Commonwealth ex rel. Martin v. Sutcliffe

• Decision Date: 22 March 1940
• Parties: COMMONWEALTH ex rel. MARTIN, Commissioner of Revenue, v. SUTCLIFFE.
• Court: Kentucky Court of Appeals

140 S.W.2d 1028

283 Ky. 274

COMMONWEALTH ex rel. MARTIN, Commissioner of Revenue, v. SUTCLIFFE.

Court of Appeals of Kentucky

March 22, 1940

Rehearing Denied June 21, 1940.

Appeal from Circuit Court, Jefferson County, Common Pleas Branch Fourth Division; Eugene Hubbard, Judge.

Proceeding by the Commonwealth of Kentucky, by and on the relation of James W. Martin, Commissioner of Revenue, against Elbert Gary Sutcliffe to assess and recover taxes on respondent's life estate in a trust created by the will of Elbert II. Gary, deceased. From a judgment of dismissal, the Commonwealth appeals.

Reversed.

Clifford E. Smith, of Frankfort, Henry S. Chesnut, of Louisville, and J. J. Leary, of Frankfort, for appellant.

Millard Cox, of Louisville, for appellee.

SIMS Commissioner.

Elbert H. Gary died a resident of New York on Aug. 5, 1927, and shortly thereafter his will was duly probated with the New York Trust Company, a corporation of New York City qualifying as executor and trustee. The will devised the income on $300,000 for life to appellee, a grandson of testator, and upon his death the trustee was directed to divide the principal of the trust among his lawful issue, per stirpes. In the event no issue survived him, this trust fund reverted to testator's estate. The will gave the absolute control and management of the trust fund to the trustee and the beneficiary had no right whatsoever in it, except to receive the income therefrom during his life. There is a spendthrift clause in the will forbidding the beneficiary to assign, mortgage or charge the income payable to him from the trust; should he do so, a forfeiture results and the fund goes to certain residuary legatees.

Elbert Gary Sutcliffe, the beneficiary of this trust, became a resident of Kentucky in 1932, and never listed his life estate therein under the Kentucky statutes levying an ad valorem tax of fifty cents on each $100 of personal property. The Commonwealth acting through its Commissioner of Revenue instituted this proceeding in the Jefferson County Court by filing a statement in which it alleged the appellee was the real and beneficial owner of a life estate in the securities held in trust for him in the State of New York; that on July 1st of each year during appellee's residence in Kentucky his life estate in the trust acquired a taxable situs in Jefferson County, Kentucky; that the securities be valued as of July 1st of each year from 1928 to 1937, and that appellee's life estate therein be valued as of those dates under the Wigglesworth Mortality Table and assessed for taxation as omitted property since appellee had not listed it for taxation; that the Commonwealth recover the taxes interest and penalties due thereon.

Appellee's answer contained a traverse followed by an affirmative plea that he became a resident of Jefferson County in September 1932; that under the terms of his grandfather's will set out in his answer, he has no custody or control over the trust fund and that the management and control of same is in his trustee; that his only interest in the trust fund is to receive the income therefrom during his life in the event he does not convey, assign, incumber or charge same; that he has paid to the Commonwealth each year he has been a resident thereof the income tax due it on the income he has received from this trust fund; that for the Commonwealth to levy an ad valorem tax on his life estate in this fund violates the Fourteenth Amendment to the Federal Constitution.

The Commonwealth's general demurrer to the answer was overruled and it appealed to the Jefferson Circuit Court where its general demurrer to the answer was again overruled whereupon, its statement was dismissed and this appeal followed. The sole question for determination by us is whether appellee's life estate in a trust created in New York, consisting of intangibles there located and held under the complete and absolute control of a trustee domiciled in New York, is subject to an ad valorem tax by the Commonwealth of Kentucky.

Appellant contends appellee's life estate in this trust is taxable under Section 4020, Ky. Stats., Baldwin's 1939 Supplement, which reads in part as follows: "And, provided further, that the situs of intangible personal property for purposes of taxation shall be at the residence of the real or beneficial owner, and not at the residence of the fiduciary or agent having the custody or possession of same."

Section 4023, Ky. Stats., reads in part:

"The holder of the legal title, and the holder of the equitable title, and the claimant or bailee in possession of the property on the first day of July of the year the assessment is made, shall be liable for taxes thereon; but, as between themselves it shall be the duty of the holder of the equitable title to list the property and pay the taxes thereon, whether the property be in possession or not at the time of the payment.

"Provided, however, that an administrator, executor, trustee, committee, curator or agent residing in the state shall not be liable for taxes on intangible personal property, where the real or beneficial owner of such intangible personal property held by them, or any of them, reside outside of the state; ***."

The position of the appellant is that appellee as the beneficiary of this trust has an equitable right and interest therein distinct from its legal ownership, which equitable interest takes the situs of the beneficiary's domicile and is subject to the ad valorem tax which the statutes of Kentucky levy on all personal property. The appellee contends Secs. 4020 and 4023, supra, attempt to subject intangibles whose situs is without the boundary of Kentucky to an ad valorem tax laid by the statutes of Kentucky, therefore, these two sections contravene the Fourteenth Amendment to the Federal Constitution. It is further contended by appellee that should his life estate in the trust be held as having a taxable situs in Kentucky, nevertheless it is not that character of property which may be subjected to an ad valorem tax.

It is argued by appellant that Bingham's Adm'r v. Com., 199 Ky. 402, 251 S.W. 936, is controlling in the case at bar unless we now depart from the principles there enunciated. But we cannot see the applicability of the Bingham case since it holds that a trust fund consisting of intangibles owned by a person domiciled in Kentucky but managed and operated by a trustee domiciled in Florida is taxable in Kentucky. We think the Bingham case is sound. Under the recent decisions of Curry v. McCanless, 307 U.S. 357, 59 S.Ct. 900, 906, 83 L.Ed. 1339, and Graves v. Elliott, 307 U.S. 383, 59 S.Ct. 913, 83 L.Ed. 1356, it was held "there are many circumstances in which more than one state may have jurisdiction to impose a tax and measure it by some or all of the taxpayer's intangibles". The property sought to be taxed there is so different from the property sought to be taxed here that we find the Bingham case of little help to us. We must not lose sight of the fact that the property sought to be taxed here is not the intangibles located in New York comprising the trust created there, nor is it the income, speaking in a limited and narrow sense, but Kentucky is laying an ad valorem tax on appellee's life estate in these intangibles, after evaluating that life estate under the Wigglesworth Mortality Table, which life estate takes the situs of the beneficiary's domicile in Kentucky.

Appellant largely relies upon Maguire v. Trefry, 253 U.S. 12, 40 S.Ct. 417, 419, 64 L.Ed. 739, where a trust was created in Pennsylvania for the benefit of a resident of Massachusetts, and the court upheld a tax laid by Massachusetts upon the beneficial interest in the trust. In the opinion the court wrote: "It is true that the legal title of the property is held by the trustee in Pennsylvania. But it is so held for the benefit of the beneficiary of the trust, and such beneficiary has an equitable right, title and interest distinct from its legal ownership. "The legal owner holds the direct and absolute dominion over the property in the view of the law; but the income, profits, or benefits thereof in his hands, belong wholly, or in part, to others."'

Appellee argues this Maguire case is not controlling, contending the tax there levied was an income tax. But we do not regard it as an income tax, except in the technical and narrow use of the term, because Mr. Justice Day in writing that opinion said that the beneficiary has an equitable right, title, and interest in the trust. Since practically all that the beneficiary of a life estate in intangibles takes is the income therefrom, it is easy to confuse an ad valorem tax on such life estate with an income tax.

Much confidence is placed by appellant in Rowe v. Braden, 126 Ohio St. 533, 186 N.E. 392, 395, where the question was whether or not Ohio had the authority to tax the beneficial interest of a resident beneficiary under a trust, the corpus of which was legally held in Pennsylvania. The court basing its decision on Maguire v. Trefry, supra, upheld the tax. Appellee urges this is another income tax...