UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA
September 23, 1971
Verner S. PURNELL, Executor of the Estate of Anna S. PURNELL, Deceased,
UNITED STATES of America
Knox, District Judge.
The opinion of the court was delivered by: KNOX
OPINION and ORDER
KNOX, District Judge.
This suit for refund of federal estate taxes involves one of the more abstruse and obscure branches of the Pennsylvania law of decedent's estates. The rule formerly was that where under a will, personal property was awarded directly to a life tenant for life with remainder over, the life tenant was treated as a debtor to the remainder man in the amount of the personal property received by the life tenant. The relationship between life tenant and remainder man was that of debtor and creditor, not trustee and beneficiary. Fortunately, the number of cases involving this question will drastically diminish as time goes on because under the Pennsylvania Estates Act of 1947, 20 Purdon's Pa. Statutes, 301.13, effective January 1, 1948, and applicable to dispositions occurring on and after that date, it is provided that a life tenant in such a situation "shall be deemed to be a trustee of such property, and not a debtor to the remainder man * * *".
We are, however, here concerned with the will of Ansby V. Purnell who died April 21, 1941. In his will (p. 106 (a) of record in Supreme Court of Pennsylvania which was offered in evidence in this case, Exhibit 12), the decedent, after mentioning certain pieces of real estate, provided:
"Second: All the rest, residue and remainder of my estate, real, personal and mixed, I give devise and bequeath to my wife, Anna S. Purnell, for and during her natural life with remainder upon her death to my son, Verner S. Purnell.
"Third: I direct that my personal estate be distributed to my wife, Anna S. Purnell, as life tenant without requiring her to give bond therefore."
This language in the will has clearly and conclusively been construed by the Supreme Court of Pennsylvania to set up a debtor-creditor relationship between Anna S. Purnell and her son, Verner S. Purnell, plaintiff herein, to the extent of property received by Mrs. Purnell from the estate of her husband. See Purnell's Estate, 424 Pa. 263, 226 A.2d 488 (1967).
Anna S. Purnell, the life tenant, died February 5, 1962, and the amount in which she was indebted to the remainder man is clearly to be allowed as a deduction in the federal estate tax return in her estate as filed by the plaintiff herein her executor.
The question, however, with which we are confronted is "What is the amount of this deduction"? The determination of this question depends upon whether you adopt the figures evaluating the personalty received by Mrs. Purnell as of the date of Mr. Purnell's death on April 12, 1941, or the value of these assets at the time of distribution on May 8, 1943. It is claimed that the securities constituting the bulk of the property received by the life tenant had appreciated in value during the intervening two years and the estate naturally claims that the amount to be allowed as a deduction is to be calculated as of the date of distribution. The government, however, contends that date of death values control. For reasons herein set forth, we hold that date of distribution values control but in this case the estate is bound by the values set forth in the 1943 distribution decree.
An examination of the Pennsylvania cases dealing with this debtor-creditor relationship shows that the life tenant is responsible to the remainder man for the amount received in distribution from the estate of the original testator. This amount is not subject to diminution for expenses of settlement of the estate of the life tenant nor for compensation to her for care of the fund and is not concerned with increase or decrease in values of securities or gains or losses from sales thereof. This can be distilled from the following cases: Reiff's Appeal, 60 Pa. 361; 124 Pa. 145, 16 A. 636 (1889); In re Letterle's Estate, 248 Pa. 95, 93 A. 935 (1915); In re Weir's Estate, 251 Pa. 499, 96 A. 1086 (1916); In re Kirkpatrick's Estate, 284 Pa. 583, 131 A. 361 (1925); In re Gillett's Estate, 130 Pa.Super. 309, 197 A. 517 (1938); In re Powell's Estate, 340 Pa. 404, 17 A.2d 391 (1941).
For instance, in Weir's Estate, supra, it was held "the specific property never becomes the subject of credit in an accounting". In Letterle's Estate, supra, it was pointed out that the assets handed over to the life tenant in the decree of distribution were valued at $12,010.58 and this was what she was responsible for regardless of losses and gains in sales of securities.
In Kirkpatrick's Estate, supra, the decree distributing the estate to the life tenant erroneously labeled it a trust but the Supreme Court treated this as a gratuitous statement in the decree and held that what the life tenant is liable for is the amount received by her.
Again, in Gillett's Estate, supra, it was held that the life tenant was responsible for the value of the estate as received by her. "The net amount and value of the property which she took possession of * * *."
Again, in Powell's Estate, supra, one of the leading cases in recent years in this field, there was a life estate with power to consume. The inventory showed the original value of $74,167.50 including certain securities which turned out to be the cause of the dispute. The second and final account filed five years after death of the original decedent showed the balance to be $36,391.28 which was awarded to the life tenant subject to her power to consume. It was held that the life tenant "was entitled to take the balance as shown by the account and assume a debtor creditor relation to the remaindermen for that sum less any part she should consume". (emphasis added). The court said "She is responsible to them only for the value of the estate at the date of distribution thereof ".
In the last of this line of cases being the very estate which is at issue in this case, we find that the District Director of Internal Revenue was made a party to a declaratory judgment proceeding, appeared by the United States Attorneys Office and filed answer thereto. The government also appeared and argued the case on appeal in the Supreme Court. It appears from the opinion by Chief Justice Bell that on April 23, 1943, the auditing judge entered a decree of distribution which directed Ansby's executors to distribute to "Anna S. Purnell life tenant" the stocks and bonds contained in his residuary estate which were valued at $97,785.50.
The court indicates that it even considered the very question that was before us because it is stated "exactly what property Anna took at her husband's death and in what capacity is important, because between 1941 and 1962, Ansby's property had very greatly enhanced in value as a result of stock dividends, stock splits and the increase in the market value of the stocks and securities which Anna received from her husband's estate. In the Supreme Court opinion, it appears that the government was claiming a tax on the increase in value but the court held that she was liable to "the remainderman for the value of the property she actually received at the date of distribution ". The court further pointed out "she also elected to take in kind the stocks and bonds which were listed at their value at the time of distribution to her." (Emphasis supplied.)
Many of these cases discuss the Act of May 17, 1871, P.L. 269 (see also the Act of February 28, 1834, P.L. 83, Sec. 49) later supplanted by similar sections in the later Acts of Assembly dealing with decedent's estates whereby the life tenant could be required to give bond in such a situation for the amount of assets received by her. We find in many of these cases that the original will excused her from giving bond or that no bond was required and this was acquiesced in by the remainder man, amounting to a waiver, but it was held in Powell's Estate, supra, that the fact that she failed to give bond at the time of the decree of distribution was immaterial. It will be noted that in Ansby V. Purnell's will the giving of bond was excused. If, however, Anna had been required to give bond, it is obvious that the bond which she would have had to have given was in the amount of the stocks and bonds received by her from Ansby's Estate, to wit, in the amount of $97,785.50 as determined by the decree.
In the instant case, it is obvious that both the government and the estate are bound by the adjudication of the Supreme Court of Pennsylvania, since this was an adversary proceeding in which the government participated. Under Internal Revenue Code, Section 2053 (a), and regulations thereunder, claims valid under State law are deductible in determining the net estate. If the state court passes on the validity of a claim, it must be allowed. While there is some doubt in the cases as to the effect of allowance of a claim pro forma without any adversary proceedings, these cases are obviously inapplicable here except as to the later account hereinafter mentioned. See First-Mechanics National Bank of Trenton v. Commissioner of Internal Revenue, 117 F.2d 127 (3d Cir. 1940); Beecher v. United States, 280 F.2d 202 (3d Cir. 1960); Babcock's Estate v. Commissioner of Internal Revenue, 234 F.2d 837 (3d Cir. 1956). It is indicated in these cases that even if the validity of the claim has not been adjudicated by the state court it may be determined on the merits by the Federal court.
The problem in this case is caused by ignoring the plain wording of the original decree of distribution in the Estate of Ansby V. Purnell which was entered by the Orphan's Court of Allegheny County on April 28, 1943. (p. 94a Ex. 12) This order of distribution plainly states:
"SCHEDULE OF DISTRIBUTION:
Balance for distribution
To: Anna S. Purnell, life tenent (sic) $97,785.50."
This figure is also in accordance with the 1965 first and final account of Verner S. Purnell, "surviving trustee under will" which shows as follows: (96a]
4-28-43 Principal received from Estate
of Ansby V. Purnell. $98,395.50
11-13-47 Proceeds sale of real estate
914 Columbus Avenue,
Pittsburgh, Pennsylvania, to
F. G. Woodward, D.B.V.
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