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. e du/thir dc ir c uit_1998/90Filed 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 Judg es, 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 s tatus as of February 1, 1998.

2. Honorable Maryanne Trump Barry, United States Di strict Court Judge for the District of New Jersey, sitting by designat ion.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 e ntitled
to a theft loss deduction under the federal tax cod e for funds wrongfully paid out from an estate and never returned. The decedent, Philip Meriano, left an est ate that
included over one million dollars worth of bearer b onds.
The bonds had been stolen from Meriano but were lat er returned to the estate. Excessive fees and costs we re charged against the estate by the stockbroker and t he attorney/investigator who had retrieved the bonds a nd
administered the estate. The IRS assessed the estat e with a deficiency. The estate then claimed before the U.S. Tax Court that the stockbroker and the attorney/investi gator had committed theft under Pennsylvania state law an d that

2the estate was therefore entitled to a deduction fo r its loss

pursuant to 26 U.S.C. S 2054. The tax court denied the deduction and the estate appealed. For the followin g reasons, we will reverse the tax court's decision a nd allow
the estate its deduction.

I. FACTS

The facts of this case were set forth in great deta il by the tax court. We will recount only those facts that ar e relevant to the issues on appeal. Philip Meriano died on Nov ember 14, 1977. Four months earlier, a fire at Meriano's residence had destroyed documentation of his ownership of mun icipal 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 thems elves 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 hel p of her husband, Anthony, Mary Orlando attempted to locate the missing securities. She was not successful until he r husband asked Edward Reardon, a stock broker, for h elp. Reardon, in turn, contacted John Lynch, an attorney and investment banker who had experience in the field o f 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 fa ce 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. Orl ando and Lynch both signed the document; Orlando's husband, Anthony, and her daughter, Connie Kates, both signe d as witnesses. The agreement contained no provision for Reardon's payment, nor did Reardon sign it. See App endix,

at 52.

Shortly after executing his agreement with Orlando, Lynch entered into a separate agreement with Reardo n,

3under which Reardon would assist Lynch with his sea rch

for the stolen bonds and Lynch would compensate him with 15 percent of the face value of any of the securiti es 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 b onds having a value of $1,823,000 from the Bossi's resid ence in San Diego. Bossi and her husband were brought back to Philadelphia, where they were charged with arson an d theft. Their trial resulted in a hung jury. After t he government failed to convict them, the Bossis reque sted

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 an y civil suits necessary to protect the value of the recover ed bearer bonds. Lynch also retained Groen, Smolow as general counsel for the estate. When the U.S. Attorney deci ded in 1980 to forego a second trial of the Bossis, the es tate and
the Bossis both filed civil actions in the U.S. Dis trict Court for the Eastern District of Pennsylvania to get con trol of the
securities.

That same year, the estate settled the suits with t he Bossis. Under the settlement agreement, the estate recovered securities with a face value of $1,623,00 0 and a fair market value of $1,146,446. Without the help o f Lynch and Reardon, the estate would have not recovered th ese securities.

Along with the Green, Smolow law firm, Lynch contin ued to represent the estate. On April 10, 1980, Lynch a nd 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" agreemen t with Mary Orlando. The agreement stated in pertinen t 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 capacit y as the duly appointed Administratrix of the Estate of Philip

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

Jr., Esquire, agree(s) to INDEMNIFY AND HOLD HARMLESS the Estate of Philip Meriano and Ma ry Orlando, the Administratrix of the Estate an d against any and all claims and loss, which the Estat e and/or the Administratrix may hereafter suffer or p ay by reason of any claims against the Estate or t he
Administratrix or as a result of the disburs ement of said funds of the Estate in payment of profe ssional fees and hereby agree to repay any and all amount s received that are determined by a court of p roper 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, 19 80, Mary Orlando signed an agreement authorizing Lynch to buy, sell or otherwise transact business with the s ecurities. Under the terms of this agreement, Orlando agreed t hat she would "waive notification . . . of any of the afore mentioned transactions and delivery of any statements, notice s, or demands pertaining thereto and hereby ratify any an d 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 K idder, Peabody. Over the next three years, Lynch transferr ed some
of the estate's bonds to his individual account. Fr om this account, Lynch liquidated the securities and used t he proceeds to pay himself and Reardon, and also to pa y the Groen, Smolow law firm, which sought fees for gener al
services to the estate and for costs associated wit h the recovery of the stolen bonds. The trial record refl ects that Lynch did not keep organized records of the transfe rs of the bonds from the safe deposit box to the estate's Kid der, 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 Append ix, at

272-273.

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

the Orphans' Court for approval of attorney and rel ated fees paid to Lynch and Reardon. Because there was some uncertainty as to the proper personal representativ e of the estate (see discussion below), the Orphans' Court d eferred action on the petition until the estate filed an ac counting with the auditing judge of the court. See Appendix, at 87. Notwithstanding the court's deferral, however, Orla ndo 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 Meri ano's deceased wife, discovered a will executed by Merian o and dated November 17, 1973. She also found a codicil, dated December 2, 1973. The will and codicil named Panepi nto and another niece, Elaine Hernardi, as beneficiarie s 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 Panepi nto was admitted to probate. The Register of Wills then revoked Mary Orlando's position as administratrix and appoi nted 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, howe ver, Panepinto and Orlando had resolved their difference s and agreed to settle their competing claims to the Meri ano

___________________________________________________ ______________

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 Pennsylv ania, approving fees. Judge Hannum had presided over the litigation betwe en the estate and the Bossis with regard to the disposition of the st olen 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 a n executor of an
estate. See 20 Pa. C.S. S 3325.

6estate. Under the terms of the settlement, Panepint o agreed

to release Orlando and her surety, INA, from any fu ture surcharge liability. Orlando and Kates withdrew the ir will contest on December 19, 1986.

The Orphans' Court Proceedings

On March 30, 1983, Panepinto filed two petitions wi th the Orphans' Court, which sought reimbursement of a ll fees paid to Lynch and Reardon. According to Panepi nto, the fees were grossly excessive, and the agreements signed by Orlando, the former administratrix, were unconsc ionable

as a matter of law.

In an attempt to determine what was left in the est ate 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 t his time represented solely by Lynch and no longer by t he 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, f iled the requested accounting with the court. According to t he 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, 1 983. That account showed that the estate had paid Reardo n $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 $3 0,950 from Lynch on April 15, 1981, for a total of $250,9 50. See Appendix at 584.

Judge Kendall Shoyer of the Orphans' Court conducte d an audit of the estate between May 2, 1986, and Mar ch 24, 1987. Judge Shoyer then considered Panepinto's moti on 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, Jud ge Shoyer ordered Lynch and Reardon to reimburse a por tion of their fees to the estate. In doing so, Judge Sho yer

7criticized Lynch's poor ethics as an attorney, part icularly

Lynch's unilateral removal of the securities from t he estate, his failure to keep adequate records, and his failu re to cooperate with the preparer of the account. See Est ate of Meriano, No. 2259 (Orphans' Court Division, Court o f Common Pleas of Philadelphia, filed September 21,19 88).

With regard to Lynch's fee, Judge Shoyer held that a reasonable fee should be based on the fair market v alue and not the face value of the securities, notwithst anding Lynch's written agreement with Orlando. In addition , Judge Shoyer held that Lynch's contingent fee should be r educed from 40 percent to 35 percent of the fair market va lue 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 th e fees he had paid out to the Groen, Smolow law firm. As a re sult, the Orphans' Court judged Reardon liable for $78,98 3.10, plus six percent interest from the dates he receive d the funds from the estate. Judge Shoyer assessed Lynch' s debt to the estate to be $99,505.09, which represented t he
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 acc ount for unexplained "costs" for which he had disbursed fund s from the estate on February 16, 1980.

All of the parties took exception to the court's adjudication. As a result, the Orphans' Court sitti ng en banc reheard the case and issued a new schedule of surcharges. See Estate of Meriano, No. 2259 (Orphan s' 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 val ue of the bonds. In addition, the Orphans' Court sitting en banc credited Lynch for several disbursements to the Gro en law firm that had not been recognized by Judge Shoyer. Lynch's surcharge therefore was initially reduced to $23,55 9.09. This reduction, however, did not end the matter of
excessive fees.

The Orphans' Court expressed concern that, even aft er adjusting Lynch and Reardon's fees for fair market value

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

explained:

Although the auditing judge does not express ly address the issue, it is clear from the amounts of c ompensation awarded to Lynch and Reardon that he found t hat Lynch was to receive 35% of the market value of the [recovered] bonds and that Reardon was to re ceive 15%

of the market value of the bonds that each m an was compensated from the gross estate. We are of the opinion that an allowance of 50% of the mark et value
of the assets recovered is unreasonable and excessive and was error for the auditing judge to allo w that amount of compensation.

En banc opinion, at 20. According to the Orphans' C ourt, Lynch should have paid Reardon out of his own funds and not those contained in the gross estate. Id. The Or phans' Court therefore ordered Lynch to pay Reardon's fair market fee, $171,966.90, back to the estate, in addition t o the $23,559.09 he already owed for the overpayment on h is own fee. In addition, Lynch was to pay six percent interest on these sums, from the date of receipt until the d ay 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 Janu ary 15, 1991. In re Estate of Meriano, 593 A.2d 421 (Pa. 19 91). Thus, Lynch remained liable to the estate for a tot al sum of $195,525.99, plus six percent interest running from the date of receipt of the funds.5 Reardon owed the est ate $78,983.10, plus six percent interest.

Neither Reardon nor Lynch adhered to their obligati ons.

___________________________________________________ ______________

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. Se e Joint Stipulation of Facts, at P20. This discrepancy, however, appear s to be the result of a simple arithmetic mistake since the Joint Stipula tion states the correct sums that were to be added in order to determine Ly nch's total liability.
See id.

9Lynch 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 nev er 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 settleme nt agreement for an undisclosed amount that was less t han the sum charged to him by the Orphans' Court. The t ax court noted that one of the estate's attorneys file d a status report on March 19, 1990, in which the attorney rep orted that all claims against Reardon had been settled. O f 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 amoun t 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 esta te in 1981. Over the last fifteen years, the parties h ave settled many of the issues regarding the estate's tax defic iency. See Stipulation of Disposition of Issues, filed Septemb er 3, 1985; Second Stipulation of Disposition of Issues, filed November 26, 1993; Joint Stipulation of Facts, filed Decembe r 5, 1994.

A special trial judge heard this case in December o f 1994. The trial judge concluded, inter alia, that the est ate was not
entitled to a theft loss deduction for the funds wh ich Lynch and Reardon had failed to return to the estate desp ite the order of the Orphans' Court that they do so. The ta x court adopted the trial judge's findings and conclusions in an opinion filed February 15, 1996. See Estate of Meri ano 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.

10II. DISCUSSION

The tax court determined that the estate was entitl ed
neither to a theft loss deduction nor to a deductio n 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 dis position of issues regarding the deductibility of administra tive 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 exercis e 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 c ourt's factual findings unless they are clearly erroneous. See Gulf Oil Corp. v. Commissioner, 914 F.2d 396, 399 (3d Ci r. 1990).

The estate maintains that it is entitled to an appr opriate theft loss deduction for the portion of Lynch and R eardon's withdrawals that were adjudged excessive by the Orp hans'
Court but never reimbursed to the estate. Section 2 054 of the tax code provides that:

[T]he value of the taxable estate shall be d etermined by deducting from the value of the gross estate losses incurred during the settlement of estates ar ising from fires, storms, shipwrecks, or other casualti es, or from theft, when such losses are not compensated for by
insurance or otherwise.

26 U.S.C. S 2054. Because Section 2054 has generate d

___________________________________________________ ______________

6. The estate also raises several evidentiary issue s on appeal. According to the estate, the tax court committed error revers ible error when it: (1) failed to admit "expert" testimony regarding the pr oper 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 c ourt 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 migh t have commingled funds or hidden assets while he was managing the es tate's securities.

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

11relatively little case law, we must examine those c ases 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. Commiss ioner, 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 o ccurred. See e.g. Lombard Brothers, Inc. v. United States, 8 93 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 Commissio ner agree that, to the extent state law controls the ou tcome of this case, the applicable law is that of Pennsylvan ia. See Joint Stipulation of Facts, P 28. The estate must p rove its entitlement to the deduction by a preponderance of evidence. See Howard v. United States, 497 F.2d 127 0, 1272 n.4 (7th Cir. 1974); Farcasanu v. Commissioner , 436 F.2d 146, 150 n.3. (D.C. Cir. 1970). See also Tax C ourt Rule 142(a).

According to the estate, the facts of this case amo unt to theft under two provisions of Pennsylvania's Crimin al 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 fo r a theft
loss deduction under Section 4113.

Section 3927 provides in pertinent part:

(a) Offense defined- A person who obt ains p roperty upon agreement, or subject to a known legal obligation,

___________________________________________________ ______________

7. Section 165(c)(3) allows a taxpayer to take a de duction for "losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, st orm, shipwreck or other casualty, or from theft." 26 U.S.C. S165(c)(3).

8. "[T]he exact nature of the crime, whether larcen y or embezzlement, of obtaining money under false pretenses, swindling or other wrongful deprivations of the property of another, is of litt le importance so long

as it amounts to theft." Edwards v. Bromberg, 232 F.2d 107, 111 (5th Cir. 1956).

12to make specified payments or other disposit ion,

whether from such property or its proceeds o r from his own property to be reserved in equivalent am ount, is guilty of theft if he intentionally deals wi th the property
obtained as his own and fails to make the re quired payment or disposition. The foregoing applie s notwithstanding that it may be impossible to identify particular property as belonging to the vict im 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 Cour t has interpreted Section 3927 as consisting of four elem ents:

1. The obtaining of property of another;

2. Subject to an agreement or known legal ob ligation upon the recip[ient] to make specified payme nts or other disposition thereof;

3. Intentional dealing with the property obt ained as the defendant's own; and

4. Failure of the defendant to make the requ ired disposition of the property.

Commonwealth v. Turrell, 584 A.2d 882, 884 (Pa. 199 0), 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 add ress the
Commissioner's contention that the Section 3927 con tains a fifth element, the presence of "thieving intent."

A. Thieving Intent

According to the Commissioner and the tax court, th e estate is ineligible for a theft loss deduction bec ause it failed to prove that Lynch or Reardon possessed "th ieving state[s] of mind" when they charged excessive fees to the estate and failed to pay them back at the request o f the Orphans' Court. See Meriano, T.C. Memo 1996-58 at 7 6,
84. We believe the tax court's has misconstrued Pennsylvania's criminal law.

13We 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 Cour t decisions cited by the tax court demonstrate the ex istence
of a fifth element under Section 3927. See Commonwe alth v. Kuykendall, 465 A.2d 29, 31-32 (Pa. Super. 1983) ; Commonwealth v. Shaffer, 420 A.2d 722, 726 (Pa. Sup er. 1980). Neither Kuykendall nor Shaffer even mention Section 3927. Instead, both cases stand for the unextraordi nary principle that a person who has misappropriated pro perty can be prosecuted under 18 Pa. C.S. S 3925 as a rec eiver of property, so long as that person possesses a "thiev ing state
of mind." This result follows from 18 Pa. C.S.S 390 2, which consolidates all theft offenses at trial. Thus, a d efendant accused of one type of theft under one section of Pennsylvania's Crime Code may be convicted with evi dence demonstrating a different type of theft under the C ode.
Section 3902 thus establishes that theft is a unita ry offense in Pennsylvania. Under this consolidation of theft offenses, a "thieving state of mind" is the essence of a thef t 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 sta te of mind" that is lacking here.

However, the Superior Court elaborated on the unita ry concept of theft under the Pennsylvania criminal co de in Robichow. There, the Superior Court explained that, under Section 3927, the taking of another's property subj ect 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 "th ieving intent" as a separate element of Section 3927. To t he contrary, it held that such intent was present when the
four traditional elements of the offense were alrea dy present.

We are aware that ultimately our determination of t his issue turns on the pronouncements of Pennsylvania's highest court, not its Superior Court. "[W]hen fede ral courts are required to interpret or apply state law, we co nsider and

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

ultimate authority of state law." Colantuno v. Aetn a 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 "thiev ing intent," much less treated it as a separate prerequ isite for criminal liability. See e.g. Turrell, 584 A.2d at 8 84 (criminal
violation occurs when individual "evinces intent no t to make the required payment or disposition"). Based o n 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 establ ished when the elements of the taking of another's proper ty subject to a known obligation and of the intentiona l disposition of it as one's own have been establishe d. It is not a separate fifth element of this crime. In sum, we do not think that the Commissioner's reading of Sectio n 3927 represents an accurate interpretation of Pennsylvan ia
criminal law.

B. Liability for Theft Under Section 3927

Having rejected "thieving intent" as a fifth elemen t, we now consider whether the estate proved by a preponderance of evidence that it was a victim of t heft as defined by Section 3927. We will examine each eleme nt 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 th e Commissioner, Lynch and Reardon did not acquire "property of another" when they converted the estat e's securities and withdrew a portion of their proceeds from the estate prior to the Orphans' Court's approval of th eir fees. We disagree. We believe that under Pennsylvania's p robate law, the moneys withdrawn from the estate constitut ed "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 a t 884. Pennsylvania statutory law defines "property of ano ther" to

15include "property in which any person other than th e actor

has an interest which the actor is not privileged t o infringe, regardless of the fact that the actor also has an i nterest 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 disa gree. Common sense dictates that the Pennsylvania courts would define "property of another" uniformly for all thef t 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 re ferring 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 propert y in which a person has an interest that may not be infr inged 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 Commonw ealth v. Rosenzweig, 522 A.2d 1088, 1092-93 (Pa. 1987). T hus, 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 t o conclude that, prior to the Orphans' Court's audit and final approval of the estate's distribution, the estate m aintained an interest in the fees withdrawn by Lynch and Rear don, and that neither Lynch nor Reardon was entitled to infringe this interest, regardless of Mary Orlando's prior a pproval of
their fees and withdrawals.

Although Pennsylvania probate law allows a personal representative (administrator or executor) to distr ibute real or personal property prior to a court's final dispo sition 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.2 d 456,

16459 (Pa. 1942) (trustees who distributed funds of d issolved

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 find s the fiduciary's prior distributions to be improper or unreasonable. See In re Free's Estate., 194 A. at 4 95. Since Reardon's investigative fee was disbursed to him pu rsuant to the approval of Mary Orlando, the estate's fiduc iary 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 Orpha ns' Court's audit and approval of the estate's account is also
treated as an at-risk distribution. It is well esta blished that the Orphans' Court's may review the reasonableness of the attorney's fee and order the estate's personal repr esentative
to reimburse the estate for some or all of the disb ursed fees if it finds the fees to be excessive, unreasonable or otherwise undeserved. See Estate of Alla Bruner, 69 1 A.2d 530, 534 (Pa. Super. 1997) (auditing judge may redu ce excessive and unreasonable attorney's fees); In re Estate of Geniviva, 675 A.2d 306, 313 (Pa. Super. 1996); In r e Estate of Rees, 625 A.2d 1203, 1206 (Pa. Super. 1993); In re Estate of Sonovick, 541 A.2d 374, 376 (Pa. Super. 1 988) (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 estat e's fiduciary for the value of excessive fees or wrongf ul appropriations. The Orphans' Court's jurisdiction, however,

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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 enc ountered, the value of

the property in question, the degree of responsi bility involved, the professional skill of the individuals render ing the services, the standing of the attorney in her profession a nd the ability of the estate to pay a reasonable fee.

Bruner, 691 A.2d at 534.

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

chancery, the Orphans' Court may also compel paymen t 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' C ourt may compel realtors acting as administrators' agent s 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 r eview Lynch and Reardon's fees, to reduce those fees if i t found them to be excessive or unreasonable, and to order Lynch and Reardon to refund the value of any securities w hich the Court found to be wrongfully taken from the estate. As the Pennsylvania Supreme Court proclaimed nearly a cent ury 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, 8 4 A. 848, 852 (Pa. 1912) (emphasis added). Because, the estate maintained a proprietary interest in any distributi ons prior to the Orphans' Court's approval, the funds withdra wn 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 the ft, 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 estat e meets
this element of Section 3927.

First, Robert Boote, an attorney familiar with prob ate law, testified at trial that attorneys who took fee s from their clients prior to an accounting "all know that [they ] are subject to ultimate approval by the court." Appendi x, at
281-82. The Commissioner did not rebut this testimo ny. As an attorney, Lynch was aware of Pennsylvania probat e law. Second, Lynch and Reardon both testified at trial t hat they were aware that their fees were subject to the Orph ans' Court's approval. See Appendix, at 441; 584-85. Fin ally, the hold harmless agreement imposed a contractual oblig ation

18on Lynch and Reardon to reimburse the estate for"an y 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 Lync h and Reardon imposed on them a legal obligation to maint ain 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 ow n. Both Lynch and Reardon disposed of the funds withdr awn from the estate for their own purposes. Lynch testi fied 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 decl ared 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 u sed the money to pay his own legal fees and taxes. See Appe ndix, at 589-90. Thus, Reardon treated the remaining fund s as his own. See Turell, 584 A.2d at 884 (attorney who used funds in client's escrow account to pay his own inc ome taxes committed theft under Section 3927).

4. Failure to make required disposition. Once the Orphans' Court issued its judgment, Lynch and Reard on's obligation to repay the estate became final. Neithe r Lynch

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10. The trial court did not permit the estate to pr esent testimony demonstrating that Lynch commingled the estate's fu nds with his own. We agree that commingling, by itself, does not demo nstrate liability under Section 3927. See Turrell, 584 A.2d at 886. H owever, insofar as Lynch's commingling of funds might have been circum stantial 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 f avor.

19nor 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 testifi ed 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 d irected by the Orphans' Court. "[A]ssuming all the other eleme nts have been satisfied, once payment is required and a n attorney fails to make such payment, then a violati on 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 fail ed to dispose of them in agreed upon manner).

Like Lynch, Reardon also committed theft, although the facts surrounding his failure to repay the estate a re slightly more complicated. At trial, Reardon testified that he had entered into an agreement with the estate, releasin g him from the Orphans' Court judgment in an exchange for an amount less than that charged to him. The date of t he agreement, as well as the amount Reardon agreed to pay, were not disclosed at trial.11 The parties apparent ly agree, however, that Reardon paid $25,000 to the estate as partial satisfaction of his agreement.

Reardon's release and partial payment of this undis closed sum does not negate our conclusion that he committe d 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 vi ctim of theft. To the contrary, the Pennsylvania Supreme Co urt has

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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 Mer iano, T.C.Mem. 1996-58 at 37-38, 39. Although the estate has quest ioned 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 abo ut the authenticity of the agreement. See Lunderstadt v. Colafella, 885 F.2d 66, 78 (3d Cir. 1989) (appellants must raise issue in opening appea l brief to preserve it). We therefore assume that the agreement is valid.

20held 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 f unds occurs, but reject the view that liability can be ne gated through a return of the misappropriated funds. The c rime is complete when all of its elements have been fulfilled, and, once completed, it cannot be undone. Ce rtainly, where an offender has made restitution, and particularly where restitution has been made before the filing of criminal charges, this can be cons idered by a sentencing court as a significant factor in mitigation of the punishment to be imposed. Restitution do es not, however, negate the fact that a crime has be en committed.

Turrell, 584 A.2d at 886. As soon as Reardon failed to pay the Orphans' Court's judgment and spent the money o n 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 ma ke required disposition of funds received have been sa tisfied by the facts of this case.

C. Collection Efforts

Finally, we note that the Commissioner questions th e authenticity of the estate's theft claim on the gro und that the estate failed to exercise adequate efforts to c ollect the money owed to it once the Orphans' Court rendered judgment against Lynch and Reardon. The Commissione r's argument appears to be that if theft "really" had o ccurred, the estate would have been more persistent in its e fforts to collect the moneys owed to it. The tax court accept ed this argument when it concluded that "this was merely a fee dispute between Lynch and the present administratri x of the estate." Meriano, T.C. Memo 1996-58 at 35.12

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12. In describing this situation as "merely a fee d ispute," the tax court did not take into account the requirement that fees , charged against an estate, must receive the ultimate approval of the O rphans' Court. See Part II.B.1 and 2, supra.

21We find the reasoning of the tax court and the

Commissioner to be without merit. The victim's purs uit of the person who has misappropriated its property is not an element under Section 3927. We believe that, once t he four elements of Section 3927 are present, a theft has o ccurred, regardless of whether the victim attempts to retrie ve the stolen property. Theft is measured by the thief 's, and not the victim's, actions and intentions. Thus, it is c ompletely irrelevant how much (or little) effort the estate e xpended in trying to get its money back, or whether the estate viewed itself as a victim of theft immediately after the O rphans' Court rendered its judgment.13

Our only concern is whether Lynch and Reardon obtained property of another, subject to a known le gal obligation, and then intentionally treated that pro perty as their own and failed to make a required disposition of property. Having found each of the four elements pr esent in this case, we must conclude that they committed the ft under Pennsylvania law and that the estate was enti tled to take a theft loss deduction pursuant to Section 205 4 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. Altho ugh the estate initially argued in its opening brief that i t was entitled to deduct the full amount of the Orphans' Court's judgment, it eventually conceded in supplemental br iefing that it could not deduct the $25,000 repaid to it b y Reardon. Thus, the estate currently claims that it is entitled to a deduction of $249,509.09. This amount represen ts the

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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 d eduction on income tax must demonstrate that there is no "reasonable p rospect 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 sta ted at trial that collection was not in issue. See Appendix at 445, 5 87, 590 and 614.

22total amount of money owed to the estate by Lynch a nd

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

Under the tax regulations, when an estate is partia lly compensated for its loss, it may take a deduction o n the remaining portion. See 26 C.F.R. S 20.2054-1. Since the estate has not received any compensation from Reard on other than the $25,000, the estate may deduct the remainder of Reardon's debt, notwithstanding its ag reement with Reardon to accept an undisclosed lesser amount

.

IV. CONCLUSION

Because the estate has demonstrated theft under Sec tion 3927 of the Pennsylvania criminal code, we will rev erse the
tax court's denial of a theft deduction to the esta te. The
estate is therefore entitled to deduct from its est ate taxes the sum of $249,509.09, the remainder due to it und er the Orphan Court's judgment.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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14. We note that the estate is not entitled to dedu ct the interest the Orphans' Court ordered Lynch and Reardon to pay. Fe deral 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 g ross 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 ne ver been considered part of the gross estate for estate tax purposes. T he estate therefore may not include the interest on Lynch and Reardon's sur charges in its theft
loss deduction.

23