Drummond v Collins (1915) 6 TC 525

An American testator left funds to US trustees to apply, at their discretion, for the maintenance and education of his grandchildren. The trustees remitted money to their mother and guardian in England. The House of Lords held these remittances were taxable income under Schedule D, Case 5.

Facts

The late Mr Marshall Field of Chicago, an American citizen, by his Will dated 14 June 1904 left a substantial fund (some 5,000,000 dollars) to US trustees on complex trusts for the benefit of the children of his deceased son, Marshall Field Junior. The trustees were directed to hold the trust estate, to accumulate income, and to add accumulations to capital until each grandchild attained 25, at which point half of the net income of their respective shares was payable to them, with the balance payable upon attainment of 35.

Clause 7 of the Will directed the trustees, out of the net income of each child’s proportionate share, to make such provision from time to time as they in their uncontrolled discretion might think necessary or advisable for the suitable maintenance and education of each child, payable either to the child, to the guardian, or applied otherwise for the child’s benefit. Clause 22 purported to prevent any beneficial interest vesting before actual payment.

The Appellant, Mrs Drummond (formerly Mrs Field), was the mother and guardian of the three infant grandchildren and resided with them in England. The US trustees remitted considerable sums to her in England for the children’s maintenance and education. She was assessed to income tax in respect of those remittances as guardian, under Schedule D, Case 5, of the Income Tax Act 1842 and section 2, Schedule D of the Income Tax Act 1853, with section 41 of the 1842 Act applied to charge her as guardian.

Issues

The case raised two principal questions:

• Whether the remittances received from the American trustees were income chargeable to income tax under Schedule D, Case 5, as profits or gains arising from foreign possessions.
• Whether the Appellant, as guardian of the infants, was properly assessable under section 41 of the Income Tax Act 1842 in respect of those remittances.

A subsidiary issue, pressed by the Appellant, was whether Case 5 applied only where the foreign possession belonged to the person sought to be assessed, and whether the payments were merely voluntary allowances falling outside the charge.

Arguments

Appellant

The Appellant contended that on the true construction of the Will and the Income Tax Acts, the trust fund was not a foreign possession of the Appellant or her children. The exercise by the trustees of their discretion in remitting moneys did not transform the fund into a foreign possession of the infants, nor did it constitute the Appellant a guardian of the children’s property within section 41. The remittances were in the nature of voluntary payments, since the trustees were under no enforceable obligation to remit. A letter from the Illinois Trust and Savings Bank emphasised that the advances were not income payable to the Appellant in any legal sense. It was further argued that Case 5 applied only where the foreign possession belonged to the person sought to be assessed.

Crown

The Crown argued that the trustees, although possessed of an uncontrolled discretion, were in substance bound to make provision for the maintenance and education of the grandchildren. The payments were not voluntary but remittances of income to which the grandchildren were legally entitled. The Appellant, as guardian, was correctly assessed under section 41 of the 1842 Act in respect of remittances received for the infants.

Judgment

King’s Bench Division (Horridge J)

Horridge J held that the proportionate shares of the trust estate held for the children were, as to each child, a foreign possession, and that the sums remitted were sums actually received in respect of foreign possessions. He held alternatively that once the trustees had exercised their discretion, the moneys remitted were themselves foreign possessions in respect of which the full amounts were received in Great Britain. The assessment was upheld.

Court of Appeal

The Court of Appeal (Cozens-Hardy MR and the President of the Probate Division; Joyce J dissenting) affirmed. Cozens-Hardy MR held that each grandchild had at least a contingent interest in the trust estate, and that where the trustees in honest exercise of their discretion remitted income for maintenance, the child became entitled to that income. The argument that the payments were voluntary gifts, analogous to a father’s allowance, was rejected, the Master of the Rolls noting that Duncan’s Trustees v Farmer (5 TC 417) was direct authority to the contrary. Money received by a guardian as guardian was the infants’ money for which the guardian must account, and section 41 of the 1842 Act made a guardian chargeable as if the infant were of full age.

Joyce J dissented, holding that the accumulating fund was neither presently nor contingently the property of the infants, that voluntary or discretionary allowances were not annual profits or gains arising from any property of the infants, and that the subject could not be taxed without clear words.

House of Lords

The House of Lords (Earl Loreburn, Lord Atkinson, Lord Parker of Waddington, Lord Sumner and Lord Wrenbury) unanimously dismissed the appeal.

Earl Loreburn held that the case fell within the letter of the Income Tax Acts: the sums were remittances from America received in Great Britain, and arose from property abroad; they also fell within Schedule D as profits or gains accruing from property to a person residing in the United Kingdom. He rejected the contention that the payments were voluntary in any relevant sense, observing that they were made in fulfilment of a testamentary disposition for the benefit of the children in the exercise of a discretion conferred by the Will: they were the children’s income in fact. He further rejected the argument that section 41 required the guardian to have control of the foreign property itself; it was sufficient that the lady had control of the sums sought to be charged.

Lord Parker of Waddington held that it was enough for Case 5 to apply that the person to be assessed had such an interest in the property as to entitle him to the profits or gains in question. Once the trustees had exercised their discretionary trust, the money was held for the infants as beneficiaries. Section 41 was a collecting, not a taxing, section, and should receive a liberal interpretation: it was sufficient that the guardian received and had the direction and application of the profits on behalf of the owner.

Lord Wrenbury construed the Will as containing a direct gift of income to the children, with the trustees’ discretion governing only the timing of payment. Even on the alternative analysis that the infants’ interests were contingent, once the discretion was exercised, the interest of the child vested and the money paid was income of the child. The test under Case 5 was not whether there was an absolute interest in a foreign possession, but whether there was such an interest in a foreign possession that the party assessed derived income from it. The Appellant, as trustee for the child and guardian, had the direction, control or management of the income within section 41.

Implications

The decision establishes that, for the purposes of Schedule D, Case 5 of the Income Tax Act 1842, it is not necessary that the person assessed should own the corpus of the foreign possession; it suffices that the person has such an interest in the foreign possession as entitles them to the profits or gains in question. The interpretation of the term “possession” is wide, in line with Lord Macnaghten’s observation in Colquhoun v Brooks.

Secondly, payments made by foreign trustees in exercise of a discretionary trust for the maintenance and education of infant beneficiaries are not, for that reason, to be treated as voluntary payments outside the charge to income tax. Once the discretion is exercised, the sums constitute the beneficiaries’ income.

Thirdly, section 41 of the 1842 Act is a collecting provision to be given a liberal construction. A guardian or similar person who receives and has the application of profits or gains on behalf of an infant beneficiary is properly chargeable, even where that person does not control the underlying foreign property from which the income is derived.

The decision is significant for practitioners advising on the UK taxation of beneficiaries of foreign settlements: residence in the United Kingdom coupled with the receipt of remittances applied for the benefit of UK-resident infant beneficiaries can give rise to a charge under Case 5, notwithstanding that the trustees enjoy a wide discretion and the beneficiaries’ substantive interests in the corpus may be contingent or deferred. The House of Lords reaffirmed that, while the letter of taxing statutes may sometimes be cut down by reference to scheme and purpose (as in Colquhoun v Brooks), such departures are exceptional and require necessity.

Verdict: Appeal dismissed with costs. The House of Lords affirmed the decisions of Horridge J and the Court of Appeal: the remittances from the American trustees were chargeable to income tax under Schedule D, Case 5, of the Income Tax Act 1842 and section 2, Schedule D of the Income Tax Act 1853, and Mrs Drummond was properly assessable as guardian under section 41 of the 1842 Act.

Source: Drummond v Collins (1915) 6 TC 525