Estate of Highberger

360 A.2d 580, 468 Pa. 120, 1976 Pa. LEXIS 664

• Court: Supreme Court of Pennsylvania
• Decided: July 6, 1976
• Docket: 22
• Status: Published

Opinions

OPINION OF THE COURT

ROBERTS, Justice.

Helen C. Highberger, a resident of New Jersey, died on March 24, 1971. Decedent was the record title holder of real property in Washington County, Pennsylvania. By agreement dated July 30, 1970, decedent had agreed to sell that property to Mr. and Mrs. William R. Taylor for $25,500. The agreement provided that the Taylors would take immediate possession of the property, make a $5,500 down payment, and make monthly payments until September 1, 1973, at which time the balance of the proceeds were due and a deed was to be delivered. The issue presented is whether decedent’s interest in the property is subject to the Pennsylvania Transfer Inheritance Tax.¹ The Orphans’ Court held that the property was exempt from the tax. We reverse.²

The Pennsylvania Inheritance and Estate Tax Act of 1961 provides:

“An inheritance tax for the use of the Commonwealth is hereby imposed upon every transfer subject to tax under this act at the rates hereinafter specified.” ³

Section 212 of the Act provides: “All transfers of property, as defined in this act . . . are subject to tax under this act.” ⁴

We must determine whether decedent’s interest in the Washington County property was within the act’s definition of “property.” Section 102 of the Act defines property, in relevant part, as:

“(iv) All real property and all tangible personal property of a non-resident decedent or transferor having its situs in Pennsylvania, including such property held in trust⁵

Appellant, the Commonwealth, argues that non-resident decedent had an interest in real property having its situs in Pennsylvania, that no exemption is applicable, and that the transfer of the property interest is therefore taxable. Appellee, the Estate of Helen C. Highberger, contends that the execution of the agreement to sell the Pennsylvania realty converted decedent’s interest into tangible personalty, exempt from the tax.⁶

It is settled law in Pennsylvania that the execution of an agreement of sale of real property converts, through the doctrine of equitable conversion, the seller’s interest into personalty and the buyer’s interest into realty. The seller is said to hold legal title as trustee for the purchaser.⁷,

However useful the doctrine of equitable conversion may be as a theory of property law it is not necessarily applicable in tax matters. Subject, of course, to constitutional limitations the Legislature is free to tax what it will.⁸ We must look to the intent of the Legislature, rather than to doctrines of property law, to determine whether decedent’s interest in the property is within the definition of property set forth in the act. In so doing, we are mindful that exemptions contained in taxing statutes are to be narrowly construed ⁹ and additional exemptions are not to be judicially created.¹⁰

This Court has previously considered whether the doctrine of equitable conversion is to be applied in inheritance tax cases. In Commonwealth v. Presbyterian Hospital, 287 Pa. 49, 134 A. 427 (1926), decedent, a non-resident, directed in his will that his real property in Pennsylvania be sold. The executor argued that the non-resident’s interest in Pennsylvania realty was not taxable because the decedent’s testamentary instructions worked an equitable conversion making the property interest intangible personalty. We there rejected the invitation to apply equitable conversion in the inheritance tax context.¹¹

In Paul’s Estate, 303 Pa. 330, 154 A. 503 (1931), a Pennsylvania resident died while under agreement to sell real property situated in New Jersey. The Commonwealth sought to assess a transfer inheritance tax and argued that the contract for the sale of the land was taxable personalty, because of the equitable conversion. We rejected the application of equitable conversion, stating:

“We are asked to disregard the fact of the testator still holding title to and possession of the lands, and to indulge in the make-believe that the land had been transmuted into something else. We are not prepared to do so.”

Decedent’s interest in the land was held to be not taxable.

The Legislature subsequently acted to clarify the definition of “property” in the Act to make an interest, such as decedent held in Paul’s Estate, taxable.¹²

Appellee contends that the Legislature clearly acted to repudiate this Court’s assertions in Paul’s Estate that equitable conversion was not applicable in an inheritance tax case. We do not agree with this interpretation. Rather, the subsequent change in the Inheritance Tax Act only altered the definition of property as it concerned resident decedents.¹³ The change may better be viewed as an indication that the General Assembly wished to tax to the fullest extent constitutionally possible, without regard to whether equitable conversion took place. Knowing that this Court did not favor application of the doctrine in the tax context, the Legislature did not see a need to address the question in terms of the definition of property of a non-resident. Thus, the legislative action shows that the General Assembly intended to disavow this Court’s rejection of equitable conversion only when the rejection of the doctrine resulted in an exemption from the tax. When, as here, our failure to apply the fiction results in imposition of the tax the legislative intent is accommodated.¹⁴

This is the conclusion reached by Grossman and Smith in Pennsylvania Inheritance and Estate Tax (1971 ed.), § 102(17)(iv)-3.3, at 26-27: as a forceful repudiation of the doctrine of equitable conversion in tax matters, applicable to all estates even though the problem of a resident decedent’s realty located outside Pennsylvania was the only problem there before the court. If this be true interpretation, then all aspects of the rule of equitable conversion for tax purposes have vanished from the tax law dealing with the definition of ‘real property,’ and the rule is not revived in the 1961 Act in respect to nonresidents owning Pennsylvania realty. Such realty would remain taxable even though under agreement of sale at the nonresident’s death, for equitable conversion is revived only in 1961 § 102(17) (iii), which is not applicable to nonresidents.

“The 1961 Act is silent as to equitable conversion in the case of a nonresident’s Pennsylvania realty bound by a contract to sell, and the issue thus becomes whether Paul’s Estate has overruled the earlier decisions, or whether those earlier decisions survive under 1961 § 102(17) (iv) as part of the definition of ‘real property.’ Paul’s Estate can certainly be interpreted

“It would seem self-evident that the rule intended to be embodied in 1961 § 102(17) was that real estate remained real estate, regardless of testamentary powers of sale or agreements of sale not ripening into conveyances before death, and that equitable conversion is a part of the 1961 law only in the limited situation described in 1961 § 102(17) (iii). There is no indication that ‘real property’ as used in 1961 § 102(17) (i) means anything different from the same term as used in 1961 § 102(17) (iv), and the implication to be derived from the very existence of 1961 § 102(17) (iii) is that the legislature believed that, absent that provision, equitable conversion was completely ineffective under the Act. Since 1961 § 102(17) (iii) revives the doctrine only for residents owning realty outside Pennsylvania, and only in certain specific situations there described, the application of the doctrine, in any of its aspects, to Pennsylvania realty owned by nonresidents, would be equivalent to a determination that the term ‘real property’ had wholly different meanings in 1961 §§ 102(17) (i) and (iv), meaning realty without regard to equitable conversion when used in 1961 § 102(17) (i) [hence the need for 1961 § 102(17) (iii)] and realty only after the doctrine had been applied when used in 1961 § 102(17) (iv).

“Therefore, it would appear to be the law under the 1961 Act that a nonresident’s Pennsylvania realty remains taxable in Pennsylvania despite the existence of facts giving rise to equitable conversion for non-tax purposes.”

Appellee correctly points to a number of situations where equitable conversion would be applied and decedent’s interest would be considered personalty.¹⁵ In none of these cases, however, would the doctrine be applied in the face of a discernible legislative intent to the contrary. Here, decedent held legal title to Pennsylvania real property. No statutory exemption from the imposition of the tax is applicable nor may we create one.

Decree of the Orphans’ Court reversed. Each party pay own costs.

POMEROY, J., filed a dissenting opinion, in which MANDERINO, J., joins.

1 . See Act of June 15, 1961, P.L. 373, §§ 101 et seq., 72 P.S. §§ 2485-101 et seq. (1964).

2 . We hear this appeal under authority of the Appellate Court Jurisdiction Act of 1970, Act of July 31, 1970, P.L. 673, art. II, § 202(3), 17 P.S. § 211.202(3) (Supp.1975).

3 . Act of June 15, 1961, P.L. 373, art. II, § 201, 72 P.S. § 2485-201 (1964).

4 . Id. § 212, 72 P.S. § 2485-212 (1964).

5 . Id., art. I, § 102(17)(iv), 72 P.S. § 2485-102(17)(iv) (1964).

6 . “Intangible personal property held by ... a decedent who, at the time of his death was a non-resident, is exempt from inheritance tax.”

Id., art. Ill, § 306, 72 P.S. § 2485-306 (1964).

7 . Payne v. Clark, 409 Pa. 557, 561, 187 A.2d 769-70 (1963); Kerr v. Day, 14 Pa. 112 (1850); see, Ladner on Conveyancing in Pennsylvania, § 5:26 (3d ed. 1961); cf. DiDonato v. Reliance Standard Life Ins. Co., 433 Pa. 221, 249 A.2d 327 (1969).

8 . See Mastrangelo v. Buckley, 433 Pa. 352, 250 A.2d 447 (1969); Goldstein v. School District, 372 Pa. 188, 93 A.2d 243 (1953); In re Baltimore & Philadelphia Steamboat Co., 302 Pa. 364, 153 A. 559 (1931); Clouser v. Reading, 270 Pa. 92, 113 A. 188 (1921); Hilbish v. Catherman, 64 Pa. 154 (1870); Weister v. Hade, 52 Pa. 474 (1866).

9 . See, e. g., Four Freedoms House of Philadelphia v. Philadelphia, 443 Pa. 215, 279 A.2d 155 (1971); Y. M. C. A. v. Reading, 402 Pa. 592, 167 A.2d 469 (1961); McGuire v. Pittsburgh School District, 359 Pa. 602, 60 A.2d 44 (1948); Commonwealth v. Clark, 344 Pa. 155, 25 A.2d 143 (1942); Commonwealth v. Philadelphia Toilet & Laundry Co., 339 Pa. 261, 13 A.2d 411 (1940).

10 . Cf. Wynnfield United Presbyterian Church v. Philadelphia, 348 Pa. 252, 35 A.2d 276 (1944); In re Bayer’s Estate, 345 Pa. 308, 26 A.2d 202 (1942).

11 . Commonwealth v. Presbyterian Hospital reversed a long line of cases which held that directions in a will to sell property worked an equitable conversion of the property. See e. g., Brennan’s Estate, 277 Pa. 509, 121 A. 321 (1923); Davidson v. Bright, 267 Pa. 580, 110 A. 301 (1920); Chamberlain’s Estate, 257 Pa. 113, 101 A. 314 (1917); Handley’s Estate, 181 Pa. 339, 37 A. 587 (1897).

12 . In the Act of June 15, 1961, P.L. 373, art. I, § 102, 72 P.S. § 2485-102(17)(iii) (1964), the General Assembly changed the definition of “property” formerly suggested by the Act of 1919, P.L. 521, § 1(b), formerly codified as 72 P.S. § 2301. The change specifically addresses “All real property and all tangible personal property having its situs outside the Commonwealth, owned by a resident decedent . . . .” The 1963 Report of the Joint State Government Commission states, “This changes existing case law: Paul’s Est. . . . ” The changed section does not, however, deal with the question presented in this case.

13 . See note 12, supra. Subsection (17)(iv), applicable in this case, was not altered from the form originally suggested by the Act of 1919, P.L. 21, § 1(b), formerly codified as 72 P.S. § 2301.

14 . This result was also reached in Hufnagel Estate, 64 Pa.D. & C. 2d 572 (Allegheny Co. O.C.1969) which presented the identical fact situation except the vendor had possession on the date of death. The doctrine of equitable conversion has been applied in inheritance tax cases by courts in some other states. E. g., Department of Revenue v. Baxter, 486 P.2d 360 (Alaska 1971); Estate of Briebach, 132 Mont. 437, 318 P.2d 223 (Mont.1957); In re Eilermann’s Estate, 179 Wash. 15, 35 P.2d 763 (Wash.1934). The decision of those courts was, of course, based on their case law and statutes. The actions of the Pennsylvania General Assembly, in view of our case law, persuades us that equitable conversion is not to be applied in this case.

15 . E. g., the doctrine of equitable conversion may apply: to transmit the property if seller or purchaser had died intestate, Kerr v. Day, 14 Pa. 112 (1850); to determine who bears the risk of loss until delivery of the deed, DiDonato v. Reliance Standard Life Ins. Co., 433 Pa. 221, 249 A.2d 327 (1969).