In re Armor
| Decision Date | 07 November 2022 |
| Docket Number | 1241 C.D. 2021 |
| Parties | In Re: Estate of William R. Armor and the Armor Family Trust Appeal of: Department of Revenue, Inheritance Tax Division |
| Court | Pennsylvania Commonwealth Court |
The Department of Revenue, Inheritance Tax Division (Department) appeals the order of the Westmoreland County Court of Common Pleas (orphans' court), dated September 28, 2021, and entered October 4, 2021, which reversed an order of the Department's Board of Appeals (Board). The Board's order denied a written protest David W. Armor (Executor) filed challenging the Department's assessment of inheritance tax on a transfer of property held in trust between his parents, William R. Armor (Husband) and Josephine S. Armor (Wife) (collectively, the Armors). The Department argues Section 2107(c)(7) of the Inheritance and Estate Tax Act (Act)[1]requires the imposition of tax. This Court recently addressed a similar dispute in In re Estate of Potocar,__ A.3d__ ( (en banc). Based on that decision, we affirm.
The Armors created the Armor Family Trust (Trust) on August 17, 2004. The Armors expressly created the Trust to qualify as a "grantor trust" under Section 676 of the Internal Revenue Code, 26 U.S.C. § 676.[2] Reproduced Record (R.R.) at 48a. In addition, the Trust provided that the Armors would be the trustors and trustees of the Trust, and that property transferred to the Trust "shall be held by the [t]rustee[s] for the benefit of the [t]rustors as tenants by the entireties." Id. at 48a-49a. The Trust granted the Armors power to revoke or amend the Trust, invade the Trust principal, and transfer portions of the trust estate to others during their joint lifetimes. If the Armors revoked all or part of the trust estate, the property subject to revocation would "revert to both [t]rustors as joint tenants with right of survivorship." Id. at 49a.
The Armors executed a First Amendment to the Trust on April 17, 2015. The 2015 amendment changed the revocation provision in the Trust to indicate that, if the Armors revoked all or part of the trust estate, the property subject to revocation would "revert to both [t]rustors as tenants by the entireties." Id. at 35a. The 2015 amendment also eliminated language in the Trust providing for the option to create a separate trust if one of the Armors died and the "[s]urviving [s]pouse effectively disclaims all of his or her beneficial interest or interests in all or any specific portion of the [t]rust [e]state comprising the [d]eceased [s]pouse's interest." Id. at 51.
Husband died on June 6, 2016. Executor filed a Pennsylvania inheritance tax return on September 8, 2017,[3] which listed property totaling $3,606,143, the large majority of which was held in the Trust. The return indicated that the property was subject to a spousal tax rate of 0% and, thus, that no tax was due. On January 23, 2018, the Department issued a notice of inheritance tax appraisement, allowance or disallowance of deductions, and assessment of tax. The notice divided the property disclosed on the return, indicating $465,184 was subject to the spousal tax rate of 0%, but $3,140,959 was subject to the 15% rate that applied to all persons who did not qualify for a lower rate by virtue of a specified family relationship. This resulted in a tax due of $471,143.85, plus interest and penalties of $17,517.13, for a total of $488,660.98.
The Department's notice explained this assessment by citing a Trust provision that enabled the trustee to "distribute principal to anyone during the lifetime of the surviving spouse." Id. at 5a. The notice stated: Id.
Executor filed a written protest with the Board.[4] He argued that all the Trust's property belonged to Wife, that no one other than Wife had an interest in the Trust, and that Wife could amend or revoke the Trust at will. Thus, Executor argued Trust property was Wife's "sole and separate property." Id. at 3a. Because Pennsylvania does not assess inheritance tax on transfers of property between spouses, he asserted, the Department's imposition of tax was improper.
On November 13, 2019, the Board issued a decision and order, denying the protest. The Board cited Section 2107(c)(5) of the Act, which imposes inheritance tax on transfers made during a transferor's life and without adequate consideration, if the transferor reserved for life or for a period not ending before death "possession or enjoyment of, or the right to the income from, the property transferred, or the right, either alone or in conjunction with any person not having an adverse interest, to designate the persons who shall possess or enjoy the property transferred or the income from the property . . . ." 72 P.S. § 9107(c)(5). The Board relied on portions of the Trust providing that the trustee pay to the trustors the entire net income of the Trust and as much of the Trust principal as they request, and that the trustors could direct the trustee to transfer Trust property to others. Because Husband was both a trustee and a trustor, the Board asserted, he had "the possession or enjoyment of, or the right to the income from, all the Trust assets during his lifetime." Id. at 82a. Further, the Board reasoned, Husband could "essentially distribute the entire Trust" to anyone at any time, such that "there is no way to quantify the range of possible scenarios." Id. The Board concluded it was appropriate to assess inheritance tax at a rate of 15%, "the highest rate in the chain of potential beneficiaries." Id.
Executor appealed the Board's decision to the orphans' court.[5] Pertinently, he argued there were several provisions in the Act "overriding" Section 2107(c)(5).
According to Executor, these included Section 2111(m) of the Act.[6] That section, with limited exception, exempts from inheritance tax "[p]roperty owned by husband and wife with right of survivorship . . . ." 72 P.S. § 9111(m). Executor also cited Section 2113 of the Act,[7] which provides deferred tax treatment for "sole use trusts." A transferor creates a "sole use trust" by transferring "property for the sole use of the transferor's surviving spouse during the surviving spouse's entire lifetime . . . ." 72 P.S. § 9113(a). Finally, Executor cited Section 2116(1.1)(ii) of the Act,[8] setting the tax rate at 0% for "the transfer of property passing to or for the use of a husband or wife . . . ." 72 P.S. § 9116(1.1)(ii). Executor argued once again that an assessment of inheritance tax was improper because Wife had "complete control and ownership" of the property in the Trust. R.R. at 102a, 144a.
The Department responded to Executor's appeal, contending that the "only way" he could have avoided inheritance tax was by deferring it through a "sole use trust" under Section 2113. Id. at 120a. The Department further contended, however, that the Trust did not meet the requirements to be a "sole use trust." The Department emphasized Section 2102 of the Act,[9] defining "transfer of property for the sole use" as "[a] transfer to or for the use of a transferee if, during the transferee's lifetime, the transferee is entitled to all income and principal distributions from the property and no person, including the transferee, possesses an inter vivos power of appointment over the property." 72 P.S. § 9102. The Department noted that Wife retained an inter vivos power of appointment. The Department proposed that tax was due under Section 2107(c)(7), which imposes tax on transfers made during a transferor's life and without adequate consideration, if, relevantly, "the transferor has at his death, either in himself alone or in conjunction with any person not having an adverse interest, a power to alter, amend or revoke the interest of the beneficiary . . . ." 72 P.S. § 9107(c)(7).
By order dated September 28, 2021, and entered October 4, 2021, the orphans' court reversed the Board. The orphans' court did not provide a thorough explanation of its reasoning but, after summarizing the parties' arguments, noted simply that it was "constrained to agree with" Executor, and that it must "follow the established legal principles that are applicable to this particular fact situation." R.R. at 181a. Thus, the court concluded no inheritance tax was due.
The Department filed an appeal to this Court. The orphans' court directed the Department to submit a concise statement of errors complained of on appeal, and the Department complied. On appeal, the Department once again argues that the Trust is not a "sole use trust" under Section 2113 and, therefore, is subject to inheritance tax under Section 2107(c)(7).
The Department's appeal requires us to interpret the Act and consider whether the assessment of inheritance tax was improper. Statutory interpretation presents a question of law for which our standard of review is de novo and our scope of review is plenary. Meyer v. Cmty. Coll. of Beaver Cnty., 93 A.3d 806, 813 (Pa. 2014) (citing Dechert LLP v. Commonwealth, 998 A.2d 575, 579 (Pa. 2010)). That is, we do not defer to the orphans' court when making a decision and may review the entire record on appeal. Mercury Trucking, Inc. v. Pa. Pub. Util Comm'n, 55 A.3d 1056, 1082 (Pa. 2012) (citing Heath v. Workers' Comp. Appeal Bd. (Pa. Bd. of Prob. &Parole), ...
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