In re Harvey Estate
Supreme Court of Pennsylvania
January 12, 1959
395 Pa. 62
Argued May 2, 1958
With respect to the 100% stock dividend declared and paid by Gulf Oil Corporation, the rule may be thus succinctly stated: When an extraordinary stock dividend is paid partly out of contributed or paid-in surplus, and partly out of applicable earned surplus, so much of the latter as is capitalized and is not required to preserve the adjusted intact book value belongs to the life tenants and all the rest of the stock dividend belongs to corpus.
I would reverse the Decree of the Court below, and I would remand the case to the Orphans’ Court with directions to enter a Decree and a Schedule of Distribution in accordance with this opinion; and I would direct that the costs be paid out of the principal of the trust estate.
Mr. Justice MUSMANNO joins in this opinion.
Harvey Estate.
Philip A. Bregy, with him MacCoy, Evans & Lewis, for remainderman, The Contributors to the Pennsylvania Hospital.
George B. Clothier, with him Obermayer, Rebmann, Maxwell & Hippel, for remainderman, Philadelphia Museum of Art.
OPINION BY MR. JUSTICE BENJAMIN R. JONES, January 12, 1959:
These appeals present questions as to the propriety, as well as the manner, of the apportionment between a life tenant and remaindermen of certain stock distributions received by the Girard Trust Corn Exchange Bank, surviving trustee under a trust created by the will of R. Wistar Harvey who died October 21, 1939.1
The decedent-settlor owned shares of stock in the General Electric Company and the Insurance Com-
After decedent‘s death 925 shares of no par common stock of General Electric Company were awarded to the trust. The General Electric Company stock distribution of 1954, presently in issue and described by the corporation as a “change and conversion“, involved the issuance of three new shares of stock with a par value of $5.00 for each old share of stock with a stated value of $6.25. The required par value of $15.00 for the three new shares was obtained by a “write-down” to the par value of the new shares of the stated value of each old share and a transfer of the necessary balance from “reinvested earnings” to the capital stock account. The life tenant urged and the court below held that this capitalization of earnings furnished a proper occasion for an apportionment. In Cunningham Estate, 395 Pa. 1, 149 A. 2d 72, we held that such a corporate transaction did not constitute an event requiring an apportionment, and, for the reasons set forth in Cunningham, we reach a like conclusion in the instant case.
The Insurance Company of North America stock distribution presents a different problem. All parties agree that this stock distribution involved an extra-
The court below held that this constituted an apportionable event and apportioned the extraordinary stock dividend between the life tenant and the remaindermen in a manner of which we fully approve for the reasons herein set forth.
The basic problem in connection with this extraordinary stock dividend is the manner of determination of the value to be assigned to each share of the stock. Such value must be determined for two reasons: (1) to ascertain the number of shares, if any, which must be retained by the trustee for the preservation of the “intact” value of the corpus and (2) to ascertain the number of shares, if any, which are to be distributed to the income beneficiary. Such value must be either book value or market value on the date of distribution of this extraordinary stock dividend (so-called “record date“). If we determine the appropriate distribution value—to principal or income, or both—to be book value, then a subsidiary problem arises.
A considerable portion of the assets of the Insurance Company of North America at the time of this extraordinary stock dividend consisted of securities of other non-related corporations, which were considerably more valuable at the time of the apportionable event than they were either at the time of the purchase of such securities by the Insurance Company or at the time of testator‘s death. If book value is the appropriate value to be employed for apportionment calculations in this situation, two questions arise: (1) whether the unrealized appreciation on these securities constitutes “earnings” to which the income beneficiary is entitled?3 (2) should the unrealized appreciation be con-
Before determining the appropriate value—book or market—to be used in this apportionment calculation, a general statement of the Pennsylvania Rule of Apportionment and the mechanics of its application is appropriate. In substance, the Rule provides that, upon the happening of an apportionable event, a life tenant is entitled to receive profits and earnings of the corporation accumulated and undistributed since the settlor‘s death or the trust‘s acquisition of the stock, so long as the intact value of the trust principal to be preserved for the remainderman is not impaired: Earp‘s Appeal, 28 Pa. 368. The formula used to apply this Rule may be described briefly in the following steps: (1) the intact value of the stock held by the trustee on which the stock distribution was made must be determined;4 (2) the intact value must be divided by a value per share assigned at the time of the apportionable event to determine the number of shares which must be retained to protect the intact value;5 (3) if intact value is protected, and additional shares remain, the dollar amount to which the life tenant is entitled must be determined, that is the amount of earnings accumulated and undistributed by the corporation since the acquisition of
In the case of decedent-owned stock, such as that presently involved, the intact value is presumptively book value at the date of decedent-settlor‘s death: Waterhouse‘s Estate, 308 Pa. 422, 427, 162 A. 295; Baird‘s Estate, 299 Pa. 39, 42, 148 A. 907; Mallory‘s Estate, 285 Pa. 186, 191, 192, 131 A. 714; Moss‘s Appeal, 83 Pa. 264.
Our initial inquiry therefore is directed toward assigning a value per share at the time of the apportionable event for the purpose of determining the number of shares of stock which are required to protect and preserve the intact value. The value selected should approximate as closely as possible the value per share used to determine the original intact value so that the status quo of the remaindermen may be maintained. As a matter of logic and consistency, we believe that for the purpose of preserving intact value, stock, after a stock dividend, should be valued at book value. Book values of the stock on the comparable dates—the date of testator‘s death and the date of the apportionable event—are more closely related since such values are based on the same provable and somewhat more stable elements than those upon which market values depend. As Mr. Justice (later Chief Justice) STERN stated in King Estate, 361 Pa. 629, 635, 636, 66 A. 2d 68: “The
The next step is to determine what value shall be employed in distributing to the income beneficiary the number of shares equal to the accumulated and undistributed earnings. The payment to the income beneficiary arises from the shares of stock distributed by the corporation as an extraordinary stock dividend after enough shares have been set aside to protect the intact value. The remaindermen argue that market value, not book value, should be employed in this calculation, while the life tenant argues the converse. The theory of the remaindermen is that if the life tenant were to immediately sell the shares apportioned to her, the amount of the accumulated earnings represented by such shares would theoretically be received. They lose sight of the fact that what is apportioned by the Rule are the shares of stock contained in the extraordinary dividend, and that the purpose of the Rule is to make an equitable and fair division between the life tenant and themselves of such shares of stock. In most
Finally, and most important, in ascertaining the amount of earnings and/or the book value of the stock of North America how do we treat unrealized appreciation in the value of securities of other non-related corporations carried as assets of North America?
North America has invested a portion of its earnings and profits in these securities. These securities are carried on the corporate books of account at the cost thereof and no entry is made in such corporate books to reflect any change in the market value until the securities are sold. However, in its “Convention Reports” filed with the insurance departments of each State in which it does business and in the balance sheets contained in its stockholders’ reports, North America
The life tenant contends that the enhanced value of these securities should be included in arriving at the amount of “earnings” to which the life tenant is entitled, if in ascertaining the book value of such securities this unrealized appreciation is utilized. Such a contention is without merit. As stated in Fox‘s Estate, 53 D. & C. 1, 5: “... The claim of the life tenant now is for unrealized gains; and his error is in assuming that a paper profit is as good as a cash profit, and that the amount of the paper profit can be fixed with accuracy.” (Emphasis supplied). The ascertainment of “earnings” is for the purpose of immediate distribution of the amount of such “earnings” to the life tenant: “earnings” cannot possibly include unrealized appreciation.
On the other hand, in ascertaining the book value to be used in allocating shares for the preservation of the intact value of the trust principal and for the allocation of shares to income, we seek the value of the assets of North America. The primary function of the use of book value is to ascertain as closely as possible the actual value of the stock as represented by the assets of the corporation.
Our approach to the problem of the inclusion or exclusion of unrealized appreciation of securities held in a corporation‘s investment portfolio for the purpose of determining the book value of the stock of such corporation must be a practical approach, such an approach as will facilitate, not impede, the application of the Pennsylvania Rule of Apportionment and will render it more, not less, workable. No hard and fast rule can or should be promulgated to the effect that the unrealized appreciation of a corporation‘s assets should be considered in determining the book value of that corporation‘s stock in every instance; in large measure,
Many corporations carry assets, such as real estate, on their corporate books at either nominal or cost-of-purchase value. On the date pertinent to the ascertainment of the book value of the stock of such corporation those assets can and often do have a value—reflecting an unrealized appreciation—in excess of the figure at which such assets are carried upon the corporate books. For instance, a fiduciary, in apportioning an extraordinary stock dividend of Corporation X payable on July 1, must ascertain the book value of Corporation X‘s stock upon that date; Corporation X carries Whiteacre upon its books either at a nominal value or at cost-of-purchase value, but on July 1, the value of Whiteacre would be based upon opinion evidence as to the market value of Whitacre upon the record date; the establishment of such enhanced value would require the production of evidence and the end result would ordinarily be the establishment of a value based upon real estate experts’ opinions of what Whiteacre might be sold for on the record date. The inclusion of such enhanced value as an item to be considered in determining book value in such a situation would be productive of more, not less, litigation in the field of apportionment, of more expenses and costs to be borne by the trust estate and would render more unworkable than ever the Pennsylvania Rule.
On the other hand, suppose that Corporation X carries as an asset upon its corporate books 500 shares of United States Steel Corporation common stock at cost-
In the present situation, North America‘s reports actually reflect the unrealized appreciation on assets held in the form of securities and the enhanced value of North America‘s securities can be fixed readily and inconvertibly by reference to the stock exchange prices on the record date. Therefore, the enhanced value, reflecting unrealized appreciation, of securities in the investment portfolio of North America may be taken into consideration by the fiduciary in fixing the book value of North America‘s stock.
Any seeming inconsistency in this conclusion is more apparent, than real. In apportionment calcula-
That portion of the decree of the court below holding the General Electric Company‘s stock distribution an apportionable event is set aside. As thus modified, the decree is affirmed. Costs on the estate.
CONCURRING OPINION BY MR. JUSTICE BELL:
I concur in the Court‘s decision. For the reasons which are set forth at length in my opinion in Cunningham Estate, I would hold that intact value is always book value, in the absence of fraud or bad faith or a material change in the corporation‘s method of valuing its assets between the date of the trust‘s acquisition of the stock and the apportionable event.
Mr. Justice MUSMANNO joins in this concurring opinion.