
TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN





NO. 03-03-00458-CV


Anderson-Clayton Bros. Funeral Home, Inc.; Restland of Dallas, Inc.; Restland Funeral
Home; Singing Hills Funeral Home, Inc.; Laurel Land Funeral Home of
Forth Worth, Inc.; Blue Bonnet Hills Funeral Home, Inc.; and
Blue Bonnet Hills Memorial Park, Inc., Appellants


v.


Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas; and Greg
Abbott, Attorney General of the State of Texas, Appellees




FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT
NO. 9912183, HONORABLE SCOTT H. JENKINS, JUDGE PRESIDING


D I S S E N T I N G   O P I N I O N


	The issue we are presented with in this controversy is, as the majority acknowledges,
whether "earnings from out-of-state investments made by Texas prepaid funeral benefits trusts,"
owned by Texas funeral homes, are out-of-state receipts for franchise tax apportionment purposes. 
Anderson-Clayton Bros. Funeral Home v. Strayhorn, No. 03-03-00458-CV, slip op. at 1 (Tex.
App.--Austin August __, 2004, no pet. h.) (emphasis added).  The majority concludes that because
it is the trusts that ultimately disburse to the funeral homes any income earned from investments, the
Comptroller's determination that the trusts are "payors" is reasonable, and therefore the investment
earnings derived from the trusts are Texas receipts.  Because I disagree with the majority's
characterization of the trusts as "payors" generating income from business done in Texas, I
respectfully dissent.
	The parties agree that the "location of the payor" rule determines how the investment
earnings should be apportioned or sourced and that the fundamental dispute in this case is about who
should be considered the "payors" of the investment earnings at issue.  The funeral homes contend
that the relevant statute, section 171.1121(b) of the tax code, directs the Comptroller to look to the
same accounting methods used to report federal income tax in determining how to apportion the
investment earnings.  And because the trusts are ignored for federal income tax purposes, the trusts
should likewise be treated as if they did not exist for apportionment purposes.  The trusts, therefore,
cannot be the payors, and we must look to the investment companies' locations to determine how
the investment earnings should be apportioned.
	The Comptroller, on the other hand, argues that section 171.1121(b) essentially
provides no guidance for determining the location of the payor.  Thus, the Comptroller may use its
own methods to determine the location of the payor, and those methods must be affirmed if
reasonable.  The majority agrees with the Comptroller's argument and holds that the Comptroller's
method of determining the location of the payor is a reasonable one.  I would hold that not only does
section 171.1121(b) indeed direct the Comptroller to use federal income tax accounting methods to
determine how to apportion investment earnings, but also that even without resorting to federal
accounting methods, the trusts are not "payors" for purposes of the location of the payor rule.
Section 171.1121(b)
 The Comptroller argues, and the majority agrees, that section 171.1121(b) "merely
requires corporations to apply the same accounting method (e.g., the installment method, the
percentage of completion method) when calculating both reportable federal taxable income and the
'gross receipts' it uses in the apportionment factor of section 171.106."  Id., slip op. at 15.  This
construction, however, is flawed in two respects:  (1) it renders subsection (b) of section 171.1121
redundant of subsection (a) of that same statute, and (2) it ignores the meaning of the term
"apportion."
	The majority maintains that subsection (b) does not address "sourcing of receipts"
but rather is intended to clarify that the method used to determine taxable earned surplus should be
the same as the one used to determine gross receipts.  Id., slip op. at 15-16.  But subsection (a) of the
statute already directs taxpayers to do so.  It provides that gross receipts mean all revenue reportable
by a corporation on its federal tax return.  Tex. Tax Code Ann. § 171.1121(a) (West 2002).  And
taxable earned surplus is determined by adjusting the amount of a corporate taxpayer's reportable
federal taxable income.  Id. § 171.110(a) (West Supp. 2004).  Gross receipts do not include revenues
not included in taxable earned surplus.  Id. § 171.1121(a).  In other words, gross receipts must be
calculated consistently with taxable earned surplus.  This is spelled out in subsection (a), not
subsection (b).
	Subsection (b), on the other hand, speaks specifically to "apportionment," not to
calculating gross receipts consistently with taxable earned surplus.  Apportion is defined in the
taxation context as "[t]he act of allocating or attributing moneys or expenses in a given way, as when
a taxpayer allocates part of profits to a particular tax year or part of the use of a personal asset to a
business."  Black's Law Dictionary 96-97 (7th ed. 1999) (emphasis added).  Attribute is defined as
"2. to explain as caused or brought about by: regard as occurring in consequence of or on account
of; . . . 3. to regard as possessed, owned, originated, characterized, or described as indicated . . . ."
Webster's Third New International Dictionary 142 (1961).  This definition is consistent with the
"location of the payor" rule; that is, in order to determine to whom the investment earnings should
be attributed and accordingly how they should be apportioned, we should first determine who
"caused" or "brought about" those investment earnings.  And according to subsection (b) of section
171.1121, we should rely on federal accounting methods to do so.
	There is nothing in section 171.1121 or elsewhere in the Franchise Tax Act that
supports the Comptroller's contention that the term "apportion" as used in section 171.1121(b)
means to calculate gross receipts consistently with taxable earned surplus.  In fact, the legislature
used "apportion" throughout the Act to refer to the allocation or attribution of receipts to Texas
versus elsewhere and to particular entities.  See, e.g., Tex. Tax Code Ann. §§ 171.1032, .1051, .106
(West Supp. 2004).  Even within section 171.1121, the legislature uses "apportion" in subsection
(e) to refer to the assignment of a corporation's share of a partnership's gross receipts to that
corporation.  Id. § 171.1121(e).  We should not construe subsection (b) any differently.

Federal Accounting Methods 
	It is without dispute that funeral trusts are "grantor" trusts. (1)  The Internal Revenue
Code requires the grantor or owner of any portion of a grantor trust to include in his taxable income
any items of income attributable to his portion of the trust.  I.R.C. § 671 (West 2002); Treas. Reg.
§ 1.671-2 (2003).  Because the funeral homes established the trust accounts, they are considered the
grantors or settlors of the trusts.  Hopkins v. Commissioner of Internal Revenue, 144 F.2d 683, 690
(6th Cir. 1944).  Thus, they must report as taxable income any income attributable to the portion of
the trusts that they own.
	Payments deposited into the trust accounts, or the trust "corpus," are refundable; that
is, the purchaser of the pre-paid funeral services may revoke the corpus trust.  Thus, the funeral
homes cannot withdraw any contractual payments from the trusts until after the purchaser dies, the
funeral service is completed, and certain required forms are presented to the depositary. 
Accordingly, the funeral homes do not recognize any payments deposited in the trust accounts as
taxable income until after the purchaser has died and the funeral services have been provided.  These
contractual payments, however, yield "earnings" once they have been invested in marketable
securities by the trusts.  Earnings are "the amount in an account in excess of the amount paid by the
purchaser of a prepaid funeral benefits contract that is deposited in the account . . . including accrued
interest, accrued income, and enhanced or increased value."  Tex. Fin. Code Ann. § 154.002(4)
(West Supp. 2004).  These earnings are non-refundable and thus irrevocable by the purchaser; even
if the purchaser revokes the funeral services agreement, he may recover the amounts paid under the
contract, but not the earnings or enhanced value of those payments.  The funeral homes are therefore
treated as the grantors or owners of the trusts and recognize the earnings as taxable income on an
annual basis.  This is so even though the funeral homes typically may not withdraw those earnings
from the trust accounts until after the funeral services are delivered or the corpus is returned.
	Income received by a grantor trust is treated as if it had been received directly by the
grantor or owner.  The funeral homes, for example, must treat investment earnings on the trust
corpus as though they received the earnings directly from the corporations that pay them into the
trust accounts, regardless of when the funeral homes actually withdraw the earnings from those trust
accounts.  In other words, income earned on investments held in a grantor trust is treated as "flowing
through" the trust as if the trust did not exist.  If we apply this federal accounting method, as section
171.1121(b) of the tax code requires us to do, the result is that the grantor trust must be treated as
a "flow-through" entity rather than as a payor of investment proceeds.  The trusts never own the
investment proceeds; rather the earnings pass directly from the paying corporations to the owner or
grantor of the trust, in this case the funeral homes.  Thus, those corporations are the "payors" for
purposes of the location of the payor rule, not the flow-through trusts, and we should look to the
location of those paying corporations to determine how to apportion the earnings, instead of looking
to the location of the trusts.

Business in Texas
	Even if I were to agree that the tax code does not require the Comptroller to apply the
federal method of treating grantor trusts as flow-through trusts rather than as payors, as the majority
holds, I would still hold that the trusts in this case cannot be characterized as the payors for purposes
of the location of the payor rule.  The trusts do not generate the investment earnings.  Nor do they
have any discretion as to how much of those earnings are to be paid to the trust grantors or when
those earnings should be paid.  Thus, I would hold that the trusts are not payors and the investment
earnings are not a result of business done in this state. 
	Finally, to the extent there is any doubt concerning the construction of section
171.1121(b), I would hold that the provision is ambiguous and apply the rule that courts strictly
construe the applicability of taxation against the taxing authority and in the taxpayer's favor.  See
Calvert v. Texas Pipe Line Co., 517 S.W.2d 777, 781 (Tex. 1974); Texas Utils. Elec. Co. v. Sharp,
962 S.W.2d 723, 726 n.4 (Tex. App.--Austin 1998, pet. denied).
	In sum, I would hold that the trusts are not payors for the purposes of the location of
the payor rule.  Thus, I would look to the location of the paying corporations to determine if
investment earnings should be apportioned as receipts from business done in this state.  Accordingly,
I would sustain the funeral homes' issue and reverse the district court's judgment.


  
					David Puryear, Justice
Before Justices Kidd, Puryear and Pemberton
Filed:   August 12, 2004
1.   Grantor trusts are trusts that are treated as if they are owned all or in part by their grantors
or by other persons deemed to be owners.  I.R.C. § 671 (West 2002); Treas. Reg. § 1.671-2 (2003).

