Norvell's Estate, In re

• Decision Date: 07 October 1964
• Parties: In re ESTATE of Florence Tack NORVELL, Deceased, Trust for Frank M. Tack and Lois V. Tack, now Thompson. Appeal of Frank M. TACK, One of the Life Tenants Under the Will of Florence Tack Norvell. Appeal of Lois V. TACK, now Thompson, One of the Life Tenants Under the Will of Florence Tack Norvell. Appeal of Harry S. TACK, a Contingent Remainderman Under the Will of Florence Tack Norvell.
• Court: Pennsylvania Supreme Court

Page 538

203 A.2d 538

415 Pa. 427

In re ESTATE of Florence Tack NORVELL, Deceased, Trust for

Frank M. Tack and Lois V. Tack, now Thompson.

Appeal of Frank M. TACK, One of the Life Tenants Under the

Will of Florence Tack Norvell.

Appeal of Lois V. TACK, now Thompson, One of the Life

Tenants Under the Will of Florence Tack Norvell.

Appeal of Harry S. TACK, a Contingent Remainderman Under the

Will of Florence Tack Norvell.

Supreme Court of Pennsylvania.

Oct. 7, 1964.

R. J. Cleary, Pittsburgh, for appellant.

Robert B. McKinley, Marsh, McKinley & Bowman, John G. Frazer, Jr., Kirkpatrick, Pomeroy, Lockhart & Johnson, Pittsburgh, for appellee.

Before BELL, C. J., and MUSMANNO, JONES, COHEN, EAGEN, O'BRIEN and ROBERTS, JJ.

ROBERTS, Justice.

Florence Tack Norvell died August 24, 1921. Her will, dated August 9, 1919, created a trust out of which the present controversy arises. Appellants are life tenants under the trust and are entitled by its provisions to receive all of the income. The trust also establishes alternative remainders over in named and unascertained persons. ¹

On March 4, 1960, the trustees filed their fifth account. The petition for distribution, filed June 1, 1960, requested the court to approve distribution to the life tenants of the proceeds from the sales of stock subscription rights and of certain shares of stock received by the trustees as stock dividends. ² Following our decision in Catherwood Trust, 405 Pa. 61, 173 A.2d 86 (filed July 26, 1961), the trustees withdrew the suggested schedule of distribution. On December 20, 1961, the trustees filed a supplemental petition for distribution and took the position that, in view of Catherwood, 'the entire apportionment matters referred to in the Petition for Distribution need need not be presented.'

The Orphans' Court of Allegheny County, by decree of April 29, 1963, approved the distribution to principal of cash from the sale of rights and the shares of stock received as stock dividends. This allocation was made under the Principal and Income Act of July 3, 1947, P.L. 1283, which Catherwood Trust, supra, held constitutionally applicable to trusts created prior to the effective date of the Act. ³

Specifically, this appeal challenges the constitutional validity of Section 3(1), 5(1) and 5(2) of the Act. Section 3(1) provides: 'All * * * dividends on corporate shares, payable other than in shares of the corporation itself of the same kind and rank as the shares on which such dividend is paid, * * * shall be deemed income unless otherwise expressly provided in this act.' ⁴

Prior to September 30, 1963, Section 5(1) directed: 'All dividends on shares of a corporation, forming a part of the principal, which are payable in the shares of the corporation itself of the same kind and rank as the shares on which such dividend is paid shall be deemed principal. * * *' ⁵

Section 5(2) reads: 'All rights to subscribe to the shares or other securities or obligations of a corporation, accruing on account of the ownership of shares or other securities in such corporation, and the proceeds of any sale of such rights shall be deemed principal. * * *'

The alleged infirmity is one of deprivation of property without due process of law. It is vigorously contended that the Principal and Income Act, as applied to this trust created years prior to the effective date of the Act, deprives the life tenants of their property without due process, in violation of Article I, Section 1 and 9 of the Pennsylvania Constitution, P.S., and the Fourteenth Amendment to the Constitution of the United States.

Appellants urge that, as life tenants, they are entitled to all the return derived from the principal of the trust and that the first sentence of Section 5(1), directing that '[a]ll dividends on shares * * * shall be deemed principal,' establishes a conclusive statutory presumption contrary to actual fact and violates the constitutional due process provisions. Substantially the same attack is made on the first sentence of Section 3(1) to the extent that it excludes from income stock dividends (of the same kind and rank as the shares on which paid).

Appellants assert, and we agree, that the contentions presently advanced were not raised or directly settled in Catherwood. We do feel, however, that the implications of that decision are unmistakably pertinent and persuasive here.

In essence, appellants argue that the Legislature has improperly and conclusively defined principal so as to preclude the life tenants from proving that the stock dividends here are 'in fact' income. This position appears based on the premise that income has a distinct, fiscal meaning (presumably, that accorded the term under the Pennsylvania Rule of Apportionment prior to the Principal and Income Act). And appellants insist that the statute may not by means of an irrebuttable presumption, constitutionally preclude them from establishing that the distributions in controversy fall within the meaning they seek to give income.

Appellants place their heaviest reliance on Heiner v. Donnan, 285 U.S. 312, 52 S.Ct. 358, 76 L.Ed. 772 (1932), but that reliance is unforunded, especially since Heiner dealt with a statute establishing, in effect, a rule of evidence. There the statute provided that gifts in excess of $5,000 made within two years of the donor's death were to be deemed as having been made 'in contemplation of death.' No opportunity was afforded to prove that a gift within the two year period was not so made. Accordingly, the value of the gift was taxable under other provisions of the taxing statute.

It is important to note that the amount of the gift was not taxable in Heiner unless made in contemplation of death, and that 'contemplation of death' had a meaning which Congress did not seek to change. The Supreme Court held the statute invalid as 'an attempt, by legislative fiat, to enact into existence a fact which here does not, and cannot be made to, exist in actuality * * *.' (Emphasis supplied.) 285 U.S. at 329, 52 S.Ct. at 362. Moreover, the Supreme Court made it quite clear that the statute was not intended to operate as a change in the substantive law, i. e., that there was no congressional intention to tax gifts not made in contemplation of death. 285 U.S. at 328-330, 52 S.Ct. at 362-363.

It seems clear to us that the Principal and Income Act does not establish, as appellants contend, a rule of evidence, i. e., a presumption contrary to the actual facts. What the statute expressly does is to set forth a substantive rule of law defining income and principal. See 4 Wigmore, Evidence §§ 1353-54 (3d ed. 1940); 9 Wigmore, op cit. supra, § 2492; cf. United States v. Carlisle, 234 F.2d 196, 199 (5th Cir.), cert. denied, 352 U.S. 841, 77 S.Ct. 63, 1 L.Ed.2d 57 (1956); Bowers v. United States, 226 F.2d 424, 428 (5th Cir. 1955); United States v. Jones, 176 F.2d 278, 288 (9th Cir. 1949); City of New Port Richey v. Fidelity & Deposit Co., 105 F.2d 348, 351, 123 A.L.R. 1352 (5th Cir. 1939); Commonwealth v. Brue, 284 Pa. 294, 296, 131 A. 367, 368 (1925).

In City of New Port Richey v. Fidelity & Deposit Co., supra, an argument similar to that presently advanced was rejected. The court said:

'We recognize that the legislature cannot make certain facts conclusive proof of another ultimate fact when there is no logical connection or probability in experience to connect them. But the real legislative intent may not be to make a rule of evidence, but a rule of substantive law, and if the legislature may constitutionally do the latter, the form of the words used will not defeat the intent.' (Emphasis supplied.) 105 F.2d at 351.

It is clear that the Legislature, by the 1947 Act, intended to, and did, change the substantive law by declaring that certain kinds and classes of stock dividends constitute principal. Thus, a new definition of income was statutorily established. ⁶ Here, unlike Heiner, the statute enacts into existence, not a fact, but a definition of a term theretofore subject to judicial determination.

We are therefore led to the question whether the Legislature possesses constitutional authority to define income. This determination, in turn, depends on whether income, as used in the statute, enjoys such a fixed definitional status that it may not be legislatively disturbed. In Catherwood we attributed to trust income no such undisturbable status.

We held in Catherwood that life tenants have no vested interest in a courtmade rule of apportionment. 405 Pa. at 72-73, 77, 173 A.2d at 91, 93. Although the life beneficiaries there (as the life tenants here) enjoyed a vested right to the income of the trust, no vested right exists in the functional, operational or definitional methods of ascertaining from time to time what constitutes such income. Due process does not mandate that prior decisions or rules remain effective and controlling forever. Thus, it is settled that there is no vested interest in a definition or method of ascertaining income. This conclusion is supported by compelling reasoning and the clear weight of authority. E. g., In re Gardner's Trust, 266 Minn. 127, 123 N.W.2d 69 (1963); In Matter of Trust of Arens, 41 N.J. 364, 197 A.2d 1 (1964); In re Will of Allis, 6 Wis.2d 1, 94 N.W.2d 226, 69 A.L.R.2d 1128 (1959); Bogert, Trusts and Trustees § 847, at 505-06 (2d ed. 1962); Bogert, 'Uniform Principal and Income Act Revised,' 101 Trusts & Estates 787, 788 (1962); King, 'Uniform Principal and Income Act, § 5: Constitutionality of Its Retroactive Applications,' 1960 Wash.U.L.Q. 339; Niles, 'Fosdick, Cunningham and Chaos,' 98 Trusts & Estates 924, 927-28 (1959); Scott, 'Principal or Income?' 100 Trusts & Estates 108, 250-51 (1961); Second Report of the New York Commission on the Modernization, Revision and Simplification of the Law of Estates, 272 n. 352, 275 (1963); 112 U.Pa.L.Rev. 290, 292 n. 14 (1963) and other authority cited therein; see Farmers Bank & Capital Trust Co. v....