Archer-Shee v Garland

Income received through a foreign trust falls under Rule 2 of Case V of Schedule D where foreign law gives the beneficiary no specific proprietary interest in the trust’s stocks, shares or their income. A right to compel proper administration is a foreign possession distinct from the underlying investments.

Rule 1 may apply without absolute ownership, but the beneficiary must have a specific interest in the relevant stocks, shares or income. Consequently, income arising from a mere chose in action against foreign trustees is taxable only to the extent of sums received in the United Kingdom.

The appellant was assessable under the Income Tax Acts in respect of his wife’s profits. She was the life beneficiary of a residuary estate administered by a New York trustee. Some trust income was remitted to the United Kingdom, while the balance remained in New York.

In earlier proceedings concerning assessments up to April 1925, the House of Lords held in Baker v Archer-Shee [1927] AC 844 that Rule 1 applied. That decision assumed that New York law corresponded with English law. The present proceedings concerned three later assessments and included uncontradicted expert evidence about New York law.

The Commissioners and Rowlatt J accepted the appellant’s case. The Court of Appeal, Greer LJ dissenting, decided for the Crown. The central issue was whether the wife had a specific interest in the underlying investments or merely a right against the foreign trustee, determining whether Rule 1 or Rule 2 of Case V applied.

1. Appeal allowed unanimously. The judgment of Rowlatt J was restored. Lord Buckmaster, Viscount Dunedin and Lord Tomlin delivered reasoned speeches. Lord Thankerton concurred, and Lord Warrington of Clyffe agreed with Lord Buckmaster.

2. Per Lord Buckmaster, the majority decision in Baker v Archer-Shee [1927] AC 844 depended upon the assumption that New York law was the same as English law. On that assumption, the beneficiary was specifically entitled in equity to the dividends from the trust’s stocks and shares. The question whether a material difference in New York law would produce another result had been left open.

3. Per Lord Buckmaster, the uncontradicted evidence established such a difference. Under New York law, the whole legal and equitable estate was vested in the trustees. The beneficiary had no right to specific dividends or interest and could only require the trustees, subject to judicial supervision, to perform the trust conscientiously.

4. Viscount Dunedin identified the ratio of the former decision as the beneficiary’s specific equitable interest in every parcel of the trust investments. The New York evidence made that conclusion impossible in the present proceedings. The beneficiary’s interest was instead a right to require payment or proper administration by the trustees.

5. Per Lord Tomlin, the wife therefore held no property interest in income arising from the particular securities, stocks and shares. She possessed only a chose in action against the American trustees. The assessable income consequently arose from a possession outside the United Kingdom other than stocks, shares or rents.

6. Rule 1 did not require absolute ownership of the investments. A limited ownership could suffice, but it had to be specific in relation to the relevant property. Since that requirement was absent, Case IV and Rule 1 of Case V did not apply. Rule 2 of Case V governed, limiting the assessment to sums actually received in the United Kingdom.

1. House of Lords: Allowed the appeal unanimously and restored the judgment of Rowlatt J.

2. Court of Appeal: Decided for the Crown by a majority, Greer LJ dissenting, reversing the result before Rowlatt J.

3. High Court: Rowlatt J upheld the Commissioners’ acceptance of the appellant’s contention.

4. Commissioners: Accepted the appellant’s case based on the evidence of New York law.

5. Earlier House of Lords proceedings: In Baker v Archer-Shee [1927] AC 844, concerning assessments up to April 1925, the House held that Rule 1 applied on the assumption that New York law corresponded with English law. It left open the consequence of a material difference between the two systems.