Rowe v. Braden, Tax Comm.

This case is here on appeal, and brings before the court the right of the state of Ohio, under the new "Intangible Tax Law," to tax the beneficiary of a trust of intangibles held by a foreign trustee; the beneficiary being a resident of the state of Ohio.

The contention of the plaintiff, Fanny Sarran Rowe, is that the attempt to tax her on the benefits received from the trust is a tax on the trust res, and constitutes a double tax on property, taxed at the source.

The second contention is that if the Intangible Tax Law provides for the taxing, as attempted by the defendants, the law illegally discriminates against the beneficiary in the method of taxation, and in both instances violates her constitutional rights.

The facts are:

On July 19, 1917, Casper H. Rowe, then a citizen of Ohio, executed a deed of trust to Girard Trust Company of Philadelphia, a corporation under the laws of Pennsylvania, whereby there was transferred to said trust company, as trustee, stocks and securities. The grantor reserved no power of revocation. By its terms, the net income of the trust was to be paid to the grantor during his lifetime, and upon his death, which has since occurred, to his wife, Fanny Sarran Rowe, the plaintiff in this action, for her life. Upon her death, the trust is to be continued for a further period of fifteen years, with remainder over to the children of the grantor and his wife and their issue. The trust res consists wholly of stocks, bonds, and cash, which have continuously been in the custody and control of the trustee at Philadelphia, Pennsylvania. None of the stocks, bonds, or securities are those of Ohio corporations or persons residing in the state of Ohio. The grant provided that in making investments and reinvestments during the life of the grantor his approval was first to be had to sales of securities, and the investment and reinvestment of the proceeds in other securities, and that after his death, his wife (beneficiary of the life estate) and the sons of the grantor, if living, should approve in writing of investments or reinvestments or sales.

During the year 1931, plaintiff, Fanny Sarran Rowe, as the owner of said life interest in the trust, received from the trustee $97,845.69. During said year, the trustee, under the laws of Pennsylvania, paid taxes to said state on such of the trust property in its hands as was not exempt from taxation.

Plaintiff as a resident of Cincinnati, Hamilton county, Ohio, filed her individual return of taxable property for 1932. In her return she disclosed and listed income yield from said trust, but declined to pay the same, claiming that no taxes could be lawfully levied thereon.

She thereupon filed this action to prevent the defendants from assessing, levying, or collecting taxes upon her life interest in said trust fund or upon the distributions made to her by the trustee, which distributions represented income received by her during the year 1931 from the trustee, less taxes and expenses of administering the trust.

The Intangible Tax Law of Ohio (114 Ohio Laws, 714) was passed pursuant to the authorization of an amendment to the Constitution empowering the Legislature to classify property for taxation.

The constitutionality of the Classified Tax Law, as passed by the Legislature, was challenged in the case of Lampson v. Cook, unreported, decided by the Court of Appeals of Ashtabula county, April 8, 1932. In that case the constitutionality of the entire new tax law was sustained. We are content with the pronouncement of the law of the Seventh District Court of Appeals in the case of Lampson v. Cook, and this disposes of the question of discrimination.

This brings us to the question of the claimed denial of due process of law within the protection of the Fourteenth Amendment of the Federal Constitution by the imposition of the tax.

As to the right to tax such an income, involving the constitutional question, it seems to be sufficient to refer to the case of Maguire v. Trefry, Tax Commissioner, 253 U.S. 12,40 S. Ct., 417, 64 L. Ed., 739. The facts in that case are parallel with those in the case at bar. The taxing law of Massachusetts is more clearly defined and is more explicit than is the Intangible Tax Law of Ohio. The act imposing the tax in the state of Massachusetts (St. 1916, c. 269, Section 9) provides:

"If an inhabitant of this commonwealth receives income from one or more * * * trustees, none of whom is an inhabitant of this commonwealth or has derived his appointment from a court of this commonwealth, such income shall be subject to the taxes assessed by this act, according to the nature of the income received by the * * * trustees."

The plaintiff in the Maguire case was a resident of Massachusetts, and was taxed upon income from a trust created by the will of one Matilda P. MacArthur, formerly of Philadelphia. The plaintiff, under the will of the decedent, was the beneficiary of a trust thereby created, and sought to enjoin the tax. The securities were held in trust by the Girard Trust Company of Philadelphia. The securities, the income from which was held taxable in Massachusetts, consisted of the bonds of three corporations and certain certificates of the Southern Railway Equipment Trust. These securities were held in trust and were in the possession of the trustee, the Girard Trust Company of Philadelphia. The trust was being administered under the laws of Pennsylvania. The Supreme Judicial Court of Massachusetts held the tax to be valid.

The Supreme Court of the United States, thereby affirming the validity of the tax, said at page 17 of 253 U.S. 40 S. Ct., 417,64 L. Ed., 739:

"We find nothing in the Fourteenth Amendment which prevents the taxation in Massachusetts of an interest of this character, thus owned and enjoyed by a resident of the State."

The Chief Justice of Massachusetts, speaking for the Supreme Judicial Court (230 Mass. 503, 120 N.E. 162), made the following statement, which is quoted by the Supreme Court of the United States in its opinion:

"The income tax is measured by reference to the riches of the person taxed actually made available to him for valuable use during a given period. It establishes a basis of taxation directly proportioned to ability to bear the burden. It is founded upon the protection afforded to the recipient of the income by the government of the Commonwealth of his residence in his person, in his right to receive the income and in his enjoyment of the income when in his possession. That government provides for him all the advantages of living in safety and in freedom and of being protected by law. It gives security to life, liberty and the other privileges of dwelling in a civilized community. It exacts in return a contribution to the support of that government measured by and based upon the income, in the fruition of which it defends him from unjust interference. It is true of the present tax, as was said by Chief Justice Shaw inBates v. Boston, 5 Cush. [Mass.] 93, at page 99, `The assessment does not touch the fund, or control it; nor does it interfere with the trustee in the exercise of his proper duties; nor call him, nor hold him, to any accountability. It affects only the income, after it has been paid by the trustee' to the beneficiary."

Quoting further from the opinion of the United States Supreme Court in the Maguire case, at page 16 of 253 U.S. 40 S. Ct., 418, 64 L. Ed., 739:

"In Fidelity Columbia Trust Company v. Louisville,245 U.S. 54 [38 S. Ct., 40, 62 L. Ed., 145, L.R.A., 1918C, 124], we held that a bank deposit of a resident of Kentucky in the bank of another State, where it was taxed, might be taxed as a credit belonging to the resident of Kentucky. In that case Union Refrigerator TransitCo. v. Kentucky, supra [199 U.S. 194, 26 S. Ct., 36,50 L. Ed., 150, 4 Ann. Cas., 493], was distinguished, and the principle was affirmed that the State of the owner's domicile might tax the credits of a resident although evidenced by debts due from residents of another State. This is the general rule recognized in the maxim `mobilia sequuntur personam,' and justifying except under exceptional circumstances, the taxation of credits and beneficial interests in property at the domicile of the owner. * * *.

"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.' 2 Story's Equity, 11th Ed., Section 964. It is this property right belonging to the beneficiary, realized in the shape of income, which is the subject-matter of the tax under the statute of Massachusetts."

It is argued that the Maguire case has no application to the case here under consideration, for the reason that Massachusetts has an income tax, and since Ohio has not actually an income tax the case does not apply. This seems to the majority of the court to be a distinction without a difference. The law of Ohio is explicit that the only property sought to be taxed in Ohio, and the only property taxed, is the income actually paid to the plaintiff, in round numbers $97,000. Whether this $97,000 be classed as an equitable interest in the trust res, or as a right, or a chose in action against the trustee, it certainly becomes property in the hands of the beneficiary when paid.

Much has been written as to the nature of the property derived from trusts in its relation to the cestui que trust. Some writers contend that the right to receive income from the trust is in the nature of property. Other writers classify the right to receive the income as a chose in action, with the legal right to enforce the payment in an action against the trustee, the legal holder of the title. Others hold that the right to receive the income is a property right and becomes property when received. However it may be classified, the right of the state of the domicile of the beneficiary to tax the income received has always been upheld.

Being taxable, has the state in its Intangible Tax Law levied a tax on the income admittedly received from the trust?

Section 5328-1, General Code (114 Ohio Laws, 717), provides:

"All moneys, credits, investments, deposits, and other intangible property of persons residing in this state shall be subject to taxation, excepting as provided in this section or asotherwise provided or exempted in this title * * *."

Such property as is in question here is not exempt under the law. As the majority of the court views it the property is income, and, under this section, is subject to taxation. It might also be classified under the term "investment." Section 5323, General Code (114 Ohio Laws, 715), in defining "Investments," classifies, among other things, "and other incorporeal rights of a pecuniary nature whatsoever from which income is or may be derived, however evidenced, excepting * * *."

The section further defines "investments" as:

"All equitable interests, life or other limited estates and annuity interests in any investment hereinbefore described, or in any fund made up of any such investments, wherever located."

Section 5638, General Code (114 Ohio Laws, 722), levies a tax on investments of "five per centum of income yield."

"Income yield" is defined in Section 5389 (114 Ohio Laws, 721, 722), in the case of equitable interests, as "the cash distributions of income so made."

Bearing on the intention of the Legislature, we find Section 5392, General Code (114 Ohio Laws, 742), which provides against the creation of trusts for the purpose of avoiding payment of an assessment or tax on the equitable interests of resident beneficiaries.

Further, as showing the intention of the Legislature, we find this recommendation of the tax committee concerning intangibles submitted to the Legislature at the time of the passing of the act. The committee states:

"The principal difficulty in taxing intangibles is to reach investments in private hands, because of the ease with which such investments may be concealed. The bill provides a tax on such intangibles owned on December thirty-first of each year, the tax to be measured by the income derived from such intangibles during the preceding calendar year, and to be equal to five per cent. of such income. This method is very similar to the Massachusetts income tax on securities, and that tax appears to be better observed and better enforced than the taxes of any other state. * * * Furthermore, for practical and constitutional reasons, it is far easier to reach the income from trusts outside of the State by taxing them on an income basis than on a principal basis. If the Ohio tax can be escaped by the simple expedient of establishing a trust in New York, any attempt to tax intangibles here will be a farce."

It would extend this opinion to an unreasonable length to undertake to answer all of the arguments presented.

Enough has been stated to show that a great deal may be said pro and con concerning taxation of the character in question.

The chief case relied upon by counsel for plaintiff is the case of Safe Deposit Trust Co. of Baltimore v. Commonwealth ofVirginia, 280 U.S. 83, 50 S. Ct., 59, 74 L. Ed., 180, 67 A.L.R., 386. That case is not controlling here, for the reason that the Commonwealth of Virginia sought to levy a tax on the corpus of the trust by reason of the fact that the beneficiaries, residents of Virginia, were the real owners of it. That is not the case under consideration. There is no attempt here to levy the tax on the trust res. Under whatever name it may be designated, the property, to wit, the distributive income, is what is sought to be taxed under the laws of Ohio. It is the thing itself which controls, and not the name under which it may be designated. Had the Legislature designated this fund as income, the Maguire case would be on all fours and controlling. Instead of designating the property specifically as income, the law of Ohio has classified it as "Intangibles," or "Investments," or as "Equitable Interest," but it is the income in the nature of property that is sought to be taxed, and, as such, is subject to taxation. The rate of taxation is based on the income actually received.

The majority of the court is of opinion that no constitutional right of the plaintiff is invaded in levying the tax, and that the law does not unduly discriminate in the classification thereof.

The petition will therefore be dismissed at the costs of the plaintiff.

Petition dismissed.

CUSHING, J., concurs.