Commonwealth v. Stewart

• Citation: 12 A.2d 444,338 Pa. 9
• Parties: COMMONWEALTH v. STEWART.
• Decision Date: 25 March 1940
• Court: United States State Supreme Court of Pennsylvania

12 A.2d 444
338 Pa. 9

COMMONWEALTH
v.
STEWART.

Supreme Court of Pennsylvania.

March 25, 1940.

12 A.2d 444

Rehearing Denied April 9, 1940.

12 A.2d 445

Appeal No. 70, January term, 1940, from judgment of Court of Common Pleas, Chester County, Miscellaneous Docket 18, page 441, No. 8979; Windle, President Judge.

Carol Harriman Stewart appealed to the Court of Common Pleas from an additional tax assessment for the year 1937 made by the Department of Revenue of the Commonwealth of Pennsylvania. From a judgment sustaining the appeal, the Commonwealth of. Pennsylvania appeals.

Reversed and record remitted with instructions to enter judgment for the Commonwealth for $8,148.88, with interest.

Argued before SCHAFFER, C. J., and MAXEY, DREW, LINN, STERN, BARNES, and PATTERSON, JJ.

Claude T. Reno, Atty. Gen., K Russell Shockley, Deputy Atty. Gen., and W. Edward Greenwood, Sp. Counsel, of Coatesville, for appellant.

Howard F. Troutman, of West Chester, Charles I. Thompson, of Philadelphia (William R. Spofford and Ballard, Spahr, Andrews & Ingersoll, all of Philadelphia, of counsel), for appellee.

Wm. A. Schnader, of Philadelphia, Amicus Curiae.

STERN, Justice.

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, 1st Ex.Sess., P.L. 51; and, if so, whether the statute, as thus applied, is unconstitutional as violating the provisions of the Federal and State Constitutions (Const.U.S.Amend. 14; P.S.Const. art. 1, § 9) which forbid the deprivation of property without due

12 A.2d 446

process of law or the provision of the State Constitution which requires uniformity of taxation (P.S.Const, art. 9, § 1).

The State Personal Property Tax Act of June 22, 1935, P.L. 414, section 3, as amended by the Act of July 17, 1936, 1st Ex.Sess, P.L. 51 (72 P.S. § 3244), 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 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 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

12 A.2d 447

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, 235 U.S. 589, 598, 599, 35 S.Ct. 154, 157, 59 L.Ed. 374. In Irwin v. Gavit, 268 U.S. 161, 167, 45 S.Ct. 475, 476, 69 L.Ed. 897, the court said: "The courts below went on the ground that the gift to the plaintiff was a bequest and carried no interest in the corpus of the fund. We do not regard those considerations as conclusive, * * * but if it were material a gift of the income of a fund ordinarily is treated by equity as creating an interest in the fund. Apart from technicalities we can perceive no distinction relevant to the question before us between a gift of the fund for life and a gift of the income from it. The fund is appropriated to the production of the same result whichever form the gift takes." In Senior v. Braden, 295 U.S. 422, 430-433, 55 S.Ct. 800, 802, 79 L. Ed. 1520, 100 A.L.R. 794, it was said: "The state [appellee] maintains that * * * 'the rights of the beneficiary consist merely of claims against the various trustees to the pro rata distribution of income, during the continuance of the trusts, and to the pro rata distribution of the proceeds of a sale of the trust estates upon their termination.' Appellant submits that ownership of the trust certificate is evidence of his interest in the land, legal title to which the trustee holds. * * * Apparently no opinion of any court definitely accepts the theory now advanced by appellees, but some writers do give it approval because of supposed consonance with general legal principles. * * * In Brown v. Fletcher, 235 U.S. 589 [597], 599, 35 S.Ct. 154, 157, 59 L.Ed. 374, we had occasion to consider...