1998 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

4-24-1998

Estate of Meriano v. Commissioner IRS

Precedential or Non-Precedential:

Docket 96-7329

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Recommended Citation

"Estate of Meriano v. Commissioner IRS" (1998). 1998 Decisions. Paper 90.

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Filed April 24, 1998 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

No. 96-7329 

ESTATE OF PHILIP MERIANO, DECEASED, 

ANITA PANEPINTO, ADMINISTRATRIX, 

 Appellant 

v. 

COMMISSIONER OF INTERNAL REVENUE SERVICE 

On Appeal from an Order of the 

Commissioner of the Internal Revenue 

(Action No. 81-26622) 

Argued on January 31, 1997 

Before: BECKER,1 Chief Judge and ROTH, Circuit Judges, 

and BARRY,2 District Judge 

(Opinion Filed April 24, 1998) 

James S. Tupitza, Esquire 

Tupitza & Marinelli 

212 West Gay Street 

West Chester, PA 19380 

_________________________________________________________________ 

1. Honorable Edward R. Becker assumed Chief Judge status as of 

February 1, 1998. 

2. Honorable Maryanne Trump Barry, United States District Court Judge 

for the District of New Jersey, sitting by designation. 
 Stephen D. Hamilton, Esquire 

 (Argued) 

 Alfred W. Putnam, Jr., Esquire 

 Drinker, Biddle & Reath 

 1345 Chestnut Street 

 Philadelphia National Bank Building 

 Philadelphia, PA 19107 

 Attorneys for Appellant 

 Loretta C. Argrett 

 Assistant Attorney General 

 Gary R. Allen 

 David I. Pincus 

 Kenneth Rosenberg (Argued) 

 United States Department of Justice 

 P.O. Box 502 

 Washington, D.C. 20044 

 Stuart L. Brown, Esquire 

 Internal Revenue Service 

 1111 Constitution Avenue, S.W. 

 Washington, D.C. 20224 

 Attorneys for Appellee 

OPINION OF THE COURT 

ROTH, Circuit Judge: 

In this case, we must decide whether an estate is entitled 

to a theft loss deduction under the federal tax code for 

funds wrongfully paid out from an estate and never 

returned. The decedent, Philip Meriano, left an estate that 

included over one million dollars worth of bearer bonds. 

The bonds had been stolen from Meriano but were later 

returned to the estate. Excessive fees and costs were 

charged against the estate by the stockbroker and the 

attorney/investigator who had retrieved the bonds and 

administered the estate. The IRS assessed the estate with a 

deficiency. The estate then claimed before the U.S. Tax 

Court that the stockbroker and the attorney/investigator 

had committed theft under Pennsylvania state law and that 

 2 
the estate was therefore entitled to a deduction for its loss 

pursuant to 26 U.S.C. S 2054. The tax court denied the 

deduction and the estate appealed. For the following 

reasons, we will reverse the tax court's decision and allow 

the estate its deduction. 

I. FACTS 

The facts of this case were set forth in great detail by the 

tax court. We will recount only those facts that are relevant 

to the issues on appeal. Philip Meriano died on November 

14, 1977. Four months earlier, a fire at Meriano's residence 

had destroyed documentation of his ownership of municipal 

bearer bonds with a face value of approximately two million 

dollars. Not long after the fire, Meriano notified the 

Philadelphia Police Department that the bonds themselves 

were missing from a safe located in an area of the residence 

damaged by the fire. 

When Meriano died, his elderly sister, Mary Orlando, was 

appointed administratrix of his estate, under the 

assumption that he had died intestate. With the help of her 

husband, Anthony, Mary Orlando attempted to locate the 

missing securities. She was not successful until her 

husband asked Edward Reardon, a stock broker, for help. 

Reardon, in turn, contacted John Lynch, an attorney and 

investment banker who had experience in the field of 

municipal bonds. 

On August 7, 1978, Mary Orlando signed a contingent fee 

agreement with Lynch to compensate him in the event he 

recovered any of the missing securities. Under the 

agreement, Lynch was to receive one-third of the face value 

of any securities recovered prior to the filing of a lawsuit. If 

any securities were recovered after suit was filed, Lynch 

was to receive forty percent of the face value. Orlando and 

Lynch both signed the document; Orlando's husband, 

Anthony, and her daughter, Connie Kates, both signed as 

witnesses. The agreement contained no provision for

Reardon's payment, nor did Reardon sign it. See Appendix, 

at 52. 

Shortly after executing his agreement with Orlando,

Lynch entered into a separate agreement with Reardon, 

 3 
under which Reardon would assist Lynch with his search 

for the stolen bonds and Lynch would compensate him with 

15 percent of the face value of any of the securities that 

were recovered. 

Lynch and Reardon eventually traced the securities to an 

account held by Philip Meriano's former housekeeper, Italia 

Bossi. Based on information from Reardon and Lynch, the 

FBI on May 1, 1979, was able to confiscate bearer bonds 

having a value of $1,823,000 from the Bossi's residence in 

San Diego. Bossi and her husband were brought back to 

Philadelphia, where they were charged with arson and 

theft. Their trial resulted in a hung jury. After the 

government failed to convict them, the Bossis requested 

that the FBI return the bonds to them. 

In December 1979, Lynch retained his brother's law firm, 

Groen, Smolow and Lynch, to assist the estate in any civil 

suits necessary to protect the value of the recovered bearer 

bonds. Lynch also retained Groen, Smolow as general

counsel for the estate. When the U.S. Attorney decided in 

1980 to forego a second trial of the Bossis, the estate and 

the Bossis both filed civil actions in the U.S. District Court 

for the Eastern District of Pennsylvania to get control of the 

securities. 

That same year, the estate settled the suits with the 

Bossis. Under the settlement agreement, the estate 

recovered securities with a face value of $1,623,000 and a 

fair market value of $1,146,446. Without the help of Lynch 

and Reardon, the estate would have not recovered these 

securities. 

Along with the Green, Smolow law firm, Lynch continued 

to represent the estate. On April 10, 1980, Lynch and 

Anthony Orlando deposited the recovered securities in a 

safety deposit box at the Provident bank. That same day, 

Lynch and Reardon signed a "hold harmless" agreement 

with Mary Orlando. The agreement stated in pertinent part: 

 Dated as of this 10th day of April, 1980, in

 consideration of the disbursement of certain funds 

 deemed earned as professional fees pursuant to prior 

 agreements with Mary Orlando, in her capacity as the 

 duly appointed Administratrix of the Estate of Philip 

 4 
 Meriano, Edward J. Reardon, Jr. and John T. Lynch 

 Jr., Esquire, agree(s) to INDEMNIFY AND HOLD

 HARMLESS the Estate of Philip Meriano and Mary 

 Orlando, the Administratrix of the Estate and against 

 any and all claims and loss, which the Estate and/or 

 the Administratrix may hereafter suffer or pay by 

 reason of any claims against the Estate or the 

 Administratrix or as a result of the disbursement of 

 said funds of the Estate in payment of professional fees 

 and hereby agree to repay any and all amounts 

 received that are determined by a court of proper 

 jurisdiction to be returnable to the Estate.

Appendix, at 109 (emphasis added). Both Reardon and

Lynch signed the agreement. 

Sometime after this agreement was executed, Lynch 

transferred the securities from the safety deposit bank to 

an account at Kidder, Peabody & Co. On April 29, 1980, 

Mary Orlando signed an agreement authorizing Lynch to 

buy, sell or otherwise transact business with the securities. 

Under the terms of this agreement, Orlando agreed that she 

would "waive notification . . . of any of the aforementioned 

transactions and delivery of any statements, notices, or 

demands pertaining thereto and hereby ratify any and all 

transactions heretofore or hereafter made by [Lynch] on or 

for [the] account." Appendix, at 110. 

In addition to creating the estate's account, Lynch and 

Reardon also established individual accounts with Kidder, 

Peabody. Over the next three years, Lynch transferred some 

of the estate's bonds to his individual account. From this 

account, Lynch liquidated the securities and used the 

proceeds to pay himself and Reardon, and also to pay the 

Groen, Smolow law firm, which sought fees for general 

services to the estate and for costs associated with the 

recovery of the stolen bonds. The trial record reflects that 

Lynch did not keep organized records of the transfers of the 

bonds from the safe deposit box to the estate's Kidder, 

Peabody account. Similarly, Lynch did not record in an 

organized fashion the withdrawals from the estate's account 

at Kidder to his own individual account. See Appendix, at 

272-273. 

 5 
On December 9, 1980, Mary Orlando filed a petition with 

the Orphans' Court for approval of attorney and related fees 

paid to Lynch and Reardon. Because there was some 

uncertainty as to the proper personal representative of the 

estate (see discussion below), the Orphans' Court deferred 

action on the petition until the estate filed an accounting 

with the auditing judge of the court. See Appendix, at 87. 

Notwithstanding the court's deferral, however, Orlando 

approved payment of $418,250 to Lynch and $250,950 to 

Reardon in a document signed by Mary Orlando and 

witnessed by her husband and her daughter.3 

The Will Contest 

In August of 1980, Anita Panepinto, a niece of Meriano's 

deceased wife, discovered a will executed by Meriano and 

dated November 17, 1973. She also found a codicil, dated 

December 2, 1973. The will and codicil named Panepinto 

and another niece, Elaine Hernardi, as beneficiaries of the 

estate. On August 30, 1980, Panepinto presented the will to 

the Register of Wills in Philadelphia. 

Two years later, the will recovered by Anita Panepinto 

was admitted to probate. The Register of Wills then revoked 

Mary Orlando's position as administratrix and appointed 

Panepinto as administratrix, c.t.a (cum testamento annexo).4 

In 1983, Panepinto filed a motion in the tax court to 

substitute herself for Mary Orlando as the estate 

representative in the present proceeding. 

Orlando and Kates contested the will. By 1986, however, 

Panepinto and Orlando had resolved their differences and 

agreed to settle their competing claims to the Meriano 

_________________________________________________________________ 

3. This agreement is marked "approved by court 3-9-81." This notation 

refers to an order by Judge John B. Hannum, of the United States 

District Court for the Eastern District of Pennsylvania, approving fees. 

Judge Hannum had presided over the litigation between the estate and 

the Bossis with regard to the disposition of the stolen securities. On 

October 2, 1981, Judge Hannum vacated this order of approval on the 

ground that he had lacked ancillary jurisdiction to approve the fees in 

the first place. See Appendix, at 108; 138-139; 426-27. 

4. An administrator c.t.a. has the same powers as an executor of an 

estate. See 20 Pa. C.S. S 3325. 

 6 
estate. Under the terms of the settlement, Panepinto agreed 

to release Orlando and her surety, INA, from any future 

surcharge liability. Orlando and Kates withdrew their will 

contest on December 19, 1986. 

The Orphans' Court Proceedings 

On March 30, 1983, Panepinto filed two petitions with 

the Orphans' Court, which sought reimbursement of all 

fees paid to Lynch and Reardon. According to Panepinto, 

the fees were grossly excessive, and the agreements signed 

by Orlando, the former administratrix, were unconscionable 

as a matter of law. 

In an attempt to determine what was left in the estate 

and what Lynch had disbursed to himself and his 

colleagues, the Orphans' Court ordered Mary Orlando to file 

an accounting with the court. Orlando, who was by this 

time represented solely by Lynch and no longer by the 

Groen Smolow law firm, did not do so. As a result, the 

Insurance Company of North America (INA), which had

acted as surety on Orlando's administratrix bond, filed the 

requested accounting with the court. According to the 

testimony of Robert Boote, an attorney retained by INA, 

Lynch had failed to maintain organized records for the 

estate and had not been forthcoming in providing 

appropriate records. 

Boote prepared a First and Final Account of Mary 

Orlando, which INA, as surety, filed on March 30, 1983. 

That account showed that the estate had paid Reardon 

$220,000 in fees and Lynch $415,761 in fees. INA 

eventually attributed additional fees to Lynch, for a total of 

$500,761.19. Reardon also received an additional $30,950 

from Lynch on April 15, 1981, for a total of $250,950. See 

Appendix at 584. 

Judge Kendall Shoyer of the Orphans' Court conducted 

an audit of the estate between May 2, 1986, and March 24, 

1987. Judge Shoyer then considered Panepinto's motion to 

reduce or deny part or all of the fees paid out by the estate 

to Lynch and Reardon. As a result of the audit, Judge 

Shoyer ordered Lynch and Reardon to reimburse a portion 

of their fees to the estate. In doing so, Judge Shoyer 

 7 
criticized Lynch's poor ethics as an attorney, particularly 

Lynch's unilateral removal of the securities from the estate, 

his failure to keep adequate records, and his failure to 

cooperate with the preparer of the account. See Estate of 

Meriano, No. 2259 (Orphans' Court Division, Court of 

Common Pleas of Philadelphia, filed September 21,1988). 

With regard to Lynch's fee, Judge Shoyer held that a 

reasonable fee should be based on the fair market value 

and not the face value of the securities, notwithstanding 

Lynch's written agreement with Orlando. In addition, Judge 

Shoyer held that Lynch's contingent fee should be reduced 

from 40 percent to 35 percent of the fair market value of 

the bonds due to his lack of cooperation with INA's

preparation of the estate's final account. Finally, Judge 

Shoyer allowed Lynch to credit only a portion of the fees he 

had paid out to the Groen, Smolow law firm. As a result, 

the Orphans' Court judged Reardon liable for $78,983.10, 

plus six percent interest from the dates he received the 

funds from the estate. Judge Shoyer assessed Lynch's debt 

to the estate to be $99,505.09, which represented the 

difference between the amount he had taken and the 

amount to which he was entitled. Judge Shoyer added

$7,500 to this amount due to Lynch's failure to account for 

unexplained "costs" for which he had disbursed funds from 

the estate on February 16, 1980. 

All of the parties took exception to the court's 

adjudication. As a result, the Orphans' Court sitting en 

banc reheard the case and issued a new schedule of 

surcharges. See Estate of Meriano, No. 2259 (Orphans' 

Court en banc, filed August 1, 1989). First, the en banc 

court agreed with Judge Shoyer that the contingent fee 

should be based on the fair market and not face value of 

the bonds. In addition, the Orphans' Court sitting en banc 

credited Lynch for several disbursements to the Groen law 

firm that had not been recognized by Judge Shoyer. Lynch's 

surcharge therefore was initially reduced to $23,559.09. 

This reduction, however, did not end the matter of 

excessive fees. 

The Orphans' Court expressed concern that, even after 

adjusting Lynch and Reardon's fees for fair market value 

 8 
instead of face value, the fees were still too high. The court 

explained: 

 Although the auditing judge does not expressly address 

 the issue, it is clear from the amounts of compensation 

 awarded to Lynch and Reardon that he found that 

 Lynch was to receive 35% of the market value of the 

 [recovered] bonds and that Reardon was to receive 15% 

 of the market value of the bonds that each man was 

 compensated from the gross estate. We are of the 

 opinion that an allowance of 50% of the market value 

 of the assets recovered is unreasonable and excessive 

 and was error for the auditing judge to allow that 

 amount of compensation. 

En banc opinion, at 20. According to the Orphans' Court, 

Lynch should have paid Reardon out of his own funds and 

not those contained in the gross estate. Id. The Orphans' 

Court therefore ordered Lynch to pay Reardon's fair market 

fee, $171,966.90, back to the estate, in addition to the 

$23,559.09 he already owed for the overpayment on his 

own fee. In addition, Lynch was to pay six percent interest 

on these sums, from the date of receipt until the day the 

money was reimbursed. Id. 

Once more, the parties appealed the decision of the

Orphans' Court. The Superior Court affirmed it per curiam 

on June 13, 1990. In re Estate of Meriano, 579 A.2d 423 

(Pa. Super. 1990). The Pennsylvania Supreme Court 

refused to hear Lynch's petition for appeal on January 15, 

1991. In re Estate of Meriano, 593 A.2d 421 (Pa. 1991). 

Thus, Lynch remained liable to the estate for a total sum of 

$195,525.99, plus six percent interest running from the 

date of receipt of the funds.5 Reardon owed the estate 

$78,983.10, plus six percent interest. 

Neither Reardon nor Lynch adhered to their obligations. 

_________________________________________________________________ 

5. The parties stipulated that Lynch owed $195,516.00, which is $9.99 

less than the sum of $171,966.90 and $23,559.09. See Joint Stipulation 

of Facts, at P20. This discrepancy, however, appears to be the result of 

a simple arithmetic mistake since the Joint Stipulation states the correct 

sums that were to be added in order to determine Lynch's total liability. 

See id. 

 9 
Lynch attempted to declare bankruptcy in 1989, but had 

his petition dismissed in 1990, due to his failure to file 

required schedules. In his petition for bankruptcy, Lynch 

listed the estate as a creditor for the sum of $225,000. After 

his attempt to declare bankruptcy failed, Lynch never paid 

any of the money he owed to the Meriano estate. 

Unlike Lynch, Reardon apparently maintained some 

contact with the estate and entered into a settlement 

agreement for an undisclosed amount that was less than 

the sum charged to him by the Orphans' Court. The tax 

court noted that one of the estate's attorneys filed a status 

report on March 19, 1990, in which the attorney reported 

that all claims against Reardon had been settled. Of the 

amount negotiated by settlement, Reardon paid only 

$25,000. 

The Present Proceeding 

This proceeding began when the Commissioner served 

the estate with a Notice of Deficiency in the amount of 

$732,106.81. In addition, the estate was assessed 

$366,053.41 for fraud pursuant to 26 U.S.C. S 6653(b). The 

Commissioner commenced proceedings against the estate 

in 1981. Over the last fifteen years, the parties have settled 

many of the issues regarding the estate's tax deficiency. See 

Stipulation of Disposition of Issues, filed September 3, 1985; 

Second Stipulation of Disposition of Issues, filed November 

26, 1993; Joint Stipulation of Facts, filed December 5, 1994. 

A special trial judge heard this case in December of 1994. 

The trial judge concluded, inter alia, that the estate was not 

entitled to a theft loss deduction for the funds which Lynch 

and Reardon had failed to return to the estate despite the 

order of the Orphans' Court that they do so. The tax court 

adopted the trial judge's findings and conclusions in an 

opinion filed February 15, 1996. See Estate of Meriano v. 

Commissioner, T.C. Memo 1996-58, 1996 WL 64854 

(U.S.T.C. filed February 15, 1996). The estate now appeals 

the tax court's denial of its theft loss deduction.

 10 
II. DISCUSSION 

The tax court determined that the estate was entitled 

neither to a theft loss deduction nor to a deduction for a 

portion of the administrative expenses taken by its

attorneys. See Estate of Meriano, T.C. Memo 1996-58 at 84, 

101. The estate does not appeal the tax court's disposition 

of issues regarding the deductibility of administrative 

expenses. Consequently, our concern is whether the estate 

is entitled to theft loss deduction for some or all of the 

money owed to it by Reardon and Lynch.6 We exercise 

jurisdiction over the tax court's decision pursuant to 16 

U.S.C. S 7482(a). We review the tax court's legal 

determinations de novo. We do not disturb the tax court's 

factual findings unless they are clearly erroneous. See Gulf 

Oil Corp. v. Commissioner, 914 F.2d 396, 399 (3d Cir. 

1990). 

The estate maintains that it is entitled to an appropriate 

theft loss deduction for the portion of Lynch and Reardon's 

withdrawals that were adjudged excessive by the Orphans' 

Court but never reimbursed to the estate. Section 2054 of 

the tax code provides that: 

 [T]he value of the taxable estate shall be determined by 

 deducting from the value of the gross estate losses 

 incurred during the settlement of estates arising from 

 fires, storms, shipwrecks, or other casualties, or from 

 theft, when such losses are not compensated for by 

 insurance or otherwise. 

26 U.S.C. S 2054. Because Section 2054 has generated 

_________________________________________________________________ 

6. The estate also raises several evidentiary issues on appeal. According 

to the estate, the tax court committed error reversible error when it: (1) 

failed to admit "expert" testimony regarding the proper interpretation of 

Pennsylvania criminal law; (2) refused to admit the Orphans' Court 

opinions as well as the testimony contained within those proceedings of 

Anthony Orlando, who had died by the time the tax court proceeding 

was under way; (3) rejected the estate's request to treat Lynch and 

Reardon as hostile witnesses on direct examination; and (4) prevented 

the estate from proffering evidence that Lynch might have commingled 

funds or hidden assets while he was managing the estate's securities. 

In light of our holding, we need not address the merits of these issues. 

 11 
relatively little case law, we must examine those cases that 

have defined "theft" as it appears in Section 165, which 

permits taxpayers to take theft loss deductions on their 

income tax.7 See Estate of Max Schlensky v. Commissioner, 

T.C. Mem. 1977-148, 1997 WL 3444. 

"Theft," as it appears in Sections 165 and 2054, is

defined by the jurisdiction in which the loss has occurred. 

See e.g. Lombard Brothers, Inc. v. United States, 893 F.2d 

520, 523 (2d Cir. 1990); Bagur v. Commissioner, 603 F.2d 

491, 501 (5th Cir. 1979); Bellis v. Commissioner , 540 F.2d 

448, 449 (9th Cir. 1976).8 The estate and Commissioner 

agree that, to the extent state law controls the outcome of 

this case, the applicable law is that of Pennsylvania. See 

Joint Stipulation of Facts, P 28. The estate must prove its 

entitlement to the deduction by a preponderance of 

evidence. See Howard v. United States, 497 F.2d 1270, 

1272 n.4 (7th Cir. 1974); Farcasanu v. Commissioner, 436 

F.2d 146, 150 n.3. (D.C. Cir. 1970). See also Tax Court 

Rule 142(a). 

According to the estate, the facts of this case amount to 

theft under two provisions of Pennsylvania's Criminal Code: 

18 Pa.C.S. S 4113, for misapplication of entrusted property; 

and 18 Pa.C.S. S 3927, for theft by failure to make required 

disposition of funds received. Because Section 3927

adequately resolves this case in the estate's favor, we will 

not consider whether the estate is also eligible for a theft 

loss deduction under Section 4113. 

Section 3927 provides in pertinent part: 

 (a) Offense defined- A person who obt ains property 

 upon agreement, or subject to a known legal obligation, 

_________________________________________________________________ 

7. Section 165(c)(3) allows a taxpayer to take a deduction for "losses of 

property not connected with a trade or business or a transaction entered 

into for profit, if such losses arise from fire, storm, shipwreck or other 

casualty, or from theft." 26 U.S.C. S165(c)(3). 

8. "[T]he exact nature of the crime, whether larceny or embezzlement, of 

obtaining money under false pretenses, swindling or other wrongful 

deprivations of the property of another, is of little importance so long 

as 

it amounts to theft." Edwards v. Bromberg, 232 F.2d 107, 111 (5th Cir. 

1956). 

 12 
 to make specified payments or other disposition, 

 whether from such property or its proceeds or from his 

 own property to be reserved in equivalent amount, is 

 guilty of theft if he intentionally deals with the property 

 obtained as his own and fails to make the required 

 payment or disposition. The foregoing applies 

 notwithstanding that it may be impossible to identify 

 particular property as belonging to the victim at the 

 time of the failure of the actor to make the required 

 payment or disposition. 

18 Pa.C.S. S 3927(a). The Pennsylvania Supreme Court has 

interpreted Section 3927 as consisting of four elements: 

 1. The obtaining of property of another; 

 2. Subject to an agreement or known legal obligation 

 upon the recip[ient] to make specified payments or 

 other disposition thereof; 

 3. Intentional dealing with the property obtained as the 

 defendant's own; and 

 4. Failure of the defendant to make the required 

 disposition of the property. 

Commonwealth v. Turrell, 584 A.2d 882, 884 (Pa. 1990), 

quoting Commonwealth v. Ohle, 470 A.2d 61, 69 (Pa. 1983) 

and Commonwealth v. Crafton, 240 Pa.Super. 12, 16, 367 

A.2d 1092, 1094-95 (1976). See also Commonwealth v. Van 

Nest, 517 Pa. 44, 50, 534 A.2d 473, 476 (Pa. 1987). Before 

we decide whether the estate has demonstrated the 

existence of these four elements, we must first address the 

Commissioner's contention that the Section 3927 contains 

a fifth element, the presence of "thieving intent."

A. Thieving Intent 

According to the Commissioner and the tax court, the 

estate is ineligible for a theft loss deduction because it 

failed to prove that Lynch or Reardon possessed "thieving 

state[s] of mind" when they charged excessive fees to the 

estate and failed to pay them back at the request of the 

Orphans' Court. See Meriano, T.C. Memo 1996-58 at 76, 

84. We believe the tax court's has misconstrued 

Pennsylvania's criminal law. 

 13 
We find nothing in Pennsylvania case law to support the 

proposition that the presence of thieving intent is a 

separate and additional element of liability under Section 

3927. Neither of the two Pennsylvania Superior Court 

decisions cited by the tax court demonstrate the existence 

of a fifth element under Section 3927. See Commonwealth 

v. Kuykendall, 465 A.2d 29, 31-32 (Pa. Super. 1983); 

Commonwealth v. Shaffer, 420 A.2d 722, 726 (Pa. Super. 

1980). Neither Kuykendall nor Shaffer even mention Section 

3927. Instead, both cases stand for the unextraordinary 

principle that a person who has misappropriated property 

can be prosecuted under 18 Pa. C.S. S 3925 as a receiver of 

property, so long as that person possesses a "thieving state 

of mind." This result follows from 18 Pa. C.S.S 3902, which 

consolidates all theft offenses at trial. Thus, a defendant 

accused of one type of theft under one section of 

Pennsylvania's Crime Code may be convicted with evidence 

demonstrating a different type of theft under the Code. 

Section 3902 thus establishes that theft is a unitary offense 

in Pennsylvania. Under this consolidation of theft offenses, 

a "thieving state of mind" is the essence of a theft charge. 

Commonwealth v. Robichow, 487 A.2d 1000, 1003 (Pa. 

Super. 1985) (quoting Shaffer, 420 A.2d 722). The 

Commissioner contends that it is this "thieving state of 

mind" that is lacking here. 

However, the Superior Court elaborated on the unitary 

concept of theft under the Pennsylvania criminal code in 

Robichow. There, the Superior Court explained that, under 

Section 3927, the taking of another's property subject to a 

known obligation and the intentional disposition of it as 

one's own constituted the "thieving state of mind" necessary 

to prove theft. See Robichow, 338 Pa. Super. at 356, 487 

A.2d at 1004-1005. Thus, Robichow did not treat "thieving 

intent" as a separate element of Section 3927. To the 

contrary, it held that such intent was present when the 

four traditional elements of the offense were already 

present. 

We are aware that ultimately our determination of this 

issue turns on the pronouncements of Pennsylvania's

highest court, not its Superior Court. "[W]hen federal courts 

are required to interpret or apply state law, we consider and 

 14 
accept the decisions of the state's highest court as the 

ultimate authority of state law." Colantuno v. Aetna Ins. Co., 

980 F.2d 908, 909 (3d Cir. 1992). Of the recent 

Pennsylvania Supreme Court cases discussing Section

3927, none has even mentioned the concept of "thieving 

intent," much less treated it as a separate prerequisite for 

criminal liability. See e.g. Turrell, 584 A.2d at 884 (criminal 

violation occurs when individual "evinces intent not to 

make the required payment or disposition"). Based on the 

Pennsylvania Supreme Court's discussion of Section 3927, 

we must conclude that "thieving intent" insofar as it is an 

element of an offense under section 3927, is established 

when the elements of the taking of another's property 

subject to a known obligation and of the intentional 

disposition of it as one's own have been established. It is 

not a separate fifth element of this crime. In sum, we do 

not think that the Commissioner's reading of Section 3927 

represents an accurate interpretation of Pennsylvania 

criminal law. 

B. Liability for Theft Under Section 3927 

Having rejected "thieving intent" as a fifth element, we 

now consider whether the estate proved by a 

preponderance of evidence that it was a victim of theft as 

defined by Section 3927. We will examine each element of 

Section 3927 separately. 

 1. Property of another. Under the first element of

Section 3927, the estate must show that Lynch and 

Reardon took "property of another." According to the 

Commissioner, Lynch and Reardon did not acquire 

"property of another" when they converted the estate's 

securities and withdrew a portion of their proceeds from the 

estate prior to the Orphans' Court's approval of their fees. 

We disagree. We believe that under Pennsylvania's probate 

law, the moneys withdrawn from the estate constituted 

"property of another" despite Mary Orlando's prior approval 

of the estate's disbursements to Lynch and Reardon.

Section 3927 does not explicitly refer to "property of 

another." Judicial precedent, however, has made it an 

element of this crime. See e.g. Turrell, 584 A.2d at 884. 

Pennsylvania statutory law defines "property of another" to 

 15 
include "property in which any person other than the actor 

has an interest which the actor is not privileged to infringe, 

regardless of the fact that the actor also has an interest in 

the property." 18 Pa. C.S. S 3901. The Commissioner

maintains that the definition contained in Section 3901 

applies only to statutory uses of the term. We disagree. 

Common sense dictates that the Pennsylvania courts would 

define "property of another" uniformly for all theft offenses, 

regardless of whether that term appears explicitly in the 

statute. At least one court has implicitly defined the 

"property of another" element in Section 3927 by referring 

to Section 3901. See Commonwealth v. Edwards, 582 A.2d 

1078, 1086 (Pa. Super. 1990). 

Applying Edwards and the language of Section 3901, we 

believe that "property of another" includes property in 

which a person has an interest that may not be infringed 

by someone else. Our conclusion is supported by the

Pennsylvania Supreme Court's holding that a victim need 

not maintain absolute title over property to claim theft by 

wrongful disposition of funds received. See Commonwealth 

v. Rosenzweig, 522 A.2d 1088, 1092-93 (Pa. 1987). Thus, 

the estate may prove theft so long as it shows that it had 

some legal interest in the securities withdrawn and

converted by Lynch and Reardon as payment of their fees. 

Our review of Pennsylvania's probate law leads us to 

conclude that, prior to the Orphans' Court's audit and final 

approval of the estate's distribution, the estate maintained 

an interest in the fees withdrawn by Lynch and Reardon, 

and that neither Lynch nor Reardon was entitled to infringe 

this interest, regardless of Mary Orlando's prior approval of 

their fees and withdrawals. 

Although Pennsylvania probate law allows a personal

representative (administrator or executor) to distribute real 

or personal property prior to a court's final disposition of an 

estate's account, the personal representative does so at his 

or her own risk. See 20 Pa. C.S. 3532. "Fiduciaries who pay 

out funds in their hands without an audit of their accounts 

do so at their own risk." In re Free's Estate , 194 A. 492, 

495 (Pa. 1937). See also In re Estate of Comerford, 130 A.2d 

458, 465 n. 11 (Pa. 1957); Estate of Pew, 655 A.2d 521, 

538 (Pa. Super. 1994). Cf. Heaney v. Riddle, 23 A.2d 456, 

 16 
459 (Pa. 1942) (trustees who distributed funds of dissolved 

corporation without prior approval of court did so at their 

own risk and could be held responsible for payments later 

determined to be improper). The Orphans' Court may direct 

the estate's fiduciary to reimburse the estate if, upon 

auditing the estate's final account, the court finds the 

fiduciary's prior distributions to be improper or 

unreasonable. See In re Free's Estate., 194 A. at 495. Since 

Reardon's investigative fee was disbursed to him pursuant 

to the approval of Mary Orlando, the estate's fiduciary and 

personal representative, his fee was subject to the review 

and approval of the Orphans' Court. 

The payment of an attorney's fee prior to the Orphans' 

Court's audit and approval of the estate's account is also 

treated as an at-risk distribution. It is well established that 

the Orphans' Court's may review the reasonableness of the 

attorney's fee and order the estate's personal representative 

to reimburse the estate for some or all of the disbursed fees 

if it finds the fees to be excessive, unreasonable or 

otherwise undeserved. See Estate of Alla Bruner, 691 A.2d 

530, 534 (Pa. Super. 1997) (auditing judge may reduce 

excessive and unreasonable attorney's fees); In re Estate of 

Geniviva, 675 A.2d 306, 313 (Pa. Super. 1996); In re Estate 

of Rees, 625 A.2d 1203, 1206 (Pa. Super. 1993); In re 

Estate of Sonovick, 541 A.2d 374, 376 (Pa. Super. 1988) 

(Orphans' Court has authority to reduce fees and 

commissions of estate's fiduciaries to "reasonable and just" 

level).9 

Ordinarily, the Orphans' Court surcharges the estate's 

fiduciary for the value of excessive fees or wrongful 

appropriations. The Orphans' Court's jurisdiction, however, 

_________________________________________________________________ 

9. In reviewing the reasonableness of an attorney's fees, the auditing 

court considers: 

 the amount of work performed, the character of the services 

 rendered, the difficulty of the problems encountered, the value of 

the 

 property in question, the degree of responsibility involved, the 

 professional skill of the individuals rendering the services, the 

 standing of the attorney in her profession and the ability of the 

 estate to pay a reasonable fee. 

Bruner, 691 A.2d at 534. 

 17 
does not end here. Consistent with its powers as a court of 

chancery, the Orphans' Court may also compel payment 

from the fiduciary's agent when it determines that the agent 

is in possession of assets belonging to the estate. See In re 

Estate of Webb, 138 A.2d 435 (Pa. 1958) (Orphans' Court 

may compel realtors acting as administrators' agents to 

turn over property belonging to decedent's estate); In re 

Watts' Estate, 27 A. 861 (Pa. 1893) (Orphans' Court has 

jurisdiction to compel administrator's attorney to turn 

assets over to estate). 

Thus, the Orphans' Court clearly had the power to review 

Lynch and Reardon's fees, to reduce those fees if it found 

them to be excessive or unreasonable, and to order Lynch 

and Reardon to refund the value of any securities which the 

Court found to be wrongfully taken from the estate. As the 

Pennsylvania Supreme Court proclaimed nearly a century 

ago, "[T]he orphans' court has jurisdictionfinally to decide 

the question of ownership and compel a surrender to a 

decedent's estate of assets improperly held by one whose 

title is colorable only." In re Williams' Estate, 84 A. 848, 852 

(Pa. 1912) (emphasis added). Because, the estate 

maintained a proprietary interest in any distributions prior 

to the Orphans' Court's approval, the funds withdrawn by 

Lynch and Reardon qualified as "property of another." The 

first prong of Section 3927 is therefore satisfied.

 2. Subject to known legal obligation. To prove theft, 

the estate must also show that Lynch and Reardon 

obtained property subject to an agreement or known legal 

obligation to make specified payments or otherwise dispose 

of the property. The record reflects that the estate meets 

this element of Section 3927. 

First, Robert Boote, an attorney familiar with probate 

law, testified at trial that attorneys who took fees from their 

clients prior to an accounting "all know that [they] are 

subject to ultimate approval by the court." Appendix, at 

281-82. The Commissioner did not rebut this testimony. As 

an attorney, Lynch was aware of Pennsylvania probate law. 

Second, Lynch and Reardon both testified at trial that they 

were aware that their fees were subject to the Orphans' 

Court's approval. See Appendix, at 441; 584-85. Finally, the 

hold harmless agreement imposed a contractual obligation 

 18 
on Lynch and Reardon to reimburse the estate for"any and 

all amounts received that are determined by a court of 

proper jurisdiction to be returnable to the Estate." 

Appendix, at 109. 

Thus, both Pennsylvania's probate law and the hold 

harmless agreement voluntarily entered into by Lynch and 

Reardon imposed on them a legal obligation to maintain the 

funds withdrawn from the estate until the Orphans' Court 

approved their fees. The second element of Section 3927 is 

thus present. 

 3. Intentional disposition of property as one's own. 

Both Lynch and Reardon disposed of the funds withdrawn 

from the estate for their own purposes. Lynch testified that 

after he converted and withdrew the securities from the 

estate, he deposited them in an account with some 

personal funds. Appendix, at 444. Shortly after the

Pennsylvania Supreme Court refused to hear Lynch's 

appeal of the Orphans' Court's judgment, Lynch declared 

bankruptcy because he was in "financial distress." 

Appendix, at 432. From this testimony, we conclude that 

Lynch had spent the funds and thus disposed of them as 

his own.10 

As for Reardon, he testified at trial that he had used the 

money to pay his own legal fees and taxes. See Appendix, 

at 589-90. Thus, Reardon treated the remaining funds as 

his own. See Turell, 584 A.2d at 884 (attorney who used 

funds in client's escrow account to pay his own income 

taxes committed theft under Section 3927). 

 4. Failure to make required disposition. Once the 

Orphans' Court issued its judgment, Lynch and Reardon's 

obligation to repay the estate became final. Neither Lynch 

_________________________________________________________________ 

10. The trial court did not permit the estate to present testimony 

demonstrating that Lynch commingled the estate's funds with his own. 

We agree that commingling, by itself, does not demonstrate liability 

under Section 3927. See Turrell, 584 A.2d at 886. However, insofar as 

Lynch's commingling of funds might have been circumstantial evidence 

of his intention to treat the funds as his own, the evidence still may 

have 

been relevant and therefore admissible. We need not address this issue, 

however, since we decide the case in the estate's favor. 

 19 
nor Reardon, however, satisfied the Orphans' Court's 

judgment. 

Lynch has paid the estate nothing since the Orphans' 

Court's judgment was affirmed. At trial, he testified that he 

did not have the funds to do so. Appendix, at 433. Lynch 

therefore committed theft under Section 3927 since he 

failed to dispose of the funds with the estate as directed by 

the Orphans' Court. "[A]ssuming all the other elements 

have been satisfied, once payment is required and an 

attorney fails to make such payment, then a violation of 

S 3927(a) has occurred." Turrell, 584 A.2d at 886 (attorney 

who obtained funds upon express agreement that they be 

held in escrow account committed theft when he failed to 

dispose of them in agreed upon manner). 

Like Lynch, Reardon also committed theft, although the 

facts surrounding his failure to repay the estate are slightly 

more complicated. At trial, Reardon testified that he had 

entered into an agreement with the estate, releasing him 

from the Orphans' Court judgment in an exchange for an 

amount less than that charged to him. The date of the 

agreement, as well as the amount Reardon agreed to pay, 

were not disclosed at trial.11 The parties apparently agree, 

however, that Reardon paid $25,000 to the estate as partial 

satisfaction of his agreement. 

Reardon's release and partial payment of this undisclosed 

sum does not negate our conclusion that he committed 

theft within the meaning of Section 3927. The fact that the 

estate attempted to cut its losses by negotiating a deal with 

Reardon does not negate the fact that it was the victim of 

theft. To the contrary, the Pennsylvania Supreme Court has 

_________________________________________________________________ 

11. The tax court accepted Reardon's testimony that the estate had 

released him from his obligation to pay the Orphans' Court's judgment 

in exchange for a negotiated lesser amount. See Meriano, T.C.Mem. 

1996-58 at 37-38, 39. Although the estate has questioned the validity of 

Reardon's agreement in supplemental briefing before this Court, it has 

not specifically challenged the tax court's finding as clearly erroneous. 

Accordingly, the estate has waived any argument about the authenticity 

of the agreement. See Lunderstadt v. Colafella, 885 F.2d 66, 78 (3d Cir. 

1989) (appellants must raise issue in opening appeal brief to preserve 

it). 

We therefore assume that the agreement is valid. 

 20 
held that a defendant's restitution has no bearing on his 

criminal liability for theft: 

 We agree that criminal liability attaches as soon as the 

 failure to make a required distribution of funds occurs, 

 but reject the view that liability can be negated through 

 a return of the misappropriated funds. The crime is 

 complete when all of its elements have been fulfilled, 

 and, once completed, it cannot be undone. Certainly, 

 where an offender has made restitution, and 

 particularly where restitution has been made before the 

 filing of criminal charges, this can be considered by a 

 sentencing court as a significant factor in mitigation of 

 the punishment to be imposed. Restitution does not, 

 however, negate the fact that a crime has been 

 committed. 

Turrell, 584 A.2d at 886. As soon as Reardon failed to pay 

the Orphans' Court's judgment and spent the money on his 

own legal fees and taxes, he violated Section 3927. Neither 

the estate's release nor Reardon's later payment of $25,000 

negates that fact. 

In sum, the four elements of theft by failure to make 

required disposition of funds received have been satisfied 

by the facts of this case. 

C. Collection Efforts 

Finally, we note that the Commissioner questions the 

authenticity of the estate's theft claim on the ground that 

the estate failed to exercise adequate efforts to collect the 

money owed to it once the Orphans' Court rendered 

judgment against Lynch and Reardon. The Commissioner's 

argument appears to be that if theft "really" had occurred, 

the estate would have been more persistent in its efforts to 

collect the moneys owed to it. The tax court accepted this 

argument when it concluded that "this was merely a fee 

dispute between Lynch and the present administratrix of 

the estate." Meriano, T.C. Memo 1996-58 at 35.12 

_________________________________________________________________ 

12. In describing this situation as "merely a fee dispute," the tax court 

did not take into account the requirement that fees, charged against an 

estate, must receive the ultimate approval of the Orphans' Court. See 

Part II.B.1 and 2, supra. 

 21 
We find the reasoning of the tax court and the 

Commissioner to be without merit. The victim's pursuit of 

the person who has misappropriated its property is not an 

element under Section 3927. We believe that, once the four 

elements of Section 3927 are present, a theft has occurred, 

regardless of whether the victim attempts to retrieve the 

stolen property. Theft is measured by the thief 's, and not 

the victim's, actions and intentions. Thus, it is completely 

irrelevant how much (or little) effort the estate expended in 

trying to get its money back, or whether the estate viewed 

itself as a victim of theft immediately after the Orphans' 

Court rendered its judgment.13 

Our only concern is whether Lynch and Reardon 

obtained property of another, subject to a known legal 

obligation, and then intentionally treated that property as 

their own and failed to make a required disposition of 

property. Having found each of the four elements present in 

this case, we must conclude that they committed theft 

under Pennsylvania law and that the estate was entitled to 

take a theft loss deduction pursuant to Section 2054 of the 

tax code. 

III. THE AMOUNT DEDUCTIBLE 

We now turn to the issue of how much the estate may

deduct for its theft loss under Section 2054. Although the 

estate initially argued in its opening brief that it was 

entitled to deduct the full amount of the Orphans' Court's 

judgment, it eventually conceded in supplemental briefing 

that it could not deduct the $25,000 repaid to it by 

Reardon. Thus, the estate currently claims that it is entitled 

to a deduction of $249,509.09. This amount represents the 

_________________________________________________________________ 

13. We do note that an estate's refusal to collect money owed to it could 

potentially disqualify it for a federal estate tax deduction under Section 

2054. Ordinarily, a taxpayer seeking a theft loss deduction on income 

tax must demonstrate that there is no "reasonable prospect of recovery." 

26 C.F.R. S1.165-1(d)(2)(I) and 1.165-8(a)(2). The Commissioner waived 

any argument with regard to this issue when she stated at trial that 

collection was not in issue. See Appendix at 445, 587, 590 and 614. 

 22 
total amount of money owed to the estate by Lynch and 

Reardon, minus the $25,000 paid by Reardon.14 

Under the tax regulations, when an estate is partially 

compensated for its loss, it may take a deduction on the 

remaining portion. See 26 C.F.R. S 20.2054-1. Since the 

estate has not received any compensation from Reardon 

other than the $25,000, the estate may deduct the 

remainder of Reardon's debt, notwithstanding its agreement 

with Reardon to accept an undisclosed lesser amount. 

IV. CONCLUSION 

Because the estate has demonstrated theft under Section 

3927 of the Pennsylvania criminal code, we will reverse the 

tax court's denial of a theft deduction to the estate. The 

estate is therefore entitled to deduct from its estate taxes 

the sum of $249,509.09, the remainder due to it under the 

Orphan Court's judgment. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

_________________________________________________________________ 

14. We note that the estate is not entitled to deduct the interest the 

Orphans' Court ordered Lynch and Reardon to pay. Federal estate tax 

applies only to the moneys contained in the estate at the time of a 

decedent's death. See generally 26 U.S.C.S 2031(a). Money generated 

after the decedent's death is not included in the gross estate for estate 

tax purposes, but is instead taxed as income under 26 U.S.C. S 641(a)(3) 

for income tax purposes. See Horne v. Commissioner, 91 T.C. 100, 103 

(Tax Court 1988); Bowes v. United States, 593 F.2d 272, 275 (7th Cir. 

1979). Thus, the interest on the excess fees has never been considered 

part of the gross estate for estate tax purposes. The estate therefore may 

not include the interest on Lynch and Reardon's surcharges in its theft 

loss deduction. 

 23