Case Information

*1 I OFF~C~OFTHEA'ITOENEY OENE&!U.OFTEXAE

omov=m SLLLLII AUmN +-n*er oc;..rr

Honorable George Si. Sheppard

Comptroller of Public AccountE

Austin, Texas

DearStir

opinion Ho. O-7&95 Re: Liability for inheritance tax on Series E. United States Government Bonds and on benefits fron a Teacher RettiemeM Fund.

Your letter of Rovember 13, 1946, addressed to this depart- ment, reads as follovm:

"The Inheritance tax report for the Estate of Lul,a Amos Eelton deceased, of Tarrant County, has been filed ath this Department, and in the examination of this reportwe find that Er. Robert ?I. R&land of Fort'dorth, the attorney in this case has excluded from the value the.gross some Series E. United States Government es& bond6 and's Teacher Retlrernent fund. Both of them

c' item were yable at death to Mary Blisabeth r Barker, a n we.

"ThisDe tnent has included this type of r asset since t e bonda were l.asued and the enactment

of the'Teacher Retirement benefit, The bonds have been included for tax pqoses because the og~~ggion nt did not become effective unt s and enjo The Teat r er Retirement fund has no eleraent of pro&t- Ion and therefore could not be considered as %nsurance. 5;e hold this fund to be merely a cash deposit built u;, by the decedent duriry her lifetime and Whatever wount remslined In said fund upon the date of death of &s, Xelton passes to Wry Elieabeth Barker and is sub- ject to a tax thereon.

rf$.ttached yox: will find a brief &mitted by tk. RoyilaAd, supporting his views with respect to the exckision of these item for tax purposes, for your *2 282

Hon. George U. She?pard - Page 2

UBO in advisirp; thla Dogartuent on the question in oon- troversp .*

Article 7ll7, R. S., provides in part as follows: *AU propert . and any interest therein inaluding t.i e**Lm3d8 of life insuranoe to the of the amunt receivable by the executor or &&xk a&&xLstrator . i + and to the extent of the excess over $I+O,ooO of the amuht receivable by all other bezefieiasies as insiiaxe. , . v&&h shall pass absolutely or in trust by #ill or by the laws, of ' desce& or-distribution of this or any other state, or by deed, grant, sale, or gift made or intmdod to take effect in possession or urjoymant after the death of the grantor or dono?, shall, upon eing to or for the use of any person . , . be su ject to gas atax..."

On the Govorment bonds 2ssuet 1:~. Rowland's brief relies strongly on .the Supreiee Court case of Eods v. ~itchall, 184 S.15. 26 &&~JudgaSmsdley. That case held that in a conterst over omer-

tHeen the estate of the deceased Governsmt bond owner and the death benefici named irr the bond the latter should prevail. The Cimrt reasoned Yx at the death benefkary aowiredi at the the bond% wore purchased, a present thou&h defeasible, interest fn then t by virtue of the coatract made or her benefit and that her rQhts did not arise by gift or devise. the parties to that of parties to an insurance The Court conpared the situation of

ucy. &Zz. Rodland urges that since this oame holds that the benef ciary in the @m&8 E"

doea not take by gift or devise, but rather by 8 contract for her benefit, therefore tine bonds are.not taxable as proser"ty under Article 7117, sip-a.

/ The Snheritauco tax Issue nas not under review ix~ that case, the issue and hence we do not regard the decision as conclusive of bsfom u3.

The cam of sethoe. v. Sheppard, 143 T. K. 2C: 997, error m+ed, contaim la3~~a~e persuasive of an opposite conclusion from t.& one reached by Kr. L?o~km.?, although that caaa like\xise is not sqmrely in pozl.nt. Th.6 Court, in passL; u.Wn the tzmA3ilit-~ of a.n irrc-vocable trust vesting iro2ert.y in a trustee with 8 life hx% in the sractoi* and the remtinder to a beneficiary, stated: *3 .

Hon. George II, Sheppard - Page 3

vPhua the trust inotrument exprsesl provided that the death the grantor must in all events occur before the remainder of the astate cbn take effect in ssesslon or enjoyment in ap;wllant, e beneficiary. d thus the trust instrument by ita o 3

fit ternus brings the iz&mt case equavely within the statute, which does not iapoee the tax on the trmsfer of the property, tlor.gn aming of the propert from the grantor nor on #e righ to beooae beneficial y lntereeted in tlk e P

pl'operty, but ispoees the tax upon the pass+ng of the property or interest t2.ereki when %ade or lntonded to t&e effect in poasesslon or enjopent af'tm the Ceath of the ~ra%ar. 9" the CoWt aAd:

Tuz-ther, 'SCCEC our stotc ir;r.srit~ce or succeesion tsx statute, the :-xLzaq geetion ie -&ether the transfer vaa nedo or intended to take effect in pooscession or enjaynent after the death of grantor or sottlor, particu- larljj in casts of trznnsfer of Foperty L-9 trust, It is not a question of when the berieficisl interest is cro&ed, but the tax is imposed upon the i-i&t to receive in SOS- sion or enjoyment after ttie death of grantor or sett !T 0r.w be have been able to find only two cases in the United States gartalng upon ;FJztion of liability for succession taxes on govern- merit ;bo.l~~. I-?, 19k.6, tho Louisima Court of hppeals ln the ca8e of Succession of mxier, 24 50. 3_d &+2, by .a tu:o to one decision held that no iAeri:aacc tax was &e. on ~ovwrxaent hsr~cis of the co- ownership type.

In 1945; the Pcnna~lvania Orphans Court In the case of In re Prifer's S&a*%, digested in 24 Gen. Ui:'est 15.51*, held that both co-ownership and bsneficiary bonds issued Ly the Govermont wore all part of the decedent's estate for Wderal Estate Tax ptnypoaea.

This depar&ent held in Opinion 80. 04691 that o>e-half of the value of L;ories 2. Gsvemxnt ‘km& 0. i' t5e co-omership type payable to husband or wife, and purchased with cox?&fty funds, is sub'ect to 7117, E.S., ". that it the State inheritance tex. In discussiw Lrticle Opinion, we s&d:

Hon. George 8. Sheppard - Pa.Te 4

lxi&oma a tax on the right to receive or succeed to sseaaion or enjoyment of propert aftor the death of t 8 deceased and property o~ases ti tiL n the purview I?

of this 6tatUte if such poaaeaaion or eIx,jzq-aent ia made contingent with or postponed until the death of the grentor donor."

fn rinciple there appears to be little distinction ,botuoen co-oitmrship ends of fuiaband andwife purchased with c0mnmit.y funda E '

and the beneficiary type of bonds, so far es inheritance taxes axq co& cerned. h tha fOIXier, the one-half cO;mmity interest of the husb&?d in the bonds saea to his wife on hf.6 death. fn the latter, the %cteraat of t.e omer of the b~zda paasea on r' his death to bea&%- CiWY. We ere adtisod by the local office of the Collector of Inter-

nal Revenue that the instructions under. which they operate ark that . such boa&a, whether of the co-omerahlp type or the beneficiary type, are subject to the federal eatote tax. Tha fQdera estate tax is levied % n tho transfer of the net estate of every decedent.' 26’ u. 3. c. -. f’ Sectlon 810. Likowiae your letter adviaea that your office has taxed this type of asset since the bonds trere isaued.

In the absence of Ed& authoritative Court decision eottling of the officials charged with the s&ter the depar&aental~eonetructlon the di%y oh co~lleeting texes, both of this St&e and of the fedenl government is entitled to rsuch ueizht.

liccordingly, in hamony 6th such departmntal conat~-uctlon and in harmony with our former opinion above referred to on a closely related question, NC ere conatramed to hold that the bxxia I*.q&red about should be considered as asaets.eubject to the inheritaxe tax.

The status the Teacher EieneMt inqufi-ed about Refirenent appears to be well aettled by the authorities. Xe are advised by the pirector of the T-8 Teacher Retirencnt Eystes that the beliefit paid in this particu1e.r cese repmsents a return of csztributiors to the fund mda by the deceased teacher, ~US interest emed thozeon. GO fbnds of the State me inc uded in the tacefit. P m&,&ing

kP>aFeatly the first case or. the subject was In re Fitzsiimons' Ratat;e, 287 ii.T.S. 171 (1937). The court held ttst the Teacher Eetirc- ,Tent benefit pai< to a n~;ried beneficfay aft&r the texherts deeth ~38 insursxto. The Court did not rQco,&ze any distinction grOi?in~ out Of *5 285 . Hon. George li. SheDpaM - PWP 5

the source of the fund, that la, whether derived fron the contribu- tious of the teacher or fro= the State. This decision was affimed by the New York Supreme Court in 292 #.YrS. 168, and.motFon for leave tc appeal to the hew York Court of Appeals was denied in 292 K.Y.S. 962.

In 1939, the United States Court of Claim in korriochan V. 11. S., 29 Fed. Sup . 860 ruled upon the status of a benefit paid after the death of n ret f red city employee. The Cwmissloner of Intorual 3evome had detemined that the portion of the bonefit consisting of the en:?loyee’s contributions plus interest thereon was to be tmcd 2.3 a part of the estate of tba deceased whereas the portion of the bene- fit having its source in funds contrjbuted by the State should be classed as Wmrance. The Court upheld the Comissionor In G.xlng the em;;loyoe’s returned contributiona plus interest ae a part of the e&ate. &?rtiorari was denied by the U. S. Supreme Court In 309 U. S. 675.

e qUQ8tiOtl a&ein arose In Uew York in the c3tie of 32 N Y 8 2d 473 This ttie the Court followed In re ?hi%~g~~% held the returned centri- the lead of the KeAo&u c&,*su ra, &d bations of the ennlo~ee v;ere taxab a aa a part of the estate. The Y

ikmi, case finady ,reaohed the !?ew York Court of h court of peals, 1 tf last resort ti that State .and was there afflned thout written opinlonr 60 X.X. 2d 8.42 (1945).

The Xernochan holding has also been followed.‘bp the still later cases of In re Burtnan’s Estate Al U.Y.S. 2d 77e end Greg Y. Co~ztissioner, 54 Ei.E. 2d 169 (?&xx.), the latter case Involving an annuity purchased frwa an insurance coq~any~ t. LeCiorse, 312 U.S. 531; I.40 A.L.R.

See also Xerlvering 719; 150 A-IL.2. 1292. .,.

Since the teacher ret&+!gnent fund benefit involved herein on1 representa coiWibutlons frol!~ the deceased teacher plus interest, p18 h old under the foregoing authorities that such benefit should be treated as en asset of the estzt6 for lnheritence tex purposes, and that it should not be clrssed as insiurmce.