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decided: November 26, 1975.



Israel Packel, Atty. Gen., John M. Duff, Deputy Atty. Gen., Pittsburgh, for appellant.

Roger Curran, Robert Y. Kopf, Jr., Pittsburgh, for appellee.

Jones, C. J., and Eagen, O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Roberts, J., filed a concurring opinion. Manderino, J., concurred in the result. Nix, J., filed a concurring and dissenting opinion. Pomeroy, J., filed a dissenting opinion in which Eagen, J., joins.

Author: Jones

[ 465 Pa. Page 57]


The executors of this estate petitioned the Orphans' Court Division to reduce the appraisement of certain assets made by the Commonwealth for purposes of imposing its transfer inheritance tax. The auditing judge sustained the taxpayers' position at a hearing held at the audit of the executors' account. 24 Fiduc.Rep. 352 (C.P.Allegheny, 1974). Exceptions having been dismissed by the court en banc, the Commonwealth appealed.*fn1

The case was tried on an agreed stipulation of facts which can be fairly summarized as follows.

[ 465 Pa. Page 58]

John Evans Rose died on March 15, 1972. On or about May 18, 1973, his two sons, as executors, filed the Pennsylvania inheritance tax return for the estate. On November 14, 1973, the Pennsylvania Department of Revenue submitted to the executors, appellees herein, its Notice of Filing Appraisement. The appraiser for the Commonwealth increased the valuation of two items which were included on the inheritance tax return, and included a third item which the executors had omitted. The first item reappraised was the decedent's undistributed share of partnership profits from his law firm. The Commonwealth's appraisement was $35,501.54. Appellees assert that the true value of the asset for Pennsylvania inheritance tax purposes is $22,799.00. The difference in valuation accurately reflects the amount of federal and state income tax which was properly paid on this item by the Estate since the item was "income in respect of a decedent," which had accrued to the decedent, but on which no income tax had been paid by the decedent because the decedent was a cash basis taxpayer.

The second item reappraised was the decedent's right to receive proceeds from the sale of 200 shares of common stock of Joy Manufacturing Company from the brokerage house of Parker/Hunter, Inc., which proceeds were also stipulated as "income in respect of a decedent." The executors valued this item at $12,734.85 and the Commonwealth appraised the item at $14,083.86. Again, the differential was the amount of federal and state income tax which the executors paid on the item.

The third item under contention is the amount of $1,635.68 representing post-mortem dividends, accumulated dividends, and returns of unearned premiums arising from several insurance policies on decedent's life which benefits were not listed by the executors as assets of the decedent's taxable estate. The Commonwealth asserts that these items are taxable assets. Appellees insist that these assets are not taxable for Pennsylvania inheritance

[ 465 Pa. Page 59]

    tax purposes because they are proceeds of insurance on the life of decedent which were payable directly to beneficiaries other than decedent's estate, and as such, they are specifically exempted from inheritance tax by the Inheritance and Estate Tax Act of 1961, June 15, P.L. 373, article III, § 303, 72 P.S. § 2485-303.

We affirm that portion of the lower court's decree which allowed a devaluation to reflect income taxes paid but remand that portion of the decree which determined that the additional insurance benefits were "proceeds of insurance."


The auditing judge ruled that the value of decedent's accrued income items (the undistributed share of partnership profits and the right to proceeds from the sale of stock) should reflect the deferred payment of federal and Pennsylvania income taxes payable in these accrued income items. The opinion and the order below relied on the decision in Tench Estate, 23 Fiduc.Rep. 478 (C.P.Allegheny, 1973)*fn2 which was never appealed by the Commonwealth. In Tench, the decedent owned a one-third interest in a partnership through which the payments on accounts receivable flowed. As in the present case, this accrued item represented "income in respect of a decedent" for federal income tax purposes. Int.Rev.Code of 1954, § 691.*fn3 On such items of income, the estate

[ 465 Pa. Page 60]

    or beneficiary is liable to pay federal income tax. The Tench court reasoned that the asset contained in built-in encumbrance so that if the Pennsylvania inheritance tax value were the full present worth of the receivable, the result would be the imposition of Pennsylvania inheritance tax upon federal income taxes. The only substantial difference between Tench and the present case is that appellees here received a devaluation for the amount of Pennsylvania income taxes paid as well as for federal income taxes.

The Commonwealth's alleged statutory basis for the taxation of the full value of the two items of "income in respect of a decedent" begins with Section 401 of the Inheritance and Estate Tax Act of 1961, 72 P.S. § 2485-401. Under the heading of "Method of computation of tax; residents," this section states that ". . . the tax shall be computed upon the value of the property, in excess of the deductions hereinafter specified, at the rates in effect at the transferor's death." Appellees readily concede that deductions for income taxes imposed after the decedent's death are not provided for in the Act and that deductions not specifically enumerated are not allowable. Inheritance and Estate Tax Act, §§ 601, 621, 72 P.S. §§ 2485-601, -621; Lazar Estate, 437 Pa. 171, 260 A.2d 734 (1970). Since no deduction is allowable, the Commonwealth argues that the word "value" in Section 401 is necessarily the gross value of the assets reduced to present worth with no allowance in the valuation for the federal and state income taxes paid.*fn4

[ 465 Pa. Page 61]

The gist of appellees' argument is that because of a technical change in federal tax law in 1942, unaccompanied by any substantial change in Pennsylvania inheritance tax law, the taxation by the Commonwealth of that portion of the decedent's estate which represents federal and state income tax is a windfall to the Commonwealth and unfair.

[ 465 Pa. Page 62]

As the auditing judge (McKenna, P. J.) pointed out in his opinion, prior to 1942, the death of a taxpayer owning an accrued income asset caused an immediate acceleration of the federal income tax obligation attached to that asset. The accrued income was reported on the decedent's final federal income tax return, Helvering v. Estate Page 62} of Enright, 312 U.S. 636, 61 S.Ct. 777, 85 L.Ed. 1093 (1941), and the income tax attributable thereto was deductible as a debt of the decedent for Pennsylvania Inheritance Tax purposes. Cf. Payne Estate, 48 Pa.D. & C. 578 (O.C.Erie, 1943).

After 1942, however, the Internal Revenue Code shifted this income tax burden to the decedent's estate or to the beneficiaries. Hence, the income tax obligation was no longer technically a debt of the decedent, thus enabling the Department of Revenue to successfully assert for many years that the income tax was non-deductible. The Pennsylvania Personal Income Tax Act of 1971 similarly imposes the burden of paying the tax upon the estate or beneficiary, 1971, March 4, P.L. 6, No. 2, § 305, added 1971, August 31, P.L. 368, No. 93, § 4, 72 P.S. § 7305 (Cum.Supp., 1975-76).

Faced with the non-deductibility of federal and state income tax from Pennsylvania inheritance tax obligations, the executors successfully persuaded the lower court that, for purposes of valuation, the federal and state income taxes paid may not be included in the present worth of the accrued income items. According to appellees, the unfairness in the Commonwealth's attempted valuation scheme lies in the facts that the Commonwealth's valuation does not reflect the real economic position of the beneficiaries and that Pennsylvania inheritance tax will be paid upon Pennsylvania income tax and upon federal income tax. This amounts to two counts of double taxation.

The federal and state governments may generally tax the same subject matter at the same time and neither the United States nor the state, in determining the amount of tax due to it, is under constitutional obligation to make any allowance on account of the tax of the other. Frick v. Pennsylvania, 268 U.S. 473, 499, 500, 45 S.Ct. 603, 69 L.Ed. 1058 (1925), affirming in part, Frick Estate, 277 Pa. 242, 121 A. 35 (1923).

[ 465 Pa. Page 63]

Similarly, there is no constitutional prohibition which prevents the state from taxing the same subject matter twice, Puntureri v. Pittsburgh School District, 359 Pa. 596, 60 A.2d 42 (1948), so long as the taxes are of a different kind, Commonwealth v. Harrisburg Light & Power Co., 284 Pa. 175, 130 A. 412 (1925), and do not violate the requirement of uniformity contained in Article VIII, Section 1 of the Pennsylvania Constitution. Dunkard Township School Tax Case, 359 Pa. 605, 60 A.2d 39 (1948); Plumy v. Philadelphia School District, 182 Pa. Super. 122, 126 A.2d 768 (1956).

However, because of the harshness which results from double taxation, the courts of this Commonwealth have developed certain rules of construction to insure that double taxation is not imposed arbitrarily. Thus, if the intent of the Legislature is unclear in imposing double taxation, there is a presumption against such a legislative purpose, which can only be overcome by express statutory language. Dixon's Case, 138 Pa. Super. 385, 11 A.2d 169 (1940); Arrott's Estate, 322 Pa. 367, 185 A. 697 (1936); Commonwealth v. Harrisburg Light & Power Co., supra. Statutes and ordinances will be construed to avoid double taxation if such construction is possible. Puntureri v. Pittsburgh School District, supra; Paul's Estate, 303 Pa. 330, 154 A. 503, cert. denied, 284 U.S. 630, 52 S.Ct. 13, 76 L.Ed. 536 (1931); Plumy v. Philadelphia School District, supra. These rules would appear to be corollaries of the more basic principle that a statute imposing a tax must be strictly construed,*fn5 and all reasonable doubt must be resolved in favor of the taxpayer. Pickering Estate, 410 Pa. 638, 190 A.2d 132 (1963); Loeb Estate, 400 Pa. 368, 162 A.2d 207 (1960).

Our issue thus narrows itself to whether the Legislature clearly expressed an intent that no allowance be granted in the ...

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