Case C84

Members: FE Dubout Ch

G Thompson M
N Dempsey M

Tribunal:
No. 3 Board of Review

Decision date: 15 December 1971.

---

G. Thompson (Member): The taxpayer company is one of ten private companies carrying on business in partnership. On or about 18 March 1958, a cheque for $50,000 was paid on behalf of the partnership into an estate bank account styled in the name of the deceased who was the former managing director of the taxpayer and of the other companies constituting the said partnership. The deceased had died on 29 July 1967, and the estate account was under the operation and control of the sole executor and trustee of the will of the deceased.

2. The deceased had been remunerated by a substantial salary, and was an employee of the taxpayer and other companies members of the said partnership. There is no doubt, on the evidence, that the deceased had been the energetic and able founder of the business which led to the formation of the partnership, and had rendered very valuable services to his employers in conducting the very substantial business thus built up.

3. This particular reference concerns the claim by taxpayer as a partner to have allowed as a deduction in the calculation of its share of the net income of the partnership, the payment of the said `Retiring allowance' of $50,000 so paid to the sole executor of deceased estate bank account. I say `executor' advisedly since, on the evidence, the executor was at such a stage of administration of the will that he had not yet become a trustee:
Vide Solomon v. Attenborough 1912, 1 C.L. 451 ; affirmed sub. nom.
Attenborough v. Solomon 1913, A.C. 76 . But in the special context of this case, it is problematical whether any distinction should necessarily be drawn between the role of the sole executor and his subsequently intended role as trustee.

4. There was tendered in evidence on behalf of the taxpayer a certain Ex. D. which purported to be a resolution passed at a meeting of Directors of the group of companies convened on 25 March 1965. Present at that meeting were the sole executor and trustee (as he subsequently became) of the deceased, his sister and the Secretary of the group of companies. The resolution passed read -

``Retiring Allowance: It was resolved that the partnership of..... pay an amount of £ 25,000 (now $50,000) to..... (the employee concerned) upon his retirement from office or employment by the partnership.''

5. Apart from the doubt as to the legal efficacy of this resolution, the evidence does not disclose that any instructions were given to implement this at any particular time. This is perhaps self-evident, for, by its very nature, the crucial point of time was uncertain. No comfort can be gleaned from this resolution by the taxpayer. At most, this resolution amounted to a solemn expression in writing of an intention to make the payment; it did not amount to any legal obligation on the part of the partnership enforceable by the proposed recipient - the deceased. Indeed, considerable time elapsed, in the events which actually happened, between the passing of that resolution in March 1965 and the actual payment, in effect, to the executor of the will of the deceased in March 1968. In sum, as at the date of death of deceased, there was no legally enforceable entitlement to the ``retiring allowance''. It remained a moral obligation only. There can be thus no contractual rights residing in the testator which was enforceable on his behalf by his executor.

---

ATC 380

6. The claim for deduction is made pursuant to the terms of sec. 78(1)(c) of the Income Tax Assessment Act, which reads -

``Section 78(1)

The following shall, subject to sub-sec. (11) of sec. seventy-seven A, sec. seventy-seven B and sec. seventy-nine C of this Act, be allowable deductions -

(c) Sums which are not otherwise allowable deductions and are paid by the taxpayer during the year of income as pensions, gratuities or retiring allowances to persons who are or have been employees or dependants of employees, to the extent to which, in the opinion of the Commissioner, those sums are paid in good faith in consideration of the past services of the employees in any business operations which were carried on by the taxpayer for the purpose of gaining or producing assessable income.''

7. At the hearing, application was made by learned Counsel for the taxpayer for an order in effect to amend the Notice of Objection and enlarge the grounds thereof to include a ground of objection under sec.51 of the Act. After argument upon this matter at the hearing, the Board ruled that it had no power to order any such amendment. On the subject of the proper interpretation of a Notice of Objection and the absence of any power to amend, vide the recent ruling of this Board in Case C69
71 A.T.C. 305 , the merits of the matter must therefore be considered pursuant to the above sec.78(1)(c) of the Act.

8. The fact that the Commissioner has already allowed the sum of $9,000 of the amount claimed does not create any estoppel against him in those proceedings, nor does it afford any argument in favour of taxpayer. It is for this Board to decide the result upon both the facts and the law. The facts are not in dispute. The case thus reduces itself to the question of what is the proper construction of the said sec.78(1)(c) of the Act as applied to the circumstances of the case. Many arguments were canvassed at the hearing, but as I view the matter, the basic question in issue is whether it can properly be held that payment of the said sum to the estate bank account - in effect to the executor (in his representative capacity) of deceased's will - is equivalent in law to a payment to a person who is or has been an employee... of the partnership. On the evidence it cannot be said that the payment was made to a person who is or has been a dependant of an employee within the meaning of the section Unfortunately for taxpayer, it is nought to the point to argue that the payment could have been effected in another way within the spirit of the section so as to be deductible.

9. It seems to me that I should now consider whether a payment to the executor of a deceased employee satisfies the requirements of the section as a payment to a person who is or has been an employee. This necessitates a brief examination of the office of executor and its practical legal effect. ``According to the civil and canon law there are three persons who are called executors, and who have to do with the execution of a person's goods after his decease. The first is the ordinary, or bishop of the diocese, and he is called executor a lege constitutus. The second is executor a testatore constitutus, being appointed by the last testament of the party. The third is executor ab episcopo constitutus, who in the civil law is called executor dativus, and in our law an administrator .'' Bacon's Abridgement of the Law (1832) Vol. III, p.421. It is with the second category of executors with which we are concerned in this reference.

10. As it is authoritatively stated in the Termes de la Ley an ``Executor is when a man makes his testament and last will and therein nameth the person that shall execute his testament, then he that is so named is his executor; and is as much in the civil law as haeres designatus or testamentarius. '' In more modern times the meaning of the term ``executor'' may be found in Hals. Laws of England 3rd ed. Vol. 16 para. 172, p.120, where it is said: ``An executor is the person appointed by will or codicil to administer the property of the testator, and to carry into effect the provisions of the will.''

11. It is sometimes loosely said that an executor stands in the shoes of his testator. There is certainly a chain of representation between testators and executors. But an executor does not assume the personal mantle of his deceased testator. He cannot. His powers and duties are confined to carrying out (executing) the terms of the will and to completing the administration of what is now termed the estate of the testator. Any debt due to, or payment made to, the estate of a testator must be distributed by the executor according to the terms of the will.

12. I now revert to the actual language of sec.78(1)(c). It appears to me that the object or purpose of this section as discerned from its language is to allow a deduction in the case of a payment of a pension, retiring allowance, or gratuity, to a living person who is or has been an employee; that is, to a person who is actually retiring or who has retired from his employment. If the death of such person intervenes, then the

---

ATC 381

section appears to contemplate payment to his dependants (and perhaps to persons who have been his dependants). I do not find it necessary to rule finally on this latter subject in parenthesis, and would prefer to leave such decision to the future if and when the issue directly arises. In my opinion, on the proper construction of the section, it cannot be properly asserted that payment of a retiring allowance to the executor of a deceased employee complies with the essential elements of deductibility pursuant to the said section.

13. In the wording of the section, a clear dichotomy appears to be drawn between payments to a person who is or has been an employee, and payments to a person who is (or probably has been) a dependant. This seems to me to highlight the statutory purpose to allow a deduction in the case of payment to a living employee, or to a living person who has been an employee, who otherwise satisfies the requirements of the subsection; and if that person be deceased, then to his dependants - or probably to his ex-dependants. In my opinion the subsection does not contemplate payment to the ``estate'' of a deceased employee, when the money could by the terms of the will (if any) or upon intestacy, go to entire strangers, remote relatives, or to persons who have had no connection with the deceased and his relationship to his employer, and/or to persons who are not, and never have been, dependants of the testator.

14. For these reasons, as a matter of law, I feel constrained to disallow the taxpayer's objection. In the peculiar circumstances of this case, the Commissioner's assessment, tel quel, must be confirmed.