November 14, 1955
Appeals, No. 5, March T., 1956 and No. 195, March T., 1955, from decree of Orphans' Court of Allegheny County, 1942, No. 7111, in re Estate of Charles F. Arrott, Dec'd. Decree affirmed.
Charles C. Arensberg, for appellants.
William H. Eckert, with him Smith, Buchanan, Ingersoll, Rodewald & Eckert, for appellee.
Grubb, guest & Littleton, filed a brief for persons interested, under Rule 46.
Before Stern, C.j., Stearne, Musmanno and Arnold, JJ.
[ 383 Pa. Page 229]
OPINION BY MR. JUSTICE ALLEN M. STEARNE
The single question presented is: where a testamentary trustee in the course of administration purchases stock with funds from the corpus of the estate, the income from which is payable to a life tenant with remainder over, and the corporations declare stock dividends on the stock, is the intact value, required to be preserved for the remaindermen, its purchase price or its book value at the date of purchase? A majority of the court below ruled that it was the purchase price, one judge dissenting.
[ 383 Pa. Page 230]
The facts in detail are recited in the adjudication of the learned auditing judge. The trustees purchased stock in several corporations. In each instance the purchase price exceeded the book value. Subsequently, the trustees received stock dividends from the respective corporations. The auditing judge ruled that the intact value of the corpus to be retained was the book value of the stock at the date of purchase and, consequently, decreed distribution to the life tenants. The trustees and the guardian and trustee ad litem filed exceptions, maintaining that it was the purchase price which constituted intact value. The exceptions were sustained by a majority of the court in banc, with a dissent as indicated.
The basic reason for the rule of equitable apportionment is that a life tenant is entitled to accumulated corporate profits and earnings on stock when it is sold, distributed, stock dividends declared, or the stock with accumulations is otherwise dealt with. The justness of the rule cannot be questioned. The difficulty is in its application.
In King Estate, 349 Pa. 27, 36 A.2d 504, it was stated by a unanimous court: "There is probably no more difficult and intricate branch of the law than the application of what is termed the Pennsylvania, or American, Rule of Apportionment. The principle of equitable apportionment was early established (see Earp's Appeal, 28 Pa. 368), and its development and refinements are ably discussed by former Chief Justice KEPHART in Nirdlinger's Estate, 290 Pa. 457, 139 A. 200, and in Waterhouse's Estate, 308 Pa. 422, 162 A. 295. There is a host of other cases, which need not be cited, dealing with various applications of the principle. In general, it is the rule that on distribution a life tenant is entitled to receive accumulated profits and earnings, except where necessary to preserve the
[ 383 Pa. Page 231]
'intact value' of principal. Where there is a stock or cash dividend, a corporate liquidation, a sale or distribution in kind, the life tenant is entitled to such accumulated profits and earnings. It is wholly immaterial in what form such accumulations appear." The difficulty in application referred to is apparent in subsequent stock transactions in the King Estate, 355 Pa. 64, 48 A.2d 858, and 361 Pa. 629, 66 A.2d 68. There was no difference of opinion concerning the rule. Its application in the subsequent stock transactions was the subject of the diverse opinions in this Court.
The Legislature, by the enactment of the Principal and Income Act of July 3, 1947, P.L. 1283, 20 PS 3470, has directed how such apportionment thereafter shall be made. This Act, however, applies only to trusts thereafter created: Warden Trust, 382 Pa. 311, 115 A.2d 159, and cases therein cited.
In determining what constitutes intact value, two situations must be considered: (1) whether the stock was acquired by the trustee at the inception of the trust from the testator or settlor; or (2) whether the trustee purchased it during the administration of the trust.
"Intact value" was defined in Nirdlinger's Estate, 290 Pa. 457, 463, 139 A. 200: "... Under the Pennsylvania or American Rule, adopted in most American jurisdictions, the rights of the life tenant and the remainderman to an extraordinary cash or a stock dividend declared during the life tenancy are determined by a division of the dividend between the claimants so as to preserve intact the book value of the devised property (the corpus) as it existed at testator's death. This was made clear by the decision in Earp's App., 28 Pa. 368, long recognized as a leading authority. The effect of the rule is to give to the life tenant the income
[ 383 Pa. Page 232]
and not the "market" value which should be preserved.
It is quite different, however, when trustees purchase stock with cash from the corpus of the trust. The fallacy in the life tenants' contention that the book value and not the cost price (which they term market value) must be accepted as intact value is most apparent. Were such contention to prevail, the life tenants would receive as income not only accumulated profits but corpus equal in amount to the difference between the book value and the purchase price. Such a conclusion would not only be unjust to the remaindermen, but would be contrary to the basic principle of the rule. Furthermore, all cases in this Court are manifestly against such a doctrine.
Appellants rely largely on the following statement in Jones v. Integrity Trust Co., 292 Pa. 149, 155, 140 A. 862: "... market value has nothing to do with such distributions; under all the situations which arise only the intact value is to be considered...." Apparently in that case there existed a complicated corporate situation involving shares of stock originally held by testator, new shares purchased by the trustee, and extraordinary stock dividends. The appeal, however, was quashed on the ground that the case stated did not present sufficient facts on which to base a judgment. Under such circumstances the order quashing the appeal cannot be seriously regarded as an authority in support of appellants' contention.
Two other cases, Packer's Estate (No. 1), 291 Pa. 194, 139 A. 867, and Baird's Estate, 299 Pa. 39, 148 A. 907, are also relied on by appellants in support of the contention that book value and not market value constitutes intact value. But in each of these cases such statements were made in connection with stock received by the trustee from a testator's or settlor's
[ 383 Pa. Page 236]
estate, and did not involve the cost price of stock purchased by the trustee.
We need not cite our numerous cases on this subject (many of which were cited by the court below) and attempt to analyze their facts and seek to reconcile them. Where a trustee purchases stock with funds from the corpus of the trust, all that the life tenant is entitled to receive in distribution is the accumulated profits or income, in whatever form such accumulations appear, in excess of the purchase price of the stock, thus preserving the intact value of that portion of the trust.
The decree is affirmed at cost of appellants.
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