Greenough v. Tax Assessors of Newport ( 1947 )

Mr. Justice Reed

delivered the opinion of the Court.

Appellants are testamentary trustees of George H. Warren, who died a resident of New York. His will was duly probated in that state and letters testamentary issued to appellants as executors. A duly authenticated copy of said will was filed and recorded in Rhode Island and there letters testamentary were also issued. Letters of trusteeship were granted to appellants by a surrogate’s court in New York. None were needed or asked for or granted by Rhode Island. At all times pertinent to this appeal, appellants, as trustees under the will, held intangible personalty for the benefit of Constance W. Warren for her life and then to certain as yet undetermined future beneficiaries.

The evidences of the intangible property in the estate of George H. Warren and in the trust in question were at all times in New York. The life beneficiary and one of the trustees are residents of New York. The other trustee resides in Rhode Island. During the period in question, he did not, however, exercise his powers, as trustee, in Rhode Island.

A personal property tax of $50 was assessed by the City of Newport, Rhode Island, against the resident trustee upon one-half of the value of the corpus of the trust. The applicable assessment statute for ad valorem taxes appears in the margin.¹ At the time of this assessment, the property consisted of 500 shares of the capital stock of Standard Oil Company of New Jersey. The tax was paid by the trustees and this suit instituted, under appropriate state procedure, in the Superior Court of the County of Newport to recover the tax from the city. The Superior Court by decision denied the petition. A bill of exceptions was prosecuted by these petitioners to the Supreme Court of Rhode Island which overruled the exceptions and remitted the case to the superior court.² Thereupon judgment was entered for the appellees and an appeal allowed to this Court. All questions of state procedure and of the applicability of the state statute to the resident trustee in the circumstances of this case were foreclosed for us by the rulings of the Supreme Court of Rhode Island.³

The appellants’ contention throughout has been that the Rhode Island statute, under which the assessment was made, if applicable to the resident trustee, was unconstitutional under the due process clause of the Fourteenth Amendment to the Constitution of the United States. Their objection in the state courts and here is that Rhode Island cannot tax the resident trustee’s proportionate part of these trust intangibles merely because that trustee resides in Rhode Island. Such a tax, they urge, is unconstitutional under the due process clause because it exacts payment measured by the value of property wholly beyond the reach of Rhode Island’s power and to which that state does not give protection or benefit. Appellants specifically disclaim reliance upon the argument that the Rhode Island tax exposes them to the danger of other ad valorem taxes in another state.⁴ The same concession was made in the Supreme Court of Rhode Island.⁵ We therefore restrict our discussion and determination to the issue presented by appellants’ insistence that Rhode Island cannot constitutionally collect this tax because the state rendered no equivalent for its exaction in protection of or benefit to the trust fund.

For the purpose of the taxation of those resident within her borders, Rhode Island has sovereign power unembarrassed by any restriction except those that emerge from the Constitution. Whether that power is exercised wisely or unwisely is the problem of each state. It may well be that sound fiscal policy would be promoted by a tax upon trust intangibles levied only by the state that is the seat of a testamentary trust.⁶ Or, it may be that the actual domicile of the trustee should be preferred for a single tax. Utilization by the states of modern reciprocal statutory tax provisions may more fairly distribute tax benefits and burdens, although the danger of competitive inducements for obtaining a settlor’s favor are obvious.⁷ But our question here is whether or not a provision of the Constitution forbids this tax. Neither the expediency of the levy nor its economic effect on the economy of the taxing state is for our consideration.⁸ We are dealing with the totality of a state’s authority in the exercise of its revenue raising powers.

The Fourteenth Amendment has been held to place a limit on a state’s power to lay an ad valorem tax on its residents.⁹ Previous decisions of this Court have held that mere power over a resident does not permit a state to exact from him a property tax on his tangible property permanently located outside the jurisdiction of the taxing state.¹⁰ Such an exaction, the cases teach, would violate the due process clause of the Fourteenth Amendment, because no benefit or protection, adequate to support a tax exaction, is furnished by the state of residence.¹¹ The domiciliary state of the owner of tangibles permanently located in another state, however, may require its resident to contribute to the government under which he lives by an income tax in which the income from the out-of-state property is an item of the taxpayer’s gross income. It is immaterial, in such a case, that the property producing the income is located in another state. New York ex rel. Cohn v. Graves, 300 U. S. 308. And, where the tangible property of a corporation has no taxable situs outside the domiciliary state, that state may tax the tangibles because the corporation exists under the law of its domicile. Southern Pacific Co. v. Kentucky, 222 U. S. 63.¹²

The precedents, holding it unconstitutional for a state to tax tangibles of a resident that are permanently beyond its boundaries, have not been applied to intangibles where the documents of owner interest are beyond the confines of the taxing jurisdiction or where the choses in action are mere promises of a nonresident without - documents.¹³ One reason that state taxation of a resident on his intangibles is justified is that when the taxpayer’s wealth is represented by intangibles, the tax gatherer has difficulty in locating them and there is uncertainty as to which taxing district affords benefits or protection to the actual property that the intangibles represent. There may be no “papers.” If the assessment is not made at the residence of the owner, intangibles may be overlooked easily by other assessors of taxes. A state is dependent upon its citizens for revenue. Wealth has long been accepted as a fair measure of a tax assessment. As a practical mode of collecting revenue, the states unrestricted by the federal Constitution have been accustomed to assess property taxes upon intangibles “wherever actually held or deposited,” belonging to their citizens and regardless of the location of the debtor.¹⁴ So long as a state chooses to tax the value of intangibles as a part of a taxpayer’s wealth, the location of the evidences of ownership is immaterial. If the location of the documents was controlling, their transfer to another jurisdiction would defeat the tax of the domiciliary state. As a matter of fact, there .is more reason for the domiciliary state of the owner of the intangibles than for any other taxing jurisdiction to collect a property tax on the intangibles. Since the intangibles themselves have no real situs, the domicile of the owner is the nearest approximation, although other taxing jurisdictions may also have power to tax the same intangibles.¹⁵ Normally the intangibles are subject to the immediate control of the owner. This close relationship between the intangibles and the owner furnishes an adequate basis for the tax on the owner by the state of his residence as against any attack for violation of the Fourteenth Amendment. The state of the owner’s residence supplies the owner with the benefits and protection inherent in the existence of an organized government. He may choose to expand his activities beyond its borders but the state of his residence is his base of operations. It is the place where he exercises certain privileges of citizenship and enjoys the protection of his domiciliary government. Does a similar relationship exist between a trustee and the intangibles of a trust?

The trustee of today moves freely from state to state. The settlor’s residence may be one state, the seat of a trust another state and the trustee or trustees may live in still another jurisdiction or may constantly change their residence.¹⁶ The official life of a trustee is, of course, different from his personal. A trust, this Court has said, is “an abstraction.” For federal income tax purposes it is sometimes dealt with as though it had a separate existence. Anderson v. Wilson, 289 U. S. 20, 27. This is because Congress has seen fit so to deal with the trust. This entity, the trust, from another point of view consists of separate interests, the equitable interest in the res of the beneficiary ¹⁷ and the legal interest of the trustee. The legal interest of the trustee in the res is a distinct right. It enables a settlor to protect his beneficiaries from the burdens of ownership, while the beneficiary retains the right, through equity, to compel the legal owner to act in accordance with his trust obligations. The trustee as the owner of this legal interest in the res may incur obligations in the administration of the trust enforceable against him, personally.¹⁸ Nothing else appearing, the trustee is personally liable at law for contracts for the trust.¹⁹ This is the rule in Rhode Island.²⁰ Specific performance may be decreed against him.²¹ Of course, the trustee when acting within his powers for the trust is entitled to exoneration or reimbursement²² and the trust res may be pursued in equity by the creditor for payment.²³

The Supreme Court of Rhode Island considered the argument that the laws of the state afforded no benefit or protection to the resident trustee. Although nothing appeared as to any specific benefit or protection which the trustee had actually received, it concluded that the state was “ready, willing and capable” of furnishing either “if requested.” A resident trustee of a foreign trust would be entitled to the same advantages from Rhode Island laws as would any natural person there resident. Greenough v. Tax Assessors, supra, 488, 47 A. 2d at 631. There may be matters of trust administration which can be litigated only in the courts of the state that is the seat of the trust. For example, in the case of a testamentary trust, the appointment of trustees, settlement, termination and distribution under the provisions of the trust are to be carried out, normally, in the courts of decedent’s domicile. See Harrison v. Commissioner of Corporations, 272 Mass. 422, 427, 172 N. E. 605, 608. But when testamentary trustees reside outside of the jurisdiction of the courts of the state of the seat of the trust, third parties dealing with the trustee on trust matters or beneficiaries may need to proceed directly against the trustee as an individual for matters arising out of his relation to the trust. Or the resident trustee may need the benefit of the Rhode Island law to enforce trust claims against a Rhode Island resident. As the trustee is a citizen of Rhode Island, the federal courts would not be open to the trustee for such causes of action where the federal jurisdiction depended upon diversity. The citizenship of the trustee and not the seat of the trust or the residence of the beneficiary is the controlling factor.²⁴ The trustee is suable like any other obligor. There is no provision of the federal Constitution which forbids suits in state courts against a resident trustee of a trust created under the laws of a sister state. Consequently, we must conclude that Rhode Island does offer benefit and protection through its law to the resident trustee as the owner of intangibles. And, while it may logically be urged that these benefits and protection are no more than is offered a resident owner of land or chattels, permanently out of the state, the same reasons, hereinbefore stated on pages 492 and 493, apply that permit state property taxation of a resident owner of intangibles while denying a state power to tax similarly the resident’s out-of-state realty.

No precedent from this Court called to our attention indicates that the federal Constitution contains provisions that forbid taxation by a state of intangibles in the hands of a resident testamentary trustee. In Brooke v. Norfolk, 277 U. S. 27, the state property tax there invalidated, evidently as violative of the Fourteenth Amendment, was assessed to a life beneficiary, on a res, composed of intangibles, when both the testator and the trustee were residents of another state where the trust was administered. Safe Deposit and Trust Company v. Virginia, 280 U. S. 83, held invalid a state’s tax on a trust’s intangibles, actually in the hands of the nonresident trustee and not subject to the control of the equitable owner, because it was an attempt to tax the trust res, intangibles actually in the hands of a nonresident trustee. This was said to conflict with the Fourteenth Amendment as a tax on a thing beyond the jurisdiction of the taxing state.²⁵ See also Graves v. Schmidlapp, 315 U. S. 657, 663, where the sovereign power of taxation was held to extend to a state resident who by will disposed of intangibles held by him as trustee with power of testamentary disposition under a nonresident trust. Nothing in these cases leads to the conclusion that a state may not tax intangibles in the hands of a resident trustee of an out-of-state trust.²⁶

State courts construe their statutes according to their understanding of state policy and apply them to such situations as their interpretation of the statutory language requires. In so adjudging, they are the final judicial authority upon the meaning of their state law. It is only in circumstances where their judgments collide with rights secured by the federal Constitution that we have power to protect or enforce the federal rights. In adjudging the taxability under state law of a resident trustee’s ownership of intangibles, without reliance upon the residence of settlor or beneficiary or the location of the intangibles, various conclusions have been reached under state law and without regard to the Constitution of the United States. They are pertinent to our problem only as illustrations of the different viewpoints of state law.²⁷

Nor do we think it constitutionally significant that the Rhode Island trustee is not the sole trustee of the New York trust. The assessment, as the statute in question required, was only upon his proportionate interest, as a trustee, in the res. Whatever may have been the character of his title to the intangibles²⁸ or the limitations on his sole administrative power over the trust,²⁹ the resident trustee was the possessor of an interest in the intangibles, sufficient, as we have explained, to support a proportional tax for the benefit and protection afforded to that interest by Rhode Island.³⁰

Affirmed.

1 General Laws of Rhode Island (1938), c. 30, § 9:

“Fifth. Intangible personal property held in trust by any executor, administrator, or trustee, whether under an express or implied trust, the income of which is to be paid to any other person, shall be taxed to such executor, administrator, or trustee in the town where such other person resides; but if such other person resides out of the state, then in the town where the executor, administrator, or trustee resides; and if there be more than one such executor, administrator, or trustee, then in equal proportions to each of such executors, administrators, and trustees in the towns where they respectively reside.”

2 General Laws of Rhode Island (1938), c. 31, §14; c. 545, §6, as amended by c. 941, Public Laws of Rhode Island (1939-40); Greenough v. Tax Assessors, 71 R. I. 477, 47 A. 2d 625.

3 Chase Securities Corporation v. Donaldson, 325 U. S. 304, 311; see Huddleston v. Dwyer, 322 U. S. 232, 237; American Federation of Labor v. Watson, 327 U. S. 582, 595.

4 See McKinney’s Consolidated Laws of New York, Tax Law, §§ 3, 350 (7), 365, 369, 377. Fidelity & Columbia Trust Co. v. Louisville, 245 U. S. 54. Compare Blackstone v. Miller, 188 U. S. 189; Curry v. McCanless, 307 U. S. 357, 363; Graves v. Elliott, 307 U. S. 383; Graves v. Schmidlapp, 315 U. S. 657; State Tax Comm’n v. Aldrich, 316 U. S. 174, 177, with Farmers Loan & Trust Co. v. Minnesota, 280 U. S. 204; First National Bank v. Maine, 284 U. S. 312.

5 Greenough v. Tax Assessors, 71 R. I. 477, 488, 47 A. 2d 625, 631.

6 Compare Harrison v. Commissioner of Corporations and Taxation, 272 Mass. 422, 172 N. E. 605.

7 Compare Mr. Justice Holmes’ dissent, Baldwin v. Missouri, 281 U. S. 586, 595.

8 State Tax Comm’n v. Aldrich, 316 U. S. 174, 181.

9 See Lawrence v. State Tax Comm’n, 286 U. S. 276, 279. Art. I, § 10, cl. 2 and 3, contain limitations on a state's power to levy import or export or tonnage duties.

10 Union Transit Co. v. Kentucky, 199 U. S. 194, 202; Frick v. Pennsylvania, 268 U. S. 473, 488; Cream of Wheat Co. v. Grand Forks, 253 U. S. 325, 328-29; Curry v. McCanless, 307 U. S. 357, 363-65, and note 3; see Wisconsin v. J. C. Penney Co., 311 U. S. 435, 444; State Tax Comm’n v. Aldrich, 316 U. S. 174, 178.

11 Even where our cases have spoken of power over the person as though it alone might be a sufficient justification for ad valorem taxation of a resident on tangibles outside the taxing jurisdiction, the language was used in instances where there were other bases for the tax. State Tax on Foreign-held Bonds, 15 Wall. 300, 319; Southern Pacific Co. v. Kentucky, 222 U. S. 63, 76; Pearson v. McGraw, 308 U. S. 313, 318.

12 See discussion in Northwest Airlines v. Minnesota, 322 U. S. 292.

13 Kirtland v. Hotchkiss, 100 U. S. 491; Fidelity & Columbia Trust Co. v. Louisville, 245 U. S. 54; compare Blodgett v. Silberman, 277 U. S. 1, 8-12; Maguire v. Trefry, 253 U. S. 12; Curry v. McCanless, 307 U. S. 357, 365-68; Wisconsin v. J. C. Penney Co., 311 U. S. 435, 444; State Tax Comm’n v. Aldrich, 316 U. S. 174, 180.

14 Kirtland v. Hotchkiss, 100 U. S. 491. Compare New York ex rel. Cohn v. Graves, 300 U. S. 308.

15 See Curry v. McCanless, 307 U. S. 357, 365-68; Wheeling Steel Corp. v. Fox, 298 U. S. 193. Certain evidences of indebtedness have been held sufficient in themselves to justify a state’s imposition of a succession tax upon their nonresident owner. Wheeler v. New York, 233 U. S. 434.

16 See Hutchison v. Ross, 262 N. Y. 381, 393, 187 N. E. 65, 70.

17 Brown v. Fletcher, 235 U. S. 589, 598-600; Blair v. Commissioner, 300 U.S. 5, 13.

18 Scott, Trusts (1939), pp. 487, 1469 et seq.; Williston, Contracts (1936) §312; Bogert, Trusts and Trustees (1935) §146.

19 Duvall v. Craig, 2 Wheat. 45, 56; Taylor v. Davis, 110 U. S. 330, 335: “A trustee may be defined generally as a person in whom some estate, interest, or power in or affecting property is vested for the benefit of another. When an agent contracts in the name of his principal, the principal contracts and is bound, but the agent is not. When a trustee contracts as such, unless he is bound no one is bound, for he has no principal. The trust estate cannot promise; the contract is therefore the personal undertaking of the trustee. As a trustee holds the estate, although only with the power and for the purpose of managing it, he is personally bound by the contracts he makes as trustee, even when designating himself as such.”

Lazenby v. Codman, 28 F. Supp. 949; Prudential Ins. Co. v. Land Estates, 31 F. Supp. 845; Peyser v. American Security & Trust Co., 107 F. 2d 625.

20 Roger Williams N. Bk. v. Groton Manufacturing Co., 16 R. I. 504, 17 A. 170.

21 Warren v. Goodloe’s Executor, 230 Ky. 514, 520, 20 S. W. 2d 278, 281.

22 Scott, Trusts, § 244 et seq. and § 268.

23 Scott, Trusts, § 267 et seq. See Ballentine v. Eaton, 297 Mass. 389, 8 N. E. 2d 808; O’Brien v. Jackson, 167 N. Y. 81, 60 N. E. 238.

24 Bullard v. Cisco, 290 U. S. 179, 190. See Memphis Street R. Co. v. Moore, 243 U. S. 299.

25 The power of a state to tax the equitable interest of a beneficiary in such circumstances was not presented. Id., pp. 92 and 95.

26 Goodsite v. Lane, 139 F. 593 (C. C. A. 6tli), holds that a state property tax on a trustee’s intangibles for the sole reason that he resides in the taxing state is invalid. It would seem this was so decided because of the Fourteenth Amendment. We do not think this case gives proper recognition to the state’s power to tax the owner of the legal title to the res.

27 The state statute taxing property to the trustee validly applies to the resident trustee: Welch v. City of Boston, 221 Mass. 155, 109 N. E. 174; Harvard Trust Co. v. Commissioner of Taxation, 284 Mass. 225, 230, 187 N. E. 596, 598; Mackay v. San Francisco, 128 Cal. 678, 61 P. 382; Millsapsw. Jackson, 78 Miss. 537, 30 So. 756; McLellan v. Concord, 78 N. H. 89, 97 A. 552; Florida v. Beardsley, 77 Fla. 803, 82 So. 794.

The state tax statute is inapplicable to the resident trustee: Dorrance’s Estate, 333 Pa. 162, 3 A. 2d 682; Commonwealth v. Peebles, 134 Ky. 121, 135, 119 S. W. 774, 778; Darrow v. Coleman, 119 N. Y. 137, 23 N. E. 488; Rand v. Pittsfield, 70 N. H. 530, 49 A. 88. Newcomb v. Paige, 224 Mass. 516, 113 N. E. 458, and Harrison v. Commissioner, 272 Mass. 422, 172 N. E. 605, declined taxation on the ground of comity and thus distinguished Welch v. City of Boston, supra, 272 Mass. 428-29, 172 N. E. 609.

28 Scott, Trusts, §§ 88.1, 103; Bogert, Trusts and Trustees, § 145.

29 Scott, Trusts, § 194; Brennan v. Willson, 71 N. Y. 502; Fritz v. City Trust Co., 72 App. Div. 532, 76 N. Y. S. 625, aff. 173 N. Y. 622, 66 N. E. 1109; In re Campbell’s Estate, 171 Misc. 750, 13 N. Y. S. 2d 773.

30 The state courts have reached varying conclusions under their statutes: See People ex rel. Beaman v. Feitner, 168 N. Y. 360, 61 N. E. 280; Mackay v. San Francisco, 128 Cal. 678, 61 P. 382; McLellan v. Concord, 78 N. H. 89, 97 A. 552; Dorrance’s Estate, 333 Pa. 162, 3 A. 2d 682; Newcomb v. Paige, 224 Mass. 516, 113 N. E. 458; Harrison v. Commissioner, 272 Mass. 422, 430-31, 172 N. E. 605, 609-10.