Court Opinion

ID: 3178806
Source: CourtListenerOpinion
Date Created: 2016-02-19 14:22:01.414698+00
Date Added: 2024-06-11T14:20:24.161526
License: Public Domain

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

In Re: Estate of William Theodore        :
Woolslare, Deceased                      :
                                         :   No. 1100 C.D. 2015
Appeal of: Alan F. Woolslare             :   Submitted: November 25, 2015

BEFORE:      HONORABLE RENÉE COHN JUBELIRER, Judge
             HONORABLE MARY HANNAH LEAVITT, Judge1
             HONORABLE ANNE E. COVEY, Judge

OPINION NOT REPORTED

MEMORANDUM OPINION
BY JUDGE LEAVITT                                            FILED: February 19, 2016

             The Estate of William Theodore Woolslare (Decedent), by its
Executor Alan F. Woolslare, pro se, appeals an order of the Court of Common
Pleas of Allegheny County, Orphans’ Court Division (orphans’ court),2 denying
Executor’s challenge to Pennsylvania’s imposition of an inheritance tax upon the
Estate’s Individual Retirement Accounts (IRAs).            Executor argues that the
orphans’ court erred. He contends that under the applicable statute the IRAs were
exempt from inheritance tax because they were not subject to federal estate tax.
Discerning no merit to this construction of the statue, we affirm.
             Decedent died in 2013. On September 23, 2014, Executor filed a
Pennsylvania Inheritance Tax return, listing four IRAs valued at $253,640.78 as

1
  This case was assigned to the opinion writer before January 4, 2016, when Judge Leavitt
became President Judge.
2
  Executor has filed all pleadings “pro se.” The Orphans’ Court noted that Executor is a
currently licensed Pennsylvania attorney.
exempt from taxation under the Inheritance and Estate Tax Act (Tax Act).3
Specifically, Executor pointed to Section 2111(r) of the Tax Act,4 which states as
follows:

                 Payments under pension, stock bonus, profit-sharing and other
                 retirement plans, including H.R.10 plans, individual retirement
                 accounts, individual retirement annuities and individual
                 retirement bonds to distributees designated by the decedent or
                 designated in accordance with the terms of the plan, are exempt
                 from inheritance tax to the extent that the decedent before his
                 death did not otherwise have the right to possess (including
                 proprietary rights at termination of employment), enjoy, assign
                 or anticipate the payment made. In addition to this exemption,
                 whether or not the decedent possessed any of these rights, the
                 payments are exempt from inheritance tax to the same extent
                 that they are exempt from Federal estate tax under the
                 provisions of the Internal Revenue Code of 1986 (Public Law
                 99-514, 26 U.S.C. § 1 et seq.), as amended, any supplement to
                 the code or any similar provision in effect from time to time for
                 Federal estate tax purposes, except that a payment which would
                 otherwise be exempt for Federal estate tax purposes if it had not
                 been made in a lump-sum or other nonexempt form of payment
                 shall be exempt from inheritance tax even though paid in a
                 lump-sum or other form of payment. The proceeds of life
                 insurance otherwise exempt under subsection (d) shall not be
                 subject to inheritance tax because they are paid under a pension,
                 stock bonus, profit-sharing, H.R.10 or other retirement plan.

72 P.S. §9111(r) (emphasis added).                   In sum, Section 2111(r) provides an
exemption in two circumstances: (1) where the holder of the IRA died prior to
enjoying “the right to possess … enjoy, assign or anticipate the payment made”

3
    Act of March 4, 1971, P.L. 6, as amended, 72 P.S. §§9101-9196.
4
    Added by Section 36 of the Act of August 4, 1991, P.L. 97, 72 P.S. §9111(r).

                                                 2
therefrom or (2) where an IRA is “exempt from Federal estate tax.”5 Because the
Estate did not owe federal estate tax on the IRAs, the Estate’s Inheritance Tax
return did not include the IRAs as taxable assets.
              In response, the Department issued a “Notice of Inheritance Tax
Appraisement, Allowance or Disallowance of Deductions and Assessment of Tax,”
concluding that the Estate’s IRAs were taxable because “[D]ecedent was over the
age of 59½.” Reproduced Record at 10a-12a (R.R. __). The Notice listed the net
value of the Estate subject to tax at $402,565.19, resulting in a total tax liability of
$20,835.78, which the Estate paid.
              The Executor then appealed to the orphans’ court, claiming that the
Estate was owed a refund of $10,843.14 because the IRAs were exempt from
Pennsylvania inheritance tax. He relied upon Section 2010(a)-(c) of the Internal
Revenue Code, which exempts estates smaller than $5,000,000, from federal
taxation.6    Under the statute’s scheduled adjustment for 2013, an estate of

5
  Decedent was 89 years old at the time of his death and had taken distributions from the IRAs.
Thus, the first exception is not applicable.
6
  It provides:
        (a) General rule.--A credit of the applicable credit amount shall be allowed to
        the estate of every decedent against the tax imposed by section 2001.
        (b) Adjustment to credit for certain gifts made before 1977.--The amount of the
        credit allowable under subsection (a) shall be reduced by an amount equal to 20
        percent of the aggregate amount allowed as a specific exemption under section
        2521 (as in effect before its repeal by the Tax Reform Act of 1976) with respect to
        gifts made by the decedent after September 8, 1976.
       (c)   Applicable credit amount.—
              (1) In general.--For purposes of this section, the applicable credit
              amount is the amount of the tentative tax which would be
              determined under section 2001(c) if the amount with respect to
              which such tentative tax is to be computed were equal to the
              applicable exclusion amount.
(Footnote continued on the next page . . .)
                                               3
$5,250,000 is entitled to an “applicable credit amount” equaling $2,045,800.7
Because the Estate’s assets totaled $501,086.11, far less than the applicable credit
amount, the Estate was entirely exempt from federal taxation. Section 2111(r) of
the Tax Act states that IRAs are “exempt from inheritance tax to the same extent

(continued . . .)
               (2) Applicable exclusion amount.--For purposes of this
               subsection, the applicable exclusion amount is the sum of—
                      (A) the basic exclusion amount, and
                      (B) in the case of a surviving spouse, the deceased
                      spousal unused exclusion amount.
               (3) Basic exclusion amount.—
                      (A) In general.--For purposes of this subsection,
                      the basic exclusion amount is $5,000,000.
                      (B) Inflation adjustment.--In the case of any
                      decedent dying in a calendar year after 2011, the
                      dollar amount in subparagraph (A) shall be
                      increased by an amount equal to-
                              (i) such dollar amount, multiplied
                              by
                              (ii) the cost-of-living adjustment
                              determined under section 1(f)(3) for
                              such calendar year by substituting
                              “calendar year 2010” for “calendar
                              year 1992” in subparagraph (B)
                              thereof.
                              If any amount as adjusted under the
                              preceding sentence is not a multiple
                              of $10,000, such amount shall be
                              rounded to the nearest multiple of
                              $10,000.
26 U.S.C. §2010(a)-(c).
7
  The Department agrees with Executor’s calculation of the “basic exclusion amount” and the
“applicable credit amount.” Department Brief at 8.

                                            4
they are exempt from Federal estate tax….” 72 P.S. §9111(r). The Estate claimed
it did not owe an inheritance tax on the IRAs.
             The orphans’ court set a briefing schedule and held oral argument.
On May 24, 2015, it dismissed the Estate’s appeal of the tax imposed by
Pennsylvania. The Estate appealed to this Court.8
             Executor raises one issue for our review. He contends that a plain
reading of Section 2111(r) of the Tax Act establishes that IRAs are exempt from
Pennsylvania’s inheritance tax to the same extent they are exempt from federal
estate tax. Because the Estate’s federal estate tax liability was zero, the Estate’s
IRAs were exempt from federal estate tax. Likewise, the Estate’s IRAs are exempt
from the Pennsylvania inheritance tax.
             The Department counters that the federal estate tax is imposed “on the
transfer of the taxable estate of every decedent who is a citizen or resident of the
United States.” 26 U.S.C. §2001(a). The “value of the taxable estate [set forth in
Section 2001 is] determined by deducting from the value of the gross estate the
deductions provided for in this part.” 26 U.S.C. §2051. The “gross estate” of a
decedent is “determined by including to the extent provided for in this part, the
value at the time of his death of all property, real or personal, tangible or
intangible, wherever situated.” 26 U.S.C. §2031(a). Therefore, the IRAs would be
included in the calculation of Decedent’s gross estate for federal estate tax
purposes.

8
  Our review of an order of the orphans’ court determines whether legal error occurred and
whether the factual findings are supported by the evidence. In re Estate of Berry, 921 A.2d
1261, 1263 n.1 (Pa. Cmwlth. 2007).

                                            5
             Although the IRAs are part of the federal taxable estate, the Estate did
not owe a tax because of the “[u]nified credit against estate tax,” set forth in
Section 2010 of the Internal Revenue Code, 26 U.S.C. §2010.             Section 2010
creates a “basic exclusion amount” of $5,250,000 and an “applicable credit
amount” of $2,045,800. Accordingly, for federal estate tax purposes, the Estate
was valued at approximately $400,000, which was offset by the unified credit.
This resulted in a federal tax liability of zero. However, a tax credit is not the same
as a tax exemption.
             The Department contends that the Executor mischaracterizes the
“basic exclusion amount” as an exemption from the federal estate tax. It is not an
exemption but, rather, a deduction, i.e., a means used to calculate the applicable
credit amount. But for the credit, the federal estate tax would be owing.
             The Department relies upon Estate of Stettler v. Department of
Revenue, 600 A.2d 234 (Pa. Cmwlth. 1991), where this Court, affirming on the
basis of the orphans’ court’s opinion, established the difference between a tax
exemption and a tax deduction. In Estate of Stettler, the executor claimed that the
decedent’s employee stock option plan was exempt from the federal estate tax
under the marital deduction provision, which allows a deduction in “the value of
any interest in property which passes or has passed from the decedent to his
surviving spouse.” 26 U.S.C. §2056(a). On this basis, the estate contended that
the stock option plan was not subject to Pennsylvania’s inheritance tax. The
orphans’ court rejected this argument.
             The orphans’ court explained that a deduction “refers to the amount
subtracted from the gross estate to arrive at the net estate for tax purposes, the net
estate being the part of the estate remaining after payment of charges against the

                                          6
entire estate.” Stettler, 600 A.2d at 236-37 (quoting trial court opinion). By
contrast, an exemption relieves “certain classes of property from liability to
taxation.”    Id. (quoting trial court opinion).     The difference was more fully
explained as follows:

              Exempt property is therefore excluded from taxation and need
              not be identified since disclosure provides no additional
              information. On the other hand, something which is deductible
              must be disclosed so that, if appropriate, it can be subtracted
              from the balance of the gross estate in order to arrive at a figure
              which represents the net estate. Exempt property, therefore, is
              not included in the decedent’s gross estate, for exemptions are
              excluded from the valuation of the gross estate. Deductions, on
              the other hand, are subtracted from the value of the gross estate,
              which gross estate valuation necessarily includes the property
              subsequently deducted in order to arrive at the valuation of the
              net estate.

Id. (quoting orphans’ court opinion).
               Here, the orphans’ court explained that “[t]he fact that the Decedent’s
estate did not have to actually [pay] any Federal Estate Tax does not equate to the
estate being exempt from Federal Estate Tax.” PA. R.A.P. 1925(a) Op. at 4; R.R.
116a.   The Decedent did not have federal estate tax liability on any assets,
including the IRAs, because the “unified credit” extinguished the tax liability.
Stated otherwise, the IRAs were not types of assets that were exempt from the
federal estate tax. The orphans’ court held that this rendered Section 2111(r) not
applicable.
              It is the taxpayer that bears the burden of proving an improper
assessment. In re Estate of Berry, 921 A.2d at 1264. Executor contends that
because the Estate did not owe any federal estate tax on the IRAs, they are exempt
under Section 2111(r) of the Tax Act. As found by the orphans’ court, the Estate’s

                                           7
IRAs were assets fully taxable as part of Decedent’s gross estate. 26 U.S.C.
§2031. It was the “unified credit against estate tax” that extinguished the Estate’s
federal estate tax liability. 26 U.S.C. §2010.
              An exemption means that the property is excluded from taxation, and
its value need not be identified in a tax filing. The Estate’s IRAs do not meet this
definition. Their actual value had to be identified because they were taxable assets.
Had the value of the Estate’s IRAs exceeded the amount of the federal credit, they
would have had a federal estate tax liability.
              This Court has held that a tax credit is not a tax exemption. We
explained the difference as follows:

              A tax credit is commonly accepted to mean a direct reduction
              against the liability for tax owed. See Somma v.
              Commonwealth, 45 Pa. Commw. 332, 405 A.2d 1323
              (1979); Hanek v. Cities of Clairton, 24 Pa. Commw.
69, 354 A.2d 35 (1976). As defined in Black’s Law Dictionary
              1310 (5th ed. 1979), a tax credit is a “(t)ype of offset in which
              the taxpayer is allowed a deduction from his tax for other taxes
              paid. A credit differs from a deduction to the extent that the
              former is subtracted from the tax while the latter is subtracted
              from income before the tax is computed.”

Dunmire v. Applied Business Controls, Inc., 440 A.2d 639, 640 (Pa. Cmwlth.
1981). A tax credit is a reduction of tax liability.9

9
  Under federal law, the Tax Court has construed the unified credit in 26 U.S.C. §2010 to create
an exemption. See Van Alen v. Commissioner, T.C. Memo. 106 T.C.M. 427, 2 n.8
(stating that “[t]he unified credit exempts a minimum amount of accumulated wealth from estate
tax.”). Nevertheless, under Pennsylvania jurisprudence, upon which we rely in the matter sub
judice, the “unified credit” in 26 U.S.C. §2010 is a credit and not an exemption.
        Moreover, were this Court to consider the federal “unified credit” an exemption, we
would find in favor of the Department. Section 2111(r) exempts the payments from IRAs “to the
same extent that they are exempt from Federal estate tax.” 72 P.S. §9111(r) (emphasis added).
(Footnote continued on the next page . . .)
                                               8
              The Estate did not pay federal estate tax on the IRAs, not because they
were an asset that is exempt from federal estate tax, but because their value did not
exceed the unified credit. Therefore, the Estate’s IRAs are not exempt from
Pennsylvania’s inheritance tax under Section 2111(r) of the Tax Act, 72 P.S. §
9111(r).
              For the above-stated reasons, we affirm the orphans’ court.

                                                    _____________________________
                                                    MARY HANNAH LEAVITT, Judge

(continued . . .)
Stated otherwise, Section 2111(r) limits the available exemption to federal exemptions
specifically targeting IRAs, as opposed to other assets, and there is no specific exemption from
the Inheritance and Estate Tax in the Internal Revenue Code. For this reason, the Estate cannot
shelter the IRAs under Section 2111(r) of the Tax Act, 72 P.S. §9111(r).

                                               9
         IN THE COMMONWEALTH COURT OF PENNSYLVANIA

In Re: Estate of William Theodore    :
Woolslare, Deceased                  :
                                     :   No. 1100 C.D. 2015
Appeal of: Alan F. Woolslare         :

                                    ORDER

            AND NOW, this 19th day of February, 2016, the order of the Court of
Common Pleas of Allegheny County, Orphans’ Court Division, dated May 27,
2015, is hereby AFFIRMED.

                                          ______________________________
                                          MARY HANNAH LEAVITT, Judge