1960 PLP 161 (PTD)

Income‑tax‑ Discontinuance of trade or profession‑Company -Director‑Periodical payments under agreement for special services payable to Director or "his executors, administrators or assigns " Liability to tax after his death‑Schedule D, Case III‑Income‑tax Act, 1952 (15 & 16 Geo. 6 & 1 Eliz. 2 c. 10), S. 123 Income‑tax Act (XI of 1912), S. 25]. Under an agreement dated December 9, 1938, a company agreed to pay its managing director in respect of special services rendered by him to the company the sum of 3,000 and certain annual payments of varying amounts, payable to him, his "executors, administrator or assigns". He died in 1941. The payments were to cease in any event on October 4, 1958, and had continued to be paid to his executors or trustees throughout the years since his death. A claim for income‑tax was made on the present trustees of his will under Case III of Schedule D on these periodical payments for the four years 1950‑51 to 1954‑55 inclusive. Held, that the sums now in question were annual payments arising under a contract‑the agreement of December 9, 1938 and it was to that agreement, rather than to the services of the deceased, that those payments were attributable; the con sideration for the contract was those services, and the consider ation for the payments was the contract, which itself by its independent vitality "generated income." Even if they had been taxable under Schedule E during the testator's lifetime that could not affect the liability to tax of the actual recipients of them after his death; accordingly the claim to tax under Case III of Schedule D succeeded. Stainer's Executors v. Purchase (1952) A C 280 ; (1951) 2 T L R 1112 ; (1951) 2 All E R 1071 distinguished. At a meeting of the commissioners held on March 28, 1957. Westminster Bank, Ltd., in its capacity of trustee of the will of the Right Hon. C. A. MeCurdy, deceased, appealed against income‑tax assessments under Case III of Schedule D* in respect of annual payments as follows :‑ [* Income‑tax Act, 1952, S. 123 : "(1) Tax under Schedule D shall be charged under the following Cases .....Case 111‑‑tax in respect of‑(a) any interest of money, whether yearly or otherwise, or any annuity, or other annual payment . ....either as a charge on any property of the person paying the same by virtue of any deed or will or otherwise, or as a reservation out of it, or as a personal debt or obligation by virtue of any contract, or whether the same is received and payable half‑yearly or at any shorter or more distant Periods ...."] 1950‑1951 372 1951‑1952 368 1952‑1953 101 1954‑1955 14 The question for their determination was whether these assessments under Schedule D were correctly made in respect of certain sums arising to the testator, his executors, administrators or assigns by virtue of an agreement dated December 9, 1938, between Trust of Insurance Shares Ltd., thereinafter called "the company" and himself. 2 No oral evidence was given before them. The following facts were admitted :‑(a) that the testator was chairman of the company's board of directors at all relevant times until his death ; (b) that the company entered into the said agreement with him dated December 9, 1938 ; (c) that he died on November 10, 1941. It was common ground that, the essentials of the matter were contained in the said agreement, and, in particular clause 2 thereof, and in article 72 of the articles of association of the company.

3. Article 72 so far as relevant after providing for ordinary directors' salaries read as follows :‑"... If by arrangement with the other directors any director shall perform or render any special duties or services outside his ordinary duties as a director the directors may pay him special remuneration, in addition to his ordinary remuneration, and such special remuneration may be by way of salary, commission, participation in profits or otherwise as may be arranged." In the agreement made on December 9, 1938, between Trust of Insurance Shares Ltd., (thereinafter called "the company") of the one part and the testator of the other part it was recited that; (i) The company was manager of inter alia a unit trust entitled The Cornhill Trust of Bank and Insurance Shares and British Government Stocks (thereinafter called "the unit trust"). (ii) The unit trust ‑ was constituted by a trust deed dated October 15, 1937. (iii) By the trust deed debenture units and deferred units were authorized to be created and to be issued upon such terms and subject to such conditions as in the trust deed were set forth. (iv) By the trust deed the company was authorized to sell deferred units at a price calculated in the manner therein set forth, which price included an initial service charge ascertained as therein mentioned. (v) The trust deed further provided that the trustees should on the last day of each distribution period (as therein defined) until the determination of the trust raise out of the trust fund thereby constituted and pay to the company (after any necessary deductions) a sum equal to one quarter of 1 per cent of the mean market value of the trust fund as on such last day as aforesaid and that the company should be entitled to retain such payments (thereinafter called "management remuneration") for its own use and benefit in addition to the service charge in the last preceding recital referred to. (vi) The trust deed further provided that subject to the conditions therein set out and after the date therein specified the company should have power to form a company (thereinafter called "the new company") with limited liability for the purpose of taking over the trust fund, in which event the company should thereafter receive such remuneration as might be agreed between the company and the new company. (vii) The testator was chairman of the board of directors of the company and had by arrangement with the other directors rendered special and valuable services to the company in relation to the unit trust, and in particular he devised the scheme embodied in the trust deed, settled the trust deed, prepared prospectuses of and advertisements for sale of units, negotiated the sale of units exceeding in number 1,000,000 and underwrote a large number of such units upon a public issue thereof. (viii) The management of the unit trust had resulted in substantial profit to the company and it was anticipated that in the future further profits would be earned from the sale of units and also from the continued receipt of management remuneration. (ix) The company recognized that the said services rendered to the company by the testator were special services outside his ordinary duties as director within the meaning of and as contemplated by article 72 of the company's articles, and the directors of the company had pursuant to that article agreed to pay him by way of special remuneration such amounts as were thereinafter mentioned, as follows; "(1) The company shall forthwith pay to Mr. McCurdy an amount equal to the service charge included in the purchase price of the deferred units purchased by him less the standard rate of commission allowed to Mr. McCurdy upon the purchase of such units the, amount so payable being agreed at 3,000; "(2) After there has been deducted from the management remuneration a percentage of 20 per cent. thereof as an agreed contribution towards the cost of the management of the unit trust for the distribution period for which such remuneration is payable there shall be paid by the company to Mr. McCurdy his executors administrators or assigns so much of the balance as bears to the whole of the balance the same proportion as 158,904 bears to the total number of deferred units in issue at the end of the last day of each distribution period. In the case of management remuneration now already received the due proportion shall be paid to Mr. McCurdy forthwith. In the case of management remuneration hereafter to be received the due proportion shall be paid to Mr. McCurdy his executors administrators or assigns within 14 days of the receipt of the remuneration by the company". (3) If the new company should take over the trust fund in manner therein before recited, then the testator should be entitled to receive a proportion equivalent to that provided for by clause 2 thereof of the remuneration of three‑eighth per cent. per annum or such less remuneration as aforesaid (calculated as aforesaid) thenceforth paid to the company after there had been deducted from such remuneration the said percentage of 20 per cent... "(5) Sums from time to time payable to Mr. McCurdy under . . . .this agreement shall be and be deemed to be moneys had and received by the company for and on behalf of Mr. McCurdy his executors administrators or assigns".

4. It was an agreed fact that the trust created under the trust deed (mentioned in the recital to the agreement) which provided that the trust thereby created unless previously deter mined under the provisions therein contained should determine on October 4, 1958, had continued throughout all years since the testators death. It was further agreed that the executors and trustees of his will had received payments from the company under the provisions of clause 2 of the said agreement every year and that the amounts so received for the years under appeal coincided with the amounts of the income‑tax assessments under Case III of Schedule D, subject to the statutory basis of com putation on the income of the year preceding the year of assessment. It was also agreed that in each of the relevant years in which the company made the payments under the provisions of clause 2 of the said agreement; (i) The company made the payments in full without any deduction for income tax ; (ii) the company had deducted the said payments as business expense in computing its profits for income‑tax purposes ; (iii) the company had been assessed to income‑tax on its profits on the footing that the said payments were allowable expenses ; and (iv) the said payments were less than the amount of the company's profits assessed to income‑tax.

5. It was contended on behalf of the bank; (i) That the payments were remuneration for the testator's services as a director of the company ; (ii) that the remuneration so paid could not be assessed under Case III of Schedule D by reason of the decision in Stainer's Executors v. Purchase (1952 A C 280).

6. It was contended on behalf of the inspector of taxes; (i) That the payments in question made by the company under the agreement of December 9, 1938, were annual payments assessable under Schedule D on the trustee of the testator's will ; (ii) that the proper construction of the said agreement was that it provided for a series of payments to the testator during his life‑time and to his representatives after his death for the period of the existence of the trust, such payments being irrespective of the employment of the testator by the company or the holding by him of office as a director of the company ; (iii) that Stainer's Executors v. Purchase had no application to the present case.

7. The commissioners gave the following determination in writing on April 23, 1957 : Their first consideration was the character, from the point of view of taxation, of the payments arising to the testator, his executors, administrators, or assigns under clause 2 of the agreement of December 9, 1938, at the time that they first arose. They appeared to bear, as between the company and him, the character of remuneration for past services. But it did not follow that they were necessarily taxable under Schedule E upon the recipient. The payments bore also the characteristics of annual payments " . . . .by virtue of any contract," chargeable under Case III of Schedule D, since they possessed the necessary qualities of periodicity, and were "pure income receipts" : See Earl Howe v Inland Revenue Commissioners (1919 2 K B 336) The contention that they were not pure income receipts, because expenses could be charged against them under rule 9 of Schedule E, appeared to postulate that they were chargeable under Schedule E, and therefore to beg the question. If they were annual payments, were they properly chargeable under Case III as such ? In view of the charging words of Schedule D, section 122 (t) (b), they could not be charged under Case III of Schedule D if they were chargeable under Schedule E as remuneration. They were of opinion, however, that they were not properly chargeable under Schedule E. Under rule i of the Rules of Schedule E in the Ninth Schedule, tax was to be annually charged in respect, of all "salaries, fees, wages, etc., "for the year of assessment, "and it appeared to them difficult, if not impossible, to discover for what years of assessment the sums arising under the agreement were to be paid. Were the said sums remuneration voted, long after, for the years in which the services were per formed : see Dracup v. Radclife ((1946) 27 T C 188) ? Or, was the sum that was immediately payable under the agreement remuneration for 1938‑39 and the sums that were payable in the future remuneration for the years in which they were to be paid over by the company, bearing in mind the important circumstance that they would continue to be payable notwithstanding the testator's death or resignation, and to any person to whom he might assign his rights ? Or, was the proper view that he received as remuneration for the year in. which the agreement was entered into, first, the sum of 3,000 under clause 1, secondly, a sum in respect of management remuneration already received, and, thirdly, the capitalized value of the right to receive sums in respect of management remuneration thereafter to be received ? There were great difficulties in accepting any of these solutions to the question and it appeared to them that in view of such difficulties the payments were,, from their inception, not assessable under Schedule E and were therefore assessable under Schedule D, Case III, as annual payments. If so, they would continue to be so assessable after his death. They had naturally been pressed with the similarity of the payments in Stainer's Executor v. Purchase ((1952) A C 280). But in that case the payments to be made did not have the quality of being "pure income payments," since they were admittedly to be included among the gross receipts of a profession, the profits of which could only be ascertained after deduction of expenses. There was therefore no question of a choice in that case of assessing either under Case II of Schedule D, or under Case III as annual payments. In the present case, however, it seemed to them that the sums to be received under the agreement did not flow from the testator's office as a director and they could be isolated from any director's remuneration assessable under Schedule` E. The said sums sprang entirely from certain special services rendered before the date of the agreement and expressed to be outside his ordinary duties as a director. It was true that the testator was a director at the date the agree ment was made, but neither the quality nor the quantity of the said sums was in any way affected by his continuance in office or the carrying on of any sort of employment with the company after the moment when the agreement was signed. [The findings of the commissioners on a second contention were not pursued on appeal and are not here set out.] They confirmed the assessments. Charles Beattie for the Westminster Bank Ltd. Cyril Harvey Q. C. and Alan Orr. for the Crown. The following cases, not cited in the judgment, were referred to in argument : Lockhart v. Moldacot Pocket Sewing Machine Co. (Ltd.) (18895TLR307) ; Mudd v. Collins (192541TLR358) ; Shipway v. Skidmore (1932 16 T C 748) Heasman v. Jordan (1954 Ch 744) Parkins v. Warwick. (1943 25 T C 419) ; Inland Revenue Commissioners v. Bew EstateF Ltd. (1956 Ch. 407) ; Cowan v. Seymour (1920 1 K B 500) Bennett v. Ogston (1930 15 T C 374) ; Carson v. Cheyney's Executor (1957 3 W L R 768) ; and Allen v. Trehearne (1938 2 K B 464). Cur. adv. vult. Solicitors : Rhys Roberts & Co. ; Solicitor, Inland Revenue.