Opinion
October 15, 1935.
November 25, 1935.
Trusts and trustees — Apportionment between corpus and life tenants — Stock dividend on stock in trust — Intact value — Earnings from contract held by company at testator's death.
On appeal by the life tenants of a testamentary trust from a final decree of distribution, it was held that the lower court, in apportioning, as between the corpus of the trust and the life beneficiaries thereof, a stock dividend received on stock in the trust, under the situation shown, properly determined the intact value of the stock in trust at the time of testator's death, by adding to the capital and surplus of the company, whose stock was held in trust, the net earnings, subsequently ascertained, derived from a contract held by the company at the time of testator's death.
Argued October 15, 1935.
Before FRAZER, C. J., KEPHART, SCHAFFER, MAXEY, DREW, LINN and BARNES, JJ.
Appeals, Nos. 137-40, March T., 1935, by life tenants, from decree of O. C. Allegheny Co., March T., 1934, No. 55, in estate of George H. Flinn, deceased. Decree affirmed.
Audit of account of executors. Before TRIMBLE, P. J.
When the account of the executors and trustees under the will of George H. Flinn, deceased, came before the orphans' court for audit, on the petition of The Colonial Trust Company, testamentary trustee, Charles Alvin Jones, Esq., was appointed guardian ad litem for Peter S. Wainwright, Mimi Wainwright, Patricia N. Wainwright and George H. Flinn, II, as well as trustee ad litem for persons not in esse who may be beneficially interested under decedent's will, for the purposes set forth in the petition, and it was directed that the guardian ad litem and trustee ad litem proceed to make a thorough investigation of the apportionment of the capital stock of the George H. Flinn Corporation among the various trusts under the will of George H. Flinn, deceased, and those entitled to receive income under the will, in order to determine whether the trustee received sufficient of the shares of stock to represent the intact value of the entire issued and outstanding capital stock of the company as of March 29, 1929, the date of the death of George H. Flinn; the guardian ad litem and trustee ad litem was further directed to file his report in writing, the report to be brought to the attention of the court before the audit of any account of the executors.
Mr. Jones filed a report, in part, as follows:
"The question in this case is one of apportionment, as between the corpus of a trust and the life beneficiaries thereof, of a stock dividend received on stock in the trust.
"The particular stock dividend involved is 8,000 shares in the George H. Flinn Corporation which the company declared on December 27, 1933, and which the executors of the will of George H. Flinn, deceased, received on that same day.
"The estate's stock in the George H. Flinn Corporation, whereon this stock dividend of 8,000 shares was paid, consisted of 4,000 shares. While the 4,000 shares, held by the estate, were composed of the decedent's original holding of 1,000 shares (the whole of the capital stock of the company) and an earlier stock dividend of 3,000 shares paid by the corporation and received by the executors within a few months of the decedent's death, it is apparent for several reasons that no question as to the apportionment of the earlier 3,000-share stock dividend is in any way here involved.
"After the executors received the 8,000-share stock dividend, their total holdings of this stock were then 12,000 shares. They thereupon set over to the trust and delivered to the trustee (one of the executors) 4,160.3537 shares. In other words, the executors concluded for themselves that it was necessary to allocate to the 4,000 shares, already in their hands, 160.3537 additional shares of the 8,000-share stock dividend in order to preserve intact the value of the trust estate's original holdings of this particular stock. The life tenants, all being sui juris, accepted the fruits of the executors' distribution of the 8,000-share stock dividend on the basis as determined by the executors and they should, therefore, be estopped from denying that the 4,000 shares in the hands of the executors did not, after the stock dividend of 8,000 shares, represent the intact value of the trust estate's original holdings. In fact, the life tenants substantially confirmed this by a writing which they signed and delivered to the executors at the time of their receipt from the latter of the portion of the 8,000-share stock dividend which the executors voluntarily distributed to them. Thus, both the executors and the life tenants formally acknowledged that the 4,000 shares in the executors' hands prior to the stock dividend of December 27, 1933, all belonged to the trust corpus, and neither appears to deny that.
"The only question, therefore, with which we are now concerned is the proper distribution of the 8,000-share stock dividend of December 27, 1933.
"The rule obtaining in Pennsylvania with respect to the apportionment, as between life tenants and the corpus of a trust, of a stock dividend received on stock in the trust was laid down by our Supreme Court more than seventy-five years ago (Earp's App., 28 Pa. 368). Since then, the rule has been confirmed and followed by the Supreme and other courts of this State many times without fundamental departure or abridgment. Any apparent differences in the intervening decisions are matters of application of one and the same rule to different facts. Known as the Pennsylvania Rule, it has also been adopted in many other jurisdictions of this country.
"In one of the more recent cases (Waterhouse's Est., 308 Pa. 422), the rule is stated by our Supreme Court at page 428 as follows: 'In the distribution of a stock dividend the "intact value" must be preserved. When it appears that the distribution of a stock dividend to the life tenant will impair the intact value of the trust estate by reducing it, then there must be an apportionment between the life tenant and the remainderman, so as to preserve the intact value or the corpus of the estate, plus any increase in that value through share purchases, or from contributed surplus of any proper capital increase, and less any decrease for capital losses.'
"While the rule in this State as to the apportionment of a stock dividend received on corpus stock is not open to question, questions have recurrently arisen concerning the elements which, under the varying circumstances of the particular case, should or should not be taken into account in arriving at the book or liquidating value of the stock in the trust at the commencement thereof, plus the increases for additional stock purchases or capital contributions and less the decreases for capital losses.
"From these decided cases, there has been developed from time to time rules of procedure, founded on legal presumptions, which are applicable to the questions arising upon the apportionment of a stock dividend. Waterhouse's Est., supra, contains a concise review of many of the cases in this State giving rise to these procedural rules and the pertinent legal presumptions whereon they are based.
"In any view, the apportionment which the executors made of the 8,000-share stock dividend received by them on December 27, 1933, failed to preserve intact the value of the trust stock in the George H. Flinn Corporation and impaired the corpus value of this trust asset to the serious injury of the remainder interests in the trust.
"The executors took as the intact value at the date of death (the estate being the owner of the whole of the capital stock of the company) the combined capital of $100,000 and a surplus for the company of $851,560.45, as shown by the balance sheet attached to the Main Company audit of March 31, 1929.
"It clearly appears, however, from the balance sheet attached to the Main Company audit no value whatsoever on account of contract 106-1 was reflected in the company's surplus on March 31, 1929, as shown by the balance sheet of the Main Company audit of that date.
"Contract 106-1 was the company's largest contract of all time. The company's rights and liabilities thereunder had become fixed ten months before the testator's death. It was, in fact, the company's only job at the time of the testator's death and the company's performance thereof had been so proceeded with that the work done thereon at the time of the testator's death amounted to twenty-three plus per cent of the whole amount of work done under the contract upon completion thereof. Moreover, the company's books and monthly balance sheets showed large earnings on account of contract 106-1 at the time of the testator's death, which earnings were increased and never diminished during the progress of the contract to completion. It is true that the earnings on contract 106-1 at the time of testator's death were carried deferred as a liability on the books of the company and not set over to surplus as profits until final completion of the contract, in keeping with the company's usual bookkeeping practice. But those earnings were in reality a thing of value to the company and, as earnings, were readily determinable from the books of the company at all times during the progress of the contract.
"In respect to contract 106-1, Main Company, in the balance sheet attached to their audit of March 31, 1929, merely followed the company's bookkeeping practice of not carrying the indicated earnings on an uncompleted contract to surplus as profits until final completion of the particular contract. The propriety of this bookkeeping practice on the part of the company is not open to question, but that the books of the company actually showed large earnings on account of contract 106-1 at the time of the testator's death is likewise not open to question. And the company's ultimate experience under the contract was still further earnings, all of which, including those accrued at the time of the testator's death, were later added to the company's surplus as profits.
"Yet, the apportionment made by the executors gave the trust stock no benefit whatsoever on account of contract 106-1 although their apportionment of the stock dividend was not made for several years after contract 106-1 had been entirely and successfully completed and its large earnings had been added to the company's surplus and thus helped to make the fund wherefrom the stock dividend of December 27, 1933, was declared and paid.
"The books of the company are prima facie evidence of what they purport to show: Baird's Est., 299 Pa. 39. It is on the books of the company that everything herein is rested by the guardian ad litem and the trustee ad litem. There is no occasion to go behind the books of the company and, indeed, it would be impossible to do so, especially at this late date.
"The intact value of the testator's stock (the whole of the company's capital stock) at the time of his death, as found by the executors, was not the true net worth of the company at that time because it did not include any value on account of contract 106-1.
"Accordingly, the apportionment of the 8,000-share stock dividend as made by the executors on the basis of the net worth for the company, as thus determined by them, failed to preserve intact the value of the testator's stock, and must, therefore, be disregarded.
"The value of contract 106-1, as it was later determined to be, should be added to the company's surplus, as of March 29, 1929, in order to determine the proper intact value for the stock in the company which the testator placed in the trust.
"Ordinarily, the intact value of trust stock is fixed as of the date of the testator's death (Waterhouse's Est., 308 Pa. 422, 427), but, that the intact value may be ascertained, under some circumstances, later than the testator's death is clearly suggested in Flinn's Est., 310 Pa. 206, where our Supreme Court said, page 210, 'As a general rule, to which of course there may be exceptions, intact value is fixed as of the date of death: Waterhouse's Est., 308 Pa. 422. '
"In McKeown's Est., 263 Pa. 78, 86, intact value was considered to be the 'value at the time the trust began.' This statement was later adopted and followed in Harkness's Est., 283 Pa. 464, 466, in Dickinson's Est., 285 Pa. 449, 452, in Mandeville's Est., 286 Pa. 368, 371, and again in Nirdlinger's Est., 290 Pa. 457, 468.
"According to the Supreme Court's interpretation in Packer's Est. (No. 1), 291 Pa. 194, 197, of the rule as stated in Nirdlinger's Est., supra, it would seem that the time for fixing intact value of trust stock was the time 'the trust estate acquired the stock upon which the dividend was declared.' And in Mandeville's Est., supra, the requirement as to the fixing of intact value was treated as being 'To preserve the shares at the inventoried price at the time they were turned over to the trustee,' etc.
"The expressions, — 'at the time the trust began' or when 'the trust estate acquired the stock' or 'the time [the shares] were turned over to the trustee,' — as the time for fixing intact value may all be properly referable to the date of death, for, in legal contemplation, a will dates from the testator's death as does a trust created thereby and the life interests attaching thereunder: Flinn's Est., supra. Yet, in Dickinson's Est., supra, the intact value of the corpus stock was refixed as of a date six years after the testator's death because of a large capital loss in that case to which the intact value at death was made subject.
"Where it is necessary first to resolve and conclude hazards or contingencies attaching to the corpus stock before any value at all can be determined for it or where the testator's will specifies or contemplates a date for the fixing of intact value, which may be later than death, are instances where the fixing of the intact value may be postponed beyond the time of death.
"There is no legal obstacle to such later fixing of intact value except that the postponement shall not work an accumulation of income contrary to the Act of April 18, 1853, P. L. 503: Maris's Est., 301 Pa. 20, 23.
"The facts present in this case require that the results from contract 106-1, when determined, be reflected in the value of the stock which the testator placed in trust.
"All rights and liabilities accruing or attaching to the George H. Flinn Corporation by virtue of contract 106-1 were referable to the date on which that contract was entered into and the company thereby became bound in the early part of June, 1928 — ten months before the death of the testator.
"To the stock in the company, which Mr. Flinn left in trust, there was then pendant, fixed rights and liabilities because of the existing contract 106-1. The whole of the assets of the company, as they then existed, were subject to all of the liabilities, certain or contingent, growing out of that contract, and the real worth of the stock as an asset in the trust could not be determined until the experience ultimately suffered or enjoyed by reason of this obligation resting upon the company, was definitely determined.
"The contract fixed a unit price for each and every bit of work to be done or piece of material to be furnished thereunder. It is of no moment that a portion of this contract had to be superseded in part on account of unanticipated difficulties encountered later on. That particular work was paid for on a time-and-materials basis without changed liability or loss to the company by reason thereof.
"If contract 106-1 had later eventuated in a loss sufficiently heavy to have wiped out the capital and the surplus of the company as of the date of the testator's death, as it might well have done, — the risk was heavy, — there would have been no intact value for this trust stock.
"Likewise, if the experience met with in the performance of the contract obligations existing at the time of the testator's death had resulted upon completion of the contract in a loss to the depletion of a portion of the surplus of the company or its capital as they existed on March 29, 1929, then the intact value of the stock as of that date would necessarily have been later reduced pro tanto. Such would have happened automatically, for there was no other fund from which losses could have been paid. Moreover, the losses to which the capital assets of a company are subject serve to reduce the intact value of stock on a question of apportionment: Dickinson's Est., 285 Pa. 449, pages 452, 453.
"Contract 106-1 added no new business to the company over what it had at the time of the testator's death and the book value of the stock at the date of the testator's death was subject to whatever might flow from this existing contract. Nothing but completion of that contract would determine whether it was gain or loss, and the ultimate loss or gain on account of that contract should be referred back to the time the liabilities thereunder were assumed by the company and its rights were acquired. Such was the effect of the ruling in Matter of Pollock, 3 Redfield Reports (N.Y.) 100.
"The fact that the company's books at the time of the testator's death did not, and could not, show the results of the completed performance of contract 106-1 should not prevent the showing of such results when it can now be done and the question is of importance for the first time. There can be no question that the capital and surplus of the company as it existed at the testator's death would have been lessened by the amount of any ultimate losses from contract 106-1: Dickinson's Est., supra. Likewise, the gains accruing therefrom should be reflected as a part of the value of the stock as of the testator's death.
"The executors and life tenants argue that the company's continued liability under the contract until completion and the ever-present hazards incidental to performance prevents contract 106-1 from furnishing any value to the stock when placed in the trust by the testator. In short, the executors and life tenants contend that, while there were indicated earnings on the contract at the date of the testator's death, such earnings might not only have been wiped out by the time of the completion of the contract, but that even the surplus and capital of the company as it existed at the time of the testator's death might have been seriously impaired or extinguished. Such, indeed, is quite true. But this very element of undermined hazard incurred by the company prior to the testator's death is itself a just reason for reflecting in the value of the stock, which the testator placed in trust, the results from contract 106-1, whether gain or loss, when they were definitely determinable.
"The testator's stock in the George H. Flinn Corporation at the time of his death was worth the company's capital and surplus as of that date, as shown by the Main Company audit, plus or less any profits or losses as the experience enjoyed or suffered in the discharge of contract 106-1 should, and certainly would, and did determine.
"For the reasons hereinbefore given the guardian ad litem and trustee ad litem expressly recommends that the intact value of the corpus stock be made to include the net earnings derived from contract 106-1, the effect whereof would be as follows:
"The total net profit to the company on contract 106-1 was $969,930.83. From this should be deducted the claims paid by the company on account of contract 102-2 from April 1, 1929, to November 30, 1933, in the sum of $120,419.57, the contingent liabilities on account of contract 106-1 in the sum of $110,391.49, and the commissions paid to officers of the company on account of contract 106-1 after the completion thereof in the sum of $89,035.
"This leaves $650,084.77 as the net profit derived from contract 106-1 after deduction of all charges, as above listed, but before allowance for taxes thereon. Deducting the New York State Franchise Tax of 4 1/2% on this $650,084.77 leaves $620,830.96, which, after deducting Federal Income Tax on the $620,830.96, leaves net $535,466.70. This added to the capital and surplus as shown by the Main Company audit of March 31, 1929, gives a net worth for the company or an intact value for the corpus stock of $1,487,027.15.
"The book value of the stock in the George H. Flinn Corporation, after the stock dividend of 8,000 shares on December 27, 1933, was issued and outstanding, was $228.7210 plus per share. In order, therefore, that the intact value of $1,487,027.15 for the corpus stock be preserved, it is necessary that there be held in the trust estates 6,501.4893 shares, or 2,501.4893 shares in addition to the 4,000 shares in the executors' hands at the time of the payment of the stock dividend and which the executors transferred and delivered to the trustee. But, as the executors set over to the trusts altogether only 160.3537 shares of the 8,000-share stock dividend, it is apparent that 2,341.1356 additional shares of the 8,000-share stock dividend will have to be set over to the trusts in order to preserve intact the value of the corpus stock.
"The balance of the 8,000-share stock dividend, after the executors transferred to the trustee 160.3537 shares thereof, or 7,839.6463 shares, were transferred and delivered by the executors to the life tenants in the proportions of their beneficial interests under the decedent's will. However, the stock thus delivered to the life tenants is still in the hands of The Colonial Trust Company under an escrow agreement with the life tenants, pending the court's disposition of this matter, hence an order on the executors to procure from the life tenants their proportional contributions of the requisite 2,341.1356 shares, and then to transfer and deliver same to the trustee under the decedent's will for the purposes of the trusts, can readily be complied with. The entry of a decree containing such an order is recommended."
The court entered a decree directing that the report and recommendation be approved, and that the account be amended and corrected by adding to the balance for distribution, as shown thereby, 2,341.1356 shares of the capital stock for a total value of $535,466.70.
On exceptions, the court, TRIMBLE, P. J., MITCHELL and CHALFANT, JJ., stated in its opinion, per curiam:
"The other principal exceptions to the decree allege error in including as corpus the profits of a contract of the George H. Flinn Corporation entered into before and completed after the death of George H. Flinn who owned all the stock in the corporation. Every phase of the questions which were presented is ably disposed of in the report filed by the guardian and trustee ad litem. The auditing judge adopted that part of the report which shows that the profits in the contract entered into in George H. Flinn's lifetime should be a part of the corpus. We see no reason for modifying the decree in this respect. It is supported by the argument and cases cited in the report of the guardian and trustee ad litem and nothing of value can be added nor is anything to be gained by restating the facts or conclusions. It follows that these exceptions should be dismissed."
The court entered a final decree of distribution, from which the life tenants appealed.
Errors assigned, among others, were dismissal of exceptions.
John O. Wicks, of Weller, Wicks Wallace, for appellants.
Charles Alvin Jones, for appellee.
After a careful study of the record in this proceeding, we are of the opinion that, under the situation shown, the apportionment of the stock dividend as made by the court below is proper. We see no reason to disturb the fee of the guardian and trustee ad litem as fixed by the court below.
Decree affirmed at appellants' cost.