In Re: Estate of W.T. Woolslare, ~ Appeal of: A.F. Woolslare ( 2016 )


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  •           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
    

Document Info

Docket Number: 1100 C.D. 2015

Judges: Leavitt, J.

Filed Date: 2/19/2016

Precedential Status: Non-Precedential

Modified Date: 12/13/2024