The school district was correct in 'expelling' your children to attend the schools in the district in which they reside.
Your claim that the childrens grandmother pays taxes there, so they should be able to attend that school district is irrelevant.
Here is what the Texas Texas Education Code says:
§ 25.001. Admission
(b) The board of trustees of a school district or its designee shall admit into the public schools of the district free of tuition a person who is over five and younger than 21 years of age on the first day of September of the school year in which admission is sought if:
(1) the person and either parent of the person reside in the school district;
(2) the person does not reside in the school district but a parent of the person resides in the school district and that parent is a joint managing conservator or the sole managing conservator or possessory conservator of the person;
(3) the person and the person's guardian or other person having lawful control of the person under a court order reside within the school district;
(4) the person has established a separate residence under Subsection (d);
(5) the person is homeless, as defined by 42 U.S.C. Section 11302, regardless of the residence of the person, of either parent of the person, or of the person's guardian or other person having lawful control of the person;
(6) the person is a foreign exchange student placed with a host family that resides in the school district by a nationally recognized foreign exchange program, unless the school district has applied for and been granted a waiver by the commissioner under Subsection (e);
(7) the person resides at a residential facility located in the district; or
(8) the person resides in the school district and is 18 years of age or older or the person's disabilities of minority have been removed.
(c) The board of trustees of a school district or the board's designee may require evidence that a person is eligible to attend the public schools of the district at the time the board or its designee considers an application for admission of the person. The board of trustees or its designee shall establish minimum proof of residency acceptable to the district. The board of trustees or its designee may make reasonable inquiries to verify a person's eligibility for admission."
http://www.capitol.state.tx.us/statutes/ed/ed002500.html#ed001.25.001
After reading the Code, it is clear that the School District was well within its rights to require transfer of the out-of-district students.
