Baker v. Archer-Shee, [1927] A.C. 844
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[HOUSE OF LORDS.]
BAKER, APPELLANT;
AND
ARCHER-SHEE, RESPONDENT.
1927 July 26.
VISCOUNT SUMNER, LORD ATKINSON, LORD WRENBURY, LORD CARSON, and LORD
BLANESBURGH.
Revenue - Income Tax - Foreign Securities, Stocks and Shares - Foreign
Possessions - Trust Fund - Dividends not remitted to the United
Kingdom - Foreign Trustees - Balance of Income paid to British
Beneficiary - Liability of Beneficiary to Income Tax - Income Tax Act,
1918 (8 & 9 Geo. 5, c. 40), Sch. D, Case IV., r. 1; Case V., rr. 1 and
2.
A testator, a citizen of the United States, left the residue of his
property in trust for his daughter during her life. The trustees, who
had full power over the investment of the trust fund, were a company
constituted under the law of the State of New York and resident
therein. The trust fund consisted of foreign Government securities,
foreign stocks and shares, and other foreign property. The trustees
paid over such of the sums they received as they considered to be
income, after deducting expenses, to the order of the daughter at a
bank in New York. No part of the income was remitted to the United
Kingdom. The respondent who was the husband of the testator's daughter
and resident in the United Kingdom, was assessed under Case IV. of
Sch. D in the full amount of the income of the trust:-
Held (by Lord Atkinson, Lord Wrenbury, and Lord Carson; Viscount
Sumner and Lord Blanesburgh dissenting), that the daughter was [*845]
specifically entitled under the will in equity during her life to the
interest and dividends of the securities, stocks, and shares comprised
in the trust fund, and that consequently her husband was assessable
under Case IV., r. 1, and Case V., r. 1, to income tax in respect
thereof (except such, if any, as were shown to be "foreign possessions
other than stocks, shares and rents") whether such interest and
dividends were remitted to the United Kingdom or not; but that the
matter should be remitted to the Commissioners to state which of the
items of the trust fund were (1.) "securities" within Case IV., r. 1,
(2.) "stocks, shares or rents" within Case V., r. 1, and (3.)
"possessions out of the United Kingdom other than stocks, shares or
rents" within Case V., r. 2.
Decision of the Court of Appeal [1927] 1 K. B. 109 reversed.
APPEAL from an order of the Court of Appeal reversing an order of
Rowlatt J.(1) upon a case stated by the Commissioners for the Special
Purposes of the Income Tax Acts.
The facts are fully stated in the report of the case before Rowlatt J.
and the Court of Appeal.
1927. Feb. 14, 15, 17. Sir Douglas Hogg A.-G. and Reginald Hills for
the appellant. Upon the true construction of the will the respondent's
wife is the sole beneficial owner of the interest and dividends of the
securities, stocks and shares comprised in the trust fund, and is
entitled to receive such interest and dividends. Upon the principles
of income tax law which apply to the chargeability of income subject
to the trusts of a will, as laid down in Williams v. Singer (2), the
person owning the income and assessable to tax in respect of it is the
person beneficially entitled thereto and not the trustee in whom such
income may be legally vested, except in so far as the trustee may be
assessed on behalf of the beneficiary. Williams v. Singer (2) was the
converse of the present case; it was a case of trustees in England and
a beneficiary abroad. In that case no point arises from the fact that
the dividends were paid direct to the beneficiary, for in Pool v.
Royal Exchange Assurance (2), which was decided at the same time, this
was not so. It was said by the Court of Appeal that the moneys which
the wife received were not moneys from foreign securities, and that
the income which she received had lost its origin and parentage by
reason of the administration of the fund by the trustees. But what
(1) [1927] 1 K. B. 109.
(2) [1921] 1 A. C. 65. [*846]
the income arises from depends upon the trusts of the will, and the
fact that it passes through the hands of trustees does not alter the
fact that it is income arising from foreign securities. In Lord
Sudeley v. Attorney-General (1) the point of the decision was that at
the crucial time the residue had not been ascertained, and therefore
the only right of the beneficiary was to have the estate administered.
That case therefore does not affect the appellant's argument. It was
applied to income tax purposes in Barnardo's Home v. Special Income
Tax Commissioners. (2) Here it is not true to say that these trustees
were not trustees of this income for the respondent's wife. The fact
that they are entitled to be recouped their proper expenses does not
alter the fact that they hold the income in trust for her. The
appellant makes no claim for tax on any sums rightly deducted by the
trustees before making payment to the wife's bank in New York.
Maugham K.C. and Edwardes Jones K.C. for the respondent. The true
nature of the gift in this will is such that the tenant for life is
not entitled to the actual income of any specific investment. The
trustees may take their expenses out of any part of this income. This
lady is entitled to the totality of the net income. There is no
warrant in the Income Tax Act for saying that she is entitled to the
income of so much shares and so much securities in specie. She is not
entitled in specie to the income of any one item of investment, but
she is entitled to have the same accounted for. The right of the
trustees to their expenses is not as her agent. Where a trustee incurs
expenditure as the trustee of a settlement he does not incur it on
behalf of the tenant for life, but on behalf of all the parties
interested: Barnardo's Homes v. Special Income Tax Commissioners. (3)
The income is to be ascertained after all proper deductions in due
course of administration. This is not a case of a specific settled
legacy, but a gift of residue. There are three categories of income:
shares, securities and foreign possessions. These are all pooled, and
out of the pool the trustees deduct the expenses of administration.
(1) [1897] A. C. 11, 18, 21.
(2) [1921] 2 A. C. 1, 8.
(3) [1921] 2 A. C. 9. [*847]
This lady is entitled to a balance, and the question is what is the
balance for income tax purposes? Under Case IV., r. 1, no right is
given to deduct from the return a single penny for costs, charges and
expenses. All that this lady is entitled to is the result of an
account, and that must be regarded as a foreign possession. In
Williams v. Singer (1) the question was not as to the property to be
taxed, but as to the person. Murray v. Inland Revenue Commissioners
(2) supports the respondent's contention. And see Fry v. Shiels'
Trustees. (3)
Reginald Hills in reply. A trust fund as such is not a source of
income and is not chargeable to tax; the constituent elements of the
fund must be looked at.
[He referred to Brooke v. Inland Revenue Commissioners. (4)]
The House took time for consideration.
1927. July 26. VISCOUNT SUMNER. My Lords, in this case the respondent
was assessed by Additional Commissioners in respect of the income tax
years 1923-4 and 1924-5. His appeal to the Special Commissioners
failed. Their decision was in turn affirmed by Rowlatt J., but was set
aside by the Court of Appeal. Hence the present appeal.
The respondent's wife was born in the United States. Under the will of
her father, Mr. Alfred Pell of New York, she is entitled, as tenant
for life, to the income of a considerable estate now held in trust by
the Trust Company of New York. So far as concerns the present appeal
it is in respect of his wife's interest under this trust that the
respondent is charged with tax.
Para. 2 of the case of the appellant, the Inspector of Taxes, runs
thus: "The question arising in this appeal is whether for income tax
purposes the income of foreign securities, held by the trustee of a
foreign will resident abroad upon trusts, which entitled the
respondent's wife to the income during her life, belonged to the
respondent's wife so as to be chargeable to Income Tax under Case 4 of
Schedule D of the Income Tax Act, 1918, whether such income was
remitted
(1) [1921] 1 A. C. 65, 75.
(2) 1926 S. L. T. 714; (No. 245, Tax Cas.).
(3) (1914) 6 Tax Cas. 583; 1915 S. C. 159.
(4) [1918] 1 K. B. 257. [*848]
to the United Kingdom or not." In different words the respondent's
case states the question to the like effect, and counsel so argued it
on both sides.
The case stated sets out the relevant sections of the will. In the
events which happened, the whole income and profits of the trust
estate were to be applied to the use of Lady Archer-Shee during her
life. The trust fund consisted, in the years now in question, of
foreign Government securities, foreign stocks and shares, and other
foreign property. The case stated says: "During the three years ended
5th April, 1925, the appellant was married to the said daughter
(Frances) of Alfred Pell, who was entitled to have the whole of the
income and profits from the said fund applied to her use."
So far it merely follows the will. It proceeds: "The Trust Company of
New York have paid over such part of the sums, which they received
from the said fund, as they considered to be income, as the same
accrued to her, to her order at Messrs. J. P. Morgan & Company's Bank
in New York, while retaining in their own possession such sums as they
thought might be required to comply with the income tax or other
provisions of American law."
This is, in effect, a finding that no profits or gains accruing in
specie from any particular trust investment have been paid to Lady
Archer-Shee at all. The trustees have throughout retained the receipt
and control of the income from all sources. Your Lordships were told
by the respondent's counsel, without contradiction, that the sums
actually paid to Messrs. J. P. Morgan & Co. for Lady Archer-Shee's
account were not remitted to her in this country, but were spent by
her in the United States, and it has been the appellant's contention
throughout, as the case stated recites, that the income arising from
the trust property was taxable here, whether actually remitted to the
United Kingdom or not. In truth the issue, as raised, is independent
of the proportions, in which the trust fund is made up of securities,
shares and other foreign possessions, and this is no doubt the reason
why the Commissioners, with the concurrence of both parties, have
thought it unnecessary to define those proportions. [*849]
There is no finding as to the law of the State of New York and, in
accordance with the settled rule, we must presume that the general law
of New York which is here relevant - namely, the law of trusts and
wills - is the same as our own. How far any such presumption arises
with regard to statutory law and particularly to revenue statutes is
another matter. I am sure no well-wisher of the State of New York
would willingly suppose that the income tax law there prevailing is
expressed in the same terms as our own.
Though the Attorney-General conceded at your Lordships' Bar that tax
should not be claimed on any sums rightly deducted by the trustee
before making payment to Lady Archer-Shee's New York Bank, I still
think that the Inland Revenue is logically committed to its original
contention that, because she is the beneficiary for life under a trust
vested in a New York trustee, she is now chargeable to English tax in
a greater measure than if she had made these investments herself and
had owned them absolutely at law, instead of being merely beneficially
entitled to their income for life in equity. This broad contention is
variously expressed - namely, (a) that the respondent was rightly
assessed in respect of income arising from "securities out of the
United Kingdom belonging to his wife" (Reason 1); (b) that the income
of the securities, forming part of the trust fund, "belongs to the
respondent's wife" (Reason 2); and (c) that it arose from the specific
investments, which constituted the trust fund, and must be charged
upon the husband accordingly "in the full amount, whether actually
remitted to this country or not." Accordingly we have to consider two
kinds of question, (a) does the income of a trust fund "belong" to the
beneficiary, so that the beneficiary is chargeable as if it arose and
accrued to him directly as his, and, if so, (b) is the amount so
chargeable the gross amount paid by way of interest or dividend on the
investments, or only the net amount received by the beneficiary after
deduction of the tax and other charges, which the trustees have
necessarily to pay out of the gross income of the trust fund, which
comes to them? [*850]
My Lords, the position of the equitable tenant for life and of the
investments which form the trust fund, is so clear, both in law and
equity, that, apart from any special prescriptions, express or
implied, of the law relating to income tax, there can, I think, be no
doubt about them.
The trustee has the full legal property in the whole of the trust fund
and the beneficiary has not. Apart from special provisions in
particular settlements, which do not affect the general principle, the
trustee is not the agent of the beneficiary, who can neither appoint
nor dismiss him. She cannot require him to change or forbid him to
change the particular investments of the fund. There is no liability
on the beneficiary for the trustee's acts on the principle of
respondeat superior and, unless the trust deed otherwise provides, the
trustee must act without remuneration to himself and cannot in any
case sue the beneficiary on any implied promise to pay. It is the
trustee alone who can give a discharge for interest, rent or dividends
to the parties who have to pay them in respect of the invested trust
estate, nor need they know the beneficiary in the matter. All that the
latter can do is to claim the assistance of a Court of equity to
enforce the trust and to compel the trustee to discharge it. This
right is quite as good and often is better than any legal right, but
it is not in any case one, which for all purposes makes the trust fund
"belong" to the beneficiary or makes the income of it accrue to him eo
instanti and directly as it leaves the hand of the party who pays it.
I do not understand that, so far, there was any contest. The
appellant's argument is that, whatever may be the legal position of
the capital and the equitable position of the trustee and the cestui
que trust as regards the right to the income, for income tax purposes
the law is otherwise, and that under the Income Tax Act and by virtue
of some implication the "accrual" is to the beneficiary.
I put aside the contention that, if the respondent is not held liable,
trustees will be liable to super tax on trust funds and beneficiaries
will be outside the benefit of exemptions from tax. It is not in this
indirect way that the general law [*851] can be set aside for the
convenience of the revenue. Super tax and exemptions depend on the
sections, which impose or confer them, not on some supposed incidence,
arising argumentatively from provisions as to the subject-matter,
which attract tax, or as to the extent of it. Super tax is chargeable
in respect of the income of an "individual" from all sources. Even in
the easiest case of a trustee to accumulate income, no one would say
that his trust was a "source of income" to him as an "individual," for
in the case of several trustees they are not "an individual" at all.
The case of exemptions is similarly dependent on the construction of
the relevant section.
It is not a private instrument like a will that can determine the
question whether a fund is taxable or whether Lady Archer-Shee is
chargeable in respect of it. That turns on the legislation, which
deals with her rights, legal or equitable. for the purposes of
taxation. It follows that it is in the terms of the Income Tax Act or
in some decided construction which binds your Lordships, that the
inland revenue can alone find authority for the present contention,
that the person "entitled to" the income is the beneficiary, and a
rule of "income tax law," which so completely and uncompromisingly
disregards the regular law of trusts and the ordinary law of property,
is one that must be enacted beyond doubt or question.
The scheme of the Act is that income is taxed, that is income which
somewhere has been received, and that persons are assessed to the
payment of that tax. The income taxed and the charge upon it are, or
should be, expressly and uniformly described on definite principles,
but assessment is a matter of convenience, now on this plan and now on
that. There is a good deal of practical advantage in tax-gathering on
this indefinite scheme, but all the same the advantage must be taken
cum onere and, if the right to charge and to assess is not to be found
in the Act either in express terms or by necessary intendment
(including what is called "the scheme of the Act"), the Crown fails. I
have looked without success for either express words or a necessary
implication, that would enable the revenue to tax a subject, who is
only [*852] an equitable tenant for life, as if she was both the
beneficiary and the trustee in one, or to claim that securities and
shares belong to her, as to which she has only a right to compel the
administration of the trust. The Rules applicable to Case IV. and r. 1
of those applicable to Case V. of Sch. D clearly apply to legal owners
and, if words properly apt to charge them are also to charge equitable
owners, it can be done only by ignoring the difference in this matter
between law and equity.
On the argument for the appellant that the equitable tenant for life
of the income of this trust estate may be directly chargeable there
are two separate questions, (a) whether she can in any case be
chargeable in respect of the difference between the gross income of
the trust and that net income, which the trustees properly retain, and
(b) where, as is here the fact, the whole fund and the income of it
are abroad, can she be chargeable at all, in respect of income arising
from foreign possessions other than securities, stocks, shares or
rents, which is not remitted to the United Kingdom? The first question
would equally affect the case, where fund, trustee and beneficiary are
all here; the second arises only where there is property abroad. It
does not seem to matter whether the income aimed at is said to arise
from or to accrue to or to belong to this or that property or person.
In the present case, where the person assessed can only be the
beneficiary or her husband for her, authority has to be shown for
taxing her in respect of something that is not here and that she does
not get. In others, however, the position of the trustee would arise
for consideration, if the trustee were here.
I do not know of any provision, which, clearly or at all, imposes
either collection at the source or vicarious liability on a trustee,
as such, as against the beneficiary, and in the case of foreign
possessions, which is this case, there are express provisions to the
contrary. The debatable question is generally one of the person to be
assessed, without deciding anything about ownership or its rights.
There is, however, no question here as to the person to be assessed;
he must be Sir Martin Archer-Shee. Counsel for the Inland Revenue
pointed to no authority that made his liability depend on anything
[*853] but the nature and extent of his wife's right to the property
which is charged.
In the present case it happens that the settlement is in the simplest
form. There is only one tenant for life and, during her life, there is
no other object of the trust to be considered. We hear of no matters
in which a conflict between income and capital and their respective
interests has arisen, nor of any business carried on by the trustee,
as to which the more complex case of trading profits would replace the
plain case of dividends paid. If there had been annuitants with a
prior right to be paid or several beneficiaries entitled to share in
the income; if there had been reversioners, who could claim that part
of the annual receipts were in the nature of accretions to capital; if
there was a trust for accumulation or a power to vary the amounts
payable from time to time as between minors, the impracticability of
saying that any or all of the beneficiaries entitled to income owned
the whole or any part of that income from the moment it became payable
and was paid and to the full extent of the amount paid, would be
evident. The same rule of "income tax law" must, however, be
applicable to all these cases. No doubt it is true that an accountant
could always more or less simply appropriate certain fractions of each
incoming and each outgoing to each object of the trust in a uniform
proportion. That, however, is done by making assumptions which may not
correspond to the facts, and by computing accordingly. The trustee may
in his discretion pay one beneficiary out of the money collected from
a security, another out of a payment of rent, and a third out of the
profits of a business. He may, on the other hand, if he thinks fit,
pay everything received into one account and then draw on that account
generally in favour of each beneficiary. In either case it is plain
that no specific dividend or interest payment "belongs" in any proper
sense of the word to any particular beneficiary. The distribution
rests with the trustee, so long as he complies with his duties. A
series of accounts could be made out between the trustee and each
beneficiary crediting the latter with a fraction of each item of
income [*854] and debiting him with a fraction of each item of outlay,
in such a way that, on aggregating all the separate accounts, the
debits and credits would exactly correspond to the trustee's general
account of his trust. Similarly, by appropriation of payments in the
trust bank account, the source out of which any given payment was made
can be calculated. Neither process shows anything material to the
nature of the beneficiary's right. They both go only to the measure
and discharge of it in money.
The fact appears to be that it has all along been the policy of the
Legislature in regard to income tax to keep aloof, as far as possible,
from questions of title and to confine itself, as far as possible, to
questions of administration. Money within the United Kingdom is taxed
where it is most conveniently found, and though that is prima facie in
the hands of its owners, in a vast number of cases it is otherwise.
Collection at the source is effected by express provisions, which
enable specified persons to pay the tax thereon to the Revenue direct
and in the first instance, and authorize them to deduct it against
another person who is placed under a statutory obligation to allow it;
e.g., under Schedules A and C, and No. 20 of the General Rules. As
Lord Cave says in Blott's case(1), a company pays as taxpayer and then
deducts; it does not pay as agent for the shareholder. Where the
person to whom the money belongs is out of the country, his agent, who
is here and handles the money, may be taxed for him. In some cases,
mostly similar to this, the assessment and charge are made on the
trustee here for the beneficiary abroad. Nothing in this scheme
catches the taxpayer, who is in the United Kingdom and whose trustee
and trust fund are not.
On suitable occasions the Act deals expressly with the respective
positions of trustee and beneficiary and distinguishes between legal
and equitable ownership, e.g., s. 37 (i.) (a), "hereditaments
belonging to any hospital .... or vested in trustees for charitable
purposes"; s. 103, sub-ss. 1 and 3, in which the case of a trustee
"who has authorized the receipt of trust property by the person
entitled thereto," is
(1) [1921] 2 A. C. 171. [*855]
distinguished from that of an agent or receiver, and also from that of
a person, who, in whatever capacity, is "in receipt of .... profits or
gains .... of or belonging to any other person, who is chargeable in
respect thereof." Sect. 54, sub-s. 4, and Sch. C, General Rule No. 2
(d) proviso, make express special provisions for substituting the acts
of beneficiaries for the action of trustees, which would in general be
alone material, and, in one single case, for the "elimination" of the
trustee as owner of the trust securities and the substitution of a
beneficiary, who, in that single case, is to be "deemed" to be the
person owning the securities, which, in general, of course he is not.
I come now to the decisions which were supposed to be in point. The
appellant contended epigrammatically that "for income tax purposes the
trustee is eliminated," a contention, which goes far and unwarrantably
beyond the words of the Act. The authority, on which it was rested,
Williams v. Singer (1), turned on the question, whether or not the
trustee, resident here, was chargeable. The fund was abroad, and he
had authorized the beneficiary, who was abroad also, to collect the
income abroad where it arose. The difference between legal and
equitable rights only came in question because it enabled the Inland
Revenue to argue that the legal owner alone was chargeable and that
the income must be deemed to have accrued or arisen to him, that is to
say, here. There is no such contention in the present case, nor was
the distinction between the gross amount collected by a trustee and
the net amount duly distributed by him to the beneficiaries one which
arose on the facts of Williams v. Singer. (1) The decision of the
House was that the trustee was not chargeable to tax here, and sundry
expressions used, to the effect that the beneficiary resident here is
chargeable, are only correlative to the ratio decidendi in its actual
form, and have no reference to the questions now in debate. Again the
case of Lord Sudeley v. Attorney-General (2) is said by Sargant L.J.
to be in its general reasoning precisely applicable. The points
referred to there
(1) [1921] 1 A. C. 65.
(2) [1897] A. C. 11. [*856]
were, first, the local situation, for the purposes of English
taxation, of an equitable right to have an estate administered, in
which the testatrix was interested as a residuary legatee at the time
of her death, and, second, the question, whether for such taxation her
interest was to be deemed to be confined to a specified fraction of
the residuary estate, corresponding to her share under her husband's
will, or extended to the whole of that residuary estate. In applying
this to the present case the learned Lord Justice says, that Lady
Archer-Shee has not any specific right to any particular item of
income, but, following Lord Herschell's reasoning, only an equitable
right to have handed over to her the net income of the estate, subject
to all proper deductions, which right of hers is a form of property
situate in New York, in whose Courts it would have to be asserted. I
think the reasoning of this judgment is correct. It is immaterial that
in Lord Sudeley's case(1)the estate of the husband of the testatrix
had not yet been administered, whereas here, no doubt, this has been
long ago accomplished. Nobody at any rate has argued the contrary, and
the point does not need discussion. Furthermore, the Rules of Case IV.
of Sch. D, which are applicable on this occasion, say expressly that,
where no money has been remitted to this country, the taxpayer here is
not chargeable in respect of foreign possessions, other than stocks
and shares, securities and rents. Lady Archer-Shee, for the reasons
already given, does not, for income tax purposes, in my view own and
is not entitled to any of the stocks, shares, securities or real
property that form part of the New York trust estate. These belong to
the trustee company, to whom also the annual payments made in respect
of them, by way of rent, interest or dividends, "arise," "accrue" and
"belong." All that she has is a right, in the forum of the trustee and
of the trust fund, to have the trust executed in her favour under an
order to be made for her benefit by the appropriate Court of equity,
and this "possession" neither consists in the trust's investments or
any of them, nor is situated here. It is "foreign."
I am therefore of opinion that the appeal fails. I attach
(1) [1897] A. C. 11. [*857]
no importance to the obvious slip, made in one of the judgments in the
Court of Appeal, as to money having been remitted to Lady Archer-Shee
here, and I need say no more about it, as I do not think that it
affected the reasoning of the judgment appealed from.
LORD ATKINSON. My Lords, the testator in this case, Alfred Pell, the
father of Lady Archer-Shee, in the sixth section of his will dated May
4, 1899, directed that all his real and personal estate, except what
was thereinbefore disposed of, should be held in trust by his
executors and trustees, that they should, during the life of his wife,
apply two-thirds of the income and profits thereof to her use, and the
remaining one-third to the use of his daughter, or any issue she
(i.e., his wife) might leave her surviving. He then provided for the
event which has in fact occurred in these words: "In the event that my
said wife shall die leaving no issue by me her surviving the whole of
the said income and profits shall thereafter be applied to the use of
my daughter Frances during her life."
The testator then by section 9 of his will appointed his wife and John
Pierpont Morgan, Junior, to be executors of his will and trustees of
all the trusts created or declared thereby. He gives his executors the
very widest powers of dealing with, selling, investing or disposing of
his real and personal estate, and changing any of the investments upon
which any portion of it might be invested. He further provided that in
case the executor, John Pierpont Morgan, Junior, should decline to
qualify, or act as an executor or trustee under his will, or should
die, resign or become incapacitated, he authorized his wife, or in
case of her death or incapacity his daughter, Frances, to nominate and
appoint some trust company organized under the law of New York State
as executor and trustee in his, Pierpont Morgan's, place or stead,
such appointment to be made in writing and duly acknowledged by her,
and to be filed in the office of the Court in which his will had been
proved. The trust company so appointed was to become one of the
executors and trustees [*858] of his will, and was to perform all the
duties, and have all the powers, authority and discretion as if it had
been appointed by his will. This last provision is curtailed by that
which follows in section 10. By this latter section he confers upon
the trust company power to retain any investment of which he was
seised or possessed, and also the power to invest and reinvest his
estate in any securities which might be approved of in writing by his
wife or daughter and by the said trust company.
It is found in the case stated that the testator died before the year
1904, and that his wife also died in that year. Mr. Pierpont Morgan,
Junior, on her death became the sole trustee and executor under the
testator's will. This gentleman seems to have occupied that position
for a period of about ten years; presumably he discharged the duties
belonging to it till he retired in the year 1914. Sargant L.J., in
giving judgment, said(1): "No importance is to be attached to the fact
that the trust fund in this case was originally formed or was derived
from a residue, because having regard to the date at which the
testator must have died, we must assume that the estate has been quite
fully administered long ago, so that here we have a definite and
specific trust fund." I quite concur, but may one not justly assume
that the words "long ago" extend to the year 1914, when Mr. John
Pierpont Morgan terminated his ten years' administration of the
estate? It would be strange indeed if a business man like him, who,
unless he belies his name, is skilled in financial affairs, should not
have completed the work of this administration in that length of time.
If he had done so it would have furnished a reason for his retirement.
Then, when he did retire, one finds this young lady, Miss Pell, who,
it is contended, has now no property in or rights to this fund beyond
the right in equity, by suit presumably, to compel the trust company
to pay to her the portion of the income to which she is entitled,
dominating the situation, and by written instrument duly acknowledged
and filed in the Court named, appointing not a named company but some
company - i.e., some company
(1) [1927] 1 K. B. 127. [*859]
which she may select to fill the office of executor and trustee
instead of Mr. John Pierpont Morgan, Junior, retired. The choice is
left with her. In addition, her powers and responsibility are not
ended there. She has, under section 10 of the will, power over the
investment and reinvestment of her father's estate in any securities,
in that her consent is necessary for any such operation. I think it is
not an unreasonable inference from these matters that the life
interest given to her by her father's will had become vested in her,
and that the trust company which she had appointed were merely her
agents to administer the fund for her and in her interest. If that be
so, payments necessarily made properly in the administration of the
fund are made in her interest and on her behalf, and, in my view, are
made with her money.
The learned Master of the Rolls is in error in supposing that the
trust company remit what they receive from the trust fund or any
portion of it to the respondent in this country. That is evident from
the following paragraph in the case stated:-
"In the year 1914 the said J. Pierpont Morgan, Junior, resigned the
trusteeship, and under the power conferred by section 9 of the said
will the Trust Company of New York, being a company constituted under
American law and resident in the State of New York, was appointed to
be executor and trustee of the will. The fund constituted under
section 6 of the will consisted of foreign Government securities,
foreign stocks and shares and other foreign property.
"During the three years ended 5th April, 1925, the appellant was
married to the said daughter (Frances) of Alfred Pell, who was
entitled to have the whole of the income and profits from the said
fund applied to her use. The Trust Company of New York have paid over
such part of the sums which they received from the said fund as they
considered to be income, as the same accrued to her order at Messrs.
J. P. Morgan and Company's bank in New York while retaining in their
own possession such sums as they thought might be required to comply
with the income tax or other provisions of American law." [*860]
But even with that correction I am unable to understand what precisely
is meant by the two following passages in the judgment of the Master
of the Rolls.(1) They run thus: (1.) "It appears from that statement
of fact that what they remit is not what I will call the dividends in
specie in their actual form; what they remit is the balance in their
hands after they have carried out their trust and defrayed the
expenses which fall upon the trust. They do not remit the whole of the
income from the profits, but they remit a sum which has lost its
origin or parentage; it has lost the shape of dividends, share
warrants, or the like, and is merely a sum of money which represents
the balance after payment of the sums which would properly fall upon
the trust." (2.) "But is this sum income arising from securities? In
Singer v. Williams (2) it was decided that shares in a foreign trading
company are foreign possessions and are not foreign securities within
Case IV. of that schedule, and the present Lord Chancellor gave an
indication or definition of what is the meaning of the word
'securities.' This lump sum of money, this balance, does not appear
rightly to fall within the words of Case IV., r. 1, as income arising
from securities. Exactly what those securities are it is unnecessary
at present to define or to determine, but from what I have already
said it is plain that this balance has lost its original character as
being dividends from debentures or shares or the like, and it appears
to me that it does not fall within Case IV., r. 1, as income arising
from securities."
The trustees undoubtedly do not remit to the beneficiaries the income
of the fund in specie, if that means, as I suppose it must mean,
forwarding to them the dividend warrants, cheques, and such like
things received by them in payment of what are debts due to the fund.
It would be unbusiness-like and ridiculous to do so. What the trustees
properly and rightly do is to cash those dividend warrants and
cheques, etc., and pay into the bank of the beneficiaries the money
they thus receive. If the trustees paid into the bank of the
beneficiaries all the income of the fund which they received,
(1) [1927] 1 K. B. 120, 122.
(2) [1921] 1 A. C. 41. [*861]
retaining nothing, I assume, on the reasoning in these paragraphs,
there would be no loss of origin, no loss of "parentage," of any
portion of the sums paid in. If that be so I am utterly unable to
understand how the retention by the trustees in their own hands of a
portion of the income which they receive in order to pay lawful claims
upon the fund, and charges which probably the lady herself would have
had to pay or get paid for her, if she was resident in New York, and
which the trustees will have to account for fully, can change the
"origin or parentage" of the residue of the income received, lodged
with the bankers of the beneficiaries. This residue has no doubt lost
the shape of dividends, share warrants or the like, but so would the
entire income of the fund if it had been lodged in the same way with
the appellant's bankers.
On the first of those two paragraphs it would appear to me as if
nothing can preserve the true character and origin and parentage of
the income paid to the beneficiaries through their bankers unless that
be done by lodging with those bankers the dividends, share warrants
and the like received by the trustees but not cashed. With all respect
I am quite unable to concur in this reasoning. I think it misleading.
An idea similar to that expressed in the two passages quoted from the
judgment of the Master of the Rolls seems to me to underlie the
following passage from the judgment of Warrington L.J., as he then
was. The passage runs thus(1): "They therefore found that the income
arising or accruing to this lady in the present case is not the actual
income derived from the various sources of investment, but that it is
such sum as the trustees from time to time considered to be the
income, while retaining in their hands the sums which are referred to
in the finding of the Commissioners." This passage would appear to
indicate that in order to satisfy the word "accruing" or "arising" to
the lady the trustees should remit to her all the dividend warrants,
cheques received by them, and such like, in payment of the income,
with the consequence I have already mentioned. The lodgment of
(1) [1927] 1 K. B. 126. [*862]
the entire income with her bankers would not apparently satisfy these
words, or if it would, how and why the lodgment of 95 per cent. of the
income, 5 per cent. being retained to satisfy some lawful claim upon
the fund, which the beneficiary, if she was resident in New York,
would probably have had to pay would not satisfy them I cannot
understand. The trustees do not, I think, properly speaking, consider
what is to be the income the beneficiary is entitled to receive. They
lodge the whole income, less what they consider it is necessary to
retain to discharge lawful claims upon the fund. I am unable to follow
the reasoning that leads to the conclusion that, by the deduction of
these sums, the character of the balance lodged changes, and acquires
a character different from what the entire income would have borne if
it had been lodged.
Sargant L.J. expresses his view of the case in the following
passage(1): "The learned judge has summed up the position, in my
judgment, perfectly accurately in a passage of his judgment which I
will now read. He says this: 'What this lady enjoys is not the stocks,
shares and rents or other property constituting the trust fund under
the will; what she has is the right to call upon the trustees, and, if
necessary, to compel the trustees to administer this property during
her life so as to give her the income arising therefrom according to
the provisions of the trust. Her interest is merely an equitable one,
and it is not an interest in the specific stocks and shares
constituting the trust fund at all.'" He apparently considers that in
that state of things the reasoning of the judges and the members of
the House of Lords who took part in the case of Lord Sudeley v.
Attorney-General (2)was applicable to this case. That case has been
frequently referred to in the argument in this case, and consistently,
almost, the important point decided is disregarded. That point was,
that the claim upon or against the residue of a testator's property
could not be enforced until the testator's estate has been fully
administered, and the net residue, which might ultimately be nothing,
ascertained. Sargant L.J. himself, states, that it must be presumed,
owing to the lapse
(1) [1927] 1 K. B. 128.
(2) [1897] A. C. 11. [*863 ]
of time, that the testator's estate has been fully administered. The
remarks of the judges to whom the learned Lord Justice refers, have
reference to the fact that the testator's estate had not been fully
administered, and do not, it appears to me, help to the conclusion at
which the learned Lord Justice has in this case arrived.
The evidence stated in the case stated is extremely scanty. It does
not indicate with any particularity the sources from which the trust
fund is derived, whether it be from foreign "Government securities,
foreign stocks and shares, or other foreign property." I have had the
pleasure and advantage of reading the judgment about to be delivered
by my noble friend Lord Wrenbury. It is, I think, clear and
convincing. I concur with him in his view of the case, and approve of
the suggestion he makes as to a reference back to the Commissioners to
restate the case by setting forth the particulars he has indicated.
LORD WRENBURY. My Lords, s. 1 of the Income Tax Act, 1918, enacts that
income tax for any year "shall be charged for that year in respect of
all property, profits, or gains described or comprised in the
Schedules numbered A, B, C, D and E." I note here the words "all
property."
Sch. D enacts that tax under that Schedule shall be charged in respect
of (a) the annual profits or gains arising or accruing (i.) to any
person residing in the United Kingdom "from any kind of property
whatever, whether situate in the United Kingdom or elsewhere." It
further enacts that tax under the Schedule shall be charged under
certain cases and after specifying five cases it adds:-
Case VI. "Tax in respect of any annual profits or gains not falling
under any of the foregoing cases, and not charged by virtue of any
other schedule." No words could be more plain to include all annual
profits of every kind.
In the case of a person residing in the United Kingdom therefore the
tax is imposed upon all property, whether situate in the United
Kingdom or elsewhere and whether described in any of the five cases or
not. [*864] Case V., however, which relates to "possessions out of the
United Kingdom," consists of two parts. The former has to do with
"stocks, shares, or rents in any place out of the United Kingdom" -
the latter with "possessions out of the United Kingdom other than
stocks, shares, or rents." In the latter case the tax is to be
"computed only on the full amount of the actual sums annually received
in the United Kingdom."
The result of the above may be shortly stated by saying that in the
case of a person residing in the United Kingdom all his property
whatever, situate in the United Kingdom or elsewhere, is charged to
tax, but if he shows that a particular part of his property is within
Case V. (2.) then the tax is computed only upon so much of the income
as is actually received in the United Kingdom.
In this case the taxpayer is a British subject resident in England.
The property from which the income is derived is in America. The
income is not remitted to this country. The case states that the
income has been paid to Lady Archer-Shee's order at Messrs. J. P.
Morgan & Co.'s bank in New York. It stops there, and does not go on to
state that it has not been remitted by New York to this country but it
is admitted at the Bar that this is the case. Under these
circumstances the question is whether the income is such as that in
that state of facts it is taxable to income tax.
The income in question is income of Lady Archer-Shee under a gift in
the will of her father Mr. Arthur Pell of New York in the following
terms: "I direct that all my real and personal estate except what is
herein before disposed of be held in trust by my Executors and
Trustees as follows .... (3.) that" (in an event which happened) "the
whole of the said income and profits shall thereafter be applied to
the use of my said daughter Frances during her life." Lady Archer-Shee
is the said daughter Frances.
The date of Mr. Pell's death does not appear, but it was before 1904.
It is not disputed that the estate has been fully administered. The
Trust Company of New York have been appointed as and now are trustees
of the fund, and it [*865] is not disputed that the funds are now in
their hands as trustees upon the trust above stated.
The securities, stocks and shares are liable to American income tax
and the Trust Company of New York are entitled to commission or other
payment for their services. Subject to these Lady Archer-Shee is
during her life entitled to the income arising from the securities,
stocks and shares and foreign possessions.
In this state of facts Lady Archer-Shee's interest under her father's
will is beyond all question "property." The question for determination
is what is the nature of that property, is it a "possession out of the
United Kingdom other than stocks, shares, or rents" within Case V.
(2.)? To escape taxation the respondent must establish that it is.
What, then, is the property to which Lady Archer-Shee is entitled? The
will is an American will. The law of America is in an English Court
question of fact. In the case stated by the Commissioners there is no
finding as to what is the American law in the light of which the
construction of Mr. Pell's will is to be ascertained. We have not
heard that there has been any agreement between the parties on the
point, and I have not traced that there has been any reference to it
in the course of the proceedings. The members of the Court of Appeal
do not appear to have considered the matter. They, and in particular
Warrington L.J., seem to have treated the question for decision as
purely a question of fact and, without any finding as to the American
law as question of fact, they contented themselevs with referring to
para. 4 of the case and founded themselves upon the statement that
there is paid over to Lady Archer-Shee's account only such part of the
sums which the trustees have received from the funds as they
considered to be income. My Lords, the question is not what the
trustees have thought proper to hand over and have handed over (which
is question of fact) but what under the will Lady Archer-Shee is
entitled to (which is question of law). The trustees, of course, have
a first charge upon the trust funds for their costs, charges and
expenses, and American income tax will be a tax which they would have
to bear and which would fall upon the beneficiary. [*866]
But this does not reduce the right of property of the beneficiary to a
right only to a balance sum after deducting these. If an owner of
shares deposits them with his banker by way of security for a loan he
is not reduced to being the owner of a balance sum being the
difference between the dividends on the shares and the interest on the
loan. He is the owner of the equity of redemption of the whole fund.
If a landowner employs an agent to collect his rents and authorizes
him to deduct a commission he does not cease to be owner of the rents.
Under Mr. Pell's will Lady Archer-Shee (if American law is the same as
English law) is, in my opinion, as matter of construction of the will,
entitled in equity specifically during her life to the dividends upon
the stocks. If, say, in January 100, after deduction of American
income tax, was received for a dividend and there was nothing owing to
the trustees which they were entitled to deduct, Lady Archer-Shee
could, in my opinion, call upon them to pay her that 100 If such a
property is not taxable it results that a person residing here
(whether a British subject or not) can by creating a foreign trust of
stocks and shares and accumulating or spending the income abroad
escape taxation upon that income.
If the estate had not been fully administered I could well understand
a contention that the right to whatever in administration might turn
out to be the fund the subject of this gift was a "foreign
possession," and fell under Case V. (2.). But that is not the case. I
have to read the will and see what is Lady Archer-Shee's right of
property in certain ascertained securities, stocks and shares now held
by the Trust Company "to the use of my said daughter." It is, I think,
if the law of America is the same as our law, an equitable right in
possession to receive during her life the proceeds of the shares and
stocks of which she is tenant for life. Her right is not to a balance
sum, but to the dividends subject to deductions as above mentioned.
Her right under the will is "property" from which income is derived.
The statute itself provides for deduction of income tax (see Sch. D,
Cases IV. and V.); the commission payable to the Trust Company is a
debt due from the beneficiary to [*867] the trustee - neither the one
nor the other is relevant to the title of the beneficiary as
distinguished from the amount which the beneficiary is entitled to
receive by virtue of her title.
The case does not give particulars of the sources of the income beyond
stating that the fund from which it arises consists of "foreign
Government securities, foreign stocks and shares and other foreign
property" (Case, para. 3). "Securities" are the subject of Sch. D.,
Case IV. (1.). "Stocks, shares or rents" are the subject of Case V.
(1.). Foreign possessions, other than stocks, shares and rents, are
the subject of Case V. (2.). The first are taxable on the full amount
arising in the year of assessment, whether the income has been or will
be received in the United Kingdom or not, subject to deduction as
there mentioned, including the deduction of any sum which has been
paid in respect of income tax in the place where the income has arisen
(in the present case American income tax). The second are taxable on
an average of the three preceding years, whether the income has been
or will be received in the United Kingdom or not, subject to
deductions as before. The third are taxable only on the actual sums
annually received in the United Kingdom from remittances payable in
the United Kingdom, etc., on an average of three years.
To succeed on this appeal the respondent must establish that the
securities, stocks, shares and property of which she is tenant for
life are within Case V. (2.). But in the absence of particulars as to
the nature of the "foreign Government securities, foreign stocks and
shares and other foreign property," mentioned in para. 4 of the case,
and of information upon which of them (a) the assessment has been made
under Case IV. (1.) on the amount arising in the year of assessment,
and (b) under Case V. (1.) on an average of the three preceding years,
and (c) under Case V. (2.) no assessment at all because there has not
been receipt in the United Kingdom, it is impossible to say whether
the assessment is right or wrong. Your Lordships are not concerned
with the figures. They are for the Special Commissioners. It is for
them to make the assessment. But you are concerned with the
principles [*868] upon which the Commissioners arrive at the figures,
and without knowledge with respect to these it is not possible either
to confirm or to disallow the assessment. The only information before
the House is that upon an income of 12,000 an assessment has been made
of 2700 This is simply 4 6 in the รบ upon 12,000, and must have been
made upon the assumption that the income arises from securities within
Case IV. (1.). The House has no means of saying whether this has been
arrived at upon a right or a wrong principle.
The Master of the Rolls more than once in the course of his judgment
says that the balance of the income is remitted to this country. That
is not so. If the case were within Case V. (2.) (which he holds it to
be) there would be nothing to assess, because the income is not
remitted to the United Kingdom. And all the members of the Court of
Appeal fell into error, I think, (1.) in failing to treat the
construction of the will as matter of American law, and (2.) in
deciding the case upon the footing that they were bound by a finding
of fact in the case stated by the Commissioners that the income paid
to the lady was not the actual income, but such balance sum as the
trustees considered to be income after retaining such sums as they
thought might be required to pay American income tax.
My Lords, in my judgment the appeal must be allowed and the matter
referred back to the Commissioners to restate the case by stating:-
(a) The particulars of the "foreign Government securities, foreign
stocks and shares, and other foreign property "sufficiently to show
first, which of them are, in their opinion, "securities" within Case
IV. (1.), and, secondly, which of them are, in their opinion, "stocks,
shares or rents" under Case V. (1.), and thirdly, which are, in their
opinion, "possessions out of the United Kingdom other than stocks,
shares or rents" under Case V. (2.), and stating
(b) Which of these they have assessed on the income of the year of
assessment and which on the average of the three preceding years, and
[*869]
(c) Stating (as was admitted at the Bar) that the sums paid as stated
in para. 4 of the case into the New York bank have not been in whole
or in part remitted to the United Kingdom.
The order of Rowlatt J. must also, I think, be discharged and the case
referred back to the Commissioners with a direction as above stated.
Any costs paid under the orders below must be repaid. The appellant to
have his costs here and below.
LORD CARSON (read by LORD BLANESBURGH). My Lords, I do not think it
necessary, having regard to the full discussion which has taken place
in the speeches which have been already made, to discuss the sections
of the Income Tax Act or the Schedules which have been already
referred to. The question which emerges from these is whether the
money paid by the trustees of the will of Alfred Pell to the order of
Lady Archer-Shee at Messrs. J. P. Morgan & Co.'s Bank in New York or
any part of it, though not remitted to this country, was chargeable to
income tax under the rules of Case IV. of Sch. D, in so far as it was
interest arising from securities, and under the first rule of Case V.,
in so far as it arose from stocks or shares: the contention being on
behalf of the respondent that under the circumstances of the case the
sum so transferred constituted in the hands of the respondent's wife a
foreign possession, and did not come within the rules mentioned as
being either interest arising from securities or from stocks and
shares.
It is, I think, essential in the first place to remember that the
property which it is sought to tax in this case was in the hands of
the trustees, to use the words of Sargant L.J., "a definite and
specific trust fund," to the whole of the income and profits of which
the respondent's wife was entitled under the will of her father Alfred
Pell. Had the residue been still undetermined or had the share to
which Lady Archer-Shee was entitled been a proportion only of the
income or profits of the residue other questions would, no doubt,
arise. The Commissioners in the case stated have found that the fund
constituted under section 6 of the will [*870] (being the residue
mentioned before) consisted of foreign Government securities, foreign
stocks and shares and other foreign property, that the respondent's
wife was entitled to have the whole of the income and profits from the
said fund applied to her use, and that the Trust Company of New York
(as trustee) had paid over such parts of the sum which they received
from the said fund as they considered to be income as the same accrued
to her order at a bank in New York whilst retaining in their
possession such sums as they thought might be required to comply with
the income tax or other provisions of American law. The Commissioners
also held that the income receivable by the wife of the respondent
from the Trust Company of New York arose from "the specific
securities, stocks, shares, rents, or other property which constituted
the trust fund." My Lords, under these circumstances I cannot myself
draw any distinction between such a trust fund and one where specific
securities, stocks and shares were vested in trustees to pay the rent
and dividends to a cestui que trust for life. In my opinion upon the
construction of the will of Alfred Pell once the residue had become
specifically ascertained, the respondent's wife was sole beneficial
owner of the interest and dividends of all the securities, stocks and
shares forming part of the trust fund therein settled and was entitled
to receive and did receive such interest and dividends. This, I think,
follows from the decision of this House in Williams v. Singer (1), and
in my opinion the Master of the Rolls correctly stated the law when he
said(2) "that in considering sums which are placed in the hands of
trustees for the purpose of paying income to beneficiaries, for the
purposes of the Income Tax Acts, you may eliminate the trustees. The
income is the income of the beneficiaries; the income does not belong
to the trustees."
The Master of the Rolls, however, yielding to the argument so put
forward by the respondent, held(3) that, having regard to the facts
found, "what they remit is not what
(1) [1921] 1 A. C. 65.
(2) [1927] 1 K. B. 123.
(3) [1927] 1 K. B. 120. [*871]
I will call the dividends in specie in their actual form; what they
remit is the balance in their hands after they have carried out their
trust and defrayed the expenses which fall upon the trust. .... It has
lost the shape of dividends, share warrants, or the like." In aid of
this view he cites certain statements made by noble Lords in this
House in the case of Lord Sudeley v. Attorney-General (1), and amongst
others that of Lord Halsbury. "It is uncertain until the residuary
estate has been ascertained of what it will consist. It may consist of
many things - it may consist of only a sum of money - and until that
has been ascertained the actual right capable of instant assertion
does not exist." My Lords, with great respect to the Master of the
Rolls, I do not think either his own reasoning or the quotations he
relies upon have any application to a case such as the present when,
as I have already pointed out, we are dealing with "a definite and
specific trust fund." My Lords, I am unable to understand why or how
the character of the sum paid to the respondent's wife ever became
changed or, as the Master of the Rolls graphically says, "was no
longer clothed in the form in which it was originally received, having
no trace of its ancestry," simply because the deductions due by law
have been made and because it has been mixed up with other trust
moneys by the trustees. It is, in my view, in the same position as if
the trustees had arranged to have the interest and dividends paid
direct to the respondent's wife and she had discharged the necessary
outgoings in accordance with the law. Whether the necessary outgoings
according to law were discharged by the trustees or by the cestui que
trust cannot, in my opinion, make any difference. I think the appeal
should be allowed, but as it is evident that no distinction was made
at the hearings before the Commissioners or Rowlatt J. between what
amount of the sum in question consisted of securities or stocks and
shares or other foreign property, and as different considerations
apply under the income tax law to these different classes of property,
I agree that the matter must be referred back
(1) [1897] A. C. 11, 15.
[*872] to the Commissioners, and as a consequence that the order of
Rowlatt J. must be modified or discharged.
LORD BLANESBURGH. My Lords, the ultimate question in this appeal turns
upon the description which in income tax phraseology ought properly to
be applied to the moneys paid during the two years in question by the
Trust Company of New York to the order of Lady Archer-Shee, the
respondent's wife, at Messrs. J. P. Morgan & Co.'s bank there. None of
these moneys have been received in the United Kingdom. It is that fact
which, if his contention as to their true description be correct,
enables the respondent to say that he is not liable to pay income tax
in respect of them, either in whole, in part, or at all.
Lady Archer-Shee's interests arise under the will of her father, an
American citizen, domiciled in the State of New York at his death in
or about the year 1904. The Trust Company of New York are the present
trustees of his will. In them the residuary settled estate is vested.
That estate, now ascertained as a corpus, consists, it is found by the
case, of foreign Government securities, foreign stocks and shares, and
other foreign property. The entire interest, dividends and profits of
these are received by the trustees. Upon them the trustees are
chargeable with American income tax, as, if they were English
trustees, they would be chargeable with United Kingdom income tax.
Being, however, resident Americans, they are no more chargeable with
that income tax upon these "foreign" receipts than would any other
resident American citizen receiving them on his own account. But is
any one else so chargeable when these receipts as such have come to no
other hand? That is the serious question involved in this appeal.
In the events which have happened the trustees hold the settled
residue upon trust to apply its income and profits to the use of Lady
Archer-Shee during her life. She has no interest in corpus. In default
of issue surviving her the entire settled residue, subject to a
payment thereout of $50,000 to a niece of the testator, is to be held
on trust for [*873] Columbia College, in the City of New York. It
follows that Lady Archer-Shee is in no sense in control of the fund.
The trustees are as much trustees for those entitled in remainder as
for her.
It was in pursuance of the trust in her favour that the payments
referred to were made. Their nature is stated by the Commissioners in
their case. They were payments over by the trustees of "such part of
the sums which they received from the said fund as they considered to
be income as the same accrued .... while retaining in their own
possession such sums as they thought might be required to comply with
the income tax or other provisions of American law."
There can, I think, be no doubt as to the meaning of the
Commissioners' statement. The payments made to Lady Archer-Shee were
payments of all that remained of a fund of miscellaneous income
receipts after there had been paid or retained thereout sums deemed by
the trustees to be sufficient to discharge the trust and other
outgoings that had first to be provided for. The payments represented,
in other words, the actual net residuary income available for the
tenant for life ascertained and only ascertained after payment or
provision had been made of or for all prior claims against the gross
residuary receipts. The income the lady received was the net income of
a totality, not the income of particular items of property. Such seems
to me to be the meaning of the statement.
Its implications, however, are no less clear. No suggestion of
irregularity on the part of the trustees being made, the statement
implies that Lady Archer-Shee had no right, during these two years
over which the payments extended, to demand more than she received or
to demand any of it at any earlier date than she received it. More
important still, the statement, I think, implies, for the same reason,
that until the moneys paid to her were actually paid over, she had
neither property in them nor right to receive them. The proper result
of any account taken would have shown - so much the statement implies
- that the liability of the trustees to pay, and in the precise
amounts, accrued only at the respective times at which the payments
were actually [*874] made. Accordingly, if the statement in the case
must be accepted by your Lordships, it is with reference and with
reference only to a fund so circumstanced that the question of the
liability of the respondent for income tax in respect of it must be
determined by the House.
And, my Lords, although the statement with its implications appears,
superficially, to be concerned as much with law as with fact, it is,
in truth, a statement of fact only. As such, it is one by which your
Lordships are, I think, indubitably bound. For the law which is
referred to is, or should be, the appropriate American law by which
the rights and duties of the trustees of this American testator's will
are defined and the nature of the interest thereunder of Lady Archer-
Shee determined. The true effect of American, as of any other foreign
law, is in England a question not of law but of fact. As such
therefore this statement must, I think, be regarded, and, if so, it
must be accepted by your Lordships. This was, I conclude, the view of
the Court of Appeal. If it was, I agree with it.
But, my Lords, I have the less hesitation in accepting without further
inquiry the statement with all its implications as a correct finding
of the American law ascertained by the Commissioners like any other
fact, because I am myself satisfied that if this were the will either
of a Scottish or of an English testator, the Commissioners' statement,
in the sense I attribute to it, would be exactly paralleled. In other
words, the case is not one in which the position is at all affected by
any speciality of American law.
I take the case of a Scottish will first, because in relation to such
a will your Lordships have the assistance of a decision of the First
Division of the Court of Session in a case very close to the present.
In Murray v. Commissioners of Inland Revenue, cited in argument and
decided on June 18, 1926 (No. 245 Tax Cases), the facts were that the
appellant's father by his will gave his residuary estate on trust for
the appellant and her sister equally during their respective lives and
directed the trustees to pay the expenses of management of the trust.
The position in other words is indistinguishable [*875] from the
present. There the gross income of the estate after deducting an
annuity of 70 payable to the testator's widow under an ante-nuptial
marriage contract, was 608 0 2, and the whole of it suffered income
tax in the hands of the trustees. The appellant's only other income
was 10 War Loan interest, and for the purposes of a claim for
repayment of income tax in respect of personal allowance, etc., she
contended that her taxed income under her father's will was one half
of the gross income of the estate, i.e., 304 0 1, without any
deduction in respect of the expenses of the management of the trust.
The First Division, at the instance, in that case, of the Crown -
there is a certain piquancy in that fact - repelled the claim: "It is
as plain as day," said Lord Clyde in delivering judgment, "that if a
liferenter returns his or her income what he returns is precisely what
he gets and nothing more nor less. It is as plain as day that the
total revenue which arose from the residuary estate was not the income
of any of the liferent beneficiaries in the residuary estate, but, on
the contrary, was the income of the trustees who were administering
the residuary estate. It was for them to pay the full income tax which
the receipt by them of that income made incident upon them. It was for
them to pay whatever may have been the expenses of administering it,
and after meeting those expenses to divide the income of the residue
among the liferent residuary beneficiaries. But there was no
justification whatever either under the statute or, as far as I can
see, in any view consistent with common sense for the course taken
here."
Lord Sands is equally express, and refers to an aspect of the matter
which is very relevant in the present case. The plaintiff's view, he
says, was that one half of the 608 0 2 belonged to her. And he
continues: "That would be a sound view no doubt if any expenses that
were incurred before any payment was made to her had been expenses
incurred by somebody she had employed to collect the money, because
then these expenses would have been her expenses if they had been
incurred, as I say, by some one whom she was free to employ or not to
employ. But that is not the situation. [*876]
The expenses which were deducted before any payment was made to her
were incurred not by any one she employed but expenses incurred by the
trustees whom the truster had appointed to manage his estate and whom
he had directed to pay all necessary charges of administration before
any division took place." Lord Blackburn gives as an illustration that
which is the present case. "The lady in this case is seeking to
recover income tax upon an income taxed at source. If the position had
been just the other way about, and if she was making a return of her
income for the purpose of having the income tax assessed upon her
income, I entertain no doubt whatever that she would have returned the
sum which she actually received from the trustees as her income under
the trust disposition and settlement of her father." "What the
appellant was entitled to under the bequest," said Lord Ashmore, "was
only one half of the full residue after deduction of the appropriate
proportion of the expenses of the trust management."
I have cited these judgments at length because the report of them may
not be readily accessible. The decision shows, I think, clearly that
the statement made in the case here by the Commissioners would be an
exact representation of Lady Archer-Shee's position if a Scottish
Court were in relation to her father's will the forum of construction
and administration.
And, my Lords, speaking for myself, I cannot doubt that the same would
be true if this were an English will with its residuary funds vested
in English trustees. In that case, Lady Archer-Shee's only specific
interest in the income of the residuary estate would be an interest in
that income cleared of all proper administrative or other payments
thereout ranking in priority to any beneficial interest of her own.
The right of the trustees to retain moneys to answer these payments in
praesenti or even, in a proper case, in futuro, is undoubted: see,
e.g., Stott v. Milne. (1) Their duty, themselves to execute their
trust, is equally undoubted. No receiver of the gross residuary income
could be obtained
(1) (1884) 25 Ch. D. 710, 715. [*877]
against them except on proof of misconduct, actual or contemplated,
and then only in a suit for the execution of the trusts of the will.
In other words, in the eye of a Court of equity the interest of Lady
Archer-Shee in the gross income of the estate is not that of a
mortgagor in the property charged, but is exactly analogous to the
interest of a residuary legatee of corpus before that residue has been
actually ascertained. I agree with Sargant L.J. that to the case with
which we are here concerned the reasoning of this House in Lord
Sudeley v. Attorney-General (1) in relation to an unascertained
capital residue is precisely applicable.
It is, of course, merely an accident that Lady Archer-Shee is sole
lifetenant. During the life of the testator's widow each was entitled
to a moiety of the residuary income. The position was in no way
different then, and it would have been in no way different however
numerous were the persons entitled to share the income between them.
But it would be difficult to suggest, if the body of life
beneficiaries were numerous, that there could be any normal right in
any or all of them together other than a right to require the trustees
to account for their receipts and payments in a due course of
administration. Such, in my judgment, was Lady Archer-Shee's right
and, in the absence of misconduct, no other.
My Lords, her position from an English point of view, could not, I
think, be better put than it is by Rowlatt J. in his judgment.(2)
"What this lady enjoys," he says, "is not the stocks, shares and rents
or other property constituting the trust fund under the will; what she
has is the right to call upon the trustees, and, if necessary, to
compel the trustees, to administer this property during her life so as
to give her the income arising therefrom according to the provisions
of the trust. Her interest is merely an equitable one, and it is not
an interest in the specific stocks and shares constituting the trust
fund at all. There is no doubt about the correctness of that
proposition."
(1) [1897] A. C. 11.
(2) [1927] 1 K. B. 116. [*878]
I agree in that statement, and it is clear that, basing himself upon
it, the learned judge, like the Court of Appeal, would have decided
the case in favour of the present respondent had he not misapprehended
the effect of Williams v. Singer (1), by failing to note, amongst
other things, that the foreign dividends there in question had been in
forma specifica actually received by the foreign beneficiary by the
direction of the trustee - a statement which applies also to the case
of Pool v. Royal Exchange Assurance (1) decided by this House at the
same time.
Be that, however, as it may, it is now, I think, agreed on all hands
that if the view of the will so expressed by the learned judge be
correct, the respondent here must succeed. For, my Lords, what Lady
Archer-Shee actually received at her bank in New York was, on that
view, neither income from securities, stocks, shares or rents in any
place out of the United Kingdom, but was, in the language of the
Income Tax Act, "income arising from possessions out of the United
Kingdom other than stocks, shares, or rents," income which while
chargeable to income tax is only so chargeable to the extent to which
it is received in the United Kingdom.
And such, as I hope I have shown, is also the position if the result
be reached by reference to the statement in the case - the only proper
foundation as I conceive for your Lordships' judgment - or by
reference to the Scots law as expounded in the judgments I have
cited.
My Lords, I confess to a sense of relief in being able to reach this
conclusion. If the alternative view prevails and the respondent is
charged with income tax according as the sums paid to his wife can, on
dissection, be traced in their different parts to income received by
the trustees from "foreign Government securities, foreign stocks and
shares and other foreign property" respectively, a burden is placed
upon him which, as it seems to me, he cannot discharge, and an inquiry
is set on foot which may never be capable of answer. For, having
regard to the statements in the case, it is, to my mind, more than
doubtful whether the
(1) [1921] 1 A. C. 65. [*879]
trustees themselves could trace the payments to their sources. These
American trustees of an American will are, of course, in no way
concerned with any question of United Kingdom income tax not
chargeable against themselves, and for the purposes of their own
administration they have no intelligible object to serve by
appropriating their retentions to any particular receipts, either
rateably or in any other way, and I cannot suppose that they have ever
done so. In any case, the respondent, who is not a beneficiary under
the testator's will, could not require the trustees to do anything so
entirely superfluous, and in the absence of any such declared
appropriation he would himself be quite unable to furnish any of the
statements X. or XI. (1.) of the Fifth Schedule to the Act which on
this footing would be required of him. These practical difficulties
confirm me in the view that this is not the kind of case to which
either of these statements has any reference at all.
It has been suggested that the view which I have taken here may
encourage evasion of a tax which ought to be paid. With reference to
that, I would only observe that before 1914 no foreign income of any
kind was taxed unless it was received in this country. In 1914, with
what almost seems an arbitrary exception, such income arrived at as is
prescribed in the statute of that year is now taxed whether received
in this country or not. All that is involved in the view I have taken
is that this particular interest of Lady Archer-Shee's is at present
within that exception. It will rest with the Legislature to introduce
the necessary amendment to the Act if, in its view, the time has come
for limiting the exception by now excluding such a foreign possession
as this of Lady Archer-Shee from its benefit.
My Lords, I do not doubt that the actual form of Rowlatt J.'s order
was adopted in the circumstances stated by the noble and learned
Viscount on the Woolsack. It was a form which effectively concealed
the difficulties involved in the principle thereby adopted. But, like
my noble and learned friend, I deprecate, in any event, any further
inquiry in this case. [*880]
I would rather than that allow the appeal simpliciter. With him,
however, I am of opinion that it should be dismissed altogether.
Order of the Court of Appeal reversed. Judgment of Rowlatt J.
discharged, and Cause remitted back to the Commissioners for the
Special Purposes of the Income Tax Acts, with a direction to restate
the Case by stating (a) The particulars of the "foreign Government
securities, foreign stocks and shares, and other foreign property"
sufficiently to show, first, which of them are, in their opinion,
"securities" within Case IV. (1.), and, secondly, which of them are,
in their opinion, "stocks, shares or rents "under Case V. (1.), and,
thirdly, which are, in their opinion, "possessions out of the United
Kingdom other than stocks, shares or rents "under Case V. (2.), and
stating (b) Which of these they have assessed on the income of the
year of assessment and which on the average of the three preceding
years, and stating (c) That the sums paid as stated in para. 4 of the
Case into the New York bank have not been in whole or in part remitted
to the United Kingdom. The respondent to repay to the appellant the
costs paid by him in the King's Bench Division under the said order of
Rowlatt J., and to pay the costs in the Court of Appeal, and also the
costs in respect of the appeal to this House.
Lords' Journals, July 26, 1927.
Solicitor for the appellant: Solicitor of Inland Revenue.
Solicitors for respondent: Boulton, Sons & Sandeman.