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 Yorkto the order of Lady Archer-Shee, the respondent's wife, at Messrs. J. P. Morgan and Company'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 at his death in or about the year 1904 in the State of New York. 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. It is convenient to note at once the reason, and the only reason, why in this case the trustees are not alone liable for this income tax upon these receipts as such. The point is not without significance, because Lady Archer-Shee's position in relation to these receipts is, of course, in no way affected, so far as her rights under the will are concerned, by the accidental nationality of the trustees for the time being.
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 there out of $50,000 to a niece of the testator, is to be held on trust for ColumbiaCollege, 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 herself.
It was in pursuance of the trust in her favour that the payments referred to were made. Their nature is stated in the 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 that statement. It means that 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 there out 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 income of a totality, not 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 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.
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, 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 Englanda 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 am the more ready without further inquiry to accept 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 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 theFirst Division of the Court of Session in a case very close to the present. In Murrayv. Commissioners of Inland Revenue, cited in argument anddecided on the 18th June 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 from the present. There the gross income of the estate, after deducting an annuity of Â£70 payable to the testator's widow under an ante-nuptial marriage contract, was Â£608 Os. 2d., and the whole of it suffered income tax in the hands of the trustees. The appellant's only other income was Â£10 War Loan interest, and for the purposes of a claim for repayment of income tax in respect of personal allowance, andc. she contended that her taxed income under her father's will was one half of the gross income of the estate, i.e., Â£304 Os. Id., without any deduction hi 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 hah of the Â£608 Os. 2d. 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 someone whom she was free to employ or not to employ. But that is not the situation. The expenses which were deducted before any payment was made to her were incurred not by anyone 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 those payments in praesenti or even, in a proper case, in futuro, is undoubted (see, e.g., Stott v. Milne, 25 Ch.Div. 710, 715). Their duty, themselves to execute their trust, is equally undoubted. No receiver of the gross residuary income could be obtained 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, the interest in the eye of a Court of Equity 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. The Attorney-General in relation to an unascertained capital residue is precisely applicable.
It is, of course, merely an accident that Lady Archer-Shee is sole life tenant. 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. It would, however, 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. What this lady enjoys," he says, " is not stocks, shares, .and rents or other property subject to the will, but what she docs enjoy and has got the right is to call upon the trustees and to force the trustees, if necessary, to administer this properly during her life so as to give her the interest of it, and so on, according to the trust. Her interest is that of equity and it is not an interest in the specific things at all. There is no doubt about the correctness of that.
I agree in that statement, arid it is clear that, basing himself upon it, the learned Judge would have decided the case in favour of the present respondent had he not misapprehended the effect of Williams v. Singer, No. 2, 1921, A.C. 65, by failing to note, amongst other things, that the foreign dividends there in question had been in forma specified actually received by the foreign beneficiary by the direction of the trustee.
Be that, however, as it may, it is now, I think, agreed on all hands that if the view of the will so expressed bythe learned Judge be correct, the respondent here must succeed. For, inv Lords, what Lady Archer-Shoe 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.
Such equally is the position if the result be reached by reference to the statement in the case—the 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 Bet 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 trustees themselves could trace the payments to their sources. They are, of course, hi no way concerned with any question of United Kingdom income tax, and for the purposes of their own administration they have no intelligible purpose 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 of this case which I have taken 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 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's from its benefit.
My Lords, I do not doubt that the actual form of Mr. Justice Rowlatt'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. With him, however, 1 am of opinion that this Appeal should be dismissed altogether.
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 moneys paid by the trustees of the will of Alfred Pell to the order of Lady Archer Shee at Messrs. J. P. Morgan and 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 4 of Schedule D, in so far as it was interest arising from securities, and under the first rule of Case 5, 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 cage stated have found that the fund constituted under s. 6 of the will (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 Court 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, 1921, AC. 65, and in my opinion the Master of the Rolls correctly stated the law when he said that when you are 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 that, having regard to the facts found, 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 .... 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 The Attorney General v. Lord Sudeley (1897, App. Cases, p. 11), and amongst others that of Lord Halsbury at p. 15 : 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 1 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 Mr. Justice Rowlatt 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, 1 agree that the matter must be referred back to the Commissioners, and as a consequence that the order of Mr. Justice Rowlatt must be modified or discharged.
The testator in this case, Alfred Pell, the father of Lady Archer- Shee, in the sixth paragraph of his will, dated the 4th May 1899, directed that ah his real and personal estate, except what was therein before 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 the ninth paragraph 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 authorised his wife, or in ease of her death or incapacity his daughter Frances, to nominate and appoint some trust company organised 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 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 seized or possessed, and also the power to invest and re-invest 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 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., at page 28of the appendix, in giving judgment said, "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 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 re- investment of her father's estate in any securities, in that her consent is necessary for any such operation. 1 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.
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 printed at pages 22 and 24 of the Appendix. They run thus, page 22 :—
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 thewhole 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; it is merely a sum of money which represents the balance after payment of the sums which would properly fall upon the trust; at page 24 But is this sum income arising from securities? In Singer and Williams, reported in 1891, Appeal Cases, page 41, shares in a foreign trading company are foreign possessions and are not foreign securities within Case IV of that schedule. In that case the present Lord Chancellor gave an indication or definition of what is the meaning of the word ' Securities ' and this lump sum of money, this balance, does not appear, though it may, rightly to fall within the words of Case IV, Rule I, as securities. It appears to me therefore that it is not income arising from securities. Exactly what those securities are it is unnecessary at present to define, or to determine. But, from what 1 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, Rule 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 unbusinesslike and ridiculous to do so. What the trustees properly and rightly do is to cash those dividend warrants and cheques, and c., 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, 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 (page 27) :—
They therefore found that the income arising or accruing to this lady hi 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 hi 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 the entire income with her bankers would not apparently satisfy these words, or if it would, low 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 (page 28) :
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 stocks, shares and rents or other property subject to the will, bat what she does enjoy and has got is the right to call upon the trustees and to force the trustees if necessary to administer this property during her life so as to give her the interest of it, and so on, according to the trust. Her interest is that of equity and it is not an interest in the specific things 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 and the Attorney General 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 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 tintestator'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 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 cast-, 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.
In this case the respondent was assessed by Additional Commissioners in respect of the income tax years 1923^ 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.
Paragraph 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, 1018, whether such income was remitted 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 5 April 1925, the appellant was married " to the said daughter 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 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.
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 and 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.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 lift- in equity. This broad contention is variously expressed, viz :— (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 ?
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 respondent 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 supertax 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 can be set aside for the convenience of the Revenue. Supertax 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. Supertax 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 on 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 persons are assessed to tin- 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 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 Rule 1 of those applicable to Case Versus of Schedule 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 In- 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 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, (hiring 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 eases. 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 Ms 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 cither 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 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 authorise 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 (1921, 2 A.C., 171), 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., section 37 (i) (a) "hereditaments " belonging to any hospital ... or vested in trustees for "charitable purposes "; section 103 (1) and (3), in which the case of a trustee who has authorised the receipt of trust property by the person entitled thereto, is 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." Section 54 (4), and Schedule 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 u beneficiary, who, in that single case, is to be deemedto 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 (1921, A.C. i. 65), turned on the question, whether or not the trustee, resident here, was chargeable. The fund was abroad and he had authorised 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. 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. A.G. (1897, A.C. 11) is said by Sargant, L.J. to be in its general reasoning precisely applicable. The points referred to there 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 hi 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 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 4 of Schedule 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 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.