12 A.2d 444 | Pa. | 1940
Lead Opinion
The question is whether the equitable life interest of a resident of Pennsylvania in a trust fund created by a resident of New York, the trustees also being residents of that state and the trust res consisting of stocks and bonds registered in the names of the trustees and kept in New York, is taxable in Pennsylvania under the Act of June 22, 1935, P. L. 414, as amended by the Act of July 17, 1936, P. L. 51; and, if so, whether the statute, as thus applied, is unconstitutional as violating the provisions of the Federal and State Constitutions which forbid the deprivation of property without due process *12 of law or the provision of the State Constitution which requires uniformity of taxation.
The State Personal Property Tax Act of June 22, 1935, P. L. 414, section 3, as amended by the Act of July 17, 1936, P. L. 51, provides: "All personal property of the classes hereinafter enumerated, owned, held or possessed by any resident, whether such personal property be owned, held or possessed by such resident in his own right, or as active trustee, agent, attorney-in-fact, or in any other capacity for the use, benefit or advantage of any other person, . . . and the equitable interest in any such personal property of the classes hereinafter enumerated [these classes including the securities here involved], owned, held or possessed by any resident, where the legal title to such personal property is vested in a trustee, agent, or attorney-in-fact domiciled in another state, and where such resident is entitled to receive all or any part of the income therefrom, is hereby made taxable, annually, for State purposes, at the rate of four mills on each dollar of the value thereof. . . . The value of the equitable interest in any personal property, made subject to tax by this section, shall be measured by ascertaining the value of the personal property in which such resident has the sole equitable interest, or in case of divided equitable interests in the same personal property, then by ascertaining such part of the value of the whole of such personal property as represents the equitable interest of such resident therein."1
In 1917 and 1926 Mary W. Harriman, a resident of the State of New York, executed deeds of trust assigning and transferring to a trust company in New York and two individual residents of New York certain bonds and stocks in trust "for the sole and exclusive use and benefit of Carol A. Harriman [who was the daughter of *13 the grantor and is referred to in the second deed as Carol Harriman Smith] during her natural life." The trustees were to invest and reinvest the securities in their discretion and to pay the net income to Carol A. Harriman (Carol Harriman Smith) during her life, the property at her death to be transferred and delivered to her surviving children and the issue of deceased children, or, if there were no such children or issue, to the other children of the grantor and their issue. The securities at all times have been kept in a safe deposit box in the vaults of the trust company in New York. The life beneficiary (by re-marriage Carol Harriman Stewart) is now a resident of the State of Pennsylvania. In a rider to her State personal property tax return for the year 1937 she stated: "The taxpayer's valuation of the securities held in said trust, based upon her present age of 47 years, is $1,899,506. The taxpayer received an income from said securities in the year 1936 of $140,088.29." In the same rider, however, she claimed that her equitable interest was not taxable. The valuation thus fixed by her was 53.9% of the market value of the securities on January 1, 1937. After some intermediate proceedings of no present significance, the Department of Revenue accepted the taxpayer's valuation and assessed the tax thereon, including interest, at $8,148.88. An appeal by the taxpayer to the Court of Common Pleas of Chester County was sustained, from which judgment the Commonwealth now appeals to this court.
The tax levied by the Act of 1935 as amended is on personal property and on equitable interests therein. It must first be determined, therefore, whether appellee's right to the income of the trust for life constitutes an equitable interest in personal property. For many years academic authorities, in learned articles, have argued the question of the real nature of a beneficiary's interest in a trust, — among them Maitland, Holdsworth, Ames, Langdell, Pound, Scott, and Stone (now Mr. Justice *14 STONE of the Supreme Court of the United States). According to the one school, the rights of the beneficiary are merely in personam, that is, only against the trustee and without any property right in the trust res itself, a mere chose in action. This view undoubtedly represents the early juridical conception of the status of a cestui que trust. But the modern trend of equity jurisprudence has inclined toward the doctrine that, in addition to rights against the trustee, the beneficiary also has rights in rem, an actual property interest in the subject-matter of the trust, an equitable ownership of the trust res.2
Whatever may be the consensus of opinion of writers on this branch of the law, in the actual decisional field the prevailing, if not unanimous ruling, both in England and in this country, adheres to the theory that the equitable beneficiary has an interest or estate in the property constituting the trust fund. "Whatever may have been the earlier view of the subject . . . the modern cases do not treat the relation between trustee and cestui que trust as contractual. . . . A proceeding by the beneficiary or his assignee for the enforcement of rights in and to the property . . . could not be treated as a suit on a contract, or as a suit for the recovery of the contents of a chose in action, or as a suit on a chose in action": Brown v. Fletcher,
Without undertaking to collate authorities from state jurisdictions, we have in our own state some indication that Pennsylvania is in accord with these views. In Commonwealth v.Lehigh Valley Railroad Co.,
The fact that appellee has only a right to the income from the trust for life, and not a greater interest, as, for example, an estate in remainder or a power of appointment of the corpus, obviously goes merely to the quantum of her equitable estate in the trust res and not to the existence of such an estate.
We find no difficulty in arriving at the conclusion that the Act of 1935 as amended by the Act of 1936 was intended to include and does include, by the phrase "the equitable interest in any such personal property," such *17 an estate as that enjoyed by appellee in the fund created by her mother, and that that estate is taxable under these statutes. It may be added that the law of the State of New York in this regard is immaterial, because the question is not what that state may consider to be an "equitable interest in personal property" but what, by the use of that phrase in our statutes, was intended to be taxed: Morgan, Executor, v.Commissioner of Internal Revenue, Supreme Court of the United States, opinion handed down January 29, 1940.
Are the Acts of 1935 and 1936, as thus construed, unconstitutional in their application to the present case?
It is urged by appellee that the trust funds have their situs in New York, are taxable3 there in the possession of the trustee, and are beyond the jurisdictional taxing power of the State of Pennsylvania. This argument loses sight of principles of constitutional law which in our opinion are firmly established, namely, that the existence of different forms of ownership interests in intangible personal property may make such intangibles amenable to taxation by more than one sovereignty, and that "double taxation," that is, taxation of such different ownerships in the same property, even though in part overlapping, is not in itself a violation of the due process clause of the Fourteenth Amendment.4 In the present instance the State of Pennsylvania is not levying a tax upon the same subject of taxation as the State of New York might do, but only upon the equitable interest of appellee in the intangibles of which the legal ownership is in the trustees. While the doctrine of mobilia sequuntur personam no longer applies to tangibles, *18
these, like land, having their tax situs in the jurisdiction in which they are physically located, (Union Refrigerator TransitCo. v. Kentucky,
It may not be amiss to repeat, because of its importance in the determination of the issue here involved, that Pennsylvania is not seeking to impose a tax upon the entire corpus of the trust fund, that is, upon the value of the securities which constitute it, but only upon the value of such interest in the property as is subject to its taxing jurisdiction, namely, the equitable interest of appellee in the fund. This clearly appears from the fact that the market value of the res is almost twice that of the assessed value of appellee's interest therein *19
as determined by herself on the basis of her age and consequent life expectancy. The Act of 1936 expressly provides that the value of the equitable interest in any personal property is to be measured by ascertaining such part of the value of the whole of the property as represents the equitable interest of the Pennsylvania resident therein, showing that the legislature had in mind that its right to tax trust funds was limited to the property right enjoyed by the Pennsylvania taxpayer in those funds. That it may be difficult to make such valuation under some hypothetical circumstances does not affect the validity of the tax. A similar difficulty arising under section 3 of the Act of June 20, 1919, P. L. 521, imposing inheritance taxes, was met by an administrative solution approved by this court: See Rowell's Estate,
According to our interpretation of the opinions of the Supreme Court of the United States, the State of Pennsylvania has jurisdiction to impose the tax here in question, and appellee is not being deprived of property without due process of law within the intendment of either the State or the Federal Constitution.
In Bullen v. Wisconsin,
In Fidelity Columbia Trust Co. v. Louisville,
In Cream of Wheat Co. v. County of Grand Forks,
In Brooke v. City of Norfolk,
In Safe Deposit Trust Co. of Baltimore v. Virginia,
In Senior v. Braden,
Any remaining doubt as to whether the Fourteenth Amendment prohibits two states from both taxing ownership interests of their respective residents in the same intangibles has been dispelled by the recent cases of Curry v. McCanless,
Appellee lays stress upon the case of Mayor and City Councilof Baltimore v. Gibbs,
We find no substantial merit in the contention that the tax imposed by the Acts of 1935 and 1936 lacks the uniformity demanded by Article IX, section 1, of the Constitution. All that the Constitution requires is, not that there be no classification of the subjects of taxation, but that it be based upon some valid reason: Commonwealth v. Alden Coal Co.,
It is further argued that the tax lacks uniformity because it applies only to such equitable beneficiaries as are entitled to receive all or any part of the income from the trust. The right to receive income, however, is the most valuable and distinctive attribute of ownership, and there is no reason why the state, in imposing a tax, may not segregate those having a right to income from the property and those not having such a right. While the State Personal Property Tax Actexpressly limits the taxation of an equitable interest to cases where the owner thereof is entitled to receive income from the trust, the same limitation would seem to be implicit in the ordinary case of legal ownership of personal property, although, of course, if the right to receive income exists, the property is taxable whether income is actually received or not.
In conclusion it may be said that appellee, as a resident of Pennsylvania, is afforded protection by our state in common with all its other citizens, and her property resources (excepting, because of constitutional requirements, land and tangibles beyond its borders) should be subject to the taxing power of the state which affords her the personal security that enables her to enjoy those resources.
Judgment reversed and the record remitted to the court below with instructions to enter judgment in favor of the Commonwealth and against appellee in the amount of the additional assessment of $8,148.88, with interest thereon at the rate of six per cent per annum from the date when such assessment was payable according to law.
Dissenting Opinion
The application of the tax to appellee is unconstitutional as an attempt to reach property not within the territorial jurisdiction of this state. The trust property is effectively localized in New York. Unlike the beneficiaries involved in the inheritance tax cases of Curry v. McCanless,
Moreover, the tax is only nominally limited to the actual worth of appellee's equitable interest. In practical effect, it is a tax on the value of the corpus. By its very terms the value of the equitable interest is "measured by ascertaining the value of the personal property in which such resident has the sole equitable interest, or in case of divided equitable interests in the same personal property, then by ascertaining such part of the value of the whole of such personal property as represents the equitable interest of such resident therein." (Italics ours). Without further legislative authority, the Department of Revenue assessed appellee by capitalizing the income which she received from the trust during the year 1936 according to her life expectancy. *26
The resulting figure represented 53.9% of the market value of the securities constituting the corpus. Either income or principal must be the subject of the tax. There is no third or middle ground for taxation between the two. While it is true, as stated in the majority opinion, some doubt may have been cast upon the soundness of Mayor and City Council of Baltimorev. Gibbs,
For the foregoing reasons, I believe the application of the tax to appellee is at war with the clear mandate of the Fourteenth Amendment, as well as the guaranty of due process which is embedded in our own State Constitution: Brooke v. Cityof Norfolk,
Mr. Chief Justice SCHAFFER joins in this dissent.