Norvell Estate
Supreme Court of Pennsylvania
October 7, 1964
415 Pa. 427 | 203 A.2d 538
For the above reasons, the decree of the lower court is affirmed.
All parties to bear their own costs.
Norvell Estate.
Argued March 23, 1964. Before BELL, C. J., MUSMANNO, JONES, COHEN, EAGEN, O‘BRIEN and ROBERTS, JJ.
Robert B. McKinley, with him John G. Frazer, Jr., and Marsh, McKinley & Bowman, and Kirkpatrick, Pomeroy, Lockhart & Johnson, for appellees.
OPINION BY MR. JUSTICE ROBERTS, October 7, 1964:
Florence Tack Norvell died August 24, 1921. Her will, dated August 9, 1919, created a trust out of which the present controversy arises. Appellants are life tenants under the trust and are entitled by its provisions to receive all of the income. The trust also establishes alternative remainders over in named and unascertained persons.1
On March 4, 1960, the trustees filed their fifth account. The petition for distribution, filed June 1, 1960, requested the court to approve distribution to the life tenants of the proceeds from the sales of stock subscription rights and of certain shares of stock received by the trustees as stock dividends.2 Following our decision in Catherwood Trust, 405 Pa. 61, 173 A. 2d 86 (filed July 26, 1961), the trustees withdrew the
The Orphans’ Court of Allegheny County, by decree of April 29, 1963, approved the distribution to principal of cash from the sale of rights and the shares of stock received as stock dividends. This allocation was made under the Principal and Income Act of July 3, 1947, P. L. 1283, which Catherwood Trust, supra, held constitutionally applicable to trusts created prior to the effective date of the Act.3
Specifically, this appeal challenges the constitutional validity of Sections 3(1), 5(1) and 5 (2) of the Act. Section 3(1) provides: “All . . . dividends on corporate shares, payable other than in shares of the corporation itself of the same kind and rank as the shares on which such dividend is paid, . . . shall be deemed income, unless otherwise expressly provided in this act.”4
Section 5(2) reads: “All rights to subscribe to the shares or other securities or obligations of a corporation, accruing on account of the ownership of shares or other securities in such corporation, and the proceeds of any sale of such rights shall be deemed principal . . . .”
The alleged infirmity is one of deprivation of property without due process of law. It is vigorously contended that the Principal and Income Act, as applied to this trust created years prior to the effective date of the Act, deprives the life tenants of their property without due process, in violation of Article I, §§1 and
Appellants urge that, as life tenants, they are entitled to all the return derived from the principal of the trust and that the first sentence of Section 5(1), directing that “all dividends on shares . . . shall be deemed principal,” establishes a conclusive statutory presumption contrary to actual fact and violates the constitutional due process provisions. Substantially the same attack is made on the first sentence of Section 3(1) to the extent that it excludes from income stock dividends (of the same kind and rank as the shares on which paid).
Appellants assert, and we agree, that the contentions presently advanced were not raised or directly settled in Catherwood. We do feel, however, that the implications of that decision are unmistakably pertinent and persuasive here.
In essence, appellants argue that the Legislature has improperly and conclusively defined principal so as to preclude the life tenants from proving that the stock dividends here are “in fact” income. This position appears based on the premise that income has a distinct, fiscal meaning (presumably, that accorded the term under the Pennsylvania Rule of Apportionment prior to the Principal and Income Act). And appellants insist that the statute may not, by means of an irrebuttable presumption, constitutionally preclude them from establishing that the distributions in controversy fall within the meaning they seek to give income.
Appellants place their heaviest reliance on Heiner v. Donnan, 285 U.S. 312, 52 S. Ct. 358 (1932), but that reliance is unfounded, especially since Heiner dealt with a statute establishing, in effect, a rule of evidence. There the statute provided that gifts in excess of $5,000 made within two years of the donor‘s death were
It is important to note that the amount of the gift was not taxable in Heiner unless made in contemplation of death, and that “contemplation of death” had a meaning which Congress did not seek to change. The Supreme Court held the statute invalid as “an attempt, by legislative fiat, to enact into existence, a fact which here does not, and cannot be made to, exist in actuality . . . .” (Emphasis supplied.) 285 U.S. at 329, 52 S. Ct. at 362. Moreover, the Supreme Court made it quite clear that the statute was not intended to operate as a change in the substantive law, i.e., that there was no congressional intention to tax gifts not made in contemplation of death. 285 U.S. at 328-30, 52 S. Ct. at 362-63.
It seems clear to us that the Principal and Income Act does not establish, as appellants contend, a rule of evidence, i.e., a presumption contrary to the actual facts. What the statute expressly does is to set forth a substantive rule of law defining income and principal. See 4 Wigmore, Evidence §§1353-54 (3d ed. 1940); 9 Wigmore, op. cit. supra, §2492; cf. United States v. Carlisle, 234 F. 2d 196, 199 (5th Cir.), cert. denied, 352 U.S. 841, 77 S. Ct. 63 (1956); Bowers v. United States, 226 F. 2d 424, 428 (5th Cir. 1955); United States v. Jones, 176 F. 2d 278, 288 (9th Cir. 1949); City of New Port Richey v. Fidelity & Deposit Co., 105 F. 2d 348, 351 (5th Cir. 1939); Commonwealth v. Brue, 284 Pa. 294, 296, 131 Atl. 367, 368 (1925).
In City of New Port Richey v. Fidelity & Deposit Co., supra, an argument similar to that presently advanced was rejected. The court said: “We recognize that the legislature cannot make certain facts conclu-
It is clear that the Legislature, by the 1947 Act, intended to, and did, change the substantive law by declaring that certain kinds and classes of stock dividends constitute principal. Thus, a new definition of income was statutorily established.6 Here, unlike Heiner, the statute enacts into existence, not a fact, but a definition of a term theretofore subject to judicial determination.
We are therefore led to the question whether the Legislature possesses constitutional authority to define income. This determination, in turn, depends on whether income, as used in the statute, enjoys such a fixed definitional status that it may not be legislatively disturbed. In Catherwood we attributed to trust income no such undisturbable status.
We held in Catherwood that life tenants have no vested interest in a court-made rule of apportionment. 405 Pa. at 72-73, 77, 173 A. 2d at 91, 93. Although the life beneficiaries there (as the life tenants here) enjoyed a vested right to the income of the trust, no vested right exists in the functional, operational or definitional methods of ascertaining from time to time what constitutes such income. Due process does not mandate that prior decisions or rules remain effective and controlling forever. Thus, it is settled that there is no vested interest in a definition or method of ascertaining income. This conclusion is supported by
We have no hesitancy in concluding that the Legislature has the power to define income.7 In the light of the complexity of current corporate finance, the definition of income is a function which the Legislature is well suited to perform. “In the area of apportionment of stock distribution between income and corpus beneficiaries, the elements of fairness, practicality and changing conditions dictate that freedom be given to lawmaking bodies to promulgate rules applicable to existing trusts.” King, supra, at 357. See
In the use of its definitional powers, of course, the Legislature may not act arbitrarily. Nebbia v. New York, 291 U.S. 502, 537, 54 S. Ct. 505, 516 (1934); Maurer v. Boardman, 336 Pa. 17, 25, 7 A. 2d 466, 473 (1939), aff‘d, 309 U.S. 598, 60 S. Ct. 726 (1940). In the face of the generally known and experienced difficulty, complexity and uncertainty under the prior rule of apportionment in ascertaining the “intact value” of designated shares of stock at a given time, the Legislature acted to provide for a fairer, more orderly and more uniform apportionment between income and principal.8 The particular definitions which the Legislature adopted by the 1947 Act represent what that body determined to be a pragmatic necessity for a current, definite, more understandable and more workable rule of fair apportionment. Such action by the Legislature, providing for remedial and commercially useable standards, is an entirely desirable legislative function. Legislation based on such broad public policy and realistic considerations is entirely proper and manifestly reasonable. The absence of arbitrariness is further attested to by the fact that the 1947 Act, in effect, basically adopts the long-established and well-regarded “Massachusetts Rule of Apportionment” embracing substantially the same definitions.9 The ra-
Appellants make a further argument. They suggest Sections 3(1) and 5 (1) of the Act are void because they are repugnant to the definitions in Section 1 of the Act, especially the definitions of “principal” and “income.” There “principal” is defined as “any
This reasoning assumes that the words “substitutions” and “income” have meanings unrelated to what follows in the remainder of the Act. We see no inconsistency between the sections. The words “substitutions” in the definition of principal and “return” in the definition of income are, in themselves, not self-contained definitions; they are merely descriptive. What is a “substitution” or a “return” is defined by later sections, including Sections 3(1) and 5(1).
Failing to find the constitutional deficiencies which appellants assert, or any similar or other infirmity, error or defect, the decree below must be affirmed.
Decree affirmed. Each party to pay own costs.
DISSENTING OPINION BY MR. CHIEF JUSTICE BELL:
The majority Opinion states that the constitutional question herein raised was not decided in Catherwood Trust, 405 Pa. 61, 173 A. 2d 86, namely, whether the application of the Act of July 3, 1947, to trusts created prior to the effective date of the Act violated Article I, §§1 and 9, of the Constitution of Pennsylvania, and the Fourteenth Amendment to the United States Constitution.
Prior to the Act of (1945) 1947, a life tenant had a vested property right in certain stock dividends and
Cunningham Estate, 395 Pa. 1, 149 A. 2d 72; Warden Trust, 382 Pa. 311, 115 A. 2d 159; Pew Trust, 362 Pa. 468, 67 A. 2d 129; Crawford Estate, 362 Pa. 458, 67 A. 2d 124; Steele Estate, 377 Pa. 250, 103 A. 2d 409, and Jones Estate, 377 Pa. 473, 105 A. 2d 353, directly and specifically hold that the application of the Act of 1947 to trusts created prior thereto, would be unconstitutional. With these decisions, I strongly agree; my views are set forth at length in my Concurring and Dissenting Opinion in Catherwood Trust, 405 Pa. 78, 173 A. 2d 94.
For these reasons and under and because of these wise decisions, I dissent.