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District Court of Appeal, Second District, Division 3, California.

Robert P. McCULLOCH, Plaintiff and Appellant, v. FRANCHISE TAX BOARD, Defendant and Respondent.

Civ. 26134.

Decided: May 24, 1963

Brady & Nossaman, Walter L. Nossaman and Joseph L. Wyatt, Jr., Los Angeles, for appellant. Stanley Mosk, Atty. Gen., Dan Kaufmann, Asst. Atty. Gen., Jay L. Shavelson and Harry W. Low, Deputy Attys. Gen., for respondent.

The plaintiff, as beneficiary of a trust, received in 1951 a distribution of income of the trust which had been accumulated in the years 1946 to 1950, inclusive.1 The State of California computed and assessed an additional personal income tax for the year 1951 because of that distribution. Having paid the amount assessed and having been denied a refund, the plaintiff brought this action for the recovery of the payment. (Rev. & Tax.Code, § 19082.) The trial court determined that the tax was imposed in accordance with the applicable law. The plaintiff has appealed from the judgment.

The facts are not in dispute. The plaintiff has been a resident of the State of California at all times since January 1946. During the period of time involved in this case (1946–1951) he resided in the County of Los Angeles with his wife and four minor children. The trust from which the distribution was made was one created pursuant to the will of the plaintiff's grandfather, who was not a resident of California at the time of his death. During the years herein relevant, the plaintiff was one of the trustees. The other trustees were his brother, a resident of Missouri who did not do any business or own any property in the State of California, and St. Louis Union Trust Company, a Missouri corporation not authorized to transact business in California and not in fact transacting any business or owning any property in California.

Pertinent provisions of the trust will be stated. It was provided in part as follows: ‘As my grandchildren respectively become twenty-five years of age, my Trustees may thereafter from time to time, pay to, expend or have expended for them such part of the net income of their respective portions held in trust, as may be necessary or advisable to assist them in business, professionally or otherwise.’ Immediately thereafter was a paragraph under which the trustees were empowered, ‘subject to the discretionary power with which they are hereinafter entrusted and charged,’ to make distributions of cash or securities in specified amounts to a grandchild when that grandchild reached the respective ages of 25, 30 and 35 years. A further provision was: ‘As my grandchildren respectively become forty years of age,2 the trusts as to them shall be terminated, and the Trustees shall, subject to the discretionary powers hereinafter conferred upon them convey, transfer, deliver and pay to them the principal and any accumulated income of the apportionments then held in trust for said grandchildren, respectively, * * *.’

Paragraph 15 of the will was as follows: ‘In case any beneficiary of any of the trusts hereby created for my grandchildren or my heirs-at-law, at the time when any payment becomes due to him, her or them, pursuant to the foregoing provisions, are not, in the judgment of the Trustees, of such habits and of such mental or business capacity, as to be able to prudently manage and properly care for the same, then the Trustees may, and should withhold part, or all, of such sum, and may continue to hold, manage, invest and reinvest the same, and pay to, expend or have expended for such beneficiary, the income, or such part thereof, or withheld principal, as may be reasonable in the discretion of the Trustees, for the maintenance and pleasure of such beneficiary, or of their family or of those dependent upon them, or the Trustees, in their discretion, may from time to time pay any beneficiary, such amounts with which they think such beneficiary may be prudently entrusted, the remainder to be held for investment and reinvestment, as aforesaid, until such time as the Trustees may deem it prudent and proper to make additional or full payment.’

The trust contained a prohibition against the anticipation of payments by a beneficiary or alienation or disposition of his or her interest in the trust.

In an earlier section of the will it was also provided that ‘the net income of the trust estate, or of the respective trusts not disbursed from year to year shall be added to the principal and thereafter invested and disbursed as herein authorized.’ The following provision was made with respect to the effect of the death of a grandchild of the trustor: ‘After the death of any of my grandchildren during the period of their respective trusts, the income and principal of the portions held in trust for them, respectively, shall by my Trustees be thereafter held for their respective heirs-at-law, who are by blood related to me; provided that [provision is then made for support of the widow of a deceased grandchild] * * *.’

In the will under which the trusts were created it was provided as follows: ‘The custody, collection, accounting and distribution of the assets and income of my estate shall reside with the Trust Company Executor and/or Trustee for and so long as there shall be a Trust Company serving in that behalf.’ A further provision was that the individual trustees (who in the period herein involved were the plaintiff and his brother) should have the ‘right and power’ to substitute for the St. Louis Union Trust Company, as trustee, ‘any reputable and experienced Trust Company, wheresoever located’; a subsequent substitution of a like nature could thereafter be made, ‘but not more frequently than once in two years, after the first substitution.’ It was further provided that: ‘Before any such substituted Trust Company shall so act, the selection shall have been approved and confirmed by the proper court having jurisdiction in the premises.’ No such substitution appears to have been made.

The trust corpus for the years 1946 to 1951 consisted of bonds issued by municipalities, counties and districts of various states, including California, stocks and bonds issued by corporations doing business throughout the United States, including some corporations which were incorporated and did business within the State of California, and real estate which was not located in California. The property in each category was of substantial value.

The problem presented in this case must be resolved in the light of the statutory law in effect in the years 1946–1951. The State of Missouri received payment of income tax with respect to the income of the trust for the years 1946 to 1950, inclusive, but no income tax of that nature was paid to the State of California. The plaintiff, as beneficiary, did not receive any of the income herein involved in the year in which it was paid to the trust and he had no absolute right to require that all of such income received by the trust in any of those years be currently distributed to him. Under the Revenue and Taxation Code as it existed in that period, if any tax way payable with respect to income which was to be accumulated it was imposed upon the trust. (See Sabine, Constitutional and Statutory Limits on the Power to Tax (1960) 12 Hastings L.J. 23, 38–39.) Section 18101 of the Revenue and Taxation Code3 was in part as follows: ‘The taxes imposed by this part upon individuals apply to the income of estates or of any kind of property held in trust * * *, including: (a) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust. * * * (d) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.’

Since the plaintiff was the only trustee who was a resident of the State of California in the pertinent period of time and since he was a beneficiary as to money or property distributable to him, section 18101 must be considered together with sections 18102 and 18103.4 Section 18102 was as follows: ‘Except as otherwise provided in Articles 2 and 4 of this chapter, the income of an estate or trust is taxable to the estate or trust. The tax applies to the entire net income of an estate, if the decedent was a resident, regardless of the residence of the fiduciary or beneficiary, and to the entire net income of a trust, if the fiduciary or beneficiary is a resident, regardless of the residence of the settlor.’ Section 18103 was as follows: ‘Where the taxability of income of a trust depends on the residence of the fiduciary and there are two or more fiduciaries for the trust, the income taxable under Section 18102 shall be apportioned according to the number of fiduciaries resident in this State pursuant to rules and regulations prescribed by the commissioner.’ Section 18105 provided in part as follows: ‘Taxes on income of an estate or trust which is taxable to the estate or trust * * * shall be paid by the fiduciary.'5

It is essential to determine whether any of the income received by the trust in the years noted and accumulated for future distribution was validly subject to the imposition of income tax by the State of California under the statutory provisions set forth hereinabove because, if such taxability did exist, the provisions of section 18106 (now found in section 17745) of the Revenue and Taxation Code are relevant. Section 18106 was as follows: ‘If, for any reason, the taxes imposed on income of a trust which is taxable to the trust because the fiduciary or beneficiary is a resident of this State are not paid when due and remain unpaid when such income is distributable to the beneficiaries, or in case the income is distributable to the beneficiaries before the taxes are due, if the taxes are not paid when due, such income shall be taxable to the beneficiaries when distributable to them except that in the case of nonresident beneficiaries such income shall be taxable only to the extent it is derived from sources within this State.’

A provision, such as was contained in section 18106 of the Revenue and Taxation Code, which attaches to the distributee of accumulated income a liability for income tax when the trust has failed to discharge its obligation to the state with respect to such income is warranted as a reasonable device by means of which the payment of taxes may be assured. (See McCreery v. McColgan, 17 Cal.2d 555, 560, 110 P.2d 1051, 133 A.L.R. 800; Edison California Stores v. McColgan, 30 Cal.2d 472, 476, 183 P.2d 16.) The question to be determined in this case is whether section 18106 could be validly applied to the factual situation involved herein.

As has been noted, the plaintiff was entitled to receive a distribution from the trust of principal, including additions thereto by reason of accumulated income, only upon survival to a designated age. Accordingly, there was no assurance at any time prior to his reaching the age of 40 years that he would actually receive the accumulated income involved in this case. Prior to distribution thereof, a non-defeasible right thereto did not vest in him. (See Commissioner of Corporations and Taxation v. Simmon, 292 Mass. 507, 198 N.E. 741, 102 A.L.R. 273; Mahler v. Conway, 236 Wis. 582, 295 N.W. 772.) The question which must be determined is whether the fact that he resided in California gave this state a constitutional basis for assessing an income tax against the trust for the years in question; if not, section 18106 was inapplicable by its own terms since there were no taxes which had become due. It has been said with respect to that problem: ‘The constitutional validity of a tax by the state of residence of the trustee on accumulated net income appears to have acceptance by the United States Supreme Court. The Court, however, has not yet had occasion to decide the validity of a tax with respect to accumulated income where the trustee is a nonresident and the tax is founded on residence of the beneficiary.’ (Sabine, Constitutional and Statutory Limits on the Power to Tax (1960), supra, 12 Hastings L.J. 23, 39–40. Under the circumstances of the present case, taxation by the State of California of the trust with respect to income received and accumulated in any one of the years 1946–1950 could not be predicated solely on the residence of the plaintiff in California during such year because the necessary nexus required by the concept of due process did not then exist. (See Miller Bros. Co. v. Maryland, 347 U.S. 340, 343–345, 74 S.Ct. 535, 98 L.Ed. 744.)6 The remaining question, therefore, is whether, in view of the fact that one of the trustees was a California resident, the State of California had jurisdiction to impose an income tax on one-third of the income which was accumulated rather than currently distributed to the beneficiary. (See former § 18103, Revenue and Taxation Code, supra.)

Guidance in the solution of the problem of jurisdiction to tax is found in the reasoning of the Supreme Court in Greenough v. Tax Assessors, 331 U.S. 486, 67 S.Ct. 1400, 91 L.Ed. 1621, although the court was there concerned with a property tax. In that case, under a testamentary trust two trustees held intangible personalty for a life beneficiary and undetermined future beneficiaries. The evidences of the intangible property (shares of capital stock of the Standard Oil Company of New Jersey) were at all times in New York. The life beneficiary and one of the trustees were residents of New York. The other trustee resided in Rhode Island, but he did not exercise his powers as trustee in Rhode Island during the period in question. The City of Newport, Rhode Island, assessed a personal property tax of $50 against the resident trustee upon one-half of the value of the corpus of the trust. The trustees asserted that Rhode Island could not tax the resident trustee's proportionate part of the trust intangibles merely because of his residence. It was urged that such a tax was unconstitutional under the due process clause because it exacted payment measured by the value of property wholly beyond the reach of Rhode Island's power and to which that state did not give protection or benefit. In the course of rejecting that contention, Mr. Justice Reed stated (331 U.S., at pp. 495–496, 67 S.Ct., at p. 1404): ‘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 of City of Newport, supra, 71 R.I. 488, 47 A.2d 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. * * * But when testamentary trustees reside outside of the jurisdiction of the courts 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. * * * Consequently, we must conclude that Rhode Island does offer benefit and protection through its law to the resident trustee as the owner of intangibles.' Mr. Justice Reed also stated (331 U.S., at page 498, 67 S.Ct., at page 1406): ‘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 intangibles or the limitations on his sole administrative power over the trust, 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.’

In the light of the reasoning of the Greenough case, this court is not free to interfere with the clear legislative intent to impose upon a trustee resident in California the duty of paying income tax upon a proportionate amount of the income received by the trust. (Cf. Mackay v. San Francisco, 128 Cal. 678, 61 P. 382.)

While former section 18106 of the Revenue and Taxation Code was applicable to the accumulated income for the years 1946–1950 which was received by the plaintiff, as beneficiary, in 1951, that section could only apply to that portion of the income (one-third) which was subject to tax in each year pursuant to former sections 18101–18103 of the Revenue and Taxation Code. The computation and assessment of which the plaintiff complains appears to have been based on all of such income. Consequently, it is necessary to remand the case to the superior court for the purpose of determining the proper amount of the plaintiff's obligation under former section 18106 of the Revenue and Taxation Code in accordance with the law as herein set forth.

The judgment is reversed and the cause is remanded for a new trial.

I would affirm the judgment. Omitting any discussion of whether, under the statute, plaintiff was in 1946–50 ‘the beneficiary’ or merely one of several beneficiaries (since the decision does not turn upon it), we face squarely the constitutional question of whether income accumulated by this trust may be taxed by California upon the ground that the beneficiary is a California resident. It seems to me that the residence of the beneficiary is a sufficient ‘nexus' to justify a tax on such income, or upon a portion of such income if the California resident is not the sole beneficiary. This is what California has claimed the right to do by legislation which has been on the books since 1935 (Stats. 1935, ch. 329, § 12, subd. (b)(3)(D); Rev. & Tax. Code, § 17742).

The fact that California may be at a disadvantage in enforcing collection directly against a foreign trustee need not be deemed a constitutional limitation on California's power to impose equitable taxation upon its residents. After all, the tax is imposed not upon the trustee, but upon the trust estate. The concept of a trust as a separate taxable entity does not require that the trust be denominated a foreign person exempt from California taxation. For this purpose a trust is better described as a fund owned by a California resident.

The readily enforceable provision for a substitute tax imposed upon the distributee when the income eventually reaches him is a reasonable means of seeing that the beneficiary of a ‘foreign’ trust obtains no special advantage over other California taxpayers. No double taxation is involved because California gives credit for the taxes paid by the trustee in Missouri. Subject to that limitation, there is no reason why a California resident whose wealth accumulates under the administration of a Missouri trustee should contribute less to the support of this state than should his fellow citizen whose wealth is managed by a local trustee.


1.  The distribution was made as of May 9, 1951, and included income received by the trust in 1951. As to that income, the plaintiff concedes that the amount received by him was properly included as part of his taxable income for the year 1951.

2.  The plaintiff became forty years of age on May 9, 1951.

3.  The substance of that section is now found in section 17731 of the Revenue and Taxation Code.

4.  The provisions currently in effect are found in sections 17742 and 17743 of the Revenue and Taxation Code.

5.  The current provision is found in the last paragraph of section 17731 of the Revenue and Taxation Code.

6.  In Miller Bros. Co. v. Maryland, supra, Mr. Justice Jackson stated (347 U.S., at pages 344–345, 74 S.Ct., at page 539): ‘But the course of decisions does reflect at least consistent adherence to one time-honored concept: that due process requires some definite link, some minimum connection, between a state and the person, property or transaction is seeks to tax.’

FORD, Justice.

SHINN, P. J., concurs.

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