Corbett v Inland Revenue Commissioners
[1937] 4 All ER 700(Judgment by: MR, Romer LJ)
Corbett
v Inland Revenue Commissioners
Judges:
Sir Wilfrid Greene MR
MR, Romer LJMacKinnon LJ
Subject References:
Income Tax
Sur-tax
Residuary life tenant
Sums credited to residuary life tenant during period of administration
Case References:
Allhusen v Whittell - (1867) LR 4 Eq 295; 23 Digest 464, 5358; 36 LJCh 929; 16 LT 695
Barnardo's Homes v Income Tax Special Comrs - [1921] 2 AC 1; 23 Digest 394, 4653; 90 LJKB 545; 125 LT 250; 7 Tax Cas 646
Marie Celeste Samaritan Society of London Hospital v Ireland Revenue Comrs - (1926) 43 TLR 23; Digest Supp; 11 Tax Cas 226
Wahl v Inland Revenue Comrs - (1933) 149 LT 203; Digest Supp; 17 Tax Cas 744
Sudeley (Lord) v A-G - [1897] AC 11; 23 Digest 463, 5354; 66 LJQB 21; 75 LT 398, affg SC; [1896] 1 QB 354
Re McEuen, McEuen v Phelps - [1913] 2 Ch 704; 23 Digest 464, 5359; 83 LJCh 66
sub nom Re McEwen, McEwen v Phelps - 109 LT 701
Re Wills, Wills v Hamilton - [1915] 1 Ch 769; 23 Digest 465, 5363; 84 LJCh 580; 113 LT 138
Judgment date: 13 December 1937
Judgment by:
MR, Romer LJ
If I did not regard myself as precluded from doing so by authority, I should myself have decided this case in favour of the appellants, for I should have thought that, when the rule in Allhusen v Whittell is applied as between tenant for life and remainderman of a residuary estate, and when a sum is, in accordance with that rule, ascertained as being the sum properly payable to the tenant for life, the sum so paid to him would be his income, and would be income which had already been brought into tax. After all, the rule in Allhusen v Whittell , as subsequently explained by Sargant LJ in Re McEuen, McEuen v Phelps and Re Wills, Wills v Hamilton , is no more than this, that, for the purpose of adjusting rights as between the tenant for life and the remainderman of a residuary estate, debts, legacies, estate duties, probate duties and so forth are to be deemed to have been paid out of such capital of the testator's estate as will be sufficient for that purpose, when to that capital is added interest on that capital from the date of the testator's death to the date of the payment of the legacy or debt, or whatever it may have been, interest being calculated at the average rate of interest earned by the testator's estate during the relevant period. When once the capital of the residuary estate has been ascertained in the way that I have mentioned, that capital is capital of the residuary estate, without any question. It is the capital to which the persons interested in the capital of the residuary estate are entitled. In the same way, I should have thought that, when, from the total income received by the executors, there has been deducted the amount of income, ascertained in the way I have mentioned, required for the purposes of paying the debts and so forth, the balance of what has been received by the executors represents part of the residuary estate to which the tenant for life is then and there entitled. In the same way with the residuary estate when it is finally determined. Speaking for myself, again in the absence of authority, I should have thought that the same rule would apply whenever and wherever it became necessary for any purpose whatsoever to ascertain what, when the residue was finally ascertained, represents income and what represents corpus. In other words, where the residue is given absolutely to a charity, I should have thought that the charity was entitled to have, in accordance with the rule of Allhusen v Whittell , the amount ascertained that represents income of the residue handed over to the charity for the purpose of enabling the charity to claim a return from the Crown of the income tax that can be found to have been paid in respect of that sum. So, too, I should have thought, in the case of a bequest of residue to an individual, the Crown would be entitled to have it ascertained, in accordance with the rule of Allhusen v Whittell , how much of what was handed over by the executors to the residuary; legatee could properly be said to represent income. But I think I am prevented from holding these views, by reason of the decision of the House of Lords in the Barnardo case. The Barnardo case was a somewhat unusual one. It was a case of a very simple administration in one respect. That is to say, the debts were all paid. Therefore, the estate would have been cleared within a very short time after probate had been granted. It is so stated, I think, by Viscount Finlay in the opinions in the House of Lords. The distribution of the estate, and therefore the ultimate ascertainment of the residue, was held up, not by difficulties of administration, but by the fact that the next-of-kin-the whole of the residue having been bequeathed in favour of the charity-disputed the will, so that the ultimate residue was not finally ascertained until the action was compromised, as it eventually was compromised, on terms which entitled the charity to receive two-thirds of the net residue and the next-of-kin to receive the other third. The two-thirds of the residue, as ultimately ascertained, having been handed over to the charity, the charity discovered that, in the meantime, certain sums for income tax had been deducted at source from the income received by the executors. Having regard to what I have said about the estate being really cleared at a comparatively early time, it seems more than probable that amongst the assets handed over to the charity, as representing the residue, were the identical securities that had borne the tax which the charity was seeking to recover, and, that being so, for the purpose of formulating their claim, the charity would no doubt claim the exact sum of income tax that had been deducted from those specific securities, because that income tax so deducted would represent, in that event, the income tax deducted from the sum ascertained to be income by the application of the rule in Allhusen v Whittell . Although that was, as I understand it, the actual claim of the charity-that is to say, to be repaid the income tax that had been paid in respect of certain specific securities-the case was not argued on the footing that the charity were entitled at any time to the income of those specific securities before distribution. It appears to have been argued on the broad footing that the charity were entitled to receive as income what, applying the doctrine in Allhusen v Whittell , should be found to be the sum, the part of residue, attributable to that income. That plainly appears, I think, if one looks at the argument of Mr Clauson (as he then was), on behalf of the appellants, the charity, in the House of Lords, in the Barnardo case. After referring to s 88 of Sched C, as extended by s 105, those being the sections under which the charity claimed that they were entitled to exemption from tax, he said, at p 3:
'If then the legislature has exempted the appellants' income the question to be determined is what is in substance and in fact the income to which the appellants are entitled. The Court of Appeal have proceeded on the basis that until the residue is ascertained it cannot be said that the residuary legatees are entitled to anything. ... The appellants had a present right to the residue when ascertained. Subject to adjustment, they were entitled to the residue from the death of the testator, and the income which that residue earned, although the exact amount could not be ascertained till later.'
That is, if I may so call it, an Allhusen v Whittell argument throughout. The argument on behalf of the Crown pointed out, amongst other things, at p 4:
'It is not put by the appellants that these dividends were the property of the charity, but their case is put on some sort of equitable accounting applicable to an estate settled on tenant for life and remaindermen on the analogy of Allhusen v. Whittell .'
So that the case was presented to the House of Lords as an Allhusen v Whittell case. Viscount Cave was the only member of the House who referred in terms to Allhusen v Whittell , and he said that the Allhusen v Whittell rule did not apply in such a case. That is to say, it did not apply to a charity which was anxious to discover what part of the residue handed over to it represented income. The other two members of the court who delivered opinions-namely, Viscount Finlay and Lord Atkinson-must, however, be taken to have been deciding that, even if the rule in Allhusen v Whittell did apply to the charity, nevertheless the sum ascertained in accordance with that rule as being the sum that would have been paid over to a tenant for life in a case of tenant for life and remainderman would not be income of a charity which had been taxed. That, I think, would account for the very general terms of the language which both Viscount Finlay and Lord Atkinson used. Viscount Finlay said, at p 8:
'There had been no creation of a trust in favour of the charity in respect of this income, it was never paid over to the charity as income.'
Of course, he is dealing there, no doubt, with the specific sums. Then he says:
'What was ultimately paid over on the close of the administration was the share of the whole estate, consisting of capital and accumulated income, which fell to the charity.'
That is precisely true of a tenant for life and a remainderman. What is handed over is the fund, consisting of capital and accumulated income, accumulated income being handed over to the tenant for life, and the capital being kept in trust for the person entitled to the corpus of the residuary estate. Then Viscount Finlay, after referring to that income (the accumulated income) says, at p 8:
'The executors, not the charity, were the recipients of this income ...'
Lord Atkinson, in still plainer terms, says, at p 11:
'... that until the claims against the testator's estate for debts, legacies, testamentary expenses, etc., have been satisfied, the residue does not come into actual existence. It is a non-existent thing until that event has occurred.'
If it is a non-existent thing until that event has occurred, it cannot possibly be earning income in the meantime. A non-existent thing cannot possibly earn income.
Language to much the same effect was used, I notice, in the Court of Appeal in the same case. Lord Sterndale MR said, at p 660:
'The executors as soon as the residue was ascertained became trustees for the residuary legatees of that fund, but until that was ascertained there was no fund to which they could become, or did become, trustees for the residuary legatees at all.'
Atkin LJ (as he then was), contrasting the case of a person entitled to a pecuniary legacy with that of a person entitled to the residuary estate, said, at p 662:
'It is not merely that the amount of the legacy is not ascertained [the residue] but that the legacy is not even in existence in the form in which it is bequeathed to the legatee. It appears to me that there is no authority for the proposition that the title of a residuary legatee relates back to the death as soon as the executor has ascertained the amount and has intimated to the legatee what that amount is.'
Applying that as I have no doubt Atkin LJ intended it to be applied-namely, to the case of a tenant for life and a remainderman-when, by the application of the rule of Allhusen v Whittell , you have discovered the sum that ought to be handed over by the executors to the tenant for life, it cannot be said by the tenant for life or against the tenant for life that his title to that sum relates back to the death of the testator, so that it can be said that that sum represents income accruing from the death of the testator until the time when it is handed over. For these reasons, notwithstanding the conclusion I should have come to but for the decision of the House of Lords in Barnardo's case, I feel that I am precluded by that decision from giving effect to those views. I agree accordingly that this appeal fails, and must be dismissed.