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ESTATE JACOB L. MILLER (04/07/76)

decided: April 7, 1976.

ESTATE OF JACOB L. MILLER, DECEASED. APPEAL OF COMMONWEALTH OF PENNSYLVANIA


COUNSEL

Vincent J. Dopko, Dep. Atty. Gen., Harrisburg, for appellant.

Samuel S. Laucks, Jr., Laucks & Monroe, Fred E. Kilgore, York, for appellee.

Jones, C. J., and Eagen, O'Brien, Roberts, Pomeroy and Nix, JJ. Manderino, J., did not participate in the consideration or decision of this case. Pomeroy, J., filed a dissenting opinion.

Author: Jones

[ 467 Pa. Page 195]

OPINION

Jacob L. Miller died on November 3, 1971, leaving an original will, with various codicils thereto, containing many interlineations and deletions. A "copy fair" was duly probated from which no appeal was taken. The will and its codicils were interpreted by the auditing judge to bequeath the residue of the testator's estate, in trust, for the benefit of his widow for life and, at her death, 61% thereof to pass to certain named charities and the remaining 39% of such residue to continue in trust for the benefit of testator's four children, for their respective lives, with remainder to their issue. The will also contains a provision that all death taxes be paid from the

[ 467 Pa. Page 196]

    residue of the state with authority to the executors to prepay such taxes on future interests.

During the period of administration the executors paid federal estate taxes in the sum of $121,477.21 and Pennsylvania transfer inheritance taxes "on account" in the sum of $35,123.20. Thereafter, on August 22, 1973, pursuant to Section 714(a)*fn1 of the Pennsylvania Inheritance and Estate Tax Act of 1961, as amended, the executors filed an election to prepay the Pennsylvania inheritance taxes on the future interests in the 39% of the residue which, after the widow's death, would ultimately vest in possession in the testator's descendants.

Pursuant to such election, the Commonwealth's appraiser valued such remainder interests, as of the date of such election, at the sum of $457,415.16. This amount constituted (1) $300,814.75 or the undisputed value of the assets existing and present in the residuary trust on the date of the election; plus (2) the previously paid federal estate and Pennsylvania inheritance taxes. This created a tax liability of $131,644.31. It is the estate's contention that it was error for the Commonwealth to add back the previously paid federal estate and Pennsylvania inheritance taxes, and that the estate's tax liability should be determined solely by reference to the value of the residuary trust on the date of the election.

[ 467 Pa. Page 197]

From this valuation by the Commonwealth the estate filed a protest to the Inheritance Tax Board;*fn2 and a decision by the Protest Board was rendered on December 21, 1973, sustaining the valuation of the Commonwealth. The estate appealed the Board's decision to the Court of Common Pleas of York County, Orphans' Court Division, as provided by Section 1003 of the Inheritance and Estate Tax Act of 1961, Act of June 15, 1961, P.L. 373, Art. X, § 1003, 72 P.S. § 2485-1003. The court in an able opinion sustained the estate's contention and modified the appraiser's valuation, holding that it was error for the Commonwealth's appraiser to add back the federal estate taxes in fixing the value of the remainder interests and that it was also error for the appraiser to add back the Pennsylvania inheritance taxes unless a portion of those taxes was paid on account. 24 Fiduc. Rep. 459 (1974). This appeal followed.*fn3

The Commonwealth contends here, as it did before the Court of Common Pleas of York County, that in determining

[ 467 Pa. Page 198]

    the value of the aforesaid remainder interest for inheritance tax purposes, all federal estate and Pennsylvania inheritance taxes theretofore paid must be included, i. e., added back, to increase the total value of the taxable remainder given to the Miller Estate residuary trust. The resolution of this issue depends upon the correct interpretation of the Inheritance and Estate Tax Act of 1961, Act of June 15, 1961, P.L. 373, 72 P.S. §§ 2485-714(a), as amended, and 2485-651. This Act is applicable to estates of decedents dying after January 1, 1962.

Under the Pennsylvania Inheritance and Estate Tax Act of 1961, the tax on a future interest may be paid in any of three ways. First, under Section 713(a), as amended:

"At any time within nine (9) months after the decedent's death, the personal representative or any party in interest may elect, by a writing filed with the register, to have the value of a future interest determined as of the date of decedent's death and to pay the tax assessed thereon."

Second, pursuant to Section 506, the remaindermen may have the interest valued and pay tax thereon as of the date the interest takes effect in possession and enjoyment. Third, under Section 714(a), as amended, the fiduciary, any time following nine months of decedent's death and prior to the future interest taking effect in possession and enjoyment, may elect to prepay the tax on the future interest.

The executors in this case chose to prepay the tax on the residuary trust pursuant to Section 714(a), as amended.*fn4 In conjunction with Sections 713 and 714, as amended, Section 506 of the Act sets forth the valuation date of a future interest as the date it takes effect in possession and enjoyment or, if an election to prepay is made after nine months of decedent's death, then the

[ 467 Pa. Page 199]

    date of said election.*fn5 The Commonwealth is now contesting the conclusion of the court below that no previously paid federal estate tax and Pennsylvania inheritance tax assessed on the prior possessory interests should be added back when computing the value of the remainder interest as of the election date.

The Commonwealth bases its add-back theory in its brief on Section 651 of the Act, which provides:

"E. Future Interests -- Cost and Taxes -- Deductible

All reasonable expenses of administration, incurred after assessment of the inheritance tax on prior interests, and all death taxes paid out of property supporting such prior interests, shall not be included in the appraisement in determining the value of a future interest on the valuation date. This section shall not apply when the tax is paid under the provisions of sections 713(a) and 714(a)."

Act of June 15, 1961, P.L. 373, Art. VI, § 651, 72 P.S. § 2485-651. Thus, the Commonwealth contends that on the date of valuation of the remainder interest the failure to add ...


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