The Appellant is, by General Rule 16 of the Income Tax Acts, assessable to income tax in respect of the profits of his wife. Her father was a citizen of the United States of America, and under his will, made in NewYork, she is entitled to receive during her life the income of his residuary estate which is held at present by the Trust Company of New York as Executor and Trustee of the will. Art of such monies are remitted to this country by the Trustee and about these no question is raised, but part remain in New York and the liability of the Appellant to have these retained monies assessed for income tax is the sole question on this appeal.
The early history of the case and all material facts are to be found in 1927 A.C., p. 844, which contains the report of the decision when the same dispute as the present was considered by this House under different circumstances. The explanation of why, notwithstanding that decision, this case is again presented to your Lordships lies in the fact that the will of the Appellant's father in law under which the property passed was then construed according to English law, and, so regarded, it was held that the interest of the Appellant's wife was derived from stocks, shares or funds outside the United Kingdom and therefore by Rule 1 of Case 5 was assessable to Income Tax whether received here or not. The question as to what might happen if the American law differed from the English was left open. Such decision covered the claims up to April 1925, but since then three assessments have been made in accordance with the law then laid down, and these are the assessments now in dispute. It is obvious, therefore, for the Appellant to succeed he must show that the American law differs in a crucial respect from the law of England, and that the former judgment has accordingly lost its force, and this he now claims to have done.
His contention was accepted by the Commissioners and Rowlatt J., but not by the Court of Appeal who, with the dissent of Greer L.J., once more found against the Appellant.
To make the point now in issue quite plain it is necessary again to refer to the Statute and the Rules.
Under Schedule D. 1, a tax is 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.
This general provision is then separated into six different cases under which the tax is to be charged, the fourth and fifth of which are the ones relevant to this appeal. They are as follows
Case IV. Tax in respect of income arising from securities out of the United Kingdom except such income as is charged under Schedule C.
Case V. Tax in respect of income arising from possessions out of the United Kingdom.
Except that these two cases appear to overlap, the matter seems so far clear, but the mists begin to fall when the rules are examined, subject to and in accordance with which the tax is to be charged, for it is then found that two distinct methods of computation and two distinct liabilities apply to different classes of property under these two rules.
It will be noticed that Case IV applies only to what are called securities and Rule 1 under it provides that the tax is in that case to be computed on the full amount thereof arising in the year of assessment whether the income has even or will, be received in the United Kingdom or not, and this differs from the rules under Case V, which create the present difficulties. The rules in question are 1 and 2, and their material portions are as follows
1. The tax in respect of income arising from stocks, shares or rents in any place out of the United Kingdom shall be computed on the full amount thereof on an average of the three preceding years, as directed in Case I, whether the income has been or will be received in the United Kingdom or not. . . .
2. The tax in respect of income arising from possessions out of the United Kingdom, other than stocks, shares or rents, shall be computed on the full amount of the actual sums annually received in the United Kingdom from remittances payable in the United Kingdom on an average of the three preceding years as directed in Case I, without any deduction or abatement other than is therein allowed.
If, therefore, the income in this case is income arising from stocks, shares or rents, it must be computed on a three years' average, and is liable to be taxed whether received in the United Kingdom or no, but if it is not it is still computed on a three years' average but only on the full amount of the actual sums annually received in the United Kingdom.
It is not for us to enquire into the reason for this change; we assume a reason to exist, and that it is wise and just. We are concerned only with whether Rule 1 or Rule 2 applies. That when this matter was formerly raised Rule 1 applied was determined by this House by Wrenbury, Carson and Atkinson LL., Sumner and Blanesburgh LL. dissenting. Lord Wrenbury's judgment was expressly concurred in by Lord Atkinson, who added no further reasons of his own.
It is, therefore, extremely important to see why Lord Wrenbury and Carson L. formed this opinion, and the report enables this to be accurately determined. Wrenbury L. at page 866 says:—
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 uring her life to the dividends upon the stocks, and on the same page he repeats this conclusion again made de pendent upon the hypothesis of the identity of the law in the two countries. He there says:—
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."
Lord Carson, at p. 870, supports the same opinion in these words:
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 stocks and shares forming part of the trust fund of the construction of the will was there the construction according to English law, the principles and effect of which badbeen enunciated by Wrenbury L. This opinion was not in accordance with that of Sumner L. who supported the judgment of Sargant L. J. in the Court of Appeal where he said 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 there from 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.
This was the opposite view to that held in this House, and it was as because it was decided that it did not define accurately Lady Archer-Shee's position under the will according to English law that the decision was given in favour of the Crown.
The evidence of two American lawyers has now been given in the
matter on behalf of the Appellant and no one has been called to contradict their statements.
Mr. Richard Powell, a Professor of Law at ColumbiaUniversity
Law School in the City of New York, stated that the provision of the law which directs who shall hold and own the property of a trust was as follows:—
Every express trust valid as such in its creation, except as herein otherwise provided, shall vest the whole estate in the trustees in law, and in equity, subject only to the execution of the trust period. The persons for whose benefit the trust is created shall take no estate or interest in the lands, but may enforce the performance of the trust in equity.This provision, although it relates in terms only to lands, had been held to be equally applicable to personal property, and again he said that Lady Archer- Shee had no right to any specific dividends or interest at all," and he explained her rights in these words: —
While it was true that under the trust in question (there being no provision for accumulation) the whole of the net income (including in the event of death any income accrued but not paid over) must ultimately be either paid over to or applied for the benefit of Lady Archer-Shee, the manner and times of doing so were within the discretion of the trustees subject to judicial supervision; that if the Trustees exercised their discretion unconscientiously. Lady Archer-Shee had the right to ask the Court to supervise their behaviour in the matter both of the management of the income and of the capital of the Trust.
This opinion was confirmed by a member of a legal firm of old standing in New York, and is uncontradicted.
The M.R. thinks that the latter part of the statement I have quoted in essentials appears to accord with the statements of Wrenbury L. The same question often presents itself to different minds under different aspects; to my mind the statement which must be taken with the other words I have quoted differs in every essential from Wrenbury L.'s views. At its highest it does no more than express what Sargant L.J. thought, but erroneously, was the English law, and it was this that Wrenbury L. rejected. I cannot reconcile the statement of the American lawyer that Lady Archer-Shee had no right to any specific dividends or interest at all with the statement of Lord Wrenbury that she was entitled in equity specifically during her life to the dividends upon the stocks. Nor, again, can I reconcile the statement that she took " no estate or interest ' in the funds, though she might enforce the performance of the trust in equity with the statement of Lord Carson that underEnglish law she was sole beneficial owner of the interest and dividends of all the stocks and shares.
In my opinion the difference between the two systems of law cannot be better explained than by contrasting the Judgments of Sumner and Blanesburgh LL. in the House of Lords, and that of Sargant L. J. in the Court of Appeal with that of Lords Wrenbury, Carson, and Atkinson which there prevailed. These former earned Judges were held to have imperfectly enunciated the English Law but they have expressed with perfect clearness what we now know is the American Law which is the law we are bound to apply.
This to my mind ends the case but the Attorney-General pressed on us with such insistence the case of Williams c. Singer, 1919 2. K.B. 108 1921 A.C. that I feel some comment is necessary.
In that case the trustees of an English settlement were domiciled in this country but the tenant for life was a French subject by marriage and domiciled abroad.
The income of the settled fund was paid under orders of the trustees direct to the tenant for life at a Bank in New York.
In those circumstances assessments were made on the trustees and these assessments were set aside by this House. One sentence from the judgment of Cave L.C. will serve to show how little to the present purpose is the consideration of that authority. He says, p. 72: The object of the acts is to secure for the State a proportion of the profits chargeable, and this end is attained, speaking generally, by the simple and effective process of taxing the profits where they are found. If the beneficiary received them he is liable to be assessed upon them. If the trustee receives and controls them he is primarily so liable. The case of Syme v. Commissioners of Inland Revenue 1914 A.C. 1013 again, is no assistance. The tax was there assessed upon income derived by any person from personal exertion 'and this was by the statute declared to include income arising or accruing from any trade although not arisen from the taxpayer's own personal exertion or trade. Under the provisions of a will trustees carried on a business and paid the Appellant one fifth of the profits and on these the tax was held duly assessed under the provisions already quoted. It is rarely profitable to attempt the interpretation of one statute by another and in this case the mere comparison of the language shows it to be useless. The former decision in the case shows that an absolute ownership of the stocks, shares and dividends is not necessary; a limited ownership is sufficient to satisfy the rule, but it shows also that such ownership must be specific in relation to the subject, and the opinion on which we are bound to act shows that is not the true position of Lady Archer-Shee. For these reasons I think this appeal should be allowed.
The first and indeed crucial point of this case is to make up one's mind as to what was the true ratio decidendi in the former case as to the same source of income in this House, for by that decision we are bound. I think the ratio decidendi very clearly appears by comparing the judgment of Viscount Sumner, who was in the minority, with the majority judgment which prevailed. Viscount Sumner thought that the specific property in the stocks, shares, securities, and other investments which formed the Trust Fund, was in the hands of the Trustees, and that accordingly what the beneficiary in this country got was what came to her from a foreign possession, namely, her right to get the Trustees to make payment to her of the balance of the income. That view was rejected by the majority on the view that there was in the beneficiary a specific and equitable interest in each and every one of the stocks, shares, etc. which formed the Trust Fund, and that the case fell either under Case IV, or, in so far as the funds consisted of stocks and shares, under Rule I of Case V, and they remitted the case to find out the exact constituents of the Fund. That case was decided without enquiry as to the law of New York. It is obvious that the judgment of the majority turns upon an assumption that the law of New York is what they declared the English law to be.
Now, in the present case, the law of New Yorkhas been enquired into, and we have heard the testimony of the lawyers examined. In face of that testimony it seems to me quite an impossibility to hold that, according to that law, there is a specific equitable interest in the beneficiary in each parcel of securities, stocks, etc. The interest of the beneficiary is just what Viscount Sumner thought it was in the former case. Accordingly I think the appeal must be allowed and the judgment of Rowlatt J. restored, for the income of Lady Archer-Shee is drawn from a foreign possession and falls under Rule 2 of Case V.
The answer to the question which falls to be determined on this appeal depends in my opinion first upon the effect of the decision in your Lordships' House in Baker v. Archer Shee 1927 A.C. 844 and secondly upon the conclusion as to American Law to be drawn from the evidence of the American lawyers.
I do not think it can be doubted that the majority of your Lordships' House in the former case, founded themselves upon the view that according to English law (with which, in that case, American law was assumed to be identical) the Appellant's wife had a property interest in the income arising from the securities stocks and shares constituting the American trust and that but for the existence of that supposed property interest the decision would have been different.
The evidence upon American Law adduced beforethe Commissioners in the present case contains statements to the effect that the whole estate in law and in equity in the trust funds is vested in the trustees and that the words of the Trust give to the Appellant's wife merely the right to resort to a Court of equity to compel the trustees to discharge the task imposed upon them which was to apply the money which they receive as a net income from the trust to her use that they have within the limits of reasonable and conscientious behaviour an absolute discretion as to the application of the income for her benefit, that if they decided to apply the money for her benefit instead of paying it over they must exercise the power to do so reasonably, and that she had no right to any specific dividends or interest at all.
In the face of these statements I think the finding of fact must necessarily be that according to American law the Appellant's wife has no property interest in the income arising from the securities stocks and shares constituting the trust fund but has only a chose in action available against the trustees.
Applying the principle of the previous decision of your Lordships' House to the case with the fact as to American law found as I have indicated it should in my opinion be found, I reach the conclusion that the assessable income, the subject of the appeal, is income arising from a possession out of the United Kingdom other than stocks shares or rents, viz. a chose in action available against the American trustees and that the assessment should be made not under Case IV and Case V rule 1 of Schedule D but under Case V rule 2 of that Schedule.
The appeal therefore in my opinion succeeds.
I concur in your Lordships' opinion.
My noble and learned friend Lord Warrington of Clyffe has asked me to say that he agrees with the judgment which I have read.