Court Opinion

ID: 9757434
Source: CourtListenerOpinion
Date Created: 2023-08-28 22:40:22.682259+00
Date Added: 2024-06-11T07:28:39.346747
License: Public Domain

POMEROY, Justice
(dissenting).
In my view, the decision of the majority of the Court in this case not only is erroneous but also will lead to unnecessary complications in the administration of decedents’ estates in Pennsylvania. Therefore, for the reasons which follow, I must respectfully dissent.
I. VALUATION OF INCOME IN RESPECT OF A DECEDENT
The initial problem presented by this case is one of valuation for Pennsylvania inheritance tax purposes of certain assets in a decedent’s estate. The value of an item of property subject to such taxation is fair market *72value as statutorily defined in the classic mold.1 Value as thus determined is an objective fact, although it may of course rest in some situations on the expert opinion of qualified persons. Where the items of property in a decedent’s estate are liquidated sums of money, such as cash or currency in hand or a credit balance in an account with a solvent bank or other debtor, no valuation problem is present, for face value and fair market value are one and the same.
In the case before us, the items in dispute are known sums of money due the decedent at the time he died; one item is a liquidated share of partnership profits, the other item the proceeds of the sale of corporate stock made by decedent’s stock broker of stock previously owned by the decedent. Given the solvency of the obligors, normally there could be no question of the value of these items on the valuation date, which normally is the date of decedent’s death; the value would be face value, and that is the value at which the appellant, the Commonwealth, did assess transfer inheritance tax in this case.
The appellees assert, however, that because of the special nature of these receivables, namely, that they are taxable to them as recipients as income for federal income tax purposes, their value for Pennsylvania inheritance tax purposes must be reduced by the amount of federal income tax they, the recipients, will be obliged to pay in respect of those items. The orphans’ court division and this Court accept that conclusion. With respect, I must disagree.
There is no doubt, as the Court’s opinion states, that as a matter of statutory construction double taxation is *73as a matter of policy to be avoided if reasonably possible. Indeed, this is an appealing case in which to seek to do so, since the liability of the questioned receivables to income taxation is undisputed and the income tax has already been ascertained and paid. I am satisfied, however, that the method of valuation now sanctioned by the Court is not within the intendment of the inheritance tax act, and may well introduce elements of complexity, uncertainty and delay in the computation of the inheritance tax and the settlement of decedents’ estates in Pennsylvania.
Instead of assigning to the receivables here involved an objective fair market value (i. e., face value reduced to present worth if need be) as of the date of decedent’s death,2 what is now being approved is an individuated value, i. e., the value to the recipients (in this case they happen to be the executors, but the transferee from the decedent could be any person appropriately designated by will or otherwise) at some time after decedent’s death when the extent of the recipient’s federal income tax liability for the items in question will have become ascertained.
Not only is such an approach contrary to the scheme of Pennsylvania inheritance taxation, but it introduces a whole body of federal income tax law — “income in respect of a decedent” — which, to say the least, is far from clear in scope and application. Thus in the task of construing the inheritance tax act the desirable goal of avoiding double taxation must be balanced against the *74disadvantages of such a new departure from an administrative standpoint.3
“Income in respect of a decedent” is a category of personal income identified as taxable by Section 691 of the Internal Revenue Code.4 It is the name given by that section to items of income earned by a decedent or to which he became otherwise entitled during his life but which were not properly reportable by him as income up to the time of his death. Under § 691 such income is to be reported by and is taxable to the persons who actually receive it (the estate or other beneficiaries).5 “A basic problem arising in the application of § 691 is that Congress has not seen fit to include a definition of ‘income in respect of a decedent’ in the Internal Revenue Code. Nor have the courts been able to fill this void by establishing a definition that would apply equally in every fact situation.” Willan, 32 T.M., Income in Respect of a Decedent-General (1970).6 The applicable regulation *75stipulates that income in respect of a decedent includes: (1) accrued income of a cash basis taxpayer; (2) income accrued solely by reason of death to an accrual basis taxpayer; and (3) income to which the decedent had a contingent claim at the time of his death. Income Tax Regulation § 1.691 (a)-1. The items involved in Mr. Rose’s estate fall into the first category, but the decision cannot logically be limited to such items.
The entire spectrum of income in respect of a decedent is wide indeed. Included in whole or in part are compensation for decedent’s services,7 income derived from the sale of property,8 investment income, such as rents, royalties, interest and corporate distributions,9 partnership receipts,10 distributions in liquidation of the decedent’s partnership interest,11 and other possible types of deferred receipts. See Ferguson, Income and Deductions in Respect of Decedents and Related Problems, 25 Tax Law Rev. 1, 27 et seq. (1969); 2 Mertens, Law of Federal Income Taxation § 12.102C, pp. 406-419; Willan, 32 T.M., Income in Respect of a Decedent-General, A4 et seq. In short, “an unexpectedly large portion of the testator’s property may constitute income in respect of a decedent at the time of his death.” 12 Henceforth, as 1 read the Court’s opinion, the estates of Pennsylvania decedents must be reduced in value by the amounts the recipients of these assorted types of property rights are obliged to pay as federal income tax thereon. The only *76guide to identifying these items, the humming birds in the pie (see note 5 supra), is the federal law on the subject; thus we are incorporating — lock, stock and barrel —into the Pennsylvania inheritance tax law a body of case law which, not unlike other aspects of federal law, is a model neither of simplicity nor of clarity. As Professor Ferguson puts it, “Twenty-five years’ experience with the concept of income in respect of decedents has seen considerable litigation but few emerging guidelines.” Ferguson, supra, at 9.13
As pointed out above, the problem of identifying these types of assets under the federal law is compounded by the fact that their valuation will now depend not on their face value or any objectively ascertainable discount factor (such as reduction to present worth, which will normally be done in any case of this sort), but by the personal tax situation of the recipient; that is, the higher the income tax bracket of the recipient in the taxable year of receipt, the lesser the value to be attributed to the item for Pennsylvania inheritance tax purposes; conversely, the lower the bracket of the recipient, the greater the value of the receivable. Thus two deferred receipt items of, say $1,000 each, which under a will are bequeathed to two different legatees will not only be valued at some lesser amount than $1,000, but at differing lesser amounts depending on the differing brackets of the two beneficiaries. These respective values, moreover, will *77not be known until the two beneficiaries have completed their own returns for the year or years of receipt; this could be months or conceivably even years after the date of death of the decedent. To hold as the Court does that such an imponderable and unpredictable figure as the effective tax rate at some future date of the person who happens to be the recipient of the income item shall relate back to the date of death of the transferor and establish taxable value in his estate as of that date seems to me a tour de force, and I cannot accept it as appropriate statutory construction.
To suggest, as does the Court’s opinion, that what it considers the inequity of valuing these assets at face (after reducing to present worth) is something foisted on our inheritance tax law by a technical Congressional amendment to the income tax law in 1942 is hardly accurate.14 The Pennsylvania inheritance tax act has been amended a number of times since 1942. The inheritance and estate tax laws of the Commonwealth received thorough study by the Joint State Government Commission in 1957, which culminated in the Inheritance and Estate Tax Act of 1961.15 Amendments to that Act were *78enacted in 1961 and 1963, and the Act has been further amended on five occasions since. In light of this history and the failure of the legislature for thirty-three years to make any alteration either in the statutory provisions for valuation or for deductions to take account of the federal change in 1942, it is difficult for me to accept the majority’s conclusion that the intent of the legislature concerning the treatment of these items is in doubt.16
As the opinion of the Court acknowledges, the fact that receipt of the property here involved happens to entail two liabilities for tax, one federal and the other state, is not an unconstitutional result. See Frick v. Pennsylvania, 268 U.S. 473, 45 S.Ct. 603, 69 L.Ed. 1058 (1925); Kirkpatrick’s Estate, 275 Pa. 271, 119 A. 269 (1922). Indeed, the receipt of these items of property may entail also a federal estate tax. That tax is expressly made non-deductible for Pennsylvania inheritance tax *79purposes by Section 622 of the Act, 72 P.S. § 2485-622, see Kirkpatrick’s Estate, supra, and it has never been held that the bite of the federal estate tax may be considered in computing the value of assets subject to Pennsylvania inheritance tax. The Court’s reasoning today, however, would seem to permit the devaluation of an accrued income item not only by the amount of federal income tax which that item must bear in the hands of the recipient, but also by the amount of federal estate tax which that item must bear if the recipient is the decedent’s estate (and so subject to the federal estate tax). This, I suggest, would be to compound the erosion of the Pennsylvania tax17 which the present decision initiates.
For these reasons I would reverse the decree in so far as it allows a reduction in valuation of income in respect of a decedent in the amount of federal income tax payable upon such income.
II. TAXATION OF INSURANCE DIVIDENDS AND UNEARNED PREMIUMS
Turning to the matter of the taxability of the insurance payments, the touchstone must be Section 303 of the Inheritance and Estate Tax Act of 1961, Act of June 15, 1961, P.L. 373, Art. III, § 303, 72 P.S. § 2485-303: “All *80proceeds of insurance on the life of the decedent, unless payable to the estate of the decedent, are exempt from inheritance tax.” (My emphasis). This is a categorical and unequivocal declaration. While the word “proceeds” is not defined in the Act and (so far as I can determine), the courts of this State have never been called upon to construe it,18 it is clear that the distinction which the Court now draws between payments which are related to the “insurance risk” and those which somehow are severable from that risk is a refinement which finds no basis in the Act. The Court states that the payment of accumulated dividends and post-mortem dividends and the return of unearned premiums in respect of the decedent’s policies may be “contingent upon criteria which are severable under the terms of the contract from the insurance risk” [opinion of the Court, ante at 120], but nowhere does the opinion indicate how one is to determine these criteria or effectuate a severance. The introduction of these uncertain concepts into what has heretofore been an accepted and uniform pattern of exempting all insurance payments from inheritance tax computation, seems to me unnecessary and confusing. Moreover, while I have no readily available statistics, there are many who die leaving life insurance proceeds as the sole or principal asset transferred to surviving members of their families. The opinion of the Court will require that henceforth each such policy be scrutinized to determine whether there exist “criteria which are severable” from the risk insured against, and file an inheritance tax return accordingly. In light of the relatively small sums usually involved in such dividend and return premium payments, the attempted distinction becomes almost a quibble.
*81There can be no doubt that, when used by itself, the word “proceeds” is one of broad import; it has been defined as “[t]hat which is received for something, whether in cash or other thing of value,” Ballentine’s Law Dictionary (3rd ed. 1969), and as “issues; income; yield; receipts; or produce,” Black’s Law Dictionary (4th ed. 1968). And there can be no doubt that the phrase “all proceeds” has a meaning which is even broader, encompassing all those things which are derived from a particular source. Thus I have no difficulty in finding that “all proceeds of insurance on the life of the decedent” includes all sums payable to named beneficiaries of a life insurance policy by virtue of the terms of those policies.
It is of course correct, as the Court observes, that a contract is not necessarily one of life insurance simply because it is so labled [opinion of the Court, ante at (p. 13 of typewritten copy)], and that a life insurance contract is not to be confused with an annuity contract, id.,19 for the risks protected against in the two types of agreements are quite discrete.20 Once it is determined, however, that a given contract is indeed a life insurance contract, I can find no basis in the Inheritance and Estate Tax Act or in any statutory or decisional law relative to life insurance for attempting to distinguish between the types of payments made to a beneficiary on death of the *82insured; all should be treated, as they have regularly been heretofore, as exempt under Section 303 of the Act.
Because the policies involved in this appeal are conceded by all concerned to be life insurance policies, the orphans’ court division was correct, in my view, in holding that all payments made to named beneficiaries by virtue of the terms of those policies are exempt from inheritance taxation.
EAGEN, J., joins in this dissent.

. “ ‘Value’ means the price at which the property would be sold by a willing seller, not compelled to sell, to a willing buyer, not compelled to buy, both of whom have reasonable knowledge of the relevant facts.” Inheritance and Estate Tax Act of 1961, Act of June 15, 1961, P.L. 373, Art. I, § 101 et seq., 72 P.S. § 2485-101 et seq. (sometimes herein referred to as “the Act”) § 102(24). An exception to this rule is made by Section 507 of the Act with respect to property subject to an option or agreement to sell.

. The valuation date is the date of the transferor’s death except as expressly provided to the contrary in the Act, § 501 of the Act, 72 P.S. § 2485-501. A major exception, not here applicable, pertains to transfers of any interest in property to take effect in possession and enjoyment after the expiration of one or more interests for a term of years, for life or for other limited period. With respect to such transfers the valuation date is the date the future interest takes effect in possession and enjoyment. § 506 of the Act, 72 P.S. § 2485-506.

. The Statutory Construction Act of 1972 provides that when the words of a statute are not explicit, the intention of the General Assembly may be ascertained by considering, among other matters, “the consequences of a particular interpretation.” 1 Pa.C.S. § 1921(c)(6). It is to be presumed that the General Assembly intends the entire statute to be effective and certain. Ibid., § 1922.

. The phrase was introduced into the law in 1942 when Congress added § 126 to the Internal Revenue Code of 1939. In general, it refers to those items of income which “accrued” to, but were not received by, a cash basis taxpayer in the year of his death under § 42 of the Revenue Act of 1934.

. An estate which has a right to receive income in respect of a decedent will include such income in the income tax filed by the estate only to the extent it is actually received; if the estate distributes a right to § 691 income to a specific legatee, the legatee becomes the taxpayer who must report the income when received. M. Carr Ferguson, Income and Deductions in Respect of Decedents and Related Problems, 25 Tax Law Rev. 1, 20 (1969).

. “In following a recipe for humming bird pie, the most difficult task is catching the humming birds. The sternest task in dealing with income in respect of a decedent is the task of detecting it. The statutory concept has never been satisfactorily defined. It is perhaps best understood in light of its legislative history and by example.” Ferguson, supra, n. 5, at 6. More than a score of articles on this subject appeared in a recent four' year period. See CCH Federal Tax Articles, 1968-72, § 69.15.

. These embrace not only back wages or salary, but fees, bonuses and commissions, certain categories of post-death benefits, proceeds from a qualified pension or profit sharing trust, the exercise of certain compensatory stock options, etc.

. For the varieties of transactions that may be included in this category, see Ferguson, supra, n. 5, at 41-58.

. See Ferguson, supra, n. 5, at 59-76.

. The ramifications and vagaries of this item are described in Ferguson, supra, n. 5, at 76-104.

. See Ferguson, supra, n. 5, at 104-126.

. See Ferguson, supra, n. 5, at 159.

. The problems in the federal tax law which the Court is now borrowing are not confined to identifying the kinds of property interests which are embraced within the term “income in respect of a decedent;” they also extend to ascertaining the appropriate deductions which are applicable to such income under section 691(b) of the Internal Revenue Code. See 2 Mertens, Law of Federal Income Taxation, § 12.102d pp. 419 et seq.; Ferguson, supra n. 5, at 134-148. In those estates where a federal estate tax is payable, the further deduction for a portion of that tax under Sec. 691(c) will become a factor in the determination of the amount of income tax for which the recipient of deferred income items is obligated. The propriety and accuracy of such deductions will, it would appear, now become a concern of the inheritance tax appraiser.

. Prior to 1942, as the majority opinion notes, earned but unpaid income items were included in the final returns of a decedent and taxed as part of his income in the tax year ending with his death; the payment of the tax was, of course, an obligation the estate had to defray and the clear value of the estate for Pennsylvania inheritance tax purposes was reduced accordingly. In order to eliminate this “bunching” in the final return of the decedent, the income tax law was changed to impose the income tax on the income to which the decedent was entitled on those persons who received it by reason of his death. See Ferguson, supra, n. 5, at 6-9.

. That this revision was carefully prepared was made clear by the chairman of the Joint State Government Commission, Baker Royer, Esq., in his forward to the 1963 Report of the Commission:
“Tentative drafts of the proposed legislation were critically examined by the bench and bar and numerous groups having specialized knowledge of the subject. The Commission and its advisors were aided substantially in their work by the Department of Justice and received helpful suggestions and advice *78from many individuals and groups, among them the Inheritance Tax Committee of the Tax Section of the Pennsylvania Bar Association, the Pennsylvania Bankers Association, Philadelphia Trust Companies Committee, Philadelphia Bar Association Tax Committee, and the Philadelphia Bar Association Orphans’ Court Committee.” General Assembly of the Commonwealth of Pennsylvania, Joint State Government Commission, Inheritance and Estate Tax Act of 1961, as amended, Foreward at V (1963).

. The legislature has never seen fit to make provision for valuing these income items in any way other than ordinary receivables are valued. Nor could the legislature create an inheritance tax deduction with respect to income taxes paid on income with respect to a decedent, for they are no longer debts of the decedent; they only become an estate obligation if the estate happens to be the recipient, in which event the tax is the estate obligation as a separate taxable entity. Contrary to the view expressed by Mr. Justice ROBERTS in his concurring opinion, it seems to me clear that neither of the two sections of the Pennsylvania Inheritance and Estate Tax Act of 1961 which allow a deduction for taxes can be applied to this type of tax obligation. Under Sec. 621 the taxes must have been owing prior to decedent’s death to be taxable; income taxes on income in respect of a decedent are not so owing. Under Sec. 622 a deduction is allowed for death taxes (other than federal estate tax) paid to other states or taxing jurisdictions outside the United States. The taxes we are here concerned with are not death taxes nor are they paid to any other state or to a foreign taxing jurisdiction.

. The federal government, when it enacted i 691 of the Internal Revenue Code, did seek to mitigate the effect of a recipient of income in respect of a decedent having to pay both income tax and an estate tax on such property. Thus § 691(c) allows the recipient of such income an offsetting income tax deduction for the portion of any federal estate tax attributable to the inclusion of such items in the decedent’s gross estate. See Income Tax Regulations § 1.691(c)(1). This provision does not, however, eliminate double taxation by the federal government, as the majority opinion seems to suggest. Opinion of the Court, supra, n. 3. It merely allows a portion of the federal estate tax to be taken as an income tax deduction. Thus if the income in respect of a decedent were $25,000 and the estate tax attributable thereto were $5,000, the latter figure would be a deduction from taxable income. Income tax would still be payable on $20,000, and estate tax on $25,000. Sec. 691(c) does not provide for a similar deduction with respect to state death taxes which are based in part on income assets.

. In cases involving the use of the term “proceeds” in wills and trust instruments, this Court has said that its meaning must depend upon the context in which it is used. See Estate of Rosenblum, 459 Pa. 201, 328 A.2d 158 (1974); see also Foster’s Estate, 324 Pa. 39, 187 A. 399 (1936); Haak Estate, 165 Pa.Super. 180, 67 A.2d 449 (1949).

. See R. Grossman & M. Smith, Pennsylvania Inheritance and Estate Tax § 303-4 (1971).
Conversely, a life insurance feature in an accident insurance policy should be treated as life insurance within the meaning of Sec. 303 of the Act. See Stark’s Estate, 43 Lane. 417 (1933).

. See Bayer’s Estate, 345 Pa. 308, 26 A.2d 202 (1942), in which it is said:
“It will be observed that, in the case of life insurance, for annual premiums payable to the company (which in effect are annuities paid by the insured) the company will pay a specified sum at the insured’s death; whereas the converse is true of the annuity contract, for, in that transaction the annuitant pays the single sum in consideration of which the company makes annual payments to him.”