Estate of Meriano v. Commissioner IRS

Opinions of the United

1998 Decisions States Court of Appeals

for the Third Circuit

4-24-1998

Estate of Meriano v. Commissioner IRS

Precedential or Non-Precedential:

Docket 96-7329

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Filed April 24, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 96-7329

ESTATE OF PHILIP MERIANO, DECEASED,

ANITA PANEPINTO, ADMINISTRATRIX,

Appellant

v.

COMMISSIONER OF INTERNAL REVENUE SERVICE

On Appeal from an Order of the

Commissioner of the Internal Revenue

(Action No. 81-26622)

Argued on January 31, 1997

Before: BECKER,1 Chief Judge and ROTH, Circuit Judges,

and BARRY,2 District Judge

(Opinion Filed April 24, 1998)

James S. Tupitza, Esquire

Tupitza & Marinelli

212 West Gay Street

West Chester, PA 19380

_________________________________________________________________

1. Honorable Edward R. Becker assumed Chief Judge status as of

February 1, 1998.

2. Honorable Maryanne Trump Barry, United States District Court Judge

for the District of New Jersey, sitting by designation.

Stephen D. Hamilton, Esquire

(Argued)

Alfred W. Putnam, Jr., Esquire

Drinker, Biddle & Reath

1345 Chestnut Street

Philadelphia National Bank Building

Philadelphia, PA 19107

Attorneys for Appellant

Loretta C. Argrett

Assistant Attorney General

Gary R. Allen

David I. Pincus

Kenneth Rosenberg (Argued)

United States Department of Justice

P.O. Box 502

Washington, D.C. 20044

Stuart L. Brown, Esquire

Internal Revenue Service

1111 Constitution Avenue, S.W.

Washington, D.C. 20224

Attorneys for Appellee

OPINION OF THE COURT

ROTH, Circuit Judge:

In this case, we must decide whether an estate is entitled

to a theft loss deduction under the federal tax code for

funds wrongfully paid out from an estate and never

returned. The decedent, Philip Meriano, left an estate that

included over one million dollars worth of bearer bonds.

The bonds had been stolen from Meriano but were later

returned to the estate. Excessive fees and costs were

charged against the estate by the stockbroker and the

attorney/investigator who had retrieved the bonds and

administered the estate. The IRS assessed the estate with a

deficiency. The estate then claimed before the U.S. Tax

Court that the stockbroker and the attorney/investigator

had committed theft under Pennsylvania state law and that

2

the estate was therefore entitled to a deduction for its loss

pursuant to 26 U.S.C. S 2054. The tax court denied the

deduction and the estate appealed. For the following

reasons, we will reverse the tax court's decision and allow

the estate its deduction.

I. FACTS

The facts of this case were set forth in great detail by the

tax court. We will recount only those facts that are relevant

to the issues on appeal. Philip Meriano died on November

14, 1977. Four months earlier, a fire at Meriano's residence

had destroyed documentation of his ownership of municipal

bearer bonds with a face value of approximately two million

dollars. Not long after the fire, Meriano notified the

Philadelphia Police Department that the bonds themselves

were missing from a safe located in an area of the residence

damaged by the fire.

When Meriano died, his elderly sister, Mary Orlando, was

appointed administratrix of his estate, under the

assumption that he had died intestate. With the help of her

husband, Anthony, Mary Orlando attempted to locate the

missing securities. She was not successful until her

husband asked Edward Reardon, a stock broker, for help.

Reardon, in turn, contacted John Lynch, an attorney and

investment banker who had experience in the field of

municipal bonds.

On August 7, 1978, Mary Orlando signed a contingent fee

agreement with Lynch to compensate him in the event he

recovered any of the missing securities. Under the

agreement, Lynch was to receive one-third of the face value

of any securities recovered prior to the filing of a lawsuit. If

any securities were recovered after suit was filed, Lynch

was to receive forty percent of the face value. Orlando and

Lynch both signed the document; Orlando's husband,

Anthony, and her daughter, Connie Kates, both signed as

witnesses. The agreement contained no provision for

Reardon's payment, nor did Reardon sign it. See Appendix,

at 52.

Shortly after executing his agreement with Orlando,

Lynch entered into a separate agreement with Reardon,

3

under which Reardon would assist Lynch with his search

for the stolen bonds and Lynch would compensate him with

15 percent of the face value of any of the securities that

were recovered.

Lynch and Reardon eventually traced the securities to an

account held by Philip Meriano's former housekeeper, Italia

Bossi. Based on information from Reardon and Lynch, the

FBI on May 1, 1979, was able to confiscate bearer bonds

having a value of $1,823,000 from the Bossi's residence in

San Diego. Bossi and her husband were brought back to

Philadelphia, where they were charged with arson and

theft. Their trial resulted in a hung jury. After the

government failed to convict them, the Bossis requested

that the FBI return the bonds to them.

In December 1979, Lynch retained his brother's law firm,

Groen, Smolow and Lynch, to assist the estate in any civil

suits necessary to protect the value of the recovered bearer

bonds. Lynch also retained Groen, Smolow as general

counsel for the estate. When the U.S. Attorney decided in

1980 to forego a second trial of the Bossis, the estate and

the Bossis both filed civil actions in the U.S. District Court

for the Eastern District of Pennsylvania to get control of the

securities.

That same year, the estate settled the suits with the

Bossis. Under the settlement agreement, the estate

recovered securities with a face value of $1,623,000 and a

fair market value of $1,146,446. Without the help of Lynch

and Reardon, the estate would have not recovered these

securities.

Along with the Green, Smolow law firm, Lynch continued

to represent the estate. On April 10, 1980, Lynch and

Anthony Orlando deposited the recovered securities in a

safety deposit box at the Provident bank. That same day,

Lynch and Reardon signed a "hold harmless" agreement

with Mary Orlando. The agreement stated in pertinent part:

Dated as of this 10th day of April, 1980, in

consideration of the disbursement of certain funds

deemed earned as professional fees pursuant to prior

agreements with Mary Orlando, in her capacity as the

duly appointed Administratrix of the Estate of Philip

4

Meriano, Edward J. Reardon, Jr. and John T. Lynch

Jr., Esquire, agree(s) to INDEMNIFY AND HOLD

HARMLESS the Estate of Philip Meriano and Mary

Orlando, the Administratrix of the Estate and against

any and all claims and loss, which the Estate and/or

the Administratrix may hereafter suffer or pay by

reason of any claims against the Estate or the

Administratrix or as a result of the disbursement of

said funds of the Estate in payment of professional fees

and hereby agree to repay any and all amounts

received that are determined by a court of proper

jurisdiction to be returnable to the Estate.

Appendix, at 109 (emphasis added). Both Reardon and

Lynch signed the agreement.

Sometime after this agreement was executed, Lynch

transferred the securities from the safety deposit bank to

an account at Kidder, Peabody & Co. On April 29, 1980,

Mary Orlando signed an agreement authorizing Lynch to

buy, sell or otherwise transact business with the securities.

Under the terms of this agreement, Orlando agreed that she

would "waive notification . . . of any of the aforementioned

transactions and delivery of any statements, notices, or

demands pertaining thereto and hereby ratify any and all

transactions heretofore or hereafter made by [Lynch] on or

for [the] account." Appendix, at 110.

In addition to creating the estate's account, Lynch and

Reardon also established individual accounts with Kidder,

Peabody. Over the next three years, Lynch transferred some

of the estate's bonds to his individual account. From this

account, Lynch liquidated the securities and used the

proceeds to pay himself and Reardon, and also to pay the

Groen, Smolow law firm, which sought fees for general

services to the estate and for costs associated with the

recovery of the stolen bonds. The trial record reflects that

Lynch did not keep organized records of the transfers of the

bonds from the safe deposit box to the estate's Kidder,

Peabody account. Similarly, Lynch did not record in an

organized fashion the withdrawals from the estate's account

at Kidder to his own individual account. See Appendix, at

272-273.

5

On December 9, 1980, Mary Orlando filed a petition with

the Orphans' Court for approval of attorney and related fees

paid to Lynch and Reardon. Because there was some

uncertainty as to the proper personal representative of the

estate (see discussion below), the Orphans' Court deferred

action on the petition until the estate filed an accounting

with the auditing judge of the court. See Appendix, at 87.

Notwithstanding the court's deferral, however, Orlando

approved payment of $418,250 to Lynch and $250,950 to

Reardon in a document signed by Mary Orlando and

witnessed by her husband and her daughter.3

The Will Contest

In August of 1980, Anita Panepinto, a niece of Meriano's

deceased wife, discovered a will executed by Meriano and

dated November 17, 1973. She also found a codicil, dated

December 2, 1973. The will and codicil named Panepinto

and another niece, Elaine Hernardi, as beneficiaries of the

estate. On August 30, 1980, Panepinto presented the will to

the Register of Wills in Philadelphia.

Two years later, the will recovered by Anita Panepinto

was admitted to probate. The Register of Wills then revoked

Mary Orlando's position as administratrix and appointed

Panepinto as administratrix, c.t.a (cum testamento annexo).4

In 1983, Panepinto filed a motion in the tax court to

substitute herself for Mary Orlando as the estate

representative in the present proceeding.

Orlando and Kates contested the will. By 1986, however,

Panepinto and Orlando had resolved their differences and

agreed to settle their competing claims to the Meriano

_________________________________________________________________

3. This agreement is marked "approved by court 3-9-81." This notation

refers to an order by Judge John B. Hannum, of the United States

District Court for the Eastern District of Pennsylvania, approving fees.

Judge Hannum had presided over the litigation between the estate and

the Bossis with regard to the disposition of the stolen securities. On

October 2, 1981, Judge Hannum vacated this order of approval on the

ground that he had lacked ancillary jurisdiction to approve the fees in

the first place. See Appendix, at 108; 138-139; 426-27.

4. An administrator c.t.a. has the same powers as an executor of an

estate. See 20 Pa. C.S. S 3325.

6

estate. Under the terms of the settlement, Panepinto agreed

to release Orlando and her surety, INA, from any future

surcharge liability. Orlando and Kates withdrew their will

contest on December 19, 1986.

The Orphans' Court Proceedings

On March 30, 1983, Panepinto filed two petitions with

the Orphans' Court, which sought reimbursement of all

fees paid to Lynch and Reardon. According to Panepinto,

the fees were grossly excessive, and the agreements signed

by Orlando, the former administratrix, were unconscionable

as a matter of law.

In an attempt to determine what was left in the estate

and what Lynch had disbursed to himself and his

colleagues, the Orphans' Court ordered Mary Orlando to file

an accounting with the court. Orlando, who was by this

time represented solely by Lynch and no longer by the

Groen Smolow law firm, did not do so. As a result, the

Insurance Company of North America (INA), which had

acted as surety on Orlando's administratrix bond, filed the

requested accounting with the court. According to the

testimony of Robert Boote, an attorney retained by INA,

Lynch had failed to maintain organized records for the

estate and had not been forthcoming in providing

appropriate records.

Boote prepared a First and Final Account of Mary

Orlando, which INA, as surety, filed on March 30, 1983.

That account showed that the estate had paid Reardon

$220,000 in fees and Lynch $415,761 in fees. INA

eventually attributed additional fees to Lynch, for a total of

$500,761.19. Reardon also received an additional $30,950

from Lynch on April 15, 1981, for a total of $250,950. See

Appendix at 584.

Judge Kendall Shoyer of the Orphans' Court conducted

an audit of the estate between May 2, 1986, and March 24,

1987. Judge Shoyer then considered Panepinto's motion to

reduce or deny part or all of the fees paid out by the estate

to Lynch and Reardon. As a result of the audit, Judge

Shoyer ordered Lynch and Reardon to reimburse a portion

of their fees to the estate. In doing so, Judge Shoyer

7

criticized Lynch's poor ethics as an attorney, particularly

Lynch's unilateral removal of the securities from the estate,

his failure to keep adequate records, and his failure to

cooperate with the preparer of the account. See Estate of

Meriano, No. 2259 (Orphans' Court Division, Court of

Common Pleas of Philadelphia, filed September 21,1988).

With regard to Lynch's fee, Judge Shoyer held that a

reasonable fee should be based on the fair market value

and not the face value of the securities, notwithstanding

Lynch's written agreement with Orlando. In addition, Judge

Shoyer held that Lynch's contingent fee should be reduced

from 40 percent to 35 percent of the fair market value of

the bonds due to his lack of cooperation with INA's

preparation of the estate's final account. Finally, Judge

Shoyer allowed Lynch to credit only a portion of the fees he

had paid out to the Groen, Smolow law firm. As a result,

the Orphans' Court judged Reardon liable for $78,983.10,

plus six percent interest from the dates he received the

funds from the estate. Judge Shoyer assessed Lynch's debt

to the estate to be $99,505.09, which represented the

difference between the amount he had taken and the

amount to which he was entitled. Judge Shoyer added

$7,500 to this amount due to Lynch's failure to account for

unexplained "costs" for which he had disbursed funds from

the estate on February 16, 1980.

All of the parties took exception to the court's

adjudication. As a result, the Orphans' Court sitting en

banc reheard the case and issued a new schedule of

surcharges. See Estate of Meriano, No. 2259 (Orphans'

Court en banc, filed August 1, 1989). First, the en banc

court agreed with Judge Shoyer that the contingent fee

should be based on the fair market and not face value of

the bonds. In addition, the Orphans' Court sitting en banc

credited Lynch for several disbursements to the Groen law

firm that had not been recognized by Judge Shoyer. Lynch's

surcharge therefore was initially reduced to $23,559.09.

This reduction, however, did not end the matter of

excessive fees.

The Orphans' Court expressed concern that, even after

adjusting Lynch and Reardon's fees for fair market value

8

instead of face value, the fees were still too high. The court

explained:

Although the auditing judge does not expressly address

the issue, it is clear from the amounts of compensation

awarded to Lynch and Reardon that he found that

Lynch was to receive 35% of the market value of the

[recovered] bonds and that Reardon was to receive 15%

of the market value of the bonds that each man was

compensated from the gross estate. We are of the

opinion that an allowance of 50% of the market value

of the assets recovered is unreasonable and excessive

and was error for the auditing judge to allow that

amount of compensation.

En banc opinion, at 20. According to the Orphans' Court,

Lynch should have paid Reardon out of his own funds and

not those contained in the gross estate. Id. The Orphans'

Court therefore ordered Lynch to pay Reardon's fair market

fee, $171,966.90, back to the estate, in addition to the

$23,559.09 he already owed for the overpayment on his

own fee. In addition, Lynch was to pay six percent interest

on these sums, from the date of receipt until the day the

money was reimbursed. Id.

Once more, the parties appealed the decision of the

Orphans' Court. The Superior Court affirmed it per curiam

on June 13, 1990. In re Estate of Meriano, 579 A.2d 423

(Pa. Super. 1990). The Pennsylvania Supreme Court

refused to hear Lynch's petition for appeal on January 15,

1991. In re Estate of Meriano, 593 A.2d 421 (Pa. 1991).

Thus, Lynch remained liable to the estate for a total sum of

$195,525.99, plus six percent interest running from the

date of receipt of the funds.5 Reardon owed the estate

$78,983.10, plus six percent interest.

Neither Reardon nor Lynch adhered to their obligations.

_________________________________________________________________

5. The parties stipulated that Lynch owed $195,516.00, which is $9.99

less than the sum of $171,966.90 and $23,559.09. See Joint Stipulation

of Facts, at P20. This discrepancy, however, appears to be the result of

a simple arithmetic mistake since the Joint Stipulation states the correct

sums that were to be added in order to determine Lynch's total liability.

See id.

9

Lynch attempted to declare bankruptcy in 1989, but had

his petition dismissed in 1990, due to his failure to file

required schedules. In his petition for bankruptcy, Lynch

listed the estate as a creditor for the sum of $225,000. After

his attempt to declare bankruptcy failed, Lynch never paid

any of the money he owed to the Meriano estate.

Unlike Lynch, Reardon apparently maintained some

contact with the estate and entered into a settlement

agreement for an undisclosed amount that was less than

the sum charged to him by the Orphans' Court. The tax

court noted that one of the estate's attorneys filed a status

report on March 19, 1990, in which the attorney reported

that all claims against Reardon had been settled. Of the

amount negotiated by settlement, Reardon paid only

$25,000.

The Present Proceeding

This proceeding began when the Commissioner served

the estate with a Notice of Deficiency in the amount of

$732,106.81. In addition, the estate was assessed

$366,053.41 for fraud pursuant to 26 U.S.C. S 6653(b). The

Commissioner commenced proceedings against the estate

in 1981. Over the last fifteen years, the parties have settled

many of the issues regarding the estate's tax deficiency. See

Stipulation of Disposition of Issues, filed September 3, 1985;

Second Stipulation of Disposition of Issues, filed November

26, 1993; Joint Stipulation of Facts, filed December 5, 1994.

A special trial judge heard this case in December of 1994.

The trial judge concluded, inter alia, that the estate was not

entitled to a theft loss deduction for the funds which Lynch

and Reardon had failed to return to the estate despite the

order of the Orphans' Court that they do so. The tax court

adopted the trial judge's findings and conclusions in an

opinion filed February 15, 1996. See Estate of Meriano v.

Commissioner, T.C. Memo 1996-58, 1996 WL 64854

(U.S.T.C. filed February 15, 1996). The estate now appeals

the tax court's denial of its theft loss deduction.

10

II. DISCUSSION

The tax court determined that the estate was entitled

neither to a theft loss deduction nor to a deduction for a

portion of the administrative expenses taken by its

attorneys. See Estate of Meriano, T.C. Memo 1996-58 at 84,

101. The estate does not appeal the tax court's disposition

of issues regarding the deductibility of administrative

expenses. Consequently, our concern is whether the estate

is entitled to theft loss deduction for some or all of the

money owed to it by Reardon and Lynch.6 We exercise

jurisdiction over the tax court's decision pursuant to 16

U.S.C. S 7482(a). We review the tax court's legal

determinations de novo. We do not disturb the tax court's

factual findings unless they are clearly erroneous. See Gulf

Oil Corp. v. Commissioner, 914 F.2d 396, 399 (3d Cir.

1990).

The estate maintains that it is entitled to an appropriate

theft loss deduction for the portion of Lynch and Reardon's

withdrawals that were adjudged excessive by the Orphans'

Court but never reimbursed to the estate. Section 2054 of

the tax code provides that:

[T]he value of the taxable estate shall be determined by

deducting from the value of the gross estate losses

incurred during the settlement of estates arising from

fires, storms, shipwrecks, or other casualties, or from

theft, when such losses are not compensated for by

insurance or otherwise.

26 U.S.C. S 2054. Because Section 2054 has generated

_________________________________________________________________

6. The estate also raises several evidentiary issues on appeal. According

to the estate, the tax court committed error reversible error when it: (1)

failed to admit "expert" testimony regarding the proper interpretation of

Pennsylvania criminal law; (2) refused to admit the Orphans' Court

opinions as well as the testimony contained within those proceedings of

Anthony Orlando, who had died by the time the tax court proceeding

was under way; (3) rejected the estate's request to treat Lynch and

Reardon as hostile witnesses on direct examination; and (4) prevented

the estate from proffering evidence that Lynch might have commingled

funds or hidden assets while he was managing the estate's securities.

In light of our holding, we need not address the merits of these issues.

11

relatively little case law, we must examine those cases that

have defined "theft" as it appears in Section 165, which

permits taxpayers to take theft loss deductions on their

income tax.7 See Estate of Max Schlensky v. Commissioner,

T.C. Mem. 1977-148, 1997 WL 3444.

"Theft," as it appears in Sections 165 and 2054, is

defined by the jurisdiction in which the loss has occurred.

See e.g. Lombard Brothers, Inc. v. United States, 893 F.2d

520, 523 (2d Cir. 1990); Bagur v. Commissioner, 603 F.2d

491, 501 (5th Cir. 1979); Bellis v. Commissioner , 540 F.2d

448, 449 (9th Cir. 1976).8 The estate and Commissioner

agree that, to the extent state law controls the outcome of

this case, the applicable law is that of Pennsylvania. See

Joint Stipulation of Facts, P 28. The estate must prove its

entitlement to the deduction by a preponderance of

evidence. See Howard v. United States, 497 F.2d 1270,

1272 n.4 (7th Cir. 1974); Farcasanu v. Commissioner, 436

F.2d 146, 150 n.3. (D.C. Cir. 1970). See also Tax Court

Rule 142(a).

According to the estate, the facts of this case amount to

theft under two provisions of Pennsylvania's Criminal Code:

18 Pa.C.S. S 4113, for misapplication of entrusted property;

and 18 Pa.C.S. S 3927, for theft by failure to make required

disposition of funds received. Because Section 3927

adequately resolves this case in the estate's favor, we will

not consider whether the estate is also eligible for a theft

loss deduction under Section 4113.

Section 3927 provides in pertinent part:

(a) Offense defined- A person who obt ains property

upon agreement, or subject to a known legal obligation,

_________________________________________________________________

7. Section 165(c)(3) allows a taxpayer to take a deduction for "losses of

property not connected with a trade or business or a transaction entered

into for profit, if such losses arise from fire, storm, shipwreck or other

casualty, or from theft." 26 U.S.C. S165(c)(3).

8. "[T]he exact nature of the crime, whether larceny or embezzlement, of

obtaining money under false pretenses, swindling or other wrongful

deprivations of the property of another, is of little importance so long

as

it amounts to theft." Edwards v. Bromberg, 232 F.2d 107, 111 (5th Cir.

1956).

12

to make specified payments or other disposition,

whether from such property or its proceeds or from his

own property to be reserved in equivalent amount, is

guilty of theft if he intentionally deals with the property

obtained as his own and fails to make the required

payment or disposition. The foregoing applies

notwithstanding that it may be impossible to identify

particular property as belonging to the victim at the

time of the failure of the actor to make the required

payment or disposition.

18 Pa.C.S. S 3927(a). The Pennsylvania Supreme Court has

interpreted Section 3927 as consisting of four elements:

1. The obtaining of property of another;

2. Subject to an agreement or known legal obligation

upon the recip[ient] to make specified payments or

other disposition thereof;

3. Intentional dealing with the property obtained as the

defendant's own; and

4. Failure of the defendant to make the required

disposition of the property.

Commonwealth v. Turrell, 584 A.2d 882, 884 (Pa. 1990),

quoting Commonwealth v. Ohle, 470 A.2d 61, 69 (Pa. 1983)

and Commonwealth v. Crafton, 240 Pa.Super. 12, 16, 367

A.2d 1092, 1094-95 (1976). See also Commonwealth v. Van

Nest, 517 Pa. 44, 50, 534 A.2d 473, 476 (Pa. 1987). Before

we decide whether the estate has demonstrated the

existence of these four elements, we must first address the

Commissioner's contention that the Section 3927 contains

a fifth element, the presence of "thieving intent."

A. Thieving Intent

According to the Commissioner and the tax court, the

estate is ineligible for a theft loss deduction because it

failed to prove that Lynch or Reardon possessed "thieving

state[s] of mind" when they charged excessive fees to the

estate and failed to pay them back at the request of the

Orphans' Court. See Meriano, T.C. Memo 1996-58 at 76,

84. We believe the tax court's has misconstrued

Pennsylvania's criminal law.

13

We find nothing in Pennsylvania case law to support the

proposition that the presence of thieving intent is a

separate and additional element of liability under Section

3927. Neither of the two Pennsylvania Superior Court

decisions cited by the tax court demonstrate the existence

of a fifth element under Section 3927. See Commonwealth

v. Kuykendall, 465 A.2d 29, 31-32 (Pa. Super. 1983);

Commonwealth v. Shaffer, 420 A.2d 722, 726 (Pa. Super.

1980). Neither Kuykendall nor Shaffer even mention Section

3927. Instead, both cases stand for the unextraordinary

principle that a person who has misappropriated property

can be prosecuted under 18 Pa. C.S. S 3925 as a receiver of

property, so long as that person possesses a "thieving state

of mind." This result follows from 18 Pa. C.S.S 3902, which

consolidates all theft offenses at trial. Thus, a defendant

accused of one type of theft under one section of

Pennsylvania's Crime Code may be convicted with evidence

demonstrating a different type of theft under the Code.

Section 3902 thus establishes that theft is a unitary offense

in Pennsylvania. Under this consolidation of theft offenses,

a "thieving state of mind" is the essence of a theft charge.

Commonwealth v. Robichow, 487 A.2d 1000, 1003 (Pa.

Super. 1985) (quoting Shaffer, 420 A.2d 722). The

Commissioner contends that it is this "thieving state of

mind" that is lacking here.

However, the Superior Court elaborated on the unitary

concept of theft under the Pennsylvania criminal code in

Robichow. There, the Superior Court explained that, under

Section 3927, the taking of another's property subject to a

known obligation and the intentional disposition of it as

one's own constituted the "thieving state of mind" necessary

to prove theft. See Robichow, 338 Pa. Super. at 356, 487

A.2d at 1004-1005. Thus, Robichow did not treat "thieving

intent" as a separate element of Section 3927. To the

contrary, it held that such intent was present when the

four traditional elements of the offense were already

present.

We are aware that ultimately our determination of this

issue turns on the pronouncements of Pennsylvania's

highest court, not its Superior Court. "[W]hen federal courts

are required to interpret or apply state law, we consider and

14

accept the decisions of the state's highest court as the

ultimate authority of state law." Colantuno v. Aetna Ins. Co.,

980 F.2d 908, 909 (3d Cir. 1992). Of the recent

Pennsylvania Supreme Court cases discussing Section

3927, none has even mentioned the concept of "thieving

intent," much less treated it as a separate prerequisite for

criminal liability. See e.g. Turrell, 584 A.2d at 884 (criminal

violation occurs when individual "evinces intent not to

make the required payment or disposition"). Based on the

Pennsylvania Supreme Court's discussion of Section 3927,

we must conclude that "thieving intent" insofar as it is an

element of an offense under section 3927, is established

when the elements of the taking of another's property

subject to a known obligation and of the intentional

disposition of it as one's own have been established. It is

not a separate fifth element of this crime. In sum, we do

not think that the Commissioner's reading of Section 3927

represents an accurate interpretation of Pennsylvania

criminal law.

B. Liability for Theft Under Section 3927

Having rejected "thieving intent" as a fifth element, we

now consider whether the estate proved by a

preponderance of evidence that it was a victim of theft as

defined by Section 3927. We will examine each element of

Section 3927 separately.

1. Property of another. Under the first element of

Section 3927, the estate must show that Lynch and

Reardon took "property of another." According to the

Commissioner, Lynch and Reardon did not acquire

"property of another" when they converted the estate's

securities and withdrew a portion of their proceeds from the

estate prior to the Orphans' Court's approval of their fees.

We disagree. We believe that under Pennsylvania's probate

law, the moneys withdrawn from the estate constituted

"property of another" despite Mary Orlando's prior approval

of the estate's disbursements to Lynch and Reardon.

Section 3927 does not explicitly refer to "property of

another." Judicial precedent, however, has made it an

element of this crime. See e.g. Turrell, 584 A.2d at 884.

Pennsylvania statutory law defines "property of another" to

15

include "property in which any person other than the actor

has an interest which the actor is not privileged to infringe,

regardless of the fact that the actor also has an interest in

the property." 18 Pa. C.S. S 3901. The Commissioner

maintains that the definition contained in Section 3901

applies only to statutory uses of the term. We disagree.

Common sense dictates that the Pennsylvania courts would

define "property of another" uniformly for all theft offenses,

regardless of whether that term appears explicitly in the

statute. At least one court has implicitly defined the

"property of another" element in Section 3927 by referring

to Section 3901. See Commonwealth v. Edwards, 582 A.2d

1078, 1086 (Pa. Super. 1990).

Applying Edwards and the language of Section 3901, we

believe that "property of another" includes property in

which a person has an interest that may not be infringed

by someone else. Our conclusion is supported by the

Pennsylvania Supreme Court's holding that a victim need

not maintain absolute title over property to claim theft by

wrongful disposition of funds received. See Commonwealth

v. Rosenzweig, 522 A.2d 1088, 1092-93 (Pa. 1987). Thus,

the estate may prove theft so long as it shows that it had

some legal interest in the securities withdrawn and

converted by Lynch and Reardon as payment of their fees.

Our review of Pennsylvania's probate law leads us to

conclude that, prior to the Orphans' Court's audit and final

approval of the estate's distribution, the estate maintained

an interest in the fees withdrawn by Lynch and Reardon,

and that neither Lynch nor Reardon was entitled to infringe

this interest, regardless of Mary Orlando's prior approval of

their fees and withdrawals.

Although Pennsylvania probate law allows a personal

representative (administrator or executor) to distribute real

or personal property prior to a court's final disposition of an

estate's account, the personal representative does so at his

or her own risk. See 20 Pa. C.S. 3532. "Fiduciaries who pay

out funds in their hands without an audit of their accounts

do so at their own risk." In re Free's Estate , 194 A. 492,

495 (Pa. 1937). See also In re Estate of Comerford, 130 A.2d

458, 465 n. 11 (Pa. 1957); Estate of Pew, 655 A.2d 521,

538 (Pa. Super. 1994). Cf. Heaney v. Riddle, 23 A.2d 456,

16

459 (Pa. 1942) (trustees who distributed funds of dissolved

corporation without prior approval of court did so at their

own risk and could be held responsible for payments later

determined to be improper). The Orphans' Court may direct

the estate's fiduciary to reimburse the estate if, upon

auditing the estate's final account, the court finds the

fiduciary's prior distributions to be improper or

unreasonable. See In re Free's Estate., 194 A. at 495. Since

Reardon's investigative fee was disbursed to him pursuant

to the approval of Mary Orlando, the estate's fiduciary and

personal representative, his fee was subject to the review

and approval of the Orphans' Court.

The payment of an attorney's fee prior to the Orphans'

Court's audit and approval of the estate's account is also

treated as an at-risk distribution. It is well established that

the Orphans' Court's may review the reasonableness of the

attorney's fee and order the estate's personal representative

to reimburse the estate for some or all of the disbursed fees

if it finds the fees to be excessive, unreasonable or

otherwise undeserved. See Estate of Alla Bruner, 691 A.2d

530, 534 (Pa. Super. 1997) (auditing judge may reduce

excessive and unreasonable attorney's fees); In re Estate of

Geniviva, 675 A.2d 306, 313 (Pa. Super. 1996); In re Estate

of Rees, 625 A.2d 1203, 1206 (Pa. Super. 1993); In re

Estate of Sonovick, 541 A.2d 374, 376 (Pa. Super. 1988)

(Orphans' Court has authority to reduce fees and

commissions of estate's fiduciaries to "reasonable and just"

level).9

Ordinarily, the Orphans' Court surcharges the estate's

fiduciary for the value of excessive fees or wrongful

appropriations. The Orphans' Court's jurisdiction, however,

_________________________________________________________________

9. In reviewing the reasonableness of an attorney's fees, the auditing

court considers:

the amount of work performed, the character of the services

rendered, the difficulty of the problems encountered, the value of

the

property in question, the degree of responsibility involved, the

professional skill of the individuals rendering the services, the

standing of the attorney in her profession and the ability of the

estate to pay a reasonable fee.

Bruner, 691 A.2d at 534.

17

does not end here. Consistent with its powers as a court of

chancery, the Orphans' Court may also compel payment

from the fiduciary's agent when it determines that the agent

is in possession of assets belonging to the estate. See In re

Estate of Webb, 138 A.2d 435 (Pa. 1958) (Orphans' Court

may compel realtors acting as administrators' agents to

turn over property belonging to decedent's estate); In re

Watts' Estate, 27 A. 861 (Pa. 1893) (Orphans' Court has

jurisdiction to compel administrator's attorney to turn

assets over to estate).

Thus, the Orphans' Court clearly had the power to review

Lynch and Reardon's fees, to reduce those fees if it found

them to be excessive or unreasonable, and to order Lynch

and Reardon to refund the value of any securities which the

Court found to be wrongfully taken from the estate. As the

Pennsylvania Supreme Court proclaimed nearly a century

ago, "[T]he orphans' court has jurisdictionfinally to decide

the question of ownership and compel a surrender to a

decedent's estate of assets improperly held by one whose

title is colorable only." In re Williams' Estate, 84 A. 848, 852

(Pa. 1912) (emphasis added). Because, the estate

maintained a proprietary interest in any distributions prior

to the Orphans' Court's approval, the funds withdrawn by

Lynch and Reardon qualified as "property of another." The

first prong of Section 3927 is therefore satisfied.

2. Subject to known legal obligation. To prove theft,

the estate must also show that Lynch and Reardon

obtained property subject to an agreement or known legal

obligation to make specified payments or otherwise dispose

of the property. The record reflects that the estate meets

this element of Section 3927.

First, Robert Boote, an attorney familiar with probate

law, testified at trial that attorneys who took fees from their

clients prior to an accounting "all know that [they] are

subject to ultimate approval by the court." Appendix, at

281-82. The Commissioner did not rebut this testimony. As

an attorney, Lynch was aware of Pennsylvania probate law.

Second, Lynch and Reardon both testified at trial that they

were aware that their fees were subject to the Orphans'

Court's approval. See Appendix, at 441; 584-85. Finally, the

hold harmless agreement imposed a contractual obligation

18

on Lynch and Reardon to reimburse the estate for"any and

all amounts received that are determined by a court of

proper jurisdiction to be returnable to the Estate."

Appendix, at 109.

Thus, both Pennsylvania's probate law and the hold

harmless agreement voluntarily entered into by Lynch and

Reardon imposed on them a legal obligation to maintain the

funds withdrawn from the estate until the Orphans' Court

approved their fees. The second element of Section 3927 is

thus present.

3. Intentional disposition of property as one's own.

Both Lynch and Reardon disposed of the funds withdrawn

from the estate for their own purposes. Lynch testified that

after he converted and withdrew the securities from the

estate, he deposited them in an account with some

personal funds. Appendix, at 444. Shortly after the

Pennsylvania Supreme Court refused to hear Lynch's

appeal of the Orphans' Court's judgment, Lynch declared

bankruptcy because he was in "financial distress."

Appendix, at 432. From this testimony, we conclude that

Lynch had spent the funds and thus disposed of them as

his own.10

As for Reardon, he testified at trial that he had used the

money to pay his own legal fees and taxes. See Appendix,

at 589-90. Thus, Reardon treated the remaining funds as

his own. See Turell, 584 A.2d at 884 (attorney who used

funds in client's escrow account to pay his own income

taxes committed theft under Section 3927).

4. Failure to make required disposition. Once the

Orphans' Court issued its judgment, Lynch and Reardon's

obligation to repay the estate became final. Neither Lynch

_________________________________________________________________

10. The trial court did not permit the estate to present testimony

demonstrating that Lynch commingled the estate's funds with his own.

We agree that commingling, by itself, does not demonstrate liability

under Section 3927. See Turrell, 584 A.2d at 886. However, insofar as

Lynch's commingling of funds might have been circumstantial evidence

of his intention to treat the funds as his own, the evidence still may

have

been relevant and therefore admissible. We need not address this issue,

however, since we decide the case in the estate's favor.

19

nor Reardon, however, satisfied the Orphans' Court's

judgment.

Lynch has paid the estate nothing since the Orphans'

Court's judgment was affirmed. At trial, he testified that he

did not have the funds to do so. Appendix, at 433. Lynch

therefore committed theft under Section 3927 since he

failed to dispose of the funds with the estate as directed by

the Orphans' Court. "[A]ssuming all the other elements

have been satisfied, once payment is required and an

attorney fails to make such payment, then a violation of

S 3927(a) has occurred." Turrell, 584 A.2d at 886 (attorney

who obtained funds upon express agreement that they be

held in escrow account committed theft when he failed to

dispose of them in agreed upon manner).

Like Lynch, Reardon also committed theft, although the

facts surrounding his failure to repay the estate are slightly

more complicated. At trial, Reardon testified that he had

entered into an agreement with the estate, releasing him

from the Orphans' Court judgment in an exchange for an

amount less than that charged to him. The date of the

agreement, as well as the amount Reardon agreed to pay,

were not disclosed at trial.11 The parties apparently agree,

however, that Reardon paid $25,000 to the estate as partial

satisfaction of his agreement.

Reardon's release and partial payment of this undisclosed

sum does not negate our conclusion that he committed

theft within the meaning of Section 3927. The fact that the

estate attempted to cut its losses by negotiating a deal with

Reardon does not negate the fact that it was the victim of

theft. To the contrary, the Pennsylvania Supreme Court has

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11. The tax court accepted Reardon's testimony that the estate had

released him from his obligation to pay the Orphans' Court's judgment

in exchange for a negotiated lesser amount. See Meriano, T.C.Mem.

1996-58 at 37-38, 39. Although the estate has questioned the validity of

Reardon's agreement in supplemental briefing before this Court, it has

not specifically challenged the tax court's finding as clearly erroneous.

Accordingly, the estate has waived any argument about the authenticity

of the agreement. See Lunderstadt v. Colafella, 885 F.2d 66, 78 (3d Cir.

1989) (appellants must raise issue in opening appeal brief to preserve

it).

We therefore assume that the agreement is valid.

20

held that a defendant's restitution has no bearing on his

criminal liability for theft:

We agree that criminal liability attaches as soon as the

failure to make a required distribution of funds occurs,

but reject the view that liability can be negated through

a return of the misappropriated funds. The crime is

complete when all of its elements have been fulfilled,

and, once completed, it cannot be undone. Certainly,

where an offender has made restitution, and

particularly where restitution has been made before the

filing of criminal charges, this can be considered by a

sentencing court as a significant factor in mitigation of

the punishment to be imposed. Restitution does not,

however, negate the fact that a crime has been

committed.

Turrell, 584 A.2d at 886. As soon as Reardon failed to pay

the Orphans' Court's judgment and spent the money on his

own legal fees and taxes, he violated Section 3927. Neither

the estate's release nor Reardon's later payment of $25,000

negates that fact.

In sum, the four elements of theft by failure to make

required disposition of funds received have been satisfied

by the facts of this case.

C. Collection Efforts

Finally, we note that the Commissioner questions the

authenticity of the estate's theft claim on the ground that

the estate failed to exercise adequate efforts to collect the

money owed to it once the Orphans' Court rendered

judgment against Lynch and Reardon. The Commissioner's

argument appears to be that if theft "really" had occurred,

the estate would have been more persistent in its efforts to

collect the moneys owed to it. The tax court accepted this

argument when it concluded that "this was merely a fee

dispute between Lynch and the present administratrix of

the estate." Meriano, T.C. Memo 1996-58 at 35.12

_________________________________________________________________

12. In describing this situation as "merely a fee dispute," the tax court

did not take into account the requirement that fees, charged against an

estate, must receive the ultimate approval of the Orphans' Court. See

Part II.B.1 and 2, supra.

21

We find the reasoning of the tax court and the

Commissioner to be without merit. The victim's pursuit of

the person who has misappropriated its property is not an

element under Section 3927. We believe that, once the four

elements of Section 3927 are present, a theft has occurred,

regardless of whether the victim attempts to retrieve the

stolen property. Theft is measured by the thief 's, and not

the victim's, actions and intentions. Thus, it is completely

irrelevant how much (or little) effort the estate expended in

trying to get its money back, or whether the estate viewed

itself as a victim of theft immediately after the Orphans'

Court rendered its judgment.13

Our only concern is whether Lynch and Reardon

obtained property of another, subject to a known legal

obligation, and then intentionally treated that property as

their own and failed to make a required disposition of

property. Having found each of the four elements present in

this case, we must conclude that they committed theft

under Pennsylvania law and that the estate was entitled to

take a theft loss deduction pursuant to Section 2054 of the

tax code.

III. THE AMOUNT DEDUCTIBLE

We now turn to the issue of how much the estate may

deduct for its theft loss under Section 2054. Although the

estate initially argued in its opening brief that it was

entitled to deduct the full amount of the Orphans' Court's

judgment, it eventually conceded in supplemental briefing

that it could not deduct the $25,000 repaid to it by

Reardon. Thus, the estate currently claims that it is entitled

to a deduction of $249,509.09. This amount represents the

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13. We do note that an estate's refusal to collect money owed to it could

potentially disqualify it for a federal estate tax deduction under Section

2054. Ordinarily, a taxpayer seeking a theft loss deduction on income

tax must demonstrate that there is no "reasonable prospect of recovery."

26 C.F.R. S1.165-1(d)(2)(I) and 1.165-8(a)(2). The Commissioner waived

any argument with regard to this issue when she stated at trial that

collection was not in issue. See Appendix at 445, 587, 590 and 614.

22

total amount of money owed to the estate by Lynch and

Reardon, minus the $25,000 paid by Reardon.14

Under the tax regulations, when an estate is partially

compensated for its loss, it may take a deduction on the

remaining portion. See 26 C.F.R. S 20.2054-1. Since the

estate has not received any compensation from Reardon

other than the $25,000, the estate may deduct the

remainder of Reardon's debt, notwithstanding its agreement

with Reardon to accept an undisclosed lesser amount.

IV. CONCLUSION

Because the estate has demonstrated theft under Section

3927 of the Pennsylvania criminal code, we will reverse the

tax court's denial of a theft deduction to the estate. The

estate is therefore entitled to deduct from its estate taxes

the sum of $249,509.09, the remainder due to it under the

Orphan Court's judgment.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

_________________________________________________________________

14. We note that the estate is not entitled to deduct the interest the

Orphans' Court ordered Lynch and Reardon to pay. Federal estate tax

applies only to the moneys contained in the estate at the time of a

decedent's death. See generally 26 U.S.C.S 2031(a). Money generated

after the decedent's death is not included in the gross estate for estate

tax purposes, but is instead taxed as income under 26 U.S.C. S 641(a)(3)

for income tax purposes. See Horne v. Commissioner, 91 T.C. 100, 103

(Tax Court 1988); Bowes v. United States, 593 F.2d 272, 275 (7th Cir.

1979). Thus, the interest on the excess fees has never been considered

part of the gross estate for estate tax purposes. The estate therefore may

not include the interest on Lynch and Reardon's surcharges in its theft

loss deduction.

23