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Precedential or Non-Precedential: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. 

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. 

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, 

(Pa. Super. 1990). The Pennsylvania Supreme Court
refused to hear Lynch's petition for appeal on January 15,
1991. In re Estate of Meriano, 

(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 

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, 

(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, 

, 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, 

.

"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, 

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

, 501 (5th Cir. 1979); Bellis v. Commissioner , 

, 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, 

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

, 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, 

, 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, 

, 884 (Pa. 1990),
quoting Commonwealth v. Ohle, 

, 69 (Pa. 1983)
and Commonwealth v. Crafton, 240 Pa.Super. 12, 16, 

, 1094-95 (1976). See also Commonwealth v. Van
Nest, 

, 50, 

, 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, 

, 31-32 (Pa. Super. 1983);
Commonwealth v. Shaffer, 

, 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, 

, 1003 (Pa.
Super. 1985) (quoting Shaffer, 

). 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 

, 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.,

, 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. 

(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. 

.
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, 

, 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, 

, 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 , 

,
495 (Pa. 1937). See also In re Estate of Comerford, 

, 465 n. 11 (Pa. 1957); Estate of Pew, 

,
538 (Pa. Super. 1994). Cf. Heaney v. Riddle, 

,

                               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 

. 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, 

, 534 (Pa. Super. 1997) (auditing judge may reduce
excessive and unreasonable attorney's fees); In re Estate of
Geniviva, 

, 313 (Pa. Super. 1996); In re Estate
of Rees, 

, 1206 (Pa. Super. 1993); In re
Estate of Sonovick, 

, 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.

.

                               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, 

(Pa. 1958) (Orphans' Court
may compel realtors acting as administrators' agents to
turn over property belonging to decedent's estate); In re
Watts' Estate, 

(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, 

, 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 

(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 

. 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." 

(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
_________________________________________________________________

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, 

, 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.

. 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 

.

                                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
_________________________________________________________________

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, 

, 103
(Tax Court 1988); Bowes v. United States, 

, 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