Untitled Texas Attorney General Opinion

THEATTORNEY GENERAL
OF TEXAS
PRICE DANIEL
ATTORNEYGENERAL
December 9, 1949
Hon. Robert 8. Calvcrt Opinion No. V-958.
Comptroller of .Public Accounts
Austin, Texas : Re: Exemption of certain tesi-
mentary trusts from inher-
itance taxes.
Dear Sir:
You have requested the opinion of this office “with re-
spect to the taxability of a bequest under Paragraph IX (b) of the
last will and testament of Frank Hays McFarland, who died a res-
ident ef Tarrant County on I&LY 7, 1946.”
From the file attached to your request we are given the
following facta. On July 2, 1947, Frank Hays McFarland and his
wife, Carrie E. McFarland, executed a joint, mutual and contrac-
tual will which has been duly probated as the Last Will and Testa-
ment of Frank mys McFarland. Carrie E. McFarland has duly
qualified as Independent Executrix, and at the time the instrument
was admitted te probate reaffirmed the agreement contained in the
will to accept under it and in all things to abide by its terms and to
continue it in full force and effect as her Last Will.
The will is a nineteen-page instrument which provides
in substance that at the death of either party all property of both,
with certain stated exceptions, is to go to the survivor as trustee
in trust for life, the trustee to have full powers of management and
disposal and the right to use the income from all property for life;
and at the death of the survivor, the remainder of such property
and all other property of every kind or character owned by the sur-
vivor or in which the survivor had’any interest, with certain stated
exceptions, are to pass to and ves,t in the Fort Worth National Rank
d Fort Worth as truetee for the uses and purposes stated in the
will. The brdt as trrratee is given stated powers of management of
&e cerpmn ef the trust which is to be at all times maintained intact.
The net income from the trust is to go to the Rector, Wardens and
Vestry of St. Andrew’s Episcopal Church of Fort Worth “as that
b&y shall be constituted at the various times the actions . . e prod
vided for are to be taken,” said body to have full power and euthord
ity to dispose of the net income of the trust in accordance with the
previsions of the will.
Hon. Robert S. Calvert, Page 2 (V-958)
Paragraph IX of the will reads, in part, as follows:
“(a) Forty-five per centum (45%) of the net
income from this trust shall go into, and constitute
the ‘McFarland Day Nursery Fund’ to be used for the
care of underprivileged children residing in Tarrant
or Parker Counties, Texas. Said,Fund shall be han-
dled and expended by, or under the direction of, the
Rector, Wardens and Vestry of St. Andrew’s Episcopal
Church of Fort Worth, Texas; and. to the greatest ex-
tent by them from time to time considered feasible,
shall be used and expended by contributing to the sup-
port, maintenance, development and improvement of an
institution, or institutions, such as The Day Nursery
Association of Fort Worth, Texas. : But we desire and
direct that, to the extent said Rector, Wardens snd Ves-
try of St. Andrew’s Episcopal Church of Fort Worth,
Texas, from time to time may consider practicable,
they exercise reasonable supervision over any institu-
tion to which contributions are made. If said Rector,
Wardens and Vestry of St, Andrew’s Episcopal Church
of Fort Worth. Texas, consider it wise and judicious,
they may, and are hereby granted full power and author-
ity to, ~acquire by purchase, or otherwise, suitable prop-
erty, or properties, and thereon operate a Day Nursery,
or Day Nurseries, or a similar institution or institu-
tions, for the care of underprivileged children living in
Parker or Tar~rant Counties, Texas.
“(b) Forty-five~per centum (45%) of the net in-
come frbm said trust &all be used to aid young men
and young women who are residents of either Tarrant
County m .Parker County, Texas, to secure .m educa-
tion or vocational training. This aid shall be granted
by long-term, low-interest loans to the young men and
young women selected as hereafter provided. Such loans
maybe made to minors. The portion of the income from
the trust created hereby which.is to be used in this way,
and all~repayments of loams and interest thereon, shall
constitute a fund to be known as the ‘Eddleman-McFar-
land Fund. ’ This fund shall always be conpolled and
managed ~by the Rectors, Wardens and Vestry of St.
Andrew’s Episcopal Church of ~.Fort Worth, Texas,,as
that body shall be constituted at thevarious times the
actions hereafter provided for are to be taken. We wish
and direct that eat all times approximately fifty per ceat-
twm (50%) of the sums available for loans be loaned to
young men rnd young women residing in Parker County.
Texar. and approximately fifty per centum (58%) to
Hon. Robert S. Calvert, Page 3 (V-958)
young men and young women residing in Tarrant Coun-
ty, Texas, In selecting residents of Parker County,
Texas, to receive such loans, wewish and direct that
the Rector, Wardens and Vestry of St. Andrew’s Epis-
copal Church of Fort Worth, Texas, consult with and,
to the fullest extent consistent with the policy estab-
lished by them, be governed by the recommendations
of a committee composed of those who are, at the time,
the County School Superintendent of Parker County,
Texas, the District Judge of Parker County, Texas, and
the Rector of All Saints Episcopal Church of Weather-
ford, Texas. We also wish and direct that all young
men and young women securing loans from the Eddle-
man-McFarland Fund be~required to attend an institu-
tion in Texas if the educational or vocational training
sought can be obtained in a Texas institution, and that
at all times said fund be administered on a wholly non-
sectarian basis, ‘without distinction or preference be-
cause of race, religion or sex. n
Paragraph IX (c) allocates the remaining te’n per cent
of the net income to the Rector, Wardens and Vestry of the St. An-
drew’s Episcopal Church of Fort Worth to be used in defraying man-
agerial and clerical expenses incurred in administering the two funds.
The trust is intended to be perpetual, and provisions are
made for changing conditions land termination of the trust if “it shall
be judicially determined by a. District Court of Parker County, Tex-
as, that it is not feasible or practicable to continue” it for either of
the two purposes above set out. In this event all funds and property
in the trust are to go outright to religious, educational and charita-
ble institutians in Tarrant and Parker Counties, Texas.
We quote from your letter requesting our opinion:
II
I . s this bequest /Paragraph IX (b)fis not to a
religious or charitable oFganieation and tl!i’Gonly ques-
tion is whether or not it is for the use of an education-
al organization and is to be used within this State. The
will is not specific that it must be used within this State,
but it can be used outside the State in case the type of
training desired is n&available within this State,
“As we interpret paragraph IX (b) the bequest is
simply ,a loan fund administered by a church. Theoret-
ically, the fund is supposed to be self-perpetuating, All
funds loaned are expected to be paid back by the individ-
uals to whom they are loaned, The only way the educa-
tional feature comes into the picture, is that the money
.
Hon. Robert S. Calvcrt, Rage 4 (V-958)
is being loaned for the purpose of obtaining an educa-
tion, No educational organization has any right in the
fund itself.
“The argument is advanced by the attorney for
the estate that this is identical with bequests often made
to educational institutions, to be used by them as a loan
fund for needy students. This, of course, is not exact-
ly correct. In the latter type of cases, the bequest is
to the educational organization. In the instant case, the
educational organization has no claim whatever on this
trust fund.
‘In v.iew of the fact that,we are uncertain as to
how this bequest should be treated, and also at the re-
quest of the attorney for the estate, the matter is being
referred to you for your attention and reply.”
Article 7332, V.C.S., provides an exemption from hher-
i&no. taxea for “property passing to or for the ume of the United
States er any raligioua, educatienal or charitable organiaation when
such bequest, devise or gift is to bc used within this State. n
We thinhthat the funds established by Paragraph IX
stand,on the sarpc footing on one essential point. That is, we think
it necedsary to first determine whether the establishment of this
trust can come ,within the statutory exemption which is allowed when
property gasses “to or for the use of religious, etc.,,.organisations.”
If the property cannot be regarded as having passed to or for the
use oft such an “organization”, no part of the trust estate is entitled
to exenaption.
There are ne Texas cases in point, but numerous deci-
sions frem ether jurisdictions deal with the problem of whether
similar bequests are within variously worded exemptive provisions.
Where the statute prevides for a deduction or exemption of prop-
erty passing to religious, educational or charitablc.insti~tutions or
corporationsif in generally held that the bequests or devisea must
be made directly to such institutiona or corporations. See In re
Price’s Estate, 192 Wis. 580, 213 N.W. 477 (1927), and In rz’s
Estete 83 In& A. 371. 147 N.E. 297 (1925). Even under ----ma-
a s
~‘type, however. the highest court of Indiana allowed an cxemp-
tion for property paaring te a Trust Company where the will of the
decedent created ldtninietrative or .gevrrning beards through whem
the educational ad chariteble bequests were to be distributed,
Crittenbergar v. State Savings k Trust Co., 189 Iud. 411, 127 N.E.
The coart regarded the Trust Company as a mere agent
through whem business was .,to be transacted and held that the trrs-
tee in cenjonction with the boards named in the will censtitrted “a
governing body,” of educational and charitable institutions witbin the
meaning d the statate.
Honl Robert S. Calvert, Page 5 (V-958)
Under our inheritance tax s.tatute the exemption allowed
for charitable, etc., bequests is not limited by a requirement that
the property pass directly to a corporation or institution, but is al-
lowed if the property passes to or for the use of a “religious, edu-
cational or charitable organization” when the “gift is to be used in
this State.” In this respect our statute is similar to the one dis-
cussed in In Re Lynch’s Estate, 72 N.D. 48, 4 N.W.2d 591 (1942),
wherein the court held that the mere delivery of property to a trus-
tee did not prevent deduction of the legacies sine; thk bequests and
legacies were not for the use of the trustee but were for the use of
certain charitable, educational and religious institutions.
The net income from the McFarland trust is to go to
“the Rector, Wardens and Vestry of St. Andrew’s Episcopal Church
of Fort Worth” to be expended as provided in Paragraph IX of the
will. If this group can be deemed a “charitable, religious or edu-
cational organization” within the meaning of the statute, the busi-
ness management and control of the corpus of the trust by the Fort
Worth National~Bank will not result in a loss of exemption.
,,The Supreme Court of California in In Re Irwin’s Es-
tate, 196 Cal. 366, 237 Pac. 1,074 (1925), held that a devise to named
Etees was a devise to an “association of persons,” The control-
ling portions of the applicable cxemptive provision in the’california
Act read as follows:
“(1) All propierty transferred to societies; cor-
p&ations, and institutions now or hereafter exempted
by law from taxation, or to any public corporation, or
to any society, corporation, institution, or association
of persons engaged in or devoted to any charitable, be-
nevolent, educational, public or other’ like work . . . or
to any person, society, corporation, institution, or as-
sociation of persons in trust for or to be devoted to any
charitable, benevolent, educational, or public purpose,
,:by reason whereof any such person or corporation shall
become beneficially entitled, in possession or expect-
ancy,. to any such property or to the income thereof,
shall be exempt; provided, however, that such society,
corporation, institution or association be organized or
existing under the laws of this state or that the prop-
erty transferred be limited for use within this state.”
By the terms of decedent’s will $ l,OOO,OOO was to go to certain Pained
trustees, their survivors and successors in perpetuity, the sum so
held and managed by them to be known as “the William G. Irwin Char-
ity Foundation. ” The trustees were to use the net income for stated
charitable purposes. The court first pointed out that the statate did
not require that the charity be a corporation and held that the “Foun-
dation” created by the will ,aptly answered the description of an “aed,
sociation.” The usual meaning of the term “association”, said the
. .
Hon. Robert S. Culvert, Page 6 (V-95g)
court, is “an unincorporated organization, composed of a body of
men, partaking in its general form and nude of procedure of the
cbracteristfcs of a corporation . . . . There can be no question
but tkat the organisation ef the txustees into a permanent associe-
tion was contemplated by the testatrix and luthorked by the terms
of her witl.” Under the will the trustees bad full management of
the endowment fund and were therefore clothed with functions and
vested with powers similar to those of a corporation in that they
were impowered to invest aed reinvest the funds and pay out the
income for the purposes which the tertatrix had ia view. They were
also required to keep records, etc., and were authorized to make
by-laws for the government and adminlrtration of the trust. Thus,
said the court, the complete organiuation provided for in the will
became rt’the death of the testatrix eo instante vested with the cor-
pus of the tr.urt.
,,’ InIx Rc Curtis’ Estate, gg Vt. 445, 92 A. 969 (191!5),
the court was concerned uiith wh4 F a board of trustees csnsti-
tuted a “society”. The decedent had devised and bequeathed to three
named trustees a remainder iaterest in all the rest and residue of
her estate to be used for purposes stated in the will, The trustees
had full power to manage and invest the corpus of the tr,ust.
pointed
The parties named in the will were nominated
as trustees,
l
n; ap-
had duly qualified, ,and had organized by elcct-
ing one of their number ao president, another as vice-president,
and another as treasurer, They had also elected en assistant cash-
ier ef the Merchant’s National Rank as clerk of the Board efTrus-
tees. All trustees were officers of seid bank and a11busiaess re-
lating to the trust was to be transacted by the bank.
The Vermont stitute exempted frem tax “every chari-
table, cducatio~l or religious society~ or institutien . . ~ created or
existing under and by virtue of the laws of this state and having its
principal office herein. . . ,”
Several arguments were advanced in support of the prop-
osition that the particular transfer did not come within the exemp-
tion provision. First it was urged that the statute should be strict-
ly construed against those claiming,exemption. The court held t~hat
althoughthis wes the rule asaaplied to general taxation, it wss not
applicable, since tke taxation of inheritances is l special form of
tnation. Next the court rejected the contention that the words “cre-
ated er existing under . . ~ the laws of this state end having a prin-
cipal office herein , , .,I’imported a corporation. :
In determining whether the beard of trustees under the
will cenatituted a charitable or rducatienal society or institution
within the meaning of the statute, the court said;
Hon. Robert S. Galvert, Page 7 (V-958) ,,
“A ‘society’ has been defined as an association
or’ company of persons united together, for any com-
mon purpose (36 Cyc. 499); also as a .number of per-
sons united together by mutual consent in order to de-
liberate, determine, and act jointly for some common
purpose (2 Bouvier’s Law Diet. /RawleE Rev.7 1010).
Persons thus associated for a piirpose that ischarita-
blc would, ex vi termiiri, be a charitable society. It is
evident that the Legisluture intended that the word
‘society,’ as used in this statute, should include ‘bodies
of men united for the advancement of religion and learn-
ing and for other pious and charitable, purposa~s,’ thus
recognizing the duty enjoined upon it by the Constitu-
tion to encourage such associations.” (p* 968)
With regard to the fact that the “society” was formed
after the ,.dacedent’s ,death the court said:
“If the individuals named in the will as trustees
had voluntarily associated themselves for the purpose
of collecting funds to aid needy boys and girls in secur-
ing an education, or if the legacy in question had been
given as a foundation of a society thereafter to be formed
for that purpose, pnd they had associated themselves in
accordance with the provisions of the will to receive the
legacy, no one would que.stion but that in so doing they
had formed a charitable associations or society. In that
case their right to receive a legacy for the purpose of
their association would not be taxable under the stat-
ute in question. We think it is unreasonable to say, be-
cause their association is effected by the will, that the
fund provided by the bounty of the testatrix shall be de-
pleted to the extent of the tax. The state can well af-
ford, considering the purpose to which the money is de-
voted, to let it pass untaxed; and we are loath to believe
that the Legislature intended to take toll of benevolences
calculated to supplement the state’s efforts in the cause
of education, or to .give such a construction to the stat-
ute es would tend to- nullify its manifest policy in this
regard,,:so long as the language ,of the statute does not
compel it,
“We hold that under the provisions of this will
tha board of trustees are a charitable society within
the meaning of the exemption clause of the statute....”
(P* 968)
Hon. R&err S. Calvert, Page 8 (V-958)
There is no appreciable difference between the were
“association”, “society” and “organization”. The word6 are ire-
quently used interchangeably in common prlance, and appear, ei-
ther specifically or in some varia&ion of the root farm, in defkit46ue
as explanatory of each other.
Webster’s New International Dictionary, 2d. Sd., @es
the following among its definitions of “organization”:
“3. T&t which ia oreniced; an organism; any
viwlly or syotemrrtic&lly organic whole; an association
d prbona, es in IL ckb.
“4. The executive structure of a busincsa; the
personnel of management, with its several duties aad
plrceo in Ministration; . . . .*
Bouvier’s Law Dictionary, Rawle’s Third Revinion, in-
Cl&id+6 the fOllowiBl( rkfiniti0Il of “assOCiatiOn”:
“An or adsed union of pcroons for a common
purpose; a* y 0 persons acting together for the pro-
motion of some object of mutual interest or kdvantage,
Cent. Diet.”
And a “society” is dcfinwd a~) "an association or com-
pany of persons united together ~for any common purpose. ti 1~ Re
Curtis’ Estate, aupra.
We think that the reason@ of the courts in the Caii-
farnia case and in the Vermont caoe is applicable to the provision
of our statute and that the property which will go to the fundr pro-
vided for in Paragraph IX of the will may be regarded as passing
“for the use of” an “or8aeiaation”.
We will,now comidcr the specific questions which you
raise with regard to the “Eddlernan-McFarland Fund” provided for
in Paragraph IX (b) of the will. As lppscars from the&WA-l* quoted
portion of the opinion of the court in fn~Re Curtis’ Estate, nupra,
t&c trust there provided for the distrbution of funds to aid needy
boys and girh in securing an education. Both parties in this case
bad presented argument8 baaed on the theory that the questioa was
whctbrr the bequest was to any “educational” society or institution.
T&e cuurt stated that this was too lyarrow a view of the question and
held thbt the fund wae maaifeatly devoted to charitable purperea.
This holding is in accord with the weight of authority. We de nbt
think that the low interest loan scheme provided for in Pasagraph
IX (b) of the will makes the purpose of the testator or the character
of the organization which will effectuate that purpose any less char-
itable. The sple question remaining is whether the fret that tie
_
Hon. Robert S, Calvert, Page 9 (V-958), ,.
funds may be expended outside the State in securing training in
certain instances will result in any loss of exemption.
It has been said that the purpose behind legislative ex-
emptions from inheritance taxes of bequests ‘to charitable institu-
tions is to encourage liberality on the part of those testators whose
means permit them to indulge their generosity in the line of pro-
moting the public good by contributing to the cause of charity. In
Re Clark, 131 Me. 105, 159 A. 500 (1932). The public is thu,s 6en-
efrted directly in the benefit conferred upon its citizens, and further
indirect benefit is found in the c,onsequent reduction of the State’s
burden, of caring for and advancing, the interests~ of its eitine,ng. 34
A.L.R, 634, 635. The reason for limiting such exemptions~to char-
itable organizations who will use the funds within the State is there-
fore readily apparent. “‘It is the policy of society to encourage be-
nevolence and charity. But it is not the proper function of a ,atate
to go outside of its own limits, and devo.te its, resourced to s,upp,or,t
the cau,se of religion, education, or missions f,or the benefit of man-
kind at large. ” Inure prime, 116 N.Y. 347, 32 N.E, 1091, 1045 (lg93).
In Morg4q vI A.T. h ‘5.m yo Cp,,,, (116 &an. ;I%, 225 P. 102’,9,,tD31~
(14241 , the court said:
“Taxes must be raised for the support and con-
duct of the governme,nt. Exemption to charitable, edu-
cational and religious organizations is bottomed upon
the fact that they render service to the state, for which
reason they are relieved of certain burdens of taxation.
The effect of an exemption is equivalent to an appro-
priation It cannot be said to have been the intent of
the legislature to make appropriation for benefit or
maintenances of foreign charities, which, at best, have
a remote chance only of benefiting the citizens of this
state.“
We think that the foregoing authorities have correctly
stated the purpose and scope of the type of exemptive provision
which is found in our statute, Viewing the bequest in the light of
these statements it is clearly exempt, The benefits directly con-
ferred are conferred upon citizens of the State of Texas, To the
extent that it aids these citizens in gaining an education and in thus
fitting them for discharging the duties of citizenship, it has corre-
spondingly reduced the State’s duties in that respect and has indi-
rectly reduced the amount of the individual taxpayer’s obligation in
support of this duty; These being the real benefits which will re-
sult from this charitable bequest, we do not think that the exetnp-
tion is lost by incidental extra-state expenditures to accomplish
these benefits in those instances in which proper training cannot be
had within the state, You are therefore advised that the bequest
made by Paragraph IX (b) is exempt from inheritance taxes,.
. -
Hon. Robert S. Calvert, Page 10 (V-958)
SUMMARY
Where the residue of an estate passes to a bank
as trustee, the income to be expended as directed in
will by the Rector, Wardens, and Vestry of a church,
the property passes for the use of an Yorganieation*
within the meaning of Article 7122, V.C.S. Under terms
of trust, provision for long-term low-interest -loans to
Tarrant and Parker Counties’ boys and girls to ass,ist
them in getting an education is charitable in nature, and
is exempt from Texas inheritance tax. In Re Curtis’
Estate, 88 Vt. 445, 92 A. 965 (1915). hkemption from
‘qance tax is not lost by possibility of extra-state
expenditure of borrowed funds if traininn not available
in Texas.
Yours very truly
ATTORNEYGENERALOF TEXAS
Assistant
I&fC/mwb
APPROVED
TL 24
ATTORNEY GENERAL