In re Estate of Zambrano

• Decision Date: 26 April 2005
• Citation: 875 A.2d 307
• Parties: In re ESTATE OF Eugene ZAMBRANO, Sr., Deceased Appeal of Eugene D. Zambrano, Jr., and Eugene D. Zambrano, III.
• Court: Pennsylvania Superior Court

875 A.2d 307

In re ESTATE OF Eugene ZAMBRANO, Sr., Deceased

Appeal of Eugene D. Zambrano, Jr., and Eugene D. Zambrano, III.

Superior Court of Pennsylvania.

Argued December 8, 2004.

Filed April 26, 2005.

Thomas M. Ferguson, Pittsburgh, for appellants.

Daniel P. Johnson, Pittsburgh, for appellee.

Before: HUDOCK, MUSMANNO and TAMILIA, JJ.

TAMILIA, J.:

¶ 1 Eugene D. Zambrano, Jr., and Eugene D. Zambrano, III, son and grandson, respectively, of the decedent and residuary beneficiaries of his estate, appeal from the March 25, 2004, Order denying all exceptions and cross-exceptions to, and making final, the December 16, 2003 Order adopting and affirming, with certain exceptions, the master's findings and conclusions relative to, inter alia, the apportionment of federal taxes.¹

Eugene D. Zambrano [Sr.] died August 6, 1995. Virginia R. Zambrano, Administratrix, c.t.a., of the Estate of Eugene D. Zambrano, Sr., filed a Petition to Apportion and Pay Death taxes with the court on June 21, 2001. On February 27, 2002, to provide additional expertise on the issues presented, [the] Court appointed a special Master to mediate the parties' dispute, and, if no resolution was reached, to hear all issues brought forth, take testimony, consider the evidence, and provide [the] Court with findings of fact and conclusions of law. The Administratrix filed her First and Partial Account on March 4, 2002. During the course of the litigation, the Residuary Beneficiaries, Eugene D. Zambrano, Jr., and Eugene D. Zambrano, III, answered the apportionment petition, and filed objections to the accounting and to remove Virginia Zambrano as Administratrix, and concerning the apportionment of federal taxes. (See [the] court's orders of January 17, 2002 and February 27, 2002.) The Master's hearing took place on January 21st through the 24th of 2003, with a court reporter present to record the proceedings.

On June 25, 2003, the Master issued his Report (hereinafter "Master's Report" or "Report"), and on October 20 and 21 of 2003 this Court heard arguments on the Report of the Master and held a hearing to consider the award of attorney fees. (A transcript of the proceedings is part of the record.) An Order was entered adopting the Master's Report on December 16, 2003. The Order incorporated several changes modifying the Master's Conclusions of Law and rejected Conclusion 4 assessing a portion of the Estate's attorney fees and Master's fees against the Residuary Beneficiaries. It is to this Order that Residuary Beneficiaries filed exceptions and the Administratrix files cross exceptions. Upon review of the record and after giving due consideration to the briefs and reply briefs submitted, the court [denied] all exceptions and cross exceptions.

Trial Court Opinion, Mazur, J., 3/25/04, at 2-3.

¶ 2 As further background, we note the decedent died testate, leaving a joint will with his spouse, which was admitted to probate on October 18, 1995.² The will essentially was a mirror will, with wife inheriting most of the estate.

¶ 3 The master's conclusions included the following. The joint property inherited by wife qualified for the marital deduction and was not part of the residue. Since the joint marital property she received did not cause any death tax, wife was not a beneficiary subject to tax apportionment. The parties apparently do not dispute this finding. Two beneficiaries were left subject to apportionment, (1) son, who inherited non-probate items including a $128,174 life insurance policy and his father's 50% interest in The Zambrano Joint Venture, valued at $635,390 for federal tax purposes, which son and father held jointly, for a total of $763,564 in taxable transfers; and (2) the net residuary estate of $124,481. Master's report, 6/25/03, at 26. The master concluded grandson was not one of the taxable beneficiaries who must bear a portion of the federal estate tax. The federal estate tax, therefore, was calculated as follows:

Initial Percentage of Apportionable Total Taxable Amount of Beneficiaries Taxable Transfers Transfers Federal estate tax ------------------------------------------------------------------------------------------- Eugene D. Zambrano, Jr. — $763,564 85.98% $209,957 Joint Venture/Life Insurance ------------------------------------------------------------------------------------------- Residuary Estate 124,481 14.02% 34,236 ------------------------------------------------------------------------------------------- Virginia R. Zambrano — 0 0 0 Joint Assets ------------------------------------------------------------------------------------------- Total $888,045 100% $244,193

¶ 4 The master further explained that in the apportionment of federal estate tax, credit for payment of Pennsylvania's inheritance tax inures to the benefit of the parties who paid the state death tax, in proportion to the amount of state taxes paid by each. Pennsylvania inheritance tax was apportioned solely to son and grandson. As indicated above, grandson was not a taxable beneficiary who must bear a portion of federal estate tax. Accordingly, son was the only beneficiary who was required to bear some of the federal tax and was "chargeable" with the payment of state death tax, i.e. receives a credit for state death taxes paid. The master therefore gave son credit for the $27,026 for state death taxes paid, reducing the federal estate tax apportioned to him to $182,931.

¶ 5 The master also considered the taxes attributable to a certain PNC Bank account. The administratrix had requested from PNC Bank a listing of the accounts in decedent's name. PNC responded with a letter which included the account at issue. Accordingly, the account was reported and taxed as part of the residue for both federal and Pennsylvania death tax purposes. The balance of the account as of the date of decedent's death was $49,044. The master apportioned the $13,489 in federal taxes attributable to this account,³ being part of the tax apportioned to the residuary estate, to son and grandson, jointly and severally, as the owners of Zambrano Corporation but without any interest apportioned thereto. Instead, the interest on this tax was to be borne by the residuary estate. Id., at 30-31.⁴

¶ 6 The master therefore calculated the following "final" apportionment of federal estate tax:

Eugene D. Zambrano, Jr. $182,931 Net Residuary Estate 20,747 Eugene D. Zambrano, Jr./Eugene D Zambrano, III 13,489 _________ $217,167 _________

¶ 7 We note that as appellants dispute only the apportionment of federal estate tax and apparently have no dispute as to Pennsylvania's inheritance tax, we will not discuss Pennsylvania's inheritance tax.⁵ It is also important to note that after the administratrix initially filed Pennsylvania inheritance tax and federal estate tax returns, she filed supplemental returns in 1997. As a result, the taxable estate for federal purposes, and correspondingly the federal estate tax, was reduced. The federal estate tax was determined to be $217,166, the penalty was reduced to $16,737.03, and the accrued and unpaid interest as of May 13, 2002 was $118,554.93.

¶ 8 In 2002, the administratrix filed a second supplemental estate tax return. According to the master, this return claims additional deductions of $227,940 for interest that had been paid or accrued on the unpaid estate tax, inheritance tax and income tax obligations. If this supplemental return is accepted, the federal estate tax liability will be reduced from $217,166 to $134,443, with corresponding reductions in interest and perhaps in penalties as well. Master's report at 15.⁶

¶ 9 The master found that the federal estate tax, as determined by the 1998-1999 Internal Revenue Service (IRS) audit, had been paid in full pursuant to levies on estate assets in the amount of $268,118.43, and a direct payment by the estate of $37,500, for total payments of $305,618.43. Id., at 17, 39. Penalties and interest, however, had not been paid in full and neither of the Zambranos had paid any federal estate tax.

¶ 10 In this appeal, appellants raise three issues which we will address seriatim:

1. Where an estate has paid only a fraction of the federal estate tax and the amount of the federal estate tax has not been finally determined by the Internal Revenue Service, may the Orphans' Court nonetheless apportion the federal estate tax to a party interested in property includible in the gross estate?

2. Where Pennsylvania law provides for a statutory methodology in apportioning federal estate tax to parties interested in property in the gross estate, may the Orphans' court utilize a statutory methodology contrary to the express statutory language?

3. May the Orphans' Court adopt a discretionary apportionment methodology of federal estate tax not authorized under the provisions of 20 Pa.C.S.A. § 3702?

Appellants' brief at 5.

Our standard of review from a final order of the Orphans' Court Division requires that we accord the findings of an Orphans' Court, sitting without a jury, the same weight and effect as the verdict of a jury. Thus, we will not disturb those findings absent manifest error. We shall modify an Orphans' Court order only if the findings upon which the order rests are not supported by competent or adequate evidence or if the court engaged in an error of law, and abuse of discretion, or a capricious disbelief of competent evidence.

In re Estate of Ciaffoni, 787 A.2d 971, 973 (Pa.Super.2001) (citations omitted).

¶ 11 Initially, appellants argue the court misinterpreted and misapplied the provisions of 20 Pa.C.S.A. § 3702, Equitable apportionment of Federal estate tax. They argue it is common practice for the estate to pay the federal estate taxes and then "seek contribution from parties interested in property includible in the gross estate." Appellants' brief at 15. Appellants also contend that since, as of the filing of appellate briefs with this Court, the IRS had not made a determination...