In re Estate of Potocar

Decision Date30 September 2022
Docket Number662 C.D. 2020,No. 662 C.D. 2020
Citation283 A.3d 936
Parties IN RE: ESTATE OF Edward J. POTOCAR, Deceased, Potocar Family Trust Appeal of: Department of Revenue, Inheritance Tax Division
CourtPennsylvania Commonwealth Court

Michelle A. Ross, Canonsburg, for Appellant.

Patrick J. Felix, III, Carnegie, for Appellees.

BEFORE: HONORABLE RENÉE COHN JUBELIRER, President Judge, HONORABLE ANNE E. COVEY, Judge, HONORABLE MICHAEL H. WOJCIK, Judge, HONORABLE CHRISTINE FIZZANO CANNON, Judge, HONORABLE ELLEN CEISLER, Judge, HONORABLE LORI A. DUMAS, Judge, HONORABLE STACY WALLACE, Judge

OPINION BY JUDGE WALLACE

The Department of Revenue, Inheritance Tax Division (Department) appeals the order of the Allegheny County Court of Common Pleas (orphans’ court), dated December 16, 2019, which reversed an order of the Department's Board of Appeals (Board). The Board's order denied a written protest Anita N. Potocar (Wife) filed, appealing the Department's assessment of inheritance tax following the death of her husband, Edward J. Potocar (Husband) (collectively, the Potocars). The Department argues the orphans’ court incorrectly determined the Potocar Family Trust (Trust) was a "sole use trust" and subject to deferred inheritance tax treatment under Section 2113 of the Inheritance and Estate Tax Act (Act).1 The Department further argues that, because the Trust was not a "sole use trust," immediate inheritance tax was due under Section 2107(c)(7) of the Act.2 After careful review, we affirm, albeit on different grounds.

I. Background and Procedural History

The Potocars created the grantor Trust on September 27, 1999.3 The Trust provided that the Potocars would be the sole trustors and trustees of the Trust, and that any property transferred to the Trust "shall be held by the [t]rustee[s] for the benefit of the [t]rustors as joint tenants with right of survivorship...." R.R. at 17-19.4 The Trust also granted the Potocars power to revoke or amend the Trust, invade the Trust principal, and transfer portions of the trust estate to other persons or organizations during their joint lifetimes. If the Potocars were to revoke 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 18.

The Potocars executed the First Amendment to the Trust on May 9, 2013 (2013 amendment). In relevant part, the 2013 amendment deleted a provision in the Trust directing the creation of a separate trust "[u]pon the death of the first [t]rustor to die...." Id. at 20. The 2013 amendment made creation of a separate trust discretionary, providing the surviving spouse with the ability to create a separate trust if he or she "disclaims all of his or her interest or interests in all or any specific portion of the [t]rust [e]state comprising the [d]eceased [s]pouse's interest...."5

Id. at 42. Absent a disclaimer, the 2013 amendment directed the Trust would "continue as a revocable trust for the benefit of the" surviving spouse, consisting of both the surviving spouse's one-half interest and the deceased spouse's one-half interest in the trust estate. Id.

Husband died on October 17, 2016.6 The record does not indicate, nor do the parties allege, Wife disclaimed any of Husband's interest in the Trust or created a separate trust. On January 4, 2017, Wife filed a Pennsylvania inheritance tax return, which disclosed property totaling $3,526,210, nearly all of which was held in the Trust. The return indicated the property was subject to a spousal tax rate of 0% and, therefore, no tax was due. The Department responded on June 12, 2017, by issuing 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 $564,722 was subject to the spousal tax rate of 0%, but $2,961,488 was subject to the 4.5% rate applicable to certain other relatives specified in the Act. This resulted in a tax due of $133,266.96, plus interest and penalties of $8,433.93, for a total of $141,700.89.

The Department's notice included only a brief explanation for this assessment. Quoting from the 2013 amendment, the notice explained a surviving spouse may distribute Trust principal "for the benefit of the surviving spouse primarily and the trustors[’] children and/or grandchildren secondarily" during the surviving spouse's lifetime. Id. at 73. The notice continued: "In the absence of a request for a future interest compromise, the Department has the right to assess tax at the highest rate in the chain of potential distributions. Therefore, the tax has been assesse[d] at 4.5% on the value of the residuary trust[.]" Id.

Wife filed a written protest with the Board. She argued the Department mistakenly believed she had created a separate trust. Tellingly, the notice from the Department relied on language in the 2013 amendment that applied only if a separate trust existed.7 Wife explained she did not use a disclaimer to create a separate trust. Further, she asserted the Trust was solely for her benefit, and she could amend or revoke the Trust at will, such that the property it held was "her sole and separate property." Id. at 75. Because Pennsylvania does not assess inheritance tax against transfers of property between spouses, Wife argued, no tax was due.

On July 29, 2019, the Board issued a decision and order, which denied Wife's protest. The Board interpreted Wife's argument as a claim that the Potocars created a "sole use trust" under Section 2113, which would result in deferred inheritance tax treatment. The Board concluded that the Trust was not a "sole use trust," and that it was subject to immediate inheritance tax, because Wife had an inter vivos power of appointment over the trust estate.

Wife appealed the Board's decision to the orphans’ court. Wife argued she had not claimed the Trust was a "sole use trust" under Section 2113. She argued the language of Section 2113 indicated a trust was a "sole use trust" if property in the trust does not belong to a surviving spouse, but the surviving spouse can use that property for his or her lifetime. Wife maintained she was the owner of the Trust's property, as the remaining trustee and beneficiary. Despite this, she argued in the alternative that the Trust met the requirements to be a "sole use trust."

Following argument and the submission of briefs, the orphans’ court entered an order dated December 16, 2019, reversing the Board.8 The Department then filed this appeal.9 The orphans’ court ordered the Department to file a concise statement of errors complained of on appeal, and the Department complied. The orphans’ court issued a brief opinion, in which it accepted Wife's argument and found she could not only use the property held in the Trust but was its owner. See id. at 137-38.

The Department now raises essentially two issues on appeal: (1) whether the Trust was entitled to deferred inheritance tax treatment as a "sole use trust" under Section 2113, and (2) if not, whether the Trust was subject to immediate inheritance tax under Section 2107(c)(7).10

II. Applicable Law

Generally, this Court reviews orphans’ court decisions to determine whether the court committed legal error and whether the evidence supports the court's factual findings. In re Est. of Berry , 921 A.2d 1261, 1263 n.1 (Pa. Cmwlth. 2007) (citing In re Est. of Kinert v. Dep't of Revenue , 693 A.2d 643, 645 (Pa. Cmwlth. 1997) ). Our focus here is on whether the orphans’ court correctly interpreted the Act. This 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. , 625 Pa. 563, 93 A.3d 806, 813 (2014) (citing Dechert LLP v. Commonwealth , 606 Pa. 334, 998 A.2d 575, 579 (2010) ). In other words, we do not defer to the orphans’ court when reaching our decision, and we may review the entire record on appeal. Mercury Trucking, Inc. v. Pa. Pub. Util. Comm'n , 618 Pa. 175, 55 A.3d 1056, 1082 (2012) (citing Heath v. Workers’ Comp. Appeal Bd. (Pa. Bd. of Prob. & Parole) , 580 Pa. 174, 860 A.2d 25, 29 n.2 (2004) ).

Our Supreme Court has characterized inheritance tax as "a tax on the right of succession in the estate of the decedent." In re Est. of Remmel , 425 Pa. 325, 228 A.2d 889, 891 (1967) (citations omitted). The Act imposes an inheritance tax on a select list of "transfers," with the tax rate applied based on the relationship of the transferor to the transferee, and the value subject to tax generally based on the date of the transferor's death.11 Section 2102 of the Act12 includes a list of definitions, including a definition of the term "transfer." A transfer "[i]ncludes the passage of ownership of property, or interest in property or income from property, in possession or enjoyment, present or future, in trust or otherwise." 72 P.S. § 9102. In interpreting the Act's provisions, this Court's goal is to ascertain and effectuate the General Assembly's intent. Mercury Trucking , 55 A.3d at 1067. We must also remain mindful that tax laws are subject to "[s]pecific interpretive rules," which direct us to strictly construe provisions imposing taxes in favor of the taxpayer, while strictly construing provisions creating "exemptions" from taxes in favor of the taxing authority. Greenwood Gaming & Ent., Inc. v. Dep't of Revenue , 625 Pa. 55, 90 A.3d 699, 710-11 (2014) (citing 1 Pa.C.S. § 1928 ).

III. The Trust is Not a "Sole Use Trust"

Initially, the parties agree the Trust is not a "sole use trust" under Section 2113, which is entitled, "Trusts and similar arrangements for spouses ."13 Department's Br. at 11-27; Wife's Br. at 4-10, 14-20. Our review supports the parties’ assessment. Section 2113 provides as follows:

(a) In the case of a transfer of property for the sole use of the transferor's surviving spouse during the surviving spouse's entire lifetime, all succeeding interests which follow the
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    • United States
    • Pennsylvania Commonwealth Court
    • August 30, 2023
    ...Ghaderi's arguments require this Court to engage in statutory interpretation, which is a question of law. See In re: Est. of Potocar, 283 A.3d 936, 941 (Pa. Cmwlth. 2022) (citing Meyer v. Cmty. Coll. of Beaver Cnty., 93 A.3d 806, 813 (Pa. 2014)). When interpreting a statute, "our standard o......
  • Nazareth Mut. Ins. Co. v. Pa. Ins. Dep't
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    • Pennsylvania Commonwealth Court
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    ...to the "personal property" of the trustor. See, e.g., In re Lines' Estate, [26 A. 728, 733 (Pa. 1893)]. In re Estate of Potocar, 283 A.3d 936, 944 (Pa. Cmwlth. 2022). We concluded that "a husband and wife may 'create' ownership using a trust." Id. In addition, the term "owner" is defined fo......

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