Case Information

*1 R-818 E ATTORNEY GENERAL PRICE DANIEL ATTORNEY GENERAL

Renerable Qeorge - -

Comptroller or PUDl&C AOCounCs

hutin, Texas Cpinton No. V-402 ,, " ,.. ^[6] Re: Whether Inclusion of entire community estate

in determlnlng~ amount of Petteral Entote Tax clue at death of husband, whioh inclurlen inorsrsed the taxes paid tJ&e State under Ch. 5a, Title 122,, V.C.S., prevents 8taM tax Qn the tight te euc- oesslon to the wife's one-half cosnnunlty ln- terest when the wife’8 death ecaurs wlthln five . . rears from the death of

the husband

opinion from this De- su+er. Your letter of gyyent on me above-captnmea. ~. . ._. ptember 17, 1947, and the l-etter or protest wnlcn ac- cmenies your request apprise us of the following fact8.

During the years of their mafilage John Wil-

liam Sanders and Louise Wylie Sanders accumulated con- siderable property-. Of this pr~operty we are c0ncerned ;r%,til;; that which was community property under the

John William Sanders died on December 6,

1943 * Th; State Inheritance Tax return; ,thereafter filed, showed a total gross estate, subject to taxa- tion in the State of Texas, in the amount of $232,122*49, which amount represented the value of hks one-half of the community estate. The State tax subsequently paid in accordance with the provisions of Chapter 5, Title 122, V.C.S., was in the amount of $3,177.61.

-. . . HonoabPe George H, Sheppard, laga 2 (V-402) *3 . .

Xonorable George Ii. Sheppard, Page 3 (V-402)

Section 8 a? Artlble 7144a reads a6 follou8: "~ectlons 1 to '7, inclusive, of this Chapter shall alwaya be construed so as not te increase the total amount of taxes pay- able to the State and the Federal Gevern- nent combined upon the ,estates o? decedents, the only purpose of said additional tax be- ing to take full advantage of the eighty (80$) per cent credit allowed by the Federal Revenue Act of 1926, to those why, have paid 0ny e8tate, fnhetitunce; legacy'j+& 8uccea- elen tax te any State or territory Or to the Dlrtrlct Columbia, In respect to any prop- erty included In the decedent's gross estate. Aots 1933, 437% Leg., p. 581, eh. 192, II 2a.' Article Is found In Chapter 5 of Title 122 and Article 71 ? 42 constItute'sChapter 5a of Title 122. The history, the theory, and the basis of the tax iarposed in these two chapters Is entirely different.

The basic provislens of Ohapter,,,5 :poere enacted br the Legislature In 1923. Chapter"fWe:impose8 a tax en vg property withfn the ~url,sdlitlon of this State, which shall pass

and any interest therein, absoiutely or in trust by will or by'the laws of de- 8Cent or bfsttibutlon of this . . . State. * . In ac- cordance wlth,the following clas8lfieatlon;~ . . .'I The taxes ao fmposed “are held to be privilege taxes, and notpropertytaxer, In other words, the tax Is uizFIP;Alht of succeesion not up,on the property,"

d " t on value or amount of the estate

but on the valu%f or amount of property passing to State v. Ro~q, 72 a particular class of parties." S.W. (2d) 593.

These taxes were the only "death" taxes of

any kind imposed by the State until 1933. In that year the Leglslature enacted Article 7144a In order to take advantage of the eighty er cent credit pro- 301(b P Ch. 27 of the vision embodied in Section Federal Revenue Act of 1926. The'full provisions of the present Federal Estate Tax Act are found In the Internal Revenue Code, Ch. 3, Title 26, U.S.C.A.

The first Federal death taxes were iaposed

in 1797. This Act was repealed in 1802. Other acts, both relatively short-lived, Intervened before the adoption of the Federal Inheritance Tax Act of 1898,

. . Honorable George If. Sheppard, Pa@? 4 (V*) which, ln turn, was repealed in 1902. In 1916 C-s8 Imposed a tax-dffferent the Act of 1898 In that the tax fs on "the eurois the leg@ sower of trantmfssion of property b Ill er dwaceut. . ." rather than on "the legal privi:ek of tam.pmperty by devise or descent.” Stebbins t.

ROlem 268 U.S. 137. This tax Is In the awn of vary- inc umxfntores of the value of the deoedent’s net - -~ estate--hen& the term %ttate" Tax.

both the old inheritance tax law the 1916 estate tax law were unsucceasfulfy~attacked as an %a- vaslon oi the.powsr of the States to regulate the Wan@- misslon property by death. Knowlton v. Moore, 178 U.S. 41; New York Trust Co. v. Bisner, 25% U S 345.

Rut even though these attacks failed, the dik&lSfae- tion nith the Federal Qovernment's "lnvaslonw of this field of taxation remained; and in 1924 the first "credit" provlslon, which allowed deduction of the State Inheritance and estate taxes In an amount not to exceed~~twenty-five per cent of the Federal tax, was passed. Rev. Acts of 1924, 8 301(b). The Reve- nue Act of 1926, R 301(b) Increased the amount of "credit" to efghty per cent. This eighty per cent I.8 still measured by the rates as fixed by the 1926 Act, although there have been several increases in the Fed- eral rates since that time. Sec. 81.9, U.S. Tres. Reg. 105.

The word9ng of the "cPedIt" prwiefon lx8 the Federal act requires that the estate, inheritance, let- aey OP suecession taxes must have been actually a te the State before the taxpayer may deduct the %mfmat of such Stzte taxes from the total Federal Estate Tax.

Rouse P. U.S., 65 Ct. Cl. (Fed.) 749, CePtfomrl Imle(i, UJ.S. 638; 49 Sup. Ct. Rep, 32. Thus if the full amount of the ellghty per cent credit Is not taken up by the State tax, the taxpayer's "credit" fs reduced accordingly Xpth the result that he pays the same over- all aaount PegardlerJs of the eventual disposition of that amount between the Stat@ and the Federal Qwern- ment.

After the enactment of this provlaie% mO8t of the states whose existfng laws dfd not result ia a tax sufficfent to equal the full einount of the eighty per cent "credit" passed Peglslatfonrequfsfte to that end* Texas was among such states and the proviafons eontalned In ArtfePe 71440, Ch, 5a, R.C.S., became a *5 ffeorge H. Sheppard, Page 5 (V-402) Honorable part of our laws in 1933. The chapter.~ltself Is en- titled “Additional Inhirltanoe Tees.” Likewise var- IQUB sections of A&cle 7144a Tefer to the “lnherl- tame tax. . . ,herebg imp&cd. . .‘I etc., despite the wording of Section 1 to the effect that there Is here- by levied an “Inheritance and transfer tax” In addl- tion to the Inheritance tax already levied. However, regardless of the tenainology used, the tax as lmpoeed by Article 714&a Is an entirely different tax from the taxes levied by Chapter 5* As we have previously pointed out,.the taxes Imposed by Chapter 5 are levied as. Lonicallr and actuallv It resta on the same barls ~~~~___

as the parent” F&e& Act. It; could rest on no ether; for, although‘it levies aidlr.eot tax, the amount of, that tax la In a,fixed percen%age of total amount previously determined by~the Federal Act in accordance rith the 1926 rates less the inheritance taxes paid under State law. Therefore the provisions of the Fed- eral law, not the prov$sgions oi, the, Texas law, deter- mine every step to be tiUs+14#h&&mput~ng the total tax

After the total tax ham been’ircertained, the

~~keps in By virtue of A~rtlele 71,448 to, claim the differenoe ,between the 8~1 of Inheritance taxes due under Chapter and the ,elgh$y per cent of the tetal’ sum of the estate tax lmpesed U$ the ,I926 Revenue Act “by reason OS the property of suoh estate whichis situated In this State and taxable under the laws of this State.”

When the Federal Government taxed the entire community estate on the death OS the husband, of course It did so by virtue Sectien 811c/)(2), Title 26, U.S.C.A., which was enacted lm1942. This Section pre- vides Sor the inclusion In the gross estate of a dece- dent all OS the community property held by the decedent and the surviving spouse with the exception of such part as may be shown to have been received as compensa- tion for personal services actually rendered by the .survlvlng spouse or derived originally Prom such corn-’ pensatlon or f&m separate property of the surviving

. There is a Surther provlro to the eSfect that shall the Interest Included In the gross en- Eroase tote of the decedent be less than the value of such part OS the community property as was subgeot t&khe decedent’s power of testamentary dlspssltlOn.

c-~

I llonerable George H. Sheppard, rage 6 (V-402) con6titutlonallty of this Section woe upheld In Feman- de% v. Wiener, 66 5. Ct. 178, and IJI U.S. v. l&ii-6 ct 191 As a result, State consunity pr erty laws r~oelie onip a llmltcd rbcotnltlon d of Fed- In the fle “1 era1 taxation. When the additional tax was imposed by virtue of Chapter 50, obviously the top figure elgbty per cent wae derived from the proper total figure of the Federal tax. only ln this way could the State take full advantage of the Federal credit provision, and such 18 the announced lntent of the State statute. The taxpay- er’r burden wae not increased at that time a8 had he not paid the difference between the State tex au aeeem- ed under Chapter said eighty par cent of the Fed- eral tex he would hove paid the difference te the United Stater Qovemment. In *ate v. Wiese, 173 S,W. (24 IW, after pointing eut that fn w event the 6ane tieunt 16 paid by the taxpayer, the Ceurt said, “We are unable to eee hew such a law can vlelate any part l f cur Cen- etltutl6m.” Seme court6 have eaid that by rcauen ef this lack ef ln,jury the taxpayer Us ne sts;lrdlng te even questfen the aonstltutlenallty of a atatute enact- ed fcr the purpose of tak3.q advantage 6f the credit allowed by the Federal Act O

145, Atf, 7Yl. Im Amy event

did net prdo8t the payment

mount l f which was necessar1Pg lncreared by the Fed- era1 Qevemaent @e lm%ue%en ln the @em eatate l f the value of an estate which, under the Texoe Paw, wae n& ewned by t&e husband.

We camot 8ee that the actlam ef the Fedemtkol Qevepmemt ln taxlsy the entire cemunlty at the death of the huBband preventer the State f’~em taxfay the right ef ruccesslen t* the wlfeae share of the cmlty on her death.

Sectlen 8 ef Art%cDe 7X44o, ppapieU8J.y quoted, deee net preclu4e thla metit. OCvleuely~ Sectlen 8 wa6 meant to apply $0 taxem due en the Wane- fer ef od euccessfen to me decedent@e estate0 At the time ef the &eath of the -band the total mount ef taxes payable to the State and to the Federal (hvem- meat wan net increased a0 reeu~t of

ceatafned in Sectlone 8-7 sf Article

toma cenuet new be applied to @bviate taxes accrui4 cm the suwesmf*n tc the estate of a dlf~ere& dece- dent O Mereever i,n this came as ts taiis estate and this deaedent there is ne Federal tax $ti~tlhe WiSeBIB 0s half of the cmunftg estate warn taxed %esrs than five *7 Honorable George Ii. Sheppard, Page 7 (V-402) years before. T.D. 5408, Cum. Bull, 1944, p. 578.

Consequently there 1s no additional State tax due un- der Chapter 5a no Increase on a “combined” pay- ment to the State and the Federal Government.

This brings us to a consideration of the sec- ond ground of protest, l.e.,that under the provisions of Article 7125, Ch. 5, deduction should be allowed for the wife’s community.lnterest as property previously taxed within five years. B..tt by the exact wording of Article 7125 there may be deducted only the value of such property a8 was ‘received from any person who dies within five (5) years prior to the death of the decedent” with the further proviso that the deduction “shall be only in the smount of the value the prop- erty upon which an inheritance tax was actually Bald.

The wife did not receive her share from her &band at his death. Unm !kbxas law she owned the one-half undivided interest at that time. Her one-half of the community was not taxed under any of the provisions of the Texas Inheritance Tax statutes as contained In Chapter 5; so as to this property no These provisions Inheritance tax.was actually paid.

of Article 7125 clearly show that the deduction which is allowed is for property previously taxed by virtue of the provisions of Chapter 5. In the absence of specific proviso, allowable deductions as to payments made under Chapter 5@ are found only In that chapter or accomplished Indirectly through provisions of the Federal Act.

The radical difference in the nature anil

basle of the taxes imposed by Chapter 5 and the tax lmpqsed by Chapter 5a, which difference we discussed at length at the outset of this opinion, in itself prevents the transposition of provisions from one act ” and application to another. A good deal has been written about 811(e)(2) and its effect on the tax- payer in community-property states. See Tax Magazine, Jan., 1947, p. 64; Feb., 1947, p. 130 for articles dls- cussing various aspects of the unequal and confisca- tery results In the Federal tax field that have sprung from a measure obviously Intended to equalize Federal estate taxes rather than to penalize the tax- payer in community-property states. One writer char- acterizes such results as flowing from the impact of jurisprudence upon the statute. As to the lnequali- ties that are inherent in the Federal law the States are powerless; but if, as a matter of policy, the *8 Honorable Qeorge B. Sheppard, rage 6 (V-402) people of Texas desire to reduce the tax burden on the passing of community property by a reduction ln State Inheritance Taxes, legislative action Is necessary. In a very excellent article, “Aftermath of the Hebst and Weiner Decisions,” 24 T.L.R. 437, Mr. Winstead points out that in most cases, the entire community estate Is attributable to the husband, and that in the usual case, assuming that the phrase “compensation for per- sonal services” includes all types of property ‘eco- nomlcally attributable to the survivor,” the entire coxmnuilt will be taxed only when the husband dies first 0 9 Otherwise, aa provided by Section 811(e)(2) previously summarlsed, the amount attributable to the surviving spouse up to the amount over which he had the power of testamentary disposal would not be in- cluded in the gross estate.) Therefore, the situation covered by the Instant case, In which relief could be afforded by change in the State law, is a narrow one which normally will arise only when the wife out- lives the husband by a period of less than five years. The 1947 Oklahoma Legislature passed an act which eliminates from the gross estate the survlv share in community property. It 1s only y apprargorlate ---I+ Bpowe’8 legislative action that an exemption of the kind here sought can be created. Such exemption may not be ac- complished by implication from inapplicable provisions on the theory that the Legislature would have Intended some such provision to apply g It coda have foreseen this particular contingency.

The result urged by the taxpayer in this

care would therefore rest on supposltion, not law; Pnd, in addition, would be predicated on a complete aisre- gara of Texas property law fn tha% there would be no recognition of the passing of the wifeus coss4unlty ln- terest at her death nor of the receipt of that interest by others. It 1s the privilege of such receipt whfch Is expressly taxed by the provisions of Chapter 5. You are therefore advised that the tax as assessed and paid under protest was lawfully cwea the State of Texas by virtue of the provisions of Chapter 5, Title 122, R.C,S.