Cunningham Estate

Cunningham Estate. 1958. Before

Argued May J., Bell, C. Jones, Jones and JJ. Arnold, Cohen, Musmanno, re-

reargument April fused 1959. for tenants. W. life Morris,

Samuel Mm propria with persona, William White, Jr., & Morris for Thomas Duane, S. Weary, HeclcscKer, for and Walter M. trustee. ad trustee litem, Burkhardt, him M. with Francis Richards, Jr., Paul Maloney, for Scheets & Bodine, Frick, Hamilton, Pepper, under Rule 46. persons, interested Ella, her Arens- with Graubart, Patterson, Crawford, <£ for berg interested under Buie 46. Dunn, person, Opinion Benjamin Janu- Mb. Justice B. Jones, 1959: ary 12,

These appeals involve a reexamination century-old Buie of “Pennsylvania Apportionment” with particular reference to its certain application to stock distributions made to a trustee1 the General Electric and the Gulf Company Oil Corporation.

Edith B. died 1933. Cunningham October testate, By will she created a trust of her estate and residuary appointed as trustee the Trust Fidelity-Philadelphia Under Company. this trust two-thirds the income payable testatrix’ B. John son, Cunningham, life his and, upon two-thirds of death, the is principal to paid be to his him issue in surviving equal shares per one-third stirpes; of the income is to payable John B. Cunningham’s E. daughter, Mary Cunningham, life her and, upon one-third of death, the is principal to be to paid her issue her in surviving equal shares per stirpes. Both the life tenants are presently alive. Mary E. Cunningham, the unmarried, only issue of living John B. Cunningham. The trust further provides that, if John B. Cunningham should die without issue him the surviving, income is to payable named certain brothers and sisters of testatrix during their lives, and, the of upon death the survivor the them, principal is to be paid equal three with shares, stipulations as to its to the use, University The Pennsylvania, American Oncologic Hospital of the City Philadel- phia and the Board of National Missions of the Pres- byterian U.S.A. All testatrix’ Church, named brothers and sisters are now dead. original corporations trustee-purchased The stock both

rather than decedent-owned. that in order

The trustee filed its third account upon various Philadelphia pass could Orphans’ to the apportionment to the questions relating possible sale of certain on the income beneficiaries gains received stock distributions securities on corporations. from certain trustee to exclusively relate questions presented The now the General common stock of trustee-purchased both Corporation, Gulf Oil Company Electric distributed additional have corporations of which These the trustee. including stockholders, to their sub- are stock distributions (1) are: these questions and income principal between ject apportionment apportion- if how should such (2) so, extent? any these The court below2 decided ment be effected? subject apportionment were stock distributions appeals described herein. These a manner more fully ensued. of each background

A of the factual brief recitation understanding to an requisite distribution problem. Company Electric General of the trust term during On occasions3 two no par 150 shares of the a total of trustee purchased cost company. aggregate of this common stock book value as of aggregate and the was $6,935.57, In 1954 the corporation dates was $2,403.50. purchase by exchang- its common stock and converted” “changed a stated which had value par the old no value ing value having par common stock share for per of $6.25 2 judge on the One dissented was divided 3-2. below The court judge on apportionment dissented another while mechanics apportion- not ground did constitute stock distributions able events. February 21, purchased 50 1939 and shares were shares 3 100 March 1951. new shares share and three per issuing $5.00 the trust’s for increasing each old thus exchange share, dis- To effect from 150 shares. holdings account required capital tribution $15.00 difference between issued (the for the three new shares and the new shares par value of the three [$15.00] $8.75). being stated value of the old share [$6.25] corporate at two The new value was arrived par of each of the stated value steps: a “write-down” (1) thus old share making from $5.00, $1.25 $6.25 shares “additional” new capital available required the balance (2) transferring $8.75—from — capital to the (earned surplus) earnings” “reinvested stock account. and conversion” “change

The court below held this and that constituted an event 87%% shares” —i.e. the ratio the “additional new to the earnings” transferred from “reinvested amount amount of adjusted capital stock account to the capital from both the transfer and “write-down”— realized subject to apportionment.

Gulf Oil Corporation On occasions4 the trustee a total of purchased two of the common stock of this corporation, shares having par each share value total $25.00. cost and the book value as of aggregate was $8,736.50 In 1951 the Gulf dates was purchase $8,997.96. Oil the distribution —which authorized it Corporation its shareholders of one additional termed a dividend —to corporation stock of the for each share of the common thus outstanding increasing its share of 250 shares. To provide trust’s from holdings of the additional share the the new par [$25.00] $18,549 its books upon per transferred corporation purchased March 1949 and 25 were shares 4 100 shares March 1951. surplus capital from share earned to the stock account per paid-in surplus capital $6,451 share from to the stock account. corpora-

The court below held inasmuch as the that, surplus tion had transferred on books from its earned capital approximately to stock account of the 75% par approximately value of the new therefore shares, of the new shares received the trustee was sub- 75% ject apportionment. to Atlhough General Electric refers distribution to the “change as a Oil conversion”, while Gulf refers important it as a “stock it is note that dividend”, essentially both transactions were in that same par part value of the new stock issued inwas supplied by earnings capital a transfer of to the upon rely account. In both instances, life tenants capitalization alleged removal of as payments justification a source future dividend apportionment. recognized by for an This fact was all Orphans’ judges Philadelphia Court of Coun- ty agreed and we believe all all of whom counsel, on although differing the facts as to the results legally flowed therefrom. inquiry

Our initial must be to determine whether these distributions constitute events or occasions “Pennsylvania Apportion- under which, Rule of require apportionment an ment”, such stock between tenants and the the life remaindermen. The basis of ruling in the court below that whenever cor- porate earnings capitalized support are the issuance of new shares of whether such shares be issued exchange outstanding or as shares, a dividend outstanding apportionment on shares, must be made. begins inquiry recognition

This with the Apportionment” “Pennsylvania Rule of has been abro- gated Principal by the Uniform Income Act substantially May repealed subsequently but 3, 1945,5 Principal July by 3, of re-enacted the and Income Act subsequent dates as all trusts the 1947,6 to created to application legislation. of such lim The Rule’s is now ited to created the of such trusts before effective dates 124; Pa. 2d statutes: 362 67 A. Estate, 458, Crawford Es Warden 382 Pa. 115 A. 2d Trust, 159; Steele 311, 362 377 103 Pew Pa. 409; Pa. A. 2d tate, 250, Trust, 67 A. 2d 865. In 99 Pa. L. 468, 129; U. Rev. 864, legislative policy public view of this declaration of a prior contra the Rule shall as to trusts we, created point legislation, beyond such it extend the Rule the 7 legislation had reached when such became effective?7 judicially Shall that which had not determined been apportionment to be an' occasion or be now event for application held such occasion or or shall the event, only of the old Rule be restricted to those situations recognized judicially or events occa prior legislative abrogation sions to the Rule?8 of the An examination of all the decisions of Court this subject apportionment on the of indicates that Rule applied apportionment only decreed in the fol lowing “(1) corpo situations: the distribution ration cash stock or or dividend, (2) liquidation corporation, (3) of the or a sale (4) or trustees, stock the issuance of rights [citing cases].”: 473, Jones 377 Estate, 354. 2d In Buist’s 476, 105 353, A. 537, 297 Pa. Estate, 147 A. we 606, “The tenant is said: life not entitled

5 416, 20 P.L. PS §3471. 1283, 6 P.L. §3470. PS Henry Fera, 131, See: Estate 26 N.J. 139 A. wherein 2d Supreme Jersey substantially of New Court was faced with problem. same aptly argues legislature Amicus curiae that “while the cannot clock”, “stop it turn back the can clock”. (1) any is declared until the increased division (2) of a form in the or distributed as a cash dividend, [corporation] (3) the affairs or dividend, up those distributed are wound so that assets are (4) this is a sale entitled there them, to receive entirely stock so of shareholder that the connection also: severed”.9 See Crawford expressly supra. In no instance has specific application situa- Rule’s to these restricted the ap- point never tions. we have fact, However, plied situ- the Rule to other than the above enumerated merger expressly held ations. we have Moreover, capitalization though even it involves a par shares was the issuance of new and different apportionable 473, 377 Pa. not an event: Jones Estate, pre- 105 A. 2d 353. instant stock distributions The impression sent a of in this situation first Court. appor- auditing judge The found the existence of an by concluding fcionable said event that when “apportionable that a “stock dividend” constituted an we meant that “when new stock is issued event”, existing supported stockholders and the new stock is capitalization earnings, a- of of that to the extent capitalization apportion- earnings, such of there is an regarded able event”. The Court en banc distribution “in the nature because stock dividends” capitalized earnings appor- had been and held that “an independent tionment is to be made cor- whenever, porate earnings capi- merger, surplus or earned are support, part, talized to whole or in the issuance shares . . .” new The court below Rule’s concluded the application to the instant stock distributions not did extend the Rule since the transactions could be con- “stock sidered dividend” events. Waterhouse’s 162 A. 295. question apportionment

The basic is an whether corporate capi- must earnings be made whenever are support talized to the issuance of new shares. Pennsylvania rationale from its Rule very inception (Earp’s Appeal, 374) has Pa. 368, deprived been that a tenant should not be earn life ings ownership which were accumulated since his mere ly corporation because the decided to them in declare logical some other than cash. The and essential form apportioning rights fairness of a stock dividend or stock represent earnings readily ap which accumulated parent entirely and sustainable. it is Furthermore, apportionable consistent to hold an that event takes place corporation liqui when the stock is sold or the represent dated only because such events last opportunity corporate any a life tenant to share earnings accumulated since creation of To the trust. any capitalization corporate hold, however, exchange followed a stock issuance or stock requiring apportionment an event an marks far departure original concept gave from the birth the Rule. apportionment

To warrant an it must be shown that corporate earnings (since acquisition there are stock) plus event. We treated have apportionable only following liqui- the events: the corporation,10 dation of the the distribution of stock extraordinary the distribution dividend,11 of an cash scrip or sale of dividend,12 the stock sale itself,13 the 10 Connolly’s (No. 1), Estate 137, 1125; McKeown’s 198 Pa. 47 A. Estate, 78, 263 Pa. 106 A. 189. 11 Earp’s Appeal, 28 Pa. 368. 12Nirdlinger’s (No. 1), Estate 160, 33; Mande 327 Pa. 193 A. Estate, 368, ville’s 562; Estate, Flaccus’s 286 Pa. 185, 133 A. 283 Pa. 129 A. 74. 13 Estate, supra; Nirdlinger’s Estate, McKeown’s 457, 290 Pa. A. 200. 139 rights and the to subscribe to stock14, the exercise of (cid:127) even dividends

distribution of stock though paid cor- such in stock of another dividends are poration.15

In were Jones 377 Pa. 105 A. 2d we 353, Estate, 473, presented apportion- problem an with the whether of merger Trust able Union event arose from the Company Pittsburgh Bank National and the Mellon capitalization Company plus and Trust concomitant surplus. over Prior to $58,000,000 earned merger capital Company stock the Union Trust had a surplus $108,- account of and an $1,500,000 earned capital stock ac- 500,000 the Mellon Bank had a surplus count of $40,000,- and an earned $7,500,000 accomplish capital merger 000. ac- To stock corporation count $60,100- of the new increased to was necessary 000 from trans- $1,550,000 it became surplus capital fer from earned to the stock account For $58,550,000. each Union share of held the Company Trust stockholders received shares of corporation of the new and the the Mellon Na- stock of Company by tional Bank and Trust held Union Trust Company earnings- capitalized was cancelled. The were less accumulated than Union Company Trust between the date of decedent’s death merger and date. Our denial of the occurrence apportionable simply event was not based on merger Ap- existence of a as the court below indicated. pellant’s argument exactly supra, in Jones Estate, position Orphans’ the same as the taken namely in the instant case, that “the true test of wheth- er an given event occurs in a situation capitalization whether the transaction results in the Trust, Hostetter’s Integrity 567; 319 Pa. Jones v. 181 A. Company al., Trust et 292 Pa. 140 A. 862. Barnes 12 A. 2d 912. any earnings of in If such is the one form or another. rejected apportionment”. there must be an We result, appor- this contention and in our determination that no was tionable event had occurred said: “While there we capitalization merger surplus [Buist’s no of ... in that prin- change 537] fact cannot the established”, ciple 478). (p. there particularly day in Present economic conditions, corporate present drastic contrast to field, inception of economic conditions in at the existence corpo during years of the Rule, the formative practices plus multiplication and extension rate application more Rule even taxes has made the of the complexities, the difficult and often unworkable. inherent are and the difficulties which uncertainties, application have in administration of the Rule in confusion, too often in times created these modern justices glaring fair inconsistencies. The essential beyond Pennsylvania equity Rule ness and of the rejection question.16 and abandon for its The basis corpo changes by legislation is the fact that ment un practice many rendered instances, have, rate ingenuity years Rule. In recent workable seeking corporate management, ends various to achieve enhancing its broadening market for as such complexi produced savings, has tax etc., effect corporate involve the transfer ty transactions surplus, earnings, etc., corporate earned books of on Earnings, modern under another. account to from one simplicity longer practice, corporate retain no meaning considered of the supra, Earp’s Appeal, decisions.17 and other nearly possible designed exact achieve as is a rule “it difficulty irrespective interests, justice successive between the p. Fera, supra, Henry 136. application”: Estate its corporate question earned whether toas is a serious “There great meaning ascribed to it surplus the sacred have should 12 general corporation-shareholder rela- rule in a

tionship expressed was well in v. Philadel- Green et al. phia Inquirer Company A. et 175, al., 169, earnings 32: “Stockholders are not entitled to the corporation. sep- corporation entity such of a A is an arate and distinct from its stockholders and a dividend necessary declaration is to in stockholder create the any ownership earnings. property right or other in the corporate leaving Where the owner of stock dies a will given person life, whereunder the stock is one for to person persons, with remainder to another does he thereby larger any property rights not create stock- as a any holder of his than himself had”. beneficiaries he exception general The Eule is an that to this rule in ownership the stockholder is considered have earnings corporation the accumulated since possession by date of the creation of the trust and earnings happening only stockholder of such awaits justification of an for event.18 The sole exception upon theory must rest that corporate management labels as reinvested earn- ings, earnings, corpo- surplus, actually earned etc., rate income Avhichhas been aside earmarked set solely for eventual distribution to the shareholders. apportionment Instead, mass of decisions. there be room should concept surplus for the that accumulated an income reten is less constantly replace capital equipment tion than it is a vehicle to at increasing costs, thereby assuring future income which otherwise might Accounting Legal, be lost to the life tenant”: Tax and Fiduciary Aspects Apportionment of Stock Proceeds —The Non- Pennsylvania Rules, Statutory Dean, Cohan and 106 U. of Pa. L. Rev. 206. difficulty argument been “One with the is that no court has willing logical conclusion, to follow it to its ultimate treat corporation earnings iDurposes as for all income to the only generally applied The rule is when the shareholders. corporation among are distributed shareholders in the Trusts, p. (1939). §236.3, Scott on Vol. form of a dividend”: corporate ac- Under modern such however, methods, up may sundry counts be are for various and set example, expansion, reasons, cost cover future equipment, contingencies future or reserves for losses “earnings” business, etc. that which is labelled may represent and often does items other than income, capital gains. such as upon corporate

The Rule holds that distribution earnings in one of the above mentioned life forms, tenant is entitled to receive the net earned income corporation a which has stock accumulated since the acquired, except preserve necessary where it is to principal. applica- the intact value of the The Rule’s requires upon fiduciary, happening tion that the the apportionable of an from determine event, the source which distribution was whether con- made, such source earnings profits corporation sists of actual or of the solely earmarked for distribution to and stockholders profits how much of said accumulated have since the creation of the trust.19 required fiduciary

The make in each instance to complete study investigation a full and and of the en- corporate background tire and to scrutinize all the cor- porate transactions at the cost of time considerable money. performs fiduciary and trust Even if such the 19“Any question trustee who has to a decide such must indeed puzzled. account, be If he tries to make a decision on his own he spend great money will to have a deal of time and in some trust history getting corporate organization issuing the of the the stock taking experts. danger . . . the advice of He runs may making- lay liability open a decision which him hands to at the portance, Bogert, men case certainty. of either will be different. may Trusts litigation No [life L well be eaten precedents cestui] Trustees, §824, p. get will up or R gain help opinion court costs and [remaindermen]. in both life deciding of the (1948). court cestui and remainder- such a lawyers’ will be In question. cases of im fees.” almost Each made duty be lias to decision too often its eventual speculative arbitrary To include on an basis. present type the orbit distributions within of stock already add chaos to events would the new chaotic condition. Whether we label being divi- “in nature of distributions as apportion- they dends” or to hold that constitute not, application, able the Rule’s events would be to extend pres- justification clearly in the an extension without ent state of the law.

This should be Rule, created the Court, acknowledge unworkability, first to inconsistencies its inequities many modern eco- instances under justi- nomic conditions. Parental defense of a child is only is de- fied to the extent that the child’s conduct language Supreme New fensible. The Court of ap- Jersey Henry supra, Estate is most Fera, posite: “It is indeed small consolation to either apparently equity life cestui or remainderman that has been if the result of served, ultimate the endeavor is substantially gain reduce the net available to trust eq- respective estate and final determination of the parties specula- upon uities of the is founded as much guesswork upon tion and as it is factors fact. These together increasing corporate complexity with the of accounting progressive- structures and which methods, ly costly analysis makes more difficult and an accurate past history corporation, prac- of the financial of a are persuade reject tical realities that us to .” [Rule] the . . practicalities The of re- the situation, the historical by application striction our Court of the Rule specific pres- to certain situations other than are here legislative public policy and the ent, enunciation of a preclude contra the Rule its extension in- to cover the stant distributions.

Decree reversed. on Costs the estate. Jus- Mr. Dissenting Opinion Concurring and tice Bell :

Cunningham Harvey test Estate Estate and are inextricably points they and since are eases, on several they points on be considered will those intertwined, together. They application and clarifica- involve the equitable Pennsylvania of of or Rule tion doctrine Apportionment applied as to stock distributions which testamentary corporations were made several trustee-purchased, (a) respectively, trustees which own, (b) common stock. decedent-owned questions in- particularly More there are two main (1) any all distributions volved: Are or of these stock remaindermen, life between tenant and (2) apportionable, if what are the correct measur- ing applicable? rods are financing, constantly changing corporate

Since corporate complex practices accounting corporate widespread appli in the have caused such confusion* apportionment appro it would cation of seem rule, priate analyze basic and wise to and review reason paramount purpose as of, rule, and the well for, prior decisions of the Court which are in some various respects irreconcilable. Company

General Electric testamentary purchased trustee shares par General no common stock Electric Com per average pany to for an cost** of share, $46.24 Each had “stated value” share tal $6935.57. per The booh value of each share held share. $6.25 infra. See ** nearly every frequent broker, every Every banker cost purchaser New listed on the stocks knows that stocks always Exchange exchanges almost and other stock York Stock they purchased, same, “market value”. were as at the dates per purchase this trust dates, was share as of the $16.02 total a book value of $2,403.50. split company In 1954 order its stock 3 for to broaden mar- the market for its reduce its i.e., many purchased by ket order could that it be employees persons by of its means, and with moderate corporate pur- savings as as tax well for and other poses. accomplish change, In order to com- this “changed pany par and converted” its no common par having per into common stock a share, value $5 and issued 3 in- new shares for each old share. This holdings Cunningham creased the Estate Trust par from 150 shares no common to 450 shares of par having per validly $5 a common, value share. To accomplish split change, this stock and this effect Company required by law to amend its charter, capital equal per Company to a have share. The $5 (1) legally, by effectuated this a “write-down” of the stated, par value of each no share $5.00, from $6.25 making capital thus new available the two $1.25 (2) by transferring shares, the balance of $8.75 surplus capital. from earned indisputable It clear a was not orphans’ stock dividend. The court believed “it was in the nature of a stock dividend”. While not it was simple pure split, nearly a it was more a stock split repeat, than a stock dividend. It we denomi was, Company “change nated conversion”; purposes and the reasons and were set forth Company in its notices to its stockholders. As Com pany Company’s further stated: “each share present par Stock Common without will automati cally be Common converted* into three shares of Stock having par Company value of not did $5 each”. throughout, Italics ours.

17 “change be and conversion” this consider or intend change (a) be intended to a stock it was dividend, |5 par par and value stock, into from no value stock (b) and what three; share into the conversion of one prima Company what facie evidence of called it is a transaction or a contract, it was. What an Act, parties prima what is facie evidence of is termed its real and realities determine it but actualities is, or la nomenclature if inconsistent with nature, and, Equity, prevail. Especially in because is this so bels, through Equity form and bases its decision looks upon 84, 263 Pa. 78, substance: McKeown’s Estate, 290 Pa. 472, A. 2d 189; 106 Nirdlinger's 364 Pa. v. 139 A. 2d 200; Murray Philadelphia, Pittsburgh, 71 2d & 280; A. Armour Co. v. nomenclature A. 2d 405. in this case the However, further and the actualities and realities

fits the facts, reality split, in not that this was a stock demonstrate a stock dividend. question When is a stock

The then arises: there split, distinguished from a stock and it as dividend, accomplished wholly part, as in this in case, or, money surplus capital, from does transfer of earned require apportion- capitalization earnings principal if between and what income, ment so, measuring rods to determine much is al- are the how principal? much to locable to income how ques- aid in a solution of It we these will, believe, up prevailing and clear much of the confusion tions origin discuss the and the basic ob- if we first reason, ject purpose Apportionment, of the Rule as well difficulty applying it to modern conditions complex corporate practices, modern and various many analyze of the then and review cases. Apportionment Pennsylvania its Rule of had Earp’s (1857). origin This was Ap pea l, beginning equitable fol doctrine—which was years Pennsylvania nearly lowed one hundred changed by Legislature until a life 1945*—that earnings company tenant to the net entitled of a paid irrespective which are out in dividends,** whether the dividend is in cash or in stock other or in property, provided forms such had ac net (or cumulated since the testator’s since death,*** acquisition trustee-purchased) pro of the stock if and adjusted vided the “intact value”, book i.e., (whenever necessary) capital capital for increases and impaired: Nirdlinger’s was not losses, 290 Pa. Estate, (No. 1), Packer’s 457; 867; Estate 291 Pa. 139 A. 194, Waterhouse’s 308 Pa. 162 A. Arrott Estate, 422, 295; 383 Pa. 2d Estate, 228, 118A. as to decedent-owned 187, McKeown’s gains 263 stock; Pa. 78, on Estate, sale of stock. supra,

In Arrott 383 Estate, Pa., Court said (pages 231) : 230, “The basic for reason rule equitable apportionment is that a life tenant is entitled corporate profits to accumulated on when it is sold, distributed, dividends declared, or the stock with accumulations is otherwise dealt with. justness questioned. of the rule cannot be The dif- ficulty application. is in its King

“In 349 Estate, Pa. 36 A. it 2d 27, 29, 504, was general, stated a unanimous court: . . ‘In it . is the rule that on distribution a life tenant is entitled May 3, July 3, apply The Acts of only 1945 and 1947 to trust Estate, estates thereafter 458, created: 362 Pa. 2d 67 A. Crawford 124; 468, Trust, 129; Pew Trust, A. 2d Warden 382 Pa. 159; A. 2d Steele 103 A. 2d 409. ** equitable subsequently ap- This doctrine was extended and plied rights gains (a) to stock as well (b) as to on the sale and liquidation of stock. —See infra. *** Except ordinary dividends. except and earnings, profits

to receive accumulated prin- value” of “intact preserve where necessary cor- cash dividend, is a stock or cipal. Where there in kind, distribution a sale or porate liquidation, profits life is entitled to such accumulated tenant such form immaterial in what earnings. It is wholly ” accumulations appear.’ object paramount In words, primary other rule devised doctrine or of this purpose judicially his from protect being deprived was to a life tenant because equitable merely share of such dividends* prop kinds of dividends in stock or in other paid were of in cash. erty instead (No. supra, 291 Pa. 194,

In Packer's Estate 1), of an extraordi- which involved (a) apportionment of se- on the sale (b) stock dividend and nary gain : Mrs. 197) “While Court said curities, (pages extraordi- still tenant, alive, the life Thomas, The court below stock dividend was declared. nary repre- so much as in only awarded to her fact thereof her es- of sented income. the administrator Appellant, as market value of the was claims the tate, that, had as it the same after the dividend was declared have whole of it should been awarded before, been the correct, this is as life Whether or not her, tenant. After appeal. present is the raised on the question first trust securi- of life certain of the tenant, the death the the appraisement a in excess price ties were at sold, of the of awarded all nearly as above made. The court that claims Appellant the remaindermen. proceeds to as him, have been awarded the whole of it should was profit thus realized administrator; her that the of earnings it was not though in income, effect legal ap- subsequently equitable was extended This doctrine gains (b) rights (a) plied as well on the sale to stock liquidation infra. of stock. —See corporations accruing death. Wheth-

the after testator’s question only is other er or not this is the correct, present appeal. on The court below was raised Nirdlinger’s right points. [in . . . We on both there held distributing 200] A. that, extraordinary stock dividends between a life tenant and corpus original a trust which holds the upon former is which the dividend is en- declared, repre- many titled to receive so the new shares as corporation accruing sents the net of the after acquired upon trust estate the stock which the divi- they represent dend for then the ac- declared, crued latter is all income; the entitled to retam represent rest the stock it does not in- dividend, any come. Neither market nor other than [i.e. value] actual or intact value book shares, any determining moment in how such a distribu- making always tion is to be made. In there should it, corpus be awarded to the of the trust such a number of the shares included in the dividend with the as, upon shares which the dividend was at declared, actual or [i.e. value] intact value book of the two paid, the stock dividend declared will after aggregate exactly sum the same as the actual or intact original value of the shares at the time the trust ac- quired plus any capital paid them, increase thereafter corporation to the on account of those and less shares, proportionate part any capital properly losses chargeable against them. Nirdlinger’s supra,

“In Est., we also held that on $ale securities a trust the income in- estate, purchase price, cluded in the way measured in the above n stated way only, belongs to the tenant, life any and other enhancement value is not and income, belongs corpus. hence to the If we were to hold other- equally it could wise, well be said that an increase popula- shifting owing realty, to of of the value trust of the estate.” is income business, tion ques supra, the Pa. In McKeown's proceeds of sale of the to tion arose as whether the conjunction dissolu with the which was made in apportionable, Company, and of were tion the Pure Oil measuring measuring rods. rod or if so what was the apportion governing the The Court extended the rule of stock sales ment of dividends to 83) liquidation (page company, “. . at : . said of a and of the com of booh value the time testatrix’ death the per value when share; its booh mon stock was $12.22 per share; and 1,760 shares were sold was $12.29 [of final sale its booh value at the time of the Company liquidation the Pure Oil shares] and of per share. $15.18 of the

“. that the assets . . It is clear, therefore, company, shares, sale 1,760 at the time of the of the of to the extent death, had after testatrix’ increased, per owing in- an accumulation of to share, seven cents of the other of the sale come; and that at the time company, liquidation and the 4,000 shares, the ex- testatrix’ increased, death, assets had after per owing $2.96 of an accumulation tent share, of between that income. is also clear It difference per $15.18 at the time share, the booh liquidation company, and the final $24.50 sale in- per price] not that [sales time, realized at share, appellant claim of For this latter reason the come. considered as income, that difference should be among . . .” must be overruled, the sons, divided “change Elec- of General and conversion” Did par” par” Company “$5 stock from “no tric par no into share conversion” one “automatic par $5 constitute an shares three “change Company General Electric event? 22 ordinary extraordi-

conversion” was neither an nor an nary repeat, reality a stock dividend; it we was, split; apportionable There and it was not an event. controlling are four for this conclusion. reasons (1) years split in 100 has ex- Never the stock change, which General Electric Com- occurred Courts, pany ap- by case, been considered to be an portionable event. While this is not it conclusive, persuasive that a life such tenant should under not, apportionment. circumstances, be entitled to an (2) particularity— This has set forth with in Buist’s 297 Pa. 147 A. Estate, 606; Water 537, house’s Estate, 308 Pa. 162 A. Es 295; 422, Neafie’s (No. 2), King tate, 325 Pa. 191 A. 56; 561, Estate (No. King 355 1), Pa. 48 A. 2d 64, 858; 349 Estate again Pa. 36 A. 2d 27, 504; and the recent case Jones 377 Pa. A. 2d Estate, 473, 105 events 353—those apportion which entitle a life tenant to a division and ment of net which have accumulated since the acquisition trust’s of the stock. In Jones su Estate, pra, (page 476) apportion the Court said : “Such an upon ment can happening and should be made any (1) namely, one of four events, the distribution corporation of an cash or (2) liquidation or corporation, dividend, or (3) (4) sale of the stock trustees, the issu rights: King (No. ance of stock 2), Estate 355 Pa. 64, King (No. 48 A. 2d 1), 65, 858; Estate, 349 36 Pa. 27, A. 2d 504; Buist’s 297 Estate, Pa. 147 A. 537, 606; Earp’s Appeal, Nirdlinger’s 28 Pa. 368; Pa. 290 Estate, Mallory’s 139 A. 457, 200; 285 Pa. A. Estate, 714; Waterhouse’s 295; A. Integrity Jones v. Trust Co., 140 A. 862.” expressly these While cases did not state those that only apportionable were the very events—since it possible difficult visualize all the forms of distribu- tion which in these modern can times be made by corporation* fact that (a) —the events were out” in repeatedly “spelled our de recent no cisions, (b) apportionment has ever been in a made such as the situation is persuasive present, that Courts should not now hold this to be an appor tionable event. Pennsylvania Public equitable The

(3) policy. in of existed this Commonwealth Apportionment Rule 1945. it abolished statute in from 1857 until was by in of Courts our sister by many States, It AvasfolloAved of all these States have nearly like Pennsylvania, but, de- judicial statute or by the Rule either by abolished Apportionment the Pennsylvania Moreover, cision. in 1947 Restatement, abandoned Rule Avas Rule in lieu thereof Massachusetts and Trusts, adopted. was and confu disagreement of the widespread

Because after Rule,** of the one as to the application sion —even cor- because liave overlooked the fact life tenants corporate practices accounting corporate have porate financing, and during complex) frequently (and quite changed become times at corporation’s years, desire because of a hundred and the last early possible), (whenever in the what or eliminate taxes avoid in, change (or simple days a stock dividend awas multiple surplus) gradually diverse and took or a distribution of of what been that the ascertainment has The net result forms. principal equitably between life what was income and —as application of the other words and remainderman —in tenant Apportionment with the distribu- equitable in connection Rule of cash, property corporation in a form other than of its a tion became difficult. often ** kindred bar and the recent from the eases at This is manifest analysis Estate, of careful well from a as as Trimble's case (some reviewed

many are prior Court of this decisions disagreement, widespread confu hereinafter) which will disclose Judges Estate, Cunningham example, in three For conflict. sion and .24

hundred years because the determina study —and tion of the apportionment became so to the trust costly ee* so to the of the est wasteful beneficiaries the Pennsylvania abolished ate,** Legislature wisely Apportionment Buie of in Pennsylvania in 1947 prescribed an different entirely easily workable Buie of Thumb sometimes called the Massa- Orphans’ County Philadelphia conclu Cburt one reached sion, Judge Judge conclusion, one reached a another different conclusion; Judge reached still a different and the learned John Orphans’ Allegheny County applied Fremont Cox of the yardstick his different and reached still another conclusion comprehensive opinion page very Trimble recent case of Moreover, only auditing Judge Survey using Estate. base, determining simple book laid down a formula for exceptions, changed distribution a stock dividend. After he (still value) complex on based book laid down a different and solely suggested formula. on Based book counsel have (which they formulas) different solutions called mathematical apportioning an dividend. If market aor used, possible combination of book and market value are solu urged tions which can be will be more than doubled. For other examples disagreement Rule, application recent as to the of the opinions King (No. see the of this Court in Estate 2), 355 Pa. King (No. 3), Furthermore, attorneys and Estate 361 Pa. 629. who specialize estates, companies throughout in trust and trust State, widely very frequently disagree among themselves as3 aiiplication Apportionment to the of the Rule. * company Philadelphia employs persons One trust several nothing attempt apportion who do but to stock dividends and other apportionable income; many employees spend other and officers part resolving apportionment problems. of their time in mag- problem apparent nitude is from the fact that & Standard Corporation Poor’s lists over 900 stock distributions industrial corporations (It virtually impossible 1956 and 1957. for an in- apply it.) dividual trustee to ** accounting The cost of court fees, particularly and counsel paid guardians to are, the fees compared and trustees ad litem with involved, the amount often tremendous. the old now extend Rule.* It unwise seems chusetts public (a) of the in the teeth because it flies Rule (b) policy an extension because this State** and application so has caused in its of the Rule, merely costly, would has become so much confusion and cost. add to the confusion ap split be an (4) hold this stock In order to repudiate the rea portionable would have we event, decision Court’s recent for this and the basis sons supra. That this is so, 377 Pa. 473, Jones Estate, analysis that case. review of from an manifest death time of his testator at the In Jones Estate par value) ($100 common 22 shares of the owned Subsequently Company. Trust Trust of the Union par Company of its shares from value $100 reduced the exchanged aon the stock share, a share to $20 thereupon became the oavu The trustees 5 for basis. par common stock of Avalué 110 shares of er of $20 Company. agreed with all This Court Union Trust parties did transaction not create that this involved, event.*** Company merged with the Union Trust

Thereafter, National as a result of which the Mellon Bank, common shares of received trustees par per having $100 each share bank, new provides Act 462. The See Crawford will, may prefers, provisions in he mate different his if the testator prevail. and his directions guess **And, believe, I I intent. venture the the testator’s give the income from of who to a life tenant that over testators 95% estate wish and intend income mean “dividends” their trust rents) (and or intend life interest and do not wish their bond receive, they dividends, earnings if were which the tenants to capitalize corporation good legitimate in faith for cor- decides porate purposes, distributing instead of them as an dividend. *** Buist’s 147 A. 608. See exchange Trust share, shares of the Union Company (having par share) $20 a a value of previously which the trustees had owned. The intact book) (i.e., of the shares held the trustees at date decedent’s death a The $4,981 was share. merger intact-book value but was undisclosed after considerably higher. part merger, As of the $58,- surplus capital. 550,000was transferred earned from surplus The increase of the Union Com- Trust pany and of the Mellon National Bank from the date merger (from of testator’s death until the date Jan- uary September 1946) represented 1, 1928 until ac- earnings merging cumulated and undistributed of the capital institutions and was not the result of contribu- capital parties tions or agreed other increases. The merger that if the created an event, prin- trustees would be entitled to retain 371 shares as cipal and 509 shares of stock should be awarded to the life opin- tenant. unanimously This Court was namely, capitalisation ion merger, that these facts, earnings, accompanying accumulated and an distri- ap- bution additional did not constitute an portionable event. majority life tenants and a contend, of the or-

phans’ apportion- court decided that there should be an (a) capi- inment General Electric because there was a (b) earnings talisation accompanying distri- part bution Exactly based thereon. same exactly situation arose, the same contention was rejected by made the life tenants and was this Court in Jones Estate. (page 476)

This Pennsylvania : Court said “The Apportionment Buie of between a life tenant who was entitled to and a income remainderman who was en- principal equitable theory titled to was based on the profits corporation aof which were

27 made, accumulated and undistributed testator’s since (or acquisition death since the it of the stock when acquired subsequent death) his were income which the life tenant under certain circumstances upon proper occasions was entitled. . . .

“Appellants Apportion seek now to have the of Rule applied merger ment extended and to cases where surplus profits capitali occurs and and undivided are part merger. zed* as of the We find no reason or au justification thority or for such an extension. by

“The instant case is ruled Buist’s 297 Estate, supra, King supra, King 349 Pa., Es Estate, Pa., supra.** tate, Pa., supra,

“The facts in Buist’s Estate, are al- Pa., most on all-fours with the facts in In the instant case. that case trustees held 200 shares of bank merged which, with several other banks, was into the Philadelphia merger National Bank. As a result the trustees received shares of stock of Phila- delphia National Bank. The booh or intact value* by the new stock exceeded $11,000 the booh intact original value* of by shares of stock owned testator at the time of his death. The life tenant claimed that [of payable excess $11,000] was income in stock immediately or cash and distributable This to her. rejected (pp. 543) her claim and said : 541, 542, merger corporations ‘The two or more is neither a throughout, repeat, Italics we ours. ** (now Justice) Mr. Justice Chief “in the concurred Jones ground disposition directly result on .the of this case is by ruling controlled in Buist’s 147 A. (created where it was held that shares issued a bank exchange merger) component for the shares banks merger did not constitute a distribution which called apportionment for an between a life and remainderman.” tenant liquidation corporate property} [and] . ..

sale nor a as distribution or division is not tantamount to a of apportionment between a an sets which calls life for ”* tenant and remainderman.’ distinguish present from Appellees cases seek to merger involved and there Jones Estate because a was they merger overlook However, no is here involved. (1) indisputable there Estate fact that in Jones here) earnings capitalization had (as which a of acquisition trus- of accumulated since (2) accompanying trus- to the an distribution and tees, (3) and that of of additional shares new tees just contend, counsel here contended there, counsel accompanying earnings capitalization an of that a (which a dif- also had of additional stock distribution value) apportionable par This an event. ferent created rejected unanimously repeat, that contention we Court, justification authority for no reason or found apportionable extending that an event rule to hold capitalization of is a earned sur- whenever there occurs plus stock based issuance of additional thereon. and the fallacy of the life ten- of this contention

The basic placed surplus earnings are earned net ants is that a and in effect constitute distribution to, for future we If were then stockholders. that so, trust fund for, supra. Net 377 Pa., Jones overrule should (or surplus profit placed in earned are loss) variety inter alia, of reasons—to cover, for a busi- needs of the business, and the future vicissitudes expansion, improvements, losses, business business ness contingencies, a cash reserve reserve for automation, corporate working capital, for other and a reserve for may purposes for in the as well as arise future, payment possible dividends. future repeat, throughout, we ours. Italics To summarize:

For each and mentioned, all the reasons hereinabove I with agree the rest of the “change conversion” or stock General Electric Com- split by not ivas pany an event.

Gulf Oil Corporation trustee of 125 purchased a total testamentary shares the common stock of Corporation Gulf Oil cost of average or a per share total cost $69.89 Each of shares had a par $25; these value $8736.50. had each a book value of as of dates share $71.98 or an purchase, book aggregate (as of the pur- dates) chase Gulf Oil small paid a cash $8997.95. dividend and a small stock quarterly, annual dividend of or all of more 5%, Avhieh, as ivill hereinafter 1% to fully appear, belong the life tenants.

The of board of directors Gulf Oil au Corporation thorized “the distribution to its of shareholders record on June 15, 1951, of one additional share of capital stock a par value each [common] [with $25] share of its capital stock held by such shareholder.” As a result this stock extraordinary dividend, 100% the trust estate’s shares holdings were increased shares. In order to declare and distrib validly ute this stock extraordinary dividend, the company was compelled to add to its capital account share per $25 ($25 for each additional par It value) share issued. effectuated increase capital from by transferring surplus $18,519 earned to the stock capital account per share* and per share from The paid-in surplus. $6.15 book the record date of the extraordinary after stock dividend Avas share; a the market value of $11.77 each share Avas$17.09. represented “applicable” earnings. $11.55 this amount transferring capital

If increased $25 had been surplus” capital, per this would share from “earned unquestionably pure clearly a extraordi- and have been nary or or a If 75%, stock dividend. a 100%, 50% paid earned had stock dividend been declared from surplus Corporation be Oil there wouldn’t Gulf extraordinary slightest stock dividend that this doubt presumptively apportionable would be an event, belong If the Com- life tenant. of it would to the all surplus paid pany out of earned declared and had simultaneously de- and had also dividend, stock 75% surplus paid out contributed clared 25% (1) crystal extra- it is clear as that dividend, 75% surplus paid ordinary earned dividend out of presumptively all event and would be an (2) payable tenant, to the life of it would be paid out stock dividend which 25% corpus. surplus belong would of contributed can- in this case, the two have been combined fact that legal effect nor basic character, not alter their fact In other words, therefrom. which flows per only share was transferred instead of $25 $18.54 legally surplus completely cannot or earned from deprive change transaction, the character earnings which are his of the net share life tenant majority’s dividend. That the in this stock distributed unjust clearly position is made unwise and unfair, by Oil strikingly Gulf that if the the fact manifest payable extraordinary Company’s dividend was surplus contributed out of out earned 1% 99% surplus, majority that this a non- hold would part dividend would event and no of the payable tenant. to the life be “change and Electric, this was not a

Unlike General par change no in the value of the there was conversion”; split. accompanying stock As nowas and there further difference between material evidencing con two transactions —in General Electric the change, split version and had be by effectuated action charter; the stockholders and an amendment of the by in Gulf paid the dividend was as a Oil, solely result a resolution of directors.*' adopted board by hold

To that dividend was not an apportionable would violate the event, primary, paramount purpose and as well as the letter object, spirit of the deprive tenant, would the life Rule, who is the primary object of testator’s bounty, applicable net on earnings reason which, principle, he is authority, emphasize entitled. We these that accumulated applicable net have not been re- tained corporation on the but, have contrary, paid been out to the trustee in the testamentary form a, stock dividend which has always been heretofore apportionable.

If there could be the doubt that slightest this was an apportionable it would event, be removed Chaun cey’s 154 A. specifically Avhich holds (a) that such a stock dividend is an apportion- able event, and (b) corpus that is entitled to receive those shares which preserve are intact necessary value plus portion of the shares which paid were out contributed In surplus. that case the Court said : (pages 447) “Distribution of extraordinary dividends between a life tenant and remainderman shall be so made as to preserve the intact value of the es tate: Flaccus’s Est., 185; Nirdlinger’s Est., Pa. 457. Such dividends presumptively belong to the life tenant, unless it appears that the intact value of the trust estate is thereby reduced ten- life ized, although shares, that would have been company if the charter had had to increase the number of shares author- unnecessary. provided for a sufficient number supra, Nirdlinger’s Est., ant is otherwise entitled: not page Est., McKeown’s 436; Graham’s 296 Pa. 468; Est., remainderman to 263 Pa. 78. The is on the burden thereby prove estate is of the trust that the intact value dividend or a he is to the diminished or that entitled supra; Boyer’s App., part it: Graham’s Est., 481. Pa. Robinson’s 144; Trust, held 449] [Dickinson’s . . We Est., “. there capital paid-in .... did not constitute that apportioning dividend a stoelc in We held that there rep part surplus which declared which was from part surplus income, earned and resented contributed corpus enough awarded to the shares should be portion * plus that maintain the intact estate to surplus against From issued contributed the shares dividends declared we have the rule that this case capital be in the distribution must, contributed out of be held remainderman, and tween life tenant protection corpus of the remainder- for the of the trust man.” principle, au reason and on

We convinced that are unquestionably clearly extra thority and this was orphans’ (as cor ordinary court stock dividend principal held) rectly between orphans’ parenthetically, note, income. We correctly such tenants in that the life held court also only much so are entitled receive a situation corpo represents earnings of the stock dividend acquisi subsequent (1) to the were earned ration capi (2) have been trustee, of the stock tion support the issue talized to preserve necessary (3) intact** are not dividend, value. throughout, repeat, ours. italics We

[**] What is intact value will be hereinafter discussed at length.

33 Rods Yardsticks or Measuring meas- What are the correct or applicable yardsticks rods to enable a court to determine the net earn- uring which in dividend or in stock ings appear form, rights, or in on to liquidation the sale or gains stock, which life tenant is entitled? equitably

In Pa. case of Waterhouse’s 308 leading Estate, 162 A. for the thir 422, third time in 295, teen and the second time in years felt com five years because of our pelled, the “confusion with respect to rules questions governing involved apportion [the ment between life tenant the remainderman a trust estate of proceeds from received the sale and stock to rights] summarize what has briefly been heretofore decided.” 427- The Court said (pages and I 430), with tooulcl several clarifying reaffirm* additions:

“. .. prima wvtaet facie, value is booh In value2 tact value be may increased con purchases, surplus tributed or any capital other increase not at tributable to and it earnings,3 subject capital to losses.4 . . .

“The income from the unless estate, otherwise deter- mined by will, distributed as follows: * Orphans’ throughout courts and trustees the Commonwealth urged relight guideposts have us to or erect to cover the situations frequently apportionment cases, that, arise I believe practicable, comply so far as is requests. we should with their “2 Est., 39, Estate, Baird’s 299 Pa. 42.” To this add: we Arrott 228, (as stock) ; 383 Pa. Estate, 232 to decedent-owned Fisher’s 607, 614; King (No. 2), Pa. Estate 355 Pa. 68. “3 Est., 449, 453; 1], Dickinson’s [No. Packer’s Est. 194, 197; Integrity Co., 291 Pa. v. Jones Trust To Pa. 149.” add; Estate, these we Arrott 383 Pa. 232. Est., supra; supra.” “4 Dickinson’s Est., Packer’s To we these Estate, 155, 159; add: Lueders’ 337 Pa. Arrott 232. scrip stock] dividends Ordinary [or cash

“[a] regardless of how belong coining tenants to to life it they declared are death soon after testator’s corpus. . company . held whose stock is costly, “de minimis” vexatious, In order to avoid litigation, confusion, conflict and eliminate and to make requests comply and Bar of Bench with the respect situ various rules with and definite the clear ordinary An frequently I add: would arise, ations that belong ordinary dividend and an stock cash dividend irrespective ir of when earned to the life tenant, respective is not there value is the intact or of whether small impaired. Ordinary by include cash dividends paid currently ir or extra cash dividends which are end).* Ordinary year’s regularly (usually stock at paid are dividends which dividends include stock would currently semi-annually annually, ir quarterly, or or year. any regularly, one and do not exceed 6% Extraordinary distributed . . “[b] . are dividends, presumption apportioned is that as follows. extraordinary cash] earn- [or an dividend is from stock ings belongs life tenant.7 .... to the extraordinary] a[n

“In the distribution of preserved. When dividend the must be ‘intact value’ extraordinary] appears a[n it that the distribution paid [which is out stock dividend to the life tenant impair applicable earnings] intact value will the reducing by estate then there must be the trust it, examples paid by General $1 For see the extra dividend of by paid the the Norfolk Motors at end of extra dividend 500 paid by Company, Un- & Western the extra dividend Railroad 400 Co., paid by Atchison, To- R. R. extra ion Pacific dividend 200 peka Fe, paid & Oil Santa and the extra dividend Standard Jersey. Company of New “7 Chauncey’s 436; Earp’s App., supra; Est., Graham’s add; Est., supra.” 446; Est., Pa. McKeown’s To these we Trust, Hostetter’s 574.

apportionment remaind and tbe between tbe life tenant corpus preserve to so as the intact value erman,9 plus through any increase that value estate,10 any purchases, surplus share or from contributed proper capital [including any enhancement increase,11 applicable any earnings*], not due to and less capital decrease for losses.12

“Where an stock dividend is made capital chargeable earnings, from not to increased assets surplus as such contributed and the stock divi- like, belongs corpus.13 dend to the . . . produces

“[c] Where that owned income price greater the estate is sold for a than the intact (as above) value defined and and such considered price greater is due to an accumulation of income, proceeds apportionable; are much so is, proceeds preserve [adjusted] necessary intact (as defined) goes value above for the trustees corpus, only represents so much the balance that goes income life tenant.15 greater “But where the stock’s due to the earning good speculative, power, or its will, intrinsic, proceeds part or enhanced market all the are value, corpus belong the to and the in- the remainderman; capital gain.16 is crease

“9 Earp’s Est., supra; Chauncey’s Est., App., supra; McKeown’s ^[291] supra; Pa., supra. "10 “11 * Nirdlinger’s Estate, Graham’s Dickinson’s Flaccus’s Est., supra; Est., Est., 283 Pa. supra; Chauncey’s Est., ^[290] Waterman’s Pa., supra; 185; Nirdlinger’s Est., Packer's Estate 279 Pa. Est., supra.” 491.” supra.” (No. 1),

“12 Dickinson’s Est., supra.” To points and we add: Flinn’s “13 Chauncey’s Est., supra.” 15, 18; Lueders’ Estate, 337 Pa. 159. “15 Est., supra; Nirdlinger’s Est., supra.” McKeown’s Nirdlinger’s supra, Est., page See “16 and cited authorities at 479.; proceeds the sale from presumption that the is “The corpus bur- the belong of the trust the stock to person they as- proving the do not rests on den of serting claim to them.17 rights arising the sale of from

“[d] Proceeds the have same manner and in the distributed should be . . following stock. . presumptions as in sale of the same determining which the the share . . In all “. cases, apportionment, his on to based receive life tenant is attributable an amount as is limited to such share fairly It does included therein.20 or can be to income capital earn- not due increases assets not include rights earnings do not in- ings, in the of stock sale speculative market enhanced items value, clude such as power. earning the stock’s presump- rights, sell stock the “When trustees represent proceeds derived therefrom is that tion showing capital burden of estate, assets contrary claim to rests on those who assert a part of fund or it.”

The life tenants nevertheless contend—notwith standing indisputable Es fact that Waterhouse’s supra, prior 308 Pa. sub and numerous tate, (as sequent recently Arrott decisions of this Court supra), agree (1) ten that a life Estate,* only ant entitled such distributed net during tenancy, his tohich accumulated as do not life impair adjusted (2) intact value of the stock and adjusted that the intact value and all other enhance corpus belongs ment in the value of the —“that just the remaindermen are entitled to what the stock actually worth at the time of the creation “17 Est., supra; Nirdlinger’s supra.” Est., McKeown’s “20 Chauncey’s Est., supra.” * fully Estate Arrott will be hereinafter discussed connection point. with another

37 support they In no less and no more.” trust, thereof Boyer’s Appeal, 224 A. cite Pa. 73 Es 320; Barnes 338 12 2d Pa. A. Lueders’ tate, 555, 560, 912; Estate, 10 A. 2d 415. 155, 158, While the aforesaid statement terse was accurate general it is those not correct statement of the cases, they rule. It was accurate those in cases because paid volved an stock dividend which was applicable earnings, impair out of and there was no capital ment of “intact” and no increase since acquisition trust’s stock. It was not an ac general basically curate statement of the because rule, entitled, only applicable earnings tenant is to Ufe being gains which are distributed in dividend or in form liquidation, rights, sales or or in the from form of everything and the remainderman is entitled to else. The life and sometimes tenants, have for Courts, gotten primary that the basic reason and the for, paramount purpose theory, of, doctrine or for rule equitably apportioning stock and other kinds of divi rights gains liquida dends, from the sale or give tion life tenant so much there represents earnings net which had accumulated of during tenancy.

the life “Intact value” was never paramount primary goal reason basic nor the for, apportionment only measuring was of, rod* —it enable the Court to ascertain the to which the equitably life tenant entitled. The contention the life tenants is fallacious the additional reason indisputable it original overlooks the fact that “in commencing tact all value”—under the cases with Dickinson’s Packer’s Estate, Pa., 291 Pa., Estate, Nirdlinger’s Estate, Waterhouse’s Pa., measuring many gradations Even this rod has as colors and as a rainbow.

38 Estate, 320 Pa., Chauncey's Flinn’s

Pa., Es 337 Pa. and Arrott Lueders’ Estate, and even Pa., re mainly court below which the upon tate, Pa., decreased) increased adjusted (i.e., lies—must be (including increases capital capital contributions, value) of market and other enhancement capital gains capital losses. the two one of which is Pa., Lueders’ Estate, is an il- apt life tenants, mainly upon by cases relied that argument of their lustration of the fallaciousness stock what the just entitled to “the remaindermen are creation the time the was worth at actually in- original no or that more”, only less and no trust, else be- and everything is to be preserved, tact value ques- In Lueders’ the tenant. Estate to the life longs extraordinary of an apportionment tion involved the share) (per form of a dividend which took the $45 option at the was payable note which promissory had stock. been preferred in its There the company reduced the origi- losses which considerably operating impaired in certain years nal intact which at which amount of undistributed existed death. The “The of the testator’s Court said: the time adopt an intact attempt original answer to this [to reduced which will fluctuate be constantly from capital as distinguished by operating losses] of cases estab- overwhelming to be found array be divi- the rule to where lishing that, left paid by dends are declared and on shares must be distributed adding a decedent trust, they intact corpus portion keep to the a sufficient existed at the time trust they value of the shares was balance to those entitled created, allotting [citing the income of the trust estate: numerous Appeal In the case of Boyer’s [224 144] cases]. : 151) 'It seems to (p. it was said be doctrine of just our that the remaindermen are entitled to cases, worth at time of the actually what ” more.’ creation of the no less and no trust, accurate That the statements were not an foregoing demonstrated statement rule general strikingly omit) the rest of the opinion (which the life tenants “. . . at the intact value recognizes existing the time of creation of the trust be added may or 'capital 'capital increases’ diminished losses’ by corporation: 1), sustained Packer’s Estate (No. 464; 291 Pa. 197; Nirdlinger’s Estate, 457, 194, Waterhouse’s 308 Pa. 428.” Estate, 422, 427,

It is as or excerpts clear that crystal foregoing succinct statements relied the life tenants are upon by not an accurate statement pertain- of the rule general to “intact value”. ing

With supra, of Arrott exception Estate, Pa., and cases which will herein- involving rights, be after we believe that can discussed, all the cases nearly reconciled expres- be the loose or by limiting general sions contained therein to the facts of that particular In case. from other words, excerpts language such as the from opinion, quotations Ap- Boyer’s 224 Pa. Lueders’ 337 Pa. and peal, Estate, Barnes in con- must be considered particular nection with the facts and when case, so are not irreconcilable with the general considered rule to “intact value”. pertaining

“Intact Value” is a essential ingredient “Intact Value” very is con- Apportionment, Rule of but there considerable as to Avhat is “intact value” and since Ar- (1) fusion (2) what is intact Pa., (a) original rott Estate, intact (b) apportionment Avhat date and value, value, allocating for purposes Avhat is intact value (c) shares distribution. measuring yardstick or best the fairest and

What is (where an the court or rods to enable rod rights are paid, or sold, or stock dividend is corpus origi- exercised) preserve (1) its sold or capi- capital plus and contributions all nal intact losses) together other (less capital all with tal increases (2) give to the life ten- and enhancement of sale) (or proceeds of much of the dividend ant so (hitherto undistributed) represents net during tenancy his life and do not have accumulated adjusted impair courts have intact value. The difficult to uni- found it devise formulate fixed measuring yardstick produce or rod which will form equity, practical readily at the same time be applicable general to all situations. The rule which took time to evolve and has some sometimes been vari- ously loosely inaccurately expressed, is based upon judicially yardstick devised as “intact known value”. period

For a considerable of time courts floun upon dered definition “intact value”. Market p's Appeal, value was used as in intact value Ear 28 Pa. 368; book value was not mentioned. Thereafter the indiscriminately courts sometimes used one, sometimes following yardsticks all, for “intact value”, viz., liquidating intrinsic actual value, value, value and book they synonymous, if although value—as were actual liquidating very book value and value are often gradually different.* Then recog booh value became (at prima facie) nized least as “intact value”; * Pew, any, agree if can is; really what “intrinsic” value generally actual value; usually market means book value liquidating differs from value because the former does not make provision capital taxes, gains, commissions, broker’s and losses always inevitably which almost occur if and when an indus- trial, manufacturing, corporation liquidated. railroad or similar

41 83 Moss’s market value was discarded: Appeal, entirely Estate 344; Pa. 140 Pa. Stokes’ 264; Smith’s Estate, (No. (No. 240 Pa. 240 Pa. Estate 277; Stokes’ 1), 2), Pa. Es McKeown’s 263 Dickinson’s 288;* 78; Estate, 457; 285 290 Pa. 449; Pa. tate, Nirdlinger’s Estate, 149; Jones v. Trust 292 Pa. Integrity Company, Pa. 299 Packer’s 291 Pa. Baird’s 194; Estate, Estate, Estate, Flaccus’s 283 Pa. 39; 185; Estate, Chauncey’s 303 Pa. 422; Pa. Waterhouse’s 308 441; King Estate, (No. (No. 355 Estate 349 Pa. Estate 27; 2), 1), King (No. 361 Pa. 629; Estate, Estate Steele 64; King 3), 377 Pa. 383 Pa. 228 to dece 250; (as Arrott Estate, dent-owned stock).

This evolution to “book value” started probably with Moss’s in 1877. Appeal,

In Moss’s The Appeal, Pa., supra, Pennsylvania its Company, having surplus amended earnings, charter capital order increase its the issue of new stock. The each stockholder a company gave right or option subscribe at share for share. par, trustee testamentary shares of sold owning 60 rights and with the proceeds purchased shares of stock at par. The life tenant claimed was, an actual distribution effect, surplus of earned profits and that she entitled to 33 shares of: the stock based upon market value. The Court held that market value toas not the applicable yardstick and that corpus was entitled to all of shares and the life tenant to none. The 270-271) Court said : (pages Boyer’s The Court Stokes’ Estates and de- after ciding value, that book value was said: “The intact value market may aid in the ascertainment of the actual value and therefore properly confusing, received in evidence on that issue”. This is a fortunately statement, if ap- not erroneous never has been plied, shows, any far as our so research case since 1857. of this the life con- theory “The fallacy [of tenant] estimating forty sists in the fact of the one hundred and at time the not at their actual value the of shares, A at market .... more un- transaction, but their rule not be It would make imagined. certain could well of of depend upon the condition parties the the rights the is as variable as with- stock the market, tides, enough out Market values are well their regularity. where are upon question parties a the distribution, question but of values between realize; upon about to should judicial decree remaindermen, life-tenants market the sands of shifting down go through rock until it the solid of actual values. reaches rule work serious in- application any might other It that within last justice. year is well known has large corporation stock of than one varied more price per over one hundred cent.” a rail A.

In Smith’s capital provided increased its way company buy each stockholder should have privilege issue one share of the three ing par every at new stockholder’s The tes original holding. shares purchased option trustee exercised the tamentary declared company Two weeks thereafter the stock. upon capital share its entire per $11 a dividend of The effect of the dividend was the new issue. including stockholders what paid purchasing they to the give practically market was new stock. The for the issued and after was it the stock the same before issued. held that both the

Judge Penrose* sale the testamen proceeds and the dividend, of new stock belonged shares trustee of tary generally ablest Judge been the considered have Pemrose Pennsylvania. matters, history judge orphans’ in the court

48 “the dividend in no sense a divi- principal since dend of ... in of tenant profits the lifetime the earned, for . . . . The extra dividend was else than life; nothing in a return to of paid carry- the stockholders the money out shares the scheme the number of ing increasing of and we must decide facts without upon regard to the names which been in distribut- may applied have fund. ... if the the It of no it be ing importance, that the market of the stock was not affected fact, price re- the new issue. As for life and by between tenant said in Moss’s 83 Pa. 271, as was mainderman, App., the question of value is to be not determined, by the stock as- by but the actual market, fluctuations of corporation sets held the stock divi- by making dend.” orphans’

This affirmed of Court the decree : value 357) court and said “. . . question (page is to be not the fluctuations of the stock determined, by corpora- but the actual assets held market, : supra.” tion Moss’s Biddle’s supra; Appeal, Appeal, Whatever doubt have existed to whether may market value was or was not “intact was defi- value”, in favor of book value nitely resolved finally A. case Dickinson’s 352. That dividend. involved the distribution of a 100% at the time of his was the owner Testator, death, Phila- Association of shares of stock The Fire liquidat- It had a value of a a delphia. par share, $50 and market or intrinsic value a ing share, $142.61 awarded value of a share. The trustees were $415 a share. shares at their liquidating $142.61 fire loss which reduced There was from value of the stock liquidating share, $142.61 held that figure a share. $71.09 the “intact value” which was to be a share was $71.09 apportionment of the extraordi- computing used market value toas even though stock dividend nary : dis 455) “Such said (page The Court much higher.* equitable prin made according be must tributions market value value nor par neither however, ciples, play any part them, only intrinsic value: Smith’s but 344.” Est., 149, 292 Pa. Trust Company,

In Jones v. Integrity 401 shares trustee purchased testamentary 140 A. a 862, Company Improvement Gas stock of the United of The share. per value of intact-book had an $81.14 which to sub- (1) of apportionment rights case involved (2) an to the stock, scribe book on apportionment based its The Court dividend. has value 156) : “Market said (pages 155, value and under all distributions; with such to do nothing be the intact value arise only situations Dickinson’s clear This is made very considered. made the same the court below where Estate, supra, on this point our conclusion repeated and we mistake; Estate in Packer’s supra, in Nirdlinger’s Estate, noteworthy 291 Pa.” It especially (No. 1), was rejected and market value applied book value was stock. trustee-purchased as value” “intact A. 299 Pa. 907, In Estate, 39, Baird’s facie prima that “intact value” was reiterated again death and that mar- date testator’s book at the of value moment. said (pages was no The Court ket value of : the intact value determining “The rule 41-42) standing, association, financial in order to increase its par price and carried new at a above issued on occasions two surplus account.” The a “contributed to what it termed the excess income which had accrued on the this was not that “As Court said represented part excess market but rather corpus necessarily belonged par ... to the it over 216), (Graham’s each Est., the intact value of 198 Pa. trust accordingly.” increased share paid the income from estate, which is to be to life corpus tenant with desig the remainder of the over to persons, definitely nated has not been set forth. We know that it is fixed as of the date of testator’s death Nirdlinger’s and, indicated in 290 Pa. par ‘intact plus value includes the value of the stock, any accumulation of earned- income, before the death Earp’s App.’ of the testator . . .: Whether it is entitled any definitely further increases has not been ruled. Market value has been eliminated as a standard of (No. 1), measurement: Packer’s Est. 291 Pa. 197; Integrity Jones v. Trust 155. Co., We have indiscriminately stated in our decisions that in tact value is liquidating actual, intrinsic, or book customary but value,* standard measurement prima used m the cases is book value. The stand- facie m'd measurement intact value of trust estates, paid income of which is beneficiary, to be to a re with mainder is the book . over, value; . . .”

Baird’s leading Estate was followed of case Waterhouse’s 162 A. 422, where, 295, repeat, we again this necessary Court felt it to once “prima restate intact value is facie, book value/’ (No. King 2), In Estate 355 Pa. 48 A. 2d 64, 858, again the Court reviewed the occasions which created (page 68) event and then said : . “. . probably ‘There is no more difficult and intricate application branch of the law than the what Pennsylvania, Appor- termed the or American, Rule of principle equitable apportionment tionment. The early (see Earp’s Appeal, 368), was established 28 Pa. development ably and its and refinements are discussed Nirdlinger’s former Chief Justice in Kephart Es- spite definition, values, repeat, In of this these we often are very different. Es in Waterhouse’s 139 A. 290 Pa. 200, tate, Prima, intact 162 A. 295. . . .’ facie, 308 Pa. 422, tate, corporate booh and this standard is the value, ivalue ele established that the unless it can be remains fixed up making not true values.* value are ments the book company’s accept man Ordinarily will the courts charging it as correct when method of items ner and good in faith.” is done dissent- in a

Mr. Justice, Jones, now Chief Justice, ing opinion, recognized market book value and not 78) (page : “The sale intact value and said preferred price (i.e., time its market value at the sold) materiality establishing in- its no would have exchange Market distribution. tact value after the Es- Baird’s value is not evidence intact value: see p. supra, at 42.” tate, (No. King 3),

In 66 A. 2d Estate again this Court reiterated that “intact value” is booh value and that value and intact value are un market merger. related. This case involved a While there was opinion among the members of difference the Court as to a number of the issues there there involved, opinion seemed to have been no difference of on the following opinion: statement in ne “The majority cessity preserving pres intact value does not mean a actually obtaining ervation the sense of the estate’s only the amount of that intact value but cash, preservation its booh value; intact value and market purpose, wholly many are, unrelated; stocks sell on the market for than less one-tenth of multiplicity In order litigation, to avoid confusion and a I would add that “This standard ‘book value’ remains fixed in the faith, change bookkeeping absence of fraud or bad or a material in original ap- between the date of value and intact the date of the portionable event.” their book if other values, especially while stocks, in speculative sell for times their book nature, many the value of in values; a stock the market depends up- myriad on a of factors other than the actual inventory value of the assets reflected in the books company’s of the corporation.”

In Steele 377 Pa. 103 A. 2d Estate, (1954), which involved an dividend, Court said : 254) (page “Appellants contend that market value of the estate’s in holding Easton re- Publishing would be Company very greatly if duced the stock dividend were distributed to the life tenant instead of added to and being retained corpus of the trust. The complete answer is that even if true this is immaterial; under the di- testamentary rection to pay net income to his and un- daughter, der the then existing law of market value Pennsylvania, no and the if materiality; it be fact, fact, the market value of the stock held in trust would be reduced is greatly not sufficient to defeat Mrs. Fretz’s to this legal right stock dividend: 361 Pa. King Estate, 66 A. 2d 629, 635, 68; Waterhouse’s Pa. 162 A. 422, 428, 295; Jones v. Integrity Trust Co., 140 A. 149, 152, 155, 862; Packer’s (No. Estate 1), 139 A. 867.” 194, 197, It clear from indisputably a review of a host cases, including those hereinabove cited and quoted, that “intact value” always meant situation every from 1876 until 1955—book not market value.

Why Market Rejected Value Was as the Yardstick

for “Intact Value” Except possibly family closely held corpora- tions, market value stocks (of listed on an Exchange) all is, cases and for nearly all nearly purposes, truest measure or determinant of actual value. How- where a yardstick or ever, rod or measuring rule is de- equitable give of an share tenant an vised to to a life gain extraordinary sale on the stock or of a dividend, part) (wholly rights, in or of stock which or represent applicable earnings, is net it accumulated crystal market value clear as that a weather-vaneish noy accurate or a fair or realistic neither a stable equitable applicable earnings. measuring net or rod stocks) periodi- (of daily, and

Market value with its cally based and fluctuations reflects therefore wide, upon great many as, variables besides —such (a) present future inter and the the alia, condition, particular corporation growth prospects and of of this (b) earning power, Industry part, it is (c) payments (present, past likely-fu- dividend (d) (e) ture), Country, the economic condition of our anticipated depression prosperity or near-future Country, (f) money (g) marginal re- our market, (h) speculation, prospects quirements, and of an ad- vantageous merger, (i) long, an actual or threatened protracted (j) (k) war or threats of strike, war, politics.

Arrott Estate nearly eighty years, For the first time four mem suddenly pur bers of this Court decided price (market value)* chase instead of book con although they stituted “intact limited one value”, it to particular In situation. Arrott unexpectedly A. 2d a four-man decided that say The Court stated that it was inaccurate that cost purchase price synonymous. value of listed stocks are market Every repeat: broker, every nearly every We stock banker fre- quent purchaser of the cost of stocks listed on stocks knows that Exchange exchanges York New Stock and other stock is almost always same, they (llie purchased, at dates were then prevailing) “market value”. determining apportionment of an original any “intact value” dividend, purchased hy the trustee

which was was not its book purchase, purchase price.* value at the date of but its purchase parties price, The which and the Court agreed was its market exceeded value, the book value. again recognized The Court once that hook value was (prima facie) for “intact value” decedent-owned stocks. approving Nirdlinger’s The after 290 Pa. Court, Estate, (No. 1), Packer’s and Estate 457, 463, quot- Waterhouse’s 308 Pa. and after Estate, 422, 427, ing approval opinion with from the Court’s in Nird- linger (pages 232-235) said : Waterhouse,

“In Baird’s 148 A. 39, 42, indiscriminately ‘. . . Court said: We have stated in our liquidat- decisions that intact value is actual, intrinsic, ing customary or book but the value, standard of meas- prima urement is used the cases hook The value. facie standard measurement intact of trust value paid the income of estates, which to be to a benefici- ary, with remainder is the book value . . .’ over, ;* appears frequently reported

“It from the cases that prevailing when the market value was in excess of the book the remaindermen value, contended market that preserved value should be rather than book value— obviously, advantage. which, would be to their This consistently Court has decided that it is ‘hook’ value (as determined) above and not the ‘market’ value preserved.” which should he quite

The then said: “It however different, purchase corpus when trustees stock with cash from the multiplicity In litigation, order to avoid confusion and a I would add “This ‘book that standard of value’ fixed in the remains faith, change fixing absence of fraud or bad aor material original value of assets between .the date of intact date event.” purchases the trustee however, . . . When, of the trust. book and not the price, purchase it is the re- The Court was value.” its intact constitutes which not it did value; intact original to the stock’s ferring be determined value was to its intact decide how (a) how (b) or stock dividend, the extraordinary after distribution. purposes to be valued shares were essential two absolutely these last to decide The failure mail is one of the Apportionment Rule of parts dozen) varying (over for the various reasons advocated or applied have been yardsticks in the Cunningham, attorneys trustees or judges, Estates. Trimble Trust Harvey new and its support Arrott in order case, was not book intact value position original novel re trustee, purchased by value when the stock was In Jones v. 308 Pa. 413; Bullitt’s upon Estate, lied Hostetter’s 149; Trust, 292 Pa. Trust Company, tegrity then said: it —and support 319 Pa. of which 572,—none subject on this numerous cases “We need not cite our to recon their facts and seek . . . and attempt analyze cile them.” re- Arrott which upon

We shall the cases analyze (purchase market value and substitute change lied of boofc-intact value. for the 80 old rule price) year opinion first of its part in the Although In- v. Jones (inter alia) upon in Arrott Estate relied said Pa. thereafter Trust 292 it 149, tegrity Company, v. Trust Company Jones —concerning Integrity value value meant book had declared that intact for : 235) trustee-purchased (page stock — statement following on “Appellants rely largely 140 292 Pa. 155, Trust Integrity Co., 149, Jones v. much higher] c. . . was A. 862: market [which all the under distributions; has to do toith such nothing to be value is which arise intact only situations Apparently ex considered.* **.. .’ in that case there complicated corporate involving isted situation shares pur originally of stock held new shares testator, extraordinary chased stock divi trustee, appeal, quashed ground dends. was on the however, present that the case stated did facts on not sufficient judgment. which to base a Under such circumstances opinion] seriously regarded [Court’s the . . . cannot be authority support appellants’ as an contention nothing [that dis market value has to do such with extraordinary tributions].” This state seems to be an opinion just recog ment after the Arrott had writer Integrity Company nized Jones v. Trust as an author “ ity (page 233) : *. . . In Bullitt’s Pa. “Following Mr. at Justice said: Jones v. Kephart Integrity purchase 292 Pa. in the of stock Trust, being rights, reasoning parallel, under stock there should have been added to the intact value of 1902, book value of the 383 shares donated or awarded to the principal; this forms a new intact value as a basis future .... See Waterhouse’s distribution; Est., ’ ” 422.” Integrity Company,

Jones v. Trust su point pra, factually exactly exactly and holds opinion. contrary In of the Arrott case, purchased trustees a number of shares United Gas (principal) question Improvement Company and the inv stock divi- olved** how the be the law The clause which is underlined was also stated to quoted. Pennsylvania cited or in a host of cases hereinabove ** by respect purchased the exer- the shares which were With to entitled, rights subscribe, life tenants were cise of If, paid (page 154) were said : “. . . . . . the new shares the Court trustees, part, money of the for, in in the hands whole or out they side be entitled a credit therefor on the income would their account.” corpus apportioned between

dend of should be 25% of the intact value income. The found that the purchased by book or intact the trustees had a shares purchase per their value of share at the time of $81.14 preserved and this book had to be for the remain- value respect apportionment derman. With to the 155-156) (pages . : “. . dividend Justice said Simpson hearing Judge] [The concluded that all of the twenty-five per shares received on the cent extraordi- nary stock would have to be awarded to the dividend, corpus but for the fact that the case trust, stated the market value of at the time suit the shares, brought, was said to be each. therefore He $106 apportioned figure, shares on the basis this giving corpus to the a sufficient measured number, price, up to make the difference between the intact purchase at value the time of the shares, their intact this value stock dividend was declared after and distributed. was error. Market This, also, higher] nothing [which was much has with to do such only distributions; under all the situations which arise very the intact value is to be considered. This is made supra, clear Dickinson’s where the Est., Court below repeated made the same mistake; and we our conclu- point Nirdlinger’s sion on supra, and in Est., (No. 1), Packer’s Estate 291 Pa. 194.” opinion dismissing summarily Arrott in thus Integrity Company Jones v. Trust as a worthwhile au- thority against apparently market overlooked the fact that in Baird’s 299 Pa. from which the opinion quoted approval, Arrott with the Court said (page 42) : “Market value has been eliminated a (No. standard 1), of measurement: Packer’s Estate Integrity 291 Pa. Company, 197; Jones v. Trust opinion 155.” The Arrott further over- Integrity looked the fact that Jones v. Company Trust was also approval cited with in Bullitt’s 308 Pa. Estate, 413, 420; Waterhouse’s Estate, 428; Hostetter’s 422, 319 Pa. Bard’s Trust, 575; 572, 339 Pa. Estate, 437; Steele 377 Pa. 433, 250, Estate, 254; Jones 377 Pa. 476. Estate,

Bullitt’s relied Arrott Estate, upon by also holds exactly In that case contrary. : 420-421) Court said “. . . have (pages there should been added to the intact value the booh [booh] the 383 . . . shares awarded to the principal; this forms a new intact value as a basis for future dis- to it tribution; should be added the cost of the shares purchased since that plus contributed time, any surplus or capital gains. See Waterhouse’s 308 Pa. 422. Est.,

“The 1928 stock dividend of dis- should be 100% tributed as follows:

Intact Value of original 1,150 [book]

shares at a share $167,814,785 $145.9259 Book Value of 383 shares stock dividend $218,332

of 1918 at a share 83,621.539 Gost shares purchased 14,836.26

$266,272,584 Add thereto surplus

Contributed per share $20.31 Capital gains per share 5.7004

a share

$26.0104 equal shares 1,595 41,486.588

Total $307,759,172 3,190 shares, being 1,595 shares original plus stock dividend of shares. Each 1,595 share would have intact value the 1928 dividend $192.92. After booh value of each share was and for the $121.09, $78,530.37, difference, $386,289.54. shares,

3,190 adjusted] the [original and value intact the between goes dividend] income, [after the book value 648 shares value] be would [book share at $121.09 plus income.” in cash as $61.75 opinion, by word of the misled the use

The Arrott purchased, $14,836.26”, of 62 shares “cost “cost”, i.e., paper be- books demonstrate what the did not notice peradventure the word yond that doubt, wit, aof the purchase and not book value used meant “cost” as there parties Bullitt’s Estate price The value. or market pur- price purchase 62 shares agreed of the the that value by their book and trustees was $9,000 chased the follows' purchase It $14,836.26. was of their at the time supporting Es- Arrott instead of that Bullitt’s Estate, expressed) exactly ambiguously (though the holds tate, opposite. 572, 181 A. the last Pa.

Hostetter’s 319 Trust, support upon by the new not does Arrott, case relied 1300 left shares Arrott rule. In that case a settlor Pennsylvania Railroad common stock of the the Eight book of each share was trust. The value $78.60. granted rights years Pennsylvania its later Railroad shares additional stockholders to subscribe to 8 shares stock for each at the rate of one share of new (par value) per price trustee share. The at a of $50 paid from therefor subscribed for shares $8100 again corpus. company On November 27, 1929, gave rights to subscribe for additional its stockholders price The trustee subscribed shares at a a share. $50 corpus paid $9,150. from for 183 shares and therefor November 1929 was “The book value before $96.73 pur- had after the additional stock been a share and, [by subscription], the book value chased completion $91.65. So at of the second sub- corpus, scription of stock in the there were shares 1,645 corpus with a total value while $150,764.25, at intact value book shares 1,300 [i.e., value] the date of the of the trust was $102,180.” creation that increase in the Court found accumulated shares was due to which had from the date of the creation of the trust to the date of the stock intact look i.e., issue, would preserved awarding value of the be corpus, life shares to the balance to the ten corpus : 575) ants. said said Jones (page The Court “We opinion in an v. Trust Integrity Co., 149, 153, We that, Mr. Justice decide now Simpson, definitely corporation where a to the trustees of estate gives they to subscribe new avail right themselves such the benefit there offer, resulting of from be in the manner as an must same apportioned ” . . .’ be;* stock dividend would extraordinary to

The life tenants would have been entitled nearly since rights represented all the stock accumulated they the trustees exercised applicable earnings. However, in exercising the stock these rights, rights paid confusion, rights more rule as to stock has caused far The irreconcilability any apportionable event. conflict and .than other proceeds following rights, sale The cases that or there held stock Estate, of, corpus apportionable: belong are not Dickinson’s to Estate, 449, 455; Thompson’s Estate, 332; 285 Pa. 153 Pa. Eisner's 143; Appeal, Pa. Moss 83 Pa. 264. 175 rights apportionable following cases held that stock are The apportioned be in the and when exercised the trustee should (and prima that dividend same manner as Nirdlinger’s Estate, belong tenant) they life : Pa. facie to the 278; Integrity Thompson’s Estate, 478; Jones Trust Pa. v. Trust, Company, 149; Hostetter’s 319 Pa. 572. rights following proceeds held that the sale case apportioned manner should be same were they proceeds presumptions the same as if were and have corpus) belong (i.e., they presumptively : to Water sale of stock house’s 430. of corpus. If, out subscription price $17,250 entitled the life tenants were that case, thereof, or the of) proceeds all these (almost rights it is cer- applicable earnings, they represented since be reim- that should equitable just corpus tainly subscription price bursed income out of for the benefit corpus the trustees paid not Kepharp’s opinion life tenants. While Justice support it does not as clear on this as it point might be, as is the Arrott intact value justify original rule, quotation: evident from the following surplus “. . . In to the life tenant giving value of the keep shares —over that necessary amount ex- shares at the of the trust that plus date no harm pended for of the additional shares—(cid:127) purchase . . .” was done to remainder interests it interpreted, No Hostetter’s Trust matter how that does not the Arrott support (Averepeat) opinion value. or) intact value is market original (cost if we Hostetter’s Trust holds that Even assume that to a price paid booh original value, plus subscription corporation to subscribe to rights exercise is the intact proper adjusted basis for determining it is a non intact sequitur say original value is the cost to the trustee. Even more original if Trust had to over- Hostetter’s intended important, more than a prior Court, rule dozen decisions of this which had established booh value intact original if and it had intended to establish a new rule, it and (a) Avould have said that it certainly clearly intended to establish a ne\v and (b) different or rule, that it intended to overrule a dozen decisions of prior and (c) quoted it would not have Court, certainly v. with from Jones Trust approval Integrity Company, held Avhich exactly opposite, namely, booh value intact in original that was trustee- do nothing had purchased and market value it. with that analysis (1)

It is clear from the foregoing prior authority Arrott Estate unsupported by any and of this since that (2) logically dozen prior to more than a it principle, contrary cited are hereinabove (which decisions of this Court intact subject original or on the basic quoted) Jones v. value and it conflicts with (3) directly President Trust 292 Pa. 149. Integrity Company, expressed present it Judge respectfully Klein case: “The as the deter- adoption purchase price in Arrott Estate minant for intact value establishing a marked deviation from the established was admittedly rule.” general

We are faced with a dilemma. There is in reality, and for no difference be present purposes, equity, tween a decedent-owned and a stock. trustee-purchased For of inheritance estate income purposes tax, tax, surcharge, tax court (gains), orphans’ accounting * are treated alike. should have they exactly they Why for different yardsticks equitable apportionment dividends or on for gains sales —one decedent-owned for trustee-purchased another stock? The answer seems obvious —there no reason, equity logic, a different justify yardstick.

In order to solve the “intact value dilemma” we and for once determine what rod must, all, measuring or rods should be for adopted (a) intact original for intact value value, (b) after the date immediately (c) purposes of distribution. apportionment, shall We review several of the dozen different briefly adopt. solutions which we are urged 1. We can overrule Pa. and Crawford sustain as constitutional provision Principal purchase. Market value at date of death and at date of

58 shall Income Act which states that the Act 1.947, (with exceptions) apply presently certain irrelevant to “all wills . . . made or theretofore thereafter created.” This would eliminate considerable travail for trustees and Courts and be the easiest beneficiaries, difficulty solution. with this solution that Estate decided that a had a life tenant Crawford applicable earnings in vested interest accumulated even though actually they he was not entitled thereto until upon happening apportion- were distributed of an able and this has reaffirmed event, Court Crawford Estate in Pew Warden 382 Pa., Trust, Trust, and Steele and we would Pa., Pa., have to repudiate completely all of overrule them and the rea upon they soning which were based. (a) purposes apply original

2. We can for in- prevailed tact value the booh value has rule, Pennsylvania years, for and limit it to decedent- (b) purchase apply owned can stocks, we price original rule of Arrott Estate intact value for trustee-purchased adopted, stoch. If such a solution is appli- we would then have to determine and define the measuring trustee-pur- cable rod for intact (a) chased stock at the time event, (b) purposes and also of distribution. impossible principle, logic

It to reconcile in equity original or in the new intact-market value rule of Arrott Estate with over a dozen decisions of this period covering years of 80 which had estab- original and maintained booh value as lished “intact again and had held over and over and over value”, (so Apportionment concerned) far as the Rule is inapplicable. Every marhet value banker and every nearly every broker and owner of stocks that the market value of a stock is often 5 know value; greater its book 15 times than that it is some- times less than its book value; and that value—(cid:127) market frequently which fluctuates much more and much more widely nearly than book value—is’ not a as accurate criterion as is book value. Furthermore, drastically inequitable the different and results which produced by applying will original often be intact- trustee-purchased market rule of Arrott in Estate original and the stocks, intact-book value rule of a myriad dealing of other cases with decedent-owned corporation (and stocks of the same sometimes the same estate) apparent strikingly trust following from the example: leaving

Mr. Smith on dies March 20, two 1952, pay trust one to estates, the income to his for wife pay daughter her and the other to life, income to his portfolio daughter’s for life. The of the includes trust company, shares of a 1,000 chemical the book value of which at decedent’s death was one-tenth of its market April testamentary On 1. value. 1952, trustee purchased for the wife’s trust samé 1,000 shares company approximately price chemical at the same as the market value on the date of decedent’s death. The book value was the same on March 20 and April May company 1952. In 1, declared extraordinary an stock dividend of which was 50% payable wholly surplus, out of earned which had ac- April apportioning cumulated since 1952. In extraordinary stock dividend in the estate for Mr. daughter, Smith’s and in the for wife estate Mr. Smith’s (if followed) his widow Avouldreceive Arrott Estate is daughter a small fraction of Avhathis would receive. Judge speaking As President Or- for the Klein, phans’ Cunningham, in said: “The un- predictability Pennsylvania Apportionment Rule by comparing present is well illustrated case with (O. Phila.) Harvey’s Estate No. C. 3165 of opinion herewith. date filed of even has been acquired shares decedent owned In that case the trustee Company few Electric of General purchased stock of shares of the trustee months after company The distribution case. in this the same drastically one ITarvey from the different case present shares decedent owned because case in the were involved.” apportioning dividends

3. In apply liquidation gains we can or on sale yardstick or meas- standard fixed rule or uniform determining intact uring wit, book value, rod, trustee-purchased stocks and in decedent-owned (with acquisition, only time of at not stocks, subsequent necessary, adjustment, proper for whenever capital losses), capital immedi- but also or increases purposes apportionable ately and for event, after the of distribution. wisely Judge Klein “But whether said:

President is to be used for the deter- market value or book value calculation are now we of the arithmetical mination important, nearly discussing, so is of itself, not, adoption opinion, standard which a as the our fixed of dependable use as a can trust administrators hereafter dissenting opinion aptly Judge his guide” Lefever, accomplishment when real is a time “There said: precise requires justice and sureness a the exactness ephemeral than the will’o’the rule rather and workable requires equitable wisp doctrine which constant anof aphorism ap- is famous Coke’s Lord re-definition. certaintie the law the posite, . . the knowne ‘. ” of all.’ safetie clarity, certainty high uni- that time It variety, conflict and con- for formity substituted be logic, no there is reason, convinced We are fusion. adopting (1) justification one rule or for equity or yardstick standard or original to determine intact value in decedent-owned stock, booh wit, and an value, entirely yardstick different rule or standard or for original trustee-purchased intact value in stock, wit, (2) market yardstick or one rule or standard or (a) original (and adjusted) determine “intact value” (b) yardstick different or rule standard or for (immediately) “intact value” after the (which is preserving event, used to aid the Court in original adjusted value”), (3) “intact and/or yardstick purposes different rule or standard or for n allocating distributing to the life tenant the exact (under number of shares to which he is the above men authorities) equitably tioned entitled. fixed The same yardstick basic standard or rule or or measur uniform ing rod for obviously “intact value” should and un questionably (1) be used for decedent-owned and for trustee-purchased (2) in each of the above mentioned instances.* experience, stability, equity

Reason, and a host authorities demonstrate that the the most fairest, stable equitable yardstick and the most standard, measur uring determining rod between life tenant and re equitable apportionment mainderman, net earn ings extraordinary have been distributed in an —which or gain dividend, which are included in the re sulting liquidation corpo from a sale stock or of a ration —is book value and not market value. We courage should, have the therefore, and the wisdom to our admit and mistake overrule Arrott adopt 228; we should book value as intact in purposes all instances* and for all in both decedent- * Except corporate where fraud or bad faith is shown bookkeeping, corporation change or has made a material valuing corporate acquisition its assets between the date stock and the event. trustee-purchased extra-

owned and stock whenever liquida- ordinary gains on the sale or stock dividend, apportionment. subject tion of stock are to respect declared With to stock dividend the 100% paid by Corporation, may thus be Gulf Oil the rule succinctly divi- stated: When an paid paid-in partly of contributed or sur- dend is out surplus, plus, partly applicable earned so out of required capitalized much of the latter as is and is not adjusted preserve belongs to intact book value tenants and all the rest of stock dividend the life belongs corpus.

I of the would reverse the Decree below, Orphans’ I remand the case Court with di- would to enter a Decree and a Schedule of Distribu- rections opinion; I di- tion in accordance with and would paid principal the costs be out of the rect that trust estate. joins

Mr. Musmanno this opinion. Justice Harvey Estate.

Case Details

Case Name: Cunningham Estate

Court Name: Supreme Court of Pennsylvania

Date Published: Jan 12, 1959

Citation: 149 A.2d 72

Docket Number: Appeals, 222, 223, and 228,

Court Abbreviation: Pa.