Remmel Estate ( 1967 )

Opinion by

Mr. Justice Roberts,

Althea E. Remmel, a resident of Pittsburgh, died on March 20, 1963, leaving an estate, which consisted entirely of personalty valued at $1,684,122.35. Deductible debts and expenses amounted to $102,573.45. By her will and the codicils thereto, decedent gave specific and pecuniary legacies to certain named persons totalling $48,945 and created a trust of the residue. This trust was divided into seventeen equal parts, the income from each of which was given to an individual life beneficiary and, in certain instances, to a successive life beneficiary. Upon the death of the beneficiary or beneficiaries entitled to receive the income from any 1/17 share of the principal of the residue that 1/17 share of principal was to be distributed to the W. H. Remmel and Althea F. Remmel Foundation, to be devoted exclusively to charitable purposes. (One of the life beneficiaries had predeceased the settlor which thereby accelerated the charitable remainder as to that 1/17 of the residue.) Mrs. Remmel expressly provided in her will that all inheritance taxes on property passing under her will be paid out of the residuary estate “or the principal of any trust succeeding thereto” and that all other legacies were given free of such taxes.

The Commonwealth assessed the combined value of the various remaining life estates to be $881,770.07 out of a total residuary estate of $1,532,603.90 or 54.34053% of that residue. Thus the combined present value of the charitable share was the reciprocal thereof, or 45.65947% of the residue. The present appeal is by the Pittsburgh National Bank, Executor under the Will of Althea F. Remmel, deceased, from the decree of the court en banc of the Orphans’ Court of Allegheny County sustaining the Commonwealth’s appraisement of the inheritance tax in the decedent’s estate.

The dispute between the Commonwealth and the appellant concerns the method of computation utilized in arriving at the amount of tax due the Commonwealth. In particular, appellant’s position is that the court below erred in permitting the Commonwealth to subtract deductions for allowable expenses and debts from a total estate valuation which included the value of charitable gifts bequeathed by the residuary clause of the decedent’s will. Appellant insists that §601 of the Inheritance and Estate Tax Act of 1961,¹ requires these deductions to be made from an estate valuation from which the amount of the charitable gifts has first been excluded. The tax consequences of the respective computations are reflected in the following comparison:²

Commonwealth’s Appellant’s Computation Computation Difference

Total Assets $1,684,122.35 $1,684,122.35

Taxable specific bequests ... 48,945.00

Taxable life estates in $1,-635,177.35 balance (54.34053%) 888,564.04

Appraisement—Gross Estate . 1,684,122.35 937,509.04

Dess: allowable debts & expenses 102,573.45 102,573.45

Clear value .................. 1,581,548.90 834,935.59

Taxable specific bequests ... 48,945.00

Taxable life estates in $1,-532,603.90 balance (54.34053%) 832,825.08

Taxable ................... 881,770.08 834,935.59 $46,834.49^*

Tax at 15% ............... $ 132,265.51 $ 125,240.34 $ 7,025.17

An inheritance tax is neither a tax on the property of the decedent or on the transfer of such property but rather a tax on the right of succession in the estate of the decedent. Belefski Estate, 413 Pa. 365, 369-70, 196 A. 2d 850, 852 (1964); Tack’s Estate, 325 Pa. 545, 549, 191 Atl. 155, 157 (1937); Orcutt's Appeal, 97 Pa. 179, 185 (1881). The tax which is imposed “upon every transfer subject to tax under this act”³ is “computed upon the value of the property, in excess of the deductions hereinafter specified.”⁴ In determining the gross value of the estate from which the deductions are taken “the appraisement to be made is not of the legacies or devises but of tbe whole estate of a decedent; the debts and expenses of administration are not to be deducted from any particular gift or gifts, but from the whole estate.” Frick’s Estate, 277 Pa. 242, 250, 121 Atl. 35, 38 (1923), rev’d on other grounds,⁵ 268 U.S. 473, 45 S. Ct. 603 (1925); accord, Tack’s Estate, supra at 551, 191 Atl. at 157-58; Camp’s Estate, 298 Pa. 405, 148 Atl. 496 (1930).

We cannot agree with appellant that the Commonwealth’s computation denies the estate the full use of its legitimate deduction under §601 of the 1961 Act, which provides: “The only deductions from the value of the property transferred shall be those set forth in this Article. Except as otherwise expressly provided in this Act, they shall be deductible regardless of whether or not assets comprising the decedent’s taxable estate are employed in the payment or discharge of the deductible items: Provided, That when a tax is imposed upon a transfer described in sections 221-241, such deductions shall be allowed to the transferee only to the extent that the transferee has actually paid the deductible items and either (1) the transferee was legally obligated to pay the deductible items, or (2) the estate subject to administration by a personal representative is insufficient to pay the deductible items.” Appellant relies principally on the clause that deductions “shall be deductible regardless of whether or not assets comprising the decedent’s taxable estate are employed in the payment or discharge of the deductible items.” Thus the executor insists that the debts and expenses borne by exempt assets are expressly made deductible against taxable transfers. However, in our view the crucial factor is not the exempt nature of the charitable gifts but rather their derivation from the residuary estate.

A residuary legatee is one who receives the remaining assets of an estate after the satisfaction of all other legacies and the payment of all debts of the estate and costs of administration, Thaw Estate, 414 Pa. 347, 352, 200 A. 2d 290, 293 (1964); Bricker’s Estate, 335 Pa. 300, 303, 6 A. 2d 905, 906-7 (1939). While the Remmel Foundation is entitled to receive, upon the termination of the life interests, the residue of Mrs. Remmel’s estate, the size of this residue is itself dependent upon the extent of these other obligations, including the amount of the inheritance tax.

The Commonwealth’s computation, whereby the allowable deductions are subtracted from the decedent’s total assets, admittedly results in fewer dollars ultimately being received by the foundation. But this does not constitute a tax on charities, for decedent herself made the decision that any tax due be paid out of the residuary estate⁶ and thereby reduced the residue by the amount of tax before her gift to charity. It is only the balance remaining in the residuary estate that decedent gave to the foundation and there is no tax upon that gift. See Foster Estate, 24 Pa. D. & C. 2d 182, 186 (D.C. Erie, 1960).⁷ Accordingly, the charitable gift must be viewed as a nontaxable transfer made from the net distributive estate, not property which is excluded from the estate itself.

Appellant argues that the inclusion of the value of the estate passing to the foundation results in approximately 45% of the allowable deductions being wasted on exempt assets. The executor relies heavily upon Kritz Estate, 387 Pa. 223, 127 A. 2d 720 (1956) and Kershaw Estate, 352 Pa. 205, 42 A. 2d 538 (1945) in support of its conclusion that the noncharitable beneficiaries should be entitled to the full benefit of allowable deductions. Both cases, however, are inapposite. Kritz and Kershaw held that a mortgage debt of the decedent was deductible even though the property subject to the mortgage was owned as a tenancy by the entireties and thus not includible in the estate’s appraisement value. Unlike the instant case, they did not involve a determination of what portion of the estate is to be included in the appraisement of the estate’s gross value from which the deductions are taken.⁸

Decree affirmed. Each party to pay own costs.

1 Act of June 15, 1961, P. L. 373, §601, 72 P.S. §2485-601.

* Being the same as the residuary charitable factor of 45.65947% multiplied by the debts and expenses of $102,573.45.

2 Taken from appellant’s brief, p. 21.

3 Act of June 15, 1961, P. D. 373, §201, 72 P.S. §2485-201.

4 Act of June 15, 1901, P. D. 373, §401, 72 P.S. §2485-401.

5 The issue before tbe United States Supreme Court was the extent to which a decedent’s estate could be subjected to taxation by both the state of domicile and other states in which the decedent had personal property at the time of his death.

6 Mrs. Remmel’s will specifically provided for the payment of inheritance tax from the residuary estate. Under the Act of June 15, 1961, P. L. 373, §718, 72 P.S. §2485-718, taxes are paid out of the residuary estate unless there is a contrary intention appearing in the will. This section reverses the practice under prior 3aw.

7 It is strenuously argued that Foster Estate, which was decided under the Act of June 20, 1919, P. L. 521, §2, has no precedential value for a case arising under §601 of the 1961 Act. We do not agree. See Grossman & Smith, Pennsylvania Inheritance and Estate Tax §601-2 at 301 (1961) ; see generally id. at §302-2.4.

8 The dissenting opinion’s reliance upon §706 of the Act of 1961 is likewise misplaced. Before the Secretary of Revenue can determine the value of the decedent’s estate he must first determine which assets are includible therein. Thus the threshold question posed by this appeal is whether the inclusion of the residuary estate in the appraisement value of the decedent’s estate amounts to a tax on charities and for the purpose of determining this threshold question, the amount of the tax is insignificant. The majority opinion answers this question in the negative whereas the dissent assumes an affirmative answer and then seeks to demonstrate, on the strength of that assumption, that the imposition of a tax on charities runs counter to the Act. Under the terms of the will the inheritance tax, which is imposed only upon the specific gifts to individuals, is to be paid out of the residuary estate, with the remainder, if any, going to the charitable foundation. Indeed, conceptually the Commonwealth’s computation no more amounts to a tax on charities than does the appellant’s, for under either approach the ultimate gift to charity is reduced by the amount of the inheritance tax which the estate must pay. Appellant’s calculation, moreover, would result in a specific gift to an individual followed by a charitable remainder being subject to less tax than the same gift not foUowed by a charitable remainder. The Act of 1961 did not intend to have the effect of reducing the specific legatee’s liability (whether this liability is to be satisfied out of his gift or the residuary estate) but simply to exempt charities from paying a tax on their inheritance.