.
The court stated that Section 46 of the Probate Code, which
Honorable Robert S. Calvert, Page 5                 Opinion No. C-12


provides for the creation of joint tenancies by specific agree-
ment was not Intended to modify the existing articles of the
statute, which srovlde methods by which community property may
be partitioned, and furthermore, that any such legislation
would be unconstitutional I view of the constitutional definl-
tion of community property.!I The court stated that the Ricks
             should be overruled, and that It would not be
EX"1~w%%i~re   "or" bonds are purchased with community funds
and Issued in the names of the spouses as co-owners.
       The Hllley case led to another revision by the Comp-
troller in his administrative practice in collecting lnheri-
tance taxes In those estates having 'or" bonds purchased with
community funds and payable to husband or wife. In Free v.
Bland,               82 Sup.Ct. 1089 (1962), the Sup-Court
me     beds&&        reversed the Texas Supreme Court and
reinstated the ruling of the Ricks case with regard to co-
ownership government bonds pused     with community funds
Issued n the names of the spouses. The Court of Civil
Appeals4 had followed the holding In the Ricks case. Appll-
cation for Writ of Brror was filed In the-8     Supreme Court
at the same time that the Court was considering the Hllley
case. After the decision in the Hllley case, the Court
acted on the Application for Writ of Error In the




2 Articles   4613, 4614, 4619, 4624a and 88Ia-23.

3 Article XVI, Section 15.    At page ~571 the Court said:
          11
           . * . Under the Constitution, property
       which she acquires during marriage in any
       manner other than by gift, devise, descent,
       purchase with separate funds, or partition
       as authorized by Articles 4624a and 88Ia-23,
       does not and cannot be made to constitute her
       separate property. Arnold v. Leonard, 114 Tex.
       535, 273 S.W. 799. 0 . ."

4 337 S.W.2d 805 (1960).



                             -51-
Honorable Robert S. Calvert, Page 6          Opinion No. C-12


reverslng the decision of the Court of Civil Appeals.5 This
Is the judgment which was reversed by the United States Supreme
Court. The United States Supreme Cgurt stated that the clear
purpose of the Treasury regulations was to confer the right
of survivorship on the surviving co-owner and not simply to
provide a convenient method of payment.
       Far from effecting a change with regard to the taxability
of transfers of government bonds of the types we have here con-
sidered, the effect of the United States Supreme Court opinion
is to reinstate the method used by the Comptroller in making
distribution for inheritance tax purposes after the Ricks case.
This Is so because the Free case is concerned per sewithpro-
perty rights, and Its oFeffect    for inheritance tax purposes
Is that which ensues therefrom, that is, the determination of
property rights necessarily determines the distribution of pro-
perty for Inheritance tax purposes. Therefore, although the
Free case affects the imposition of the tax and the amounts
thereof, If any, it in no wise raises any question as to the
validity of the tax.
       The last sentence on page 2, the last sentence of the
first paragraph and the entire second paragraph on page 3 no
longer correctly state the law with respect to those cases in
which the husband using community funds establishes a joint
tenancy for himself and his wife. However, despite the state-
ment in Opinion No. O-6691 that the Treasury "regulation Is not
In conflict with the community property law of Texas. . .' (a
statement clearly contra to the holding in the Hille
supra), both Opinion No. O-6691 and Opinion No.~5%E~ectly
state the law as to whether the decedent's interest in govern-
ment bonds is, upon passing at death, subject to inheritance
tax.




5 162 Tex. 72, 344 S.W.2d 435 (1961).

6 The Treasury regulations provide that the co-owner of United
States savings bonds issued in the "or" form who survives the
other co-owner "will be recognized as the sole and absolute
owner' of the bond (31 C.F.R., Sec. 3l5.61), and that "no
judicial determination will be recognized which would defeat
or Impair the rights of survivorship conveyed by these regu-
lations." (Id. Sec. 315.20). Thus the survivorship provision
Is a Federal-w   which must prevail under the Supremacy Clause.

                            -52-
Honorable Robert S. Calvert, Page 7           Opinion No. C-12


                      S U M M,A R Y

             Attorney General's Opinion No. O’-6691
      held that one-half of the value of United States
      Government bonds of the co-ownership type pur-
      chased with community funds and payable to
      husband or wife ,issubject to an Inheritance
      tax upon the death of the husband. Opinion No.
      O-7495 holds that the transfer of United 'States
      Government bonds payable to a named beneficiary
      is subject to an Inheritance tax upon the death
      of the owner. The holdings of these onf~nions
      on these two points are,not ~affeatedby the
      decision In Free v. Bland,     U.S.      82
      S.Ct. 1089 (19b2); and they-    rea??%Aed.
      The Free case affects the distribution of
      government bond,sfor lnherltance tax purposes,
      not the taxabllity~of such successions thereto.
      -
                               Yoursvery   truly,
                               WAGGONER CARR
                               Attorney General of Texas




APPROVED:
OPINION COMMITTEE,
W. V. Geppert, Chairman
Arthur Sandlln
Bill Allen
Cecil Rotsch
Pat Bailey
APPROVED FOR THE ATTORNEY GENERAL
By: Stanton Stone




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