[CHANCERY DIVISION]

In re EMERY'S INVESTMENTS TRUSTS. EMERY v. EMERY.

[1957 E. 467.]

Equity - Clean hands - Presumption of advancement - Transaction in contravention of foreign revenue law - Foreign securities registered abroad in wife's name - Registration to avoid husband's tax liability in breach of foreign law - Intention that beneficial interest be held equally by husband and wife - Claim by husband to beneficial half interest in securities - Whether husband entitled to set up purpose of registration to rebut presumption of advancement.

Presumption (Rebuttable) - Advancement - Husband and wife - Foreign securities registered in wife's name - Intention that beneficial interest

be held equally by husband and wife - Registration in wife's name to avoid husband's liability to foreign tax - Whether presumption rebutted.

Conflict of Laws - Revenue laws - Transaction in contravention of foreign tax law - Whether object may be set up to rebut presumption of advancement.

The plaintiff was a British subject married to an American citizen with whom at all material times he lived in South America, where he was employed and accordingly entitled to hold American dollars. American Savings Bonds purchased with the husband's money were registered in the name of the wife (the husband as an alien being unable to hold these bonds) with the husband expressly named as a beneficiary with her. Later the husband changed the bonds for common stock in American securities, which were also registered in the name of the wife; the intention of the husband was that the beneficial interest in the securities should be as to one-half to the wife and the other half to him; but, in order to avoid payment of American withholding tax, to which as an alien he was liable under American Federal law, no mention was made of his beneficial interest.

Subsequently the wife removed the securities and sold them. On a claim by the husband for a declaration that at the date of removal of the securities the wife held them as to one-half for him, alternatively, for the return of half of the proceeds of sale as money had and received by the wife to his use:-

Held, (1) that the registration of the securities in the wife's name raised a presumption of advancement which could not be rebutted on the ground that the purpose of the registration in her name only was to enable the husband to avoid payment of American Federal tax, for equity would not grant relief in respect of a transaction carried out in contravention of law, albeit a foreign revenue law.

Gascoigne v. Gascoigne [1918] 1 K.B. 223; 34 T.L.R. 168 and dicta of Denning L.J. in Regazzoni v. K. C. Sethia (1944) Ltd. [1956] 2 Q.B. 490; [1956] 2 W.L.R. 204; 3 W.L.R. 79; [1956] 2 All E.R. 487 applied.

(2) That once the equitable presumption of advancement arose there was no room for the common law claim based on money had and received to the use of the husband. The husband, accordingly, was not entitled to claim any share in the securities.

ACTION.

The plaintiff, Ralph Emery, a British subject, claimed a declaration that securities standing on November 30, 1955, in the name of the defendant, his wife, Helen Emery, an American citizen, were as to one-half of their value held by her in trust for him, alternatively, the return of one-half of the proceeds of their sale as money had and received by the defendant to his use.

The following statement of facts is taken from the judgment: The parties were married in 1935. At all material times since 1929 the husband had been employed by one or more companies in the Shell group, and over the material period had fulfilled a succession of tours of duty in the South American Continent and Mexico. During that period, as he was resident in a "hard currency area," he was entitled to hold dollars, and in September, 1945, he opened a joint account in the names of himself and his wife in New York with a branch of the Irving Trust Company. That account, throughout its existence, was fed by money belonging to the husband. The wife was entitled to draw upon it equally with her husband, which was his way of providing for her needs.

Towards the end of 1947 the husband decided to invest a certain amount from the joint account every month in United States Savings Bonds Series E. Those bonds were not unlike the British National Savings Certificates - namely, over the years they increased in value, but no interest was payable. In pursuance of this intention, the plaintiff, by a letter dated November 14, 1947, wrote to the Irving Trust Company authorising them to invest 75 dollars per month in these savings bonds and to deduct the purchase price from the joint account. The letter ended: "The co-owner will be my wife, Helen B. Emery." From the outset of this phase of the financial transactions the bonds were to be held for the joint benefit of the husband and wife.

It was not in fact permissible to issue these United States Savings Bonds to a non-resident alien of the United States, which was the plaintiff's status as regards the United States; and the bonds which had been issued were cancelled. Further bonds were issued in the name of the wife, with the husband expressly named as the beneficiary with her. No difficulty arose in that respect, and Wynn-Parry J. was satisfied on the evidence that it was within the relevant Federal law, which was the law applicable.

Until October, 1953, bonds were regularly acquired, as regards all of which the wife was trustee, and she and the husband were the beneficiaries in equal shares. In October, 1953, a material change occurred, when the husband was advised that he would do better from the financial point of view to invest any moneys available in common stock of first-class American companies, rather than to continue to do so in the National Bonds. In order to carry out that intention a letter was written by the husband to the Irving Trust Company on October 14, 1953; the material part of that letter was: "Secondly, my wife and I have decided

to withdraw the holdings of U.S. Government Series 'E' bonds which you hold in her name. Would you kindly arrange to redeem these, and invest the proceeds in Shell Oil Company stock in Mrs. Emery's name; we should like to buy 100 shares in Shell, and the difference would be made up by charging it to our checking account [The joint account]." That was done, and the shares were taken up in the wife's name. In February, 1954, a purchase was made of New York shares of the Royal Dutch Petroleum Company; in February, 1955, 100 shares of the common stock of the Curtiss Wright Corporation were purchased, and registered in the wife's name; and, finally, in February, 1955, 20 shares of common stock of General Motors Corporation were purchased, and registered in the name of the wife.

The shares were thus left in the name of the wife and dividends were paid into the joint account, the trust company merely holding the certificates. In July, 1955, however, as a result of a talk between the manager of the Trust Company in New York on the one hand, and the husband on the other, the husband was informed that the trust company would like to regularise the position by opening a custody account in the name of the wife. In connection with their custody account, the Irving Trust Company had a particular form which was a full and detailed document.

It was addressed to the trust company by the wife, in whose name it was intended to open the custody account and was dated July 4, 1955. It stated: "Gentlemen: You are hereby authorised and requested to open a custody account in the name(s) of the undersigned [the wife] and, as custodian, to hold any securities or other property deposited with you for such account for, and subject at all times to the instructions of, the undersigned and subject to the terms and conditions set forth below ..." and there was authority to exchange securities in temporary form for securities in definitive form, and other authorities.

In the third clause it was stated: "You are authorised to execute as agents in the name of the undersigned all declarations, affidavits and certificates of ownership now or hereafter required in collecting income and principal payments, inserting thereon the name(s) of the undersigned as the owner(s) of the securities, without indicating thereon that the undersigned's net income does not exceed the undersigned's personal exemption and other credits for Federal income tax purposes. In the event the status of the undersigned is such that withholding of tax from such income is required, you are authorised to withhold the

required amounts." Then the status of the undersigned was set out as being: "Citizen of U.S.A. with legal residence in Brazil." At the end of the document, below the signature of the wife, was a paragraph headed: "Supplementary instructions for joint account with right of survivorship." That was not treated as relevant, but there followed a delegation of authority which amounted to a power of attorney, and the wife appointed the husband as her attorney with full power of "transfer, sale, exchange, or other disposition of any or all of the securities ... including income and proceeds, at any time held by you for account of the undersigned ..."

That document on the face of it held out the wife as being solely interested in the securities and the income therefrom. Wynn-Parry J. found as a fact that the husband was clearly a party to it, in the sense that he had it sent to him, that he read it and that he procured his wife to execute it and to appoint him as her attorney.

In 1955, the wife, having been asked for a divorce by her husband, consulted a solicitor in New York on whose advice on November 30, 1955, she removed all the securities from the Irving Trust Co., as she was entitled to do under terms of the document relating to the custody account. Later she sold the securities. The husband did not discover that the securities had been withdrawn from the trust company until February, 1956, when, acting under the power of attorney, he requested the bank to hand them over to him. Their reply was that they were unable to comply with his request because the wife had already withdrawn the securities.

The marriage came to an end in 1956, and the parties came to England separately. There had been matrimonial proceedings which were not here relevant.

The argument is reported only on the questions of a resulting trust and of advancement.

E. A. Morrison for the husband. The wife held half of the beneficial interest in the securities in trust for her husband. It is clear on the facts that he intended that a half share was to be held for him as beneficiary, and it is immaterial that there is no express recorded trust such as a settlement: see Underhill's Law of Trusts and Trustees, 10th ed., p. 26. On the previous holdings of United States bonds the husband was expressly named as the joint beneficiary with his wife, and there is no evidence of

any change of intention. The intention that he is the joint owner is supported by the correspondence in 1947, which is sufficient to constitute a declaration of trust in favour of the husband: Bentley v. Mackay¹ If the court is not satisfied that these documents constitute a sufficient declaration of trust, it may consider the evidence of conversations and the conduct of the parties; and these wholly support the submission that the husband's intention was that the property was to be held for the benefit of himself and his wife jointly. It is not, moreover, necessary for the creation of a trust for it to be communicated to the trustee and it does not matter that the wife was not informed that her husband was creating a trust for their joint benefit: Standing v. Bowring²; Middleton v. Pollock.³

Alternatively, there is a resulting trust for the husband. The wife has alleged that the transfer of the securities was intended as an out-and-out gift to her; but a gift by a husband to a wife, where, as here, both parties draw on the funds, must be supported by a clear and distinct act on his part showing that he intended to divest himself of the property for that purpose: Mews v. Mews.⁴ The mere fact that the name of the wife was inserted on the banking account does not of itself rebut the presumption of a resulting trust. In Marshal v. Crutwell⁵ it was held that the transfer of the husband's banking account into the joint names of himself and his wife was merely a convenient way of managing the husband's affairs, and did not vest the money beneficially in the wife, although she could, as in the present case, draw on the fund.

It is conceded that the presumption of advancement arises, and that the husband, to establish his claim, must rebut that presumption. The evidence of the husband and his letters clearly show that his intention, which was never shown to have changed, was that the securities were to be their joint property: see Warren v. Gurney⁶ and Shephard v. Cartwright.⁷ His purpose in placing the securities in his wife's name without reference to his beneficial interest was solely to avoid payment of withholding tax, and in no way signified a change in his intention that the securities were the joint property. The manner in which dividends are paid may rebut the presumption of advancement,

1 (1851) 15 Beav. 12, 19.

2 (1885) 31 Ch.D. 282; 2 T.L.R. 202.

3 (1876) 2 Ch.D. 104.

4 (1852) 15 Beav. 529.

5 (1875) L.R. 20 Eq. 328.

6 [1944] 2 All E.R. 472.

7 [1955] A.C. 431; [1954] 3 W.L.R. 967; [1954] 3 All E.R. 649.

and throughout they were paid into the joint account on which the husband drew jointly with his wife. Where money is placed in the wife's name to be used solely for domestic purposes, the presumption in favour of a gift is easily removed: Harrods Ltd. v. Tester.⁸ The power of attorney in favour of the husband was executed so that he could retain control of the securities. The evidence taken altogether shows a continued intention that the securities, like the original holdings in United States bonds, were to be the joint property of the husband and wife, which is sufficient to rebut the presumption of advancement.

H. E. Francis for the wife. It is common ground that the presumption of advancement applies, and the presumption of advancement rebuts any presumption of a resulting trust which could arise from the fact that the husband provided the money. The doctrine of advancement arises if, from the relationship of the parties, the court will infer that the transfer of the property into the name of another person was intended for that person's benefit: see Shephard v. Cartwright⁹ and Dunbar v. Dunbar.¹⁰ The presumption of advancement could itself be rebutted by evidence that the husband told his wife at or before the time of the purchase that she was to hold the shares as trustee for their joint benefit. But the evidence admissible to rebut the presumption of advancement is of a very limited nature: Shephard v. Cartwright¹¹; Grey v. Grey.¹² The rule, which is well settled, as it was stated in Shephard v. Cartwright,¹³ is that evidence of events which take place subsequently to the transfer is inadmissible, and the evidence that the husband retained control of the securities and of his dealings with the dividends is accordingly excluded. The husband stated that his sole object in putting the shares into his wife's name without reference to his beneficial interest was to avoid the payment of United States withholding tax. Had this been United Kingdom tax, the case would have been covered by Gascoigne v. Gascoigne,¹⁴ which is on all fours with this case. But although this is United States tax and the court will not enforce the tax laws of another country, it was stated by Denning L.J. in Regazzoni v. K. C. Sethia (1944) Ltd.¹⁵ that the court will not aid a person to disobey the laws

8 [1937] 2 All E.R. 236.

9 [1955] A.C. 431.

10 [1909] 2 Ch. 639.

11 [1955] A.C. 431.

12 (1677) 2 Swanst. 594.

13 [1955] A.C. 431.

14 [1918] 1 K.B. 223; 34 T.L.R. 168.

15 [1956] 2 Q.B. 490, 515; [1956] 2 W.L.R. 204; 3 W.L.R. 79; [1956] 2 All E.R. 487.

of a friendly State, and the husband cannot, therefore, in order to rebut the presumption of advancement, pray in aid the fact that his object was to defeat American fiscal law. His claim cannot, therefore, succeed.

Morrison in reply. The husband's object was not to defeat the American tax law, but legitimately so to arrange his affairs as to lessen the burden of taxation. The dictum of Denning L.J. in the Regazzoni case¹⁵ was obiter, and was not referred to when the case went to the House of Lords.¹⁶ It has never been held that the arrangement of a person's affairs, not in itself in contravention of the law, to avoid liability to tax is illegal: see Commissioner of Stamp Duties v. Byrnes.¹⁷

WYNN-PARRY J. stated the facts as set out above and continued: The husband now seeks to recover from his wife one-half of the property which represents the securities in question. The question which I have to decide is whether or not the husband is entitled to any relevant relief.

I must consider again the end of the first phase, during which there can be no doubt but that the bonds were held in the name of the wife as trustee for the husband and the wife in equal shares so far as the beneficial interest was concerned. But immediately the first investment of the shares in the Shell Oil Company was made and registered in the wife's name, there being no longer any reference whatsoever to the beneficial interest of the husband, the equitable presumption of advancement arose, and it became necessary to answer the question: why were the shares put into the name of the wife?

There are two relevant intentions to be considered in this matter, and it is essential to recognise that circumstance and to distinguish between them. I find as a fact that the intention of the husband throughout was that the beneficial interest in all the shares should be as to half to the wife and as to the other half to him. I do not find, in effect, that he intended the beneficial interest in the whole to be his wife's.

But that is not enough to carry the husband to success, because I still have to consider the question why, contrary to what was done before, the shares were not merely registered in the wife's name, and why there was a complete omission of any

15 [1956] 2 Q.B. 490, 515.

16 [1958] A.C. 301; [1957] 3 W.L.R. 752; [1957] 3 All E.R. 286.

17 [1911] A.C. 386; 27 T.L.R. 408.

reference to his having a beneficial interest. The evidence disclosed that, under the Federal law of the United States, where dividends are payable to a non-resident alien the recipient is liable to a withholding tax which it is the duty either of the company declaring the dividend, or a body in the position of the Irving Trust Company receiving the dividends from the company, to deduct. Also I am satisfied from the evidence that the husband was well aware of that provision of the United States taxation law. That is plain from the documents alone, because in a letter of February 14, 1955, the husband wrote: "With reference to my cable of February 2 in which I requested you to purchase for my account 100 shares of Curtiss Wright Common Stock, I acknowledge receipt of your advices to the effect that this purchase was carried out at a price of 19.7/8ths. I omitted to include in my request that this stock should be registered in the name of my wife, Mrs. Helen B. Emery, who is a U.S. citizen and therefore not subject to the withholding tax. Would you kindly see that the registration is made in her name."

That the husband knew about the withholding tax is also clear from a letter dated July 30, 1954, addressed to his wife, in which it was stated: "... While reviewing the stock records of Shell Oil Company, we noticed that instead of withholding 30 per cent. tax from your June 25 dividend, we withheld only 15 per cent. resulting in our overpaying you $15.00. We regret any inconvenience caused you but would appreciate your sending us that amount with the enclosed copy of this letter." The matter was adjusted, however, as shown from a letter of August 10, 1954, on the trust company being satisfied that the wife was a citizen of the United States.

I am unable to proceed except upon the view that the husband knew that there was this withholding tax and that he, as a non-resident alien, was liable to suffer deduction of tax in respect of his beneficial interest in the securities. Indeed the husband in paragraph 3 of his statement of claim put this tax position in the forefront of his case, because the pleader says: "By reason of the fact that the defendant, being an American citizen, is not liable to pay to the American Government a withholding tax of 30 per cent. on the value of dividends earned in the United States which by an American Federal Statute is chargeable to non-resident aliens of that country and for no other reason on the plaintiff's instructions and with the concurrence of the

defendant each and all of the said shares on purchase were placed in the defendant's name to be held by her for the joint benefit of the plaintiff and of the defendant."

In the circumstances which I have detailed, it is clear that, had the tax involved been United Kingdom income tax, this case would have been covered by Gascoigne v. Gascoigne,¹ and would have been concluded against the plaintiff. The headnote in that case is as follows: "A husband took a lease of land in his wife's name and built a house upon it with his own money. He used his wife's name in the transaction with her knowledge and connivance because he was in debt and was desirous of protecting the property from his creditors. In an action by him against his wife for a declaration that she held the property as trustee for him:- Held, that he could not be allowed to set up his own fraudulent design as rebutting the presumption that the conveyance was intended as a gift to her, and that she was entitled to retain the property for her own use notwithstanding that she was a party to the fraud." Lush J.,² giving the judgment of the Divisional Court, said: "His" - that is, the county court judge's - "findings of fact must be taken to mean that the plaintiff, with his wife's knowledge and connivance, concocted the scheme of putting his property in her name, while retaining the beneficial interest, for the purpose of misleading, defeating and delaying present or future creditors. This was the whole basis of the plaintiff's case, and it could not be put in any other way consistently with his claim to be the owner of the property. It was the reason he himself gave for his conduct. Now, assuming that there was evidence to support the finding that the defendant was a party to the scheme which the plaintiff admitted, but without deciding it, what the learned judge has done is this: He has permitted the plaintiff to rebut the presumption which the law raises by setting up his own illegality and fraud, and to obtain relief in equity because he has succeeded in proving it. The plaintiff cannot do this; and, whether the point was taken or not in the county court this court cannot allow a judgment to stand which has given relief under such circumstances as that."

In the analysis it will be found that there were two relevant intentions in Gascoigne v. Gascoigne.³ The first was the intention of the husband that the house and land should, so far as the

1 [1918] 1 K.B. 223; 34 T.L.R. 168.

2 [1918] 1 K.B. 223, 226.

3 [1918] 1 K.B. 223.

beneficial interest was concerned, be and remain his. The second intention was that he put the land and house into his wife's name with a view to protecting it from his creditors in case he should get into financial difficulties. In this case the first intention, corresponding to that in Gascoigne v. Gascoigne,³ is the intention that the husband had throughout that the beneficial interest in the securities should be shared between himself and his wife. The second intention, which corresponds with the second intention in Gascoigne v. Gascoigne,³ is the intention which the husband had in putting the securities in his wife's name, without any reference being made to the retention by him of any beneficial interest, namely, to avoid payment of withholding tax on his beneficial interest.

As I take that view I do not propose to traverse the evidence in any detail. It is enough to say that the wife, who was clearly a witness of the truth, was not able to help me very much. The husband, on the other hand, satisfied me by his evidence that his intention was that the beneficial interest should be shared, and there are various indications to support that, such as the retention of control and the payment of the dividends into the joint account. But matters such as the retention of control and the payment into the joint account cannot be decisive when once the equitable presumption of advancement has arisen, and it is necessary for the husband, in his endeavour to rebut that presumption, to assert that the property in question was put into his wife's name in order to avoid the payment on his beneficial interest of tax which would otherwise have been payable, so that, upon the basis that the tax had been United Kingdom tax, it appears to me that Gascoigne v. Gascoigne⁴ completely covers the present case.

I, of course, am dealing here not with United Kingdom income tax, but with the Federal tax of the United States of America. There is, however, authority of the Court of Appeal which binds me in Regazzoni v. K. C. Sethia (1944) Ltd.⁵ I need refer only to a passage in the judgment of Denning L.J., who said⁶: "It is perfectly true that the courts of this country will not enforce the revenue laws or the criminal laws of another country at the suit of that other country, either directly or indirectly. These courts do not sit to collect taxes for another country or to inflict

3 [1918] 1 K.B. 223.

4 Ibid.

5 [1956] 2 Q.B. 490; [1956] 2 W.L.R. 204; 3 W.L.R. 79; [1956] 2 All E.R. 487.

6 [1956] 2 Q.B. 515.

punishments for it; and this is so even between countries of the Commonwealth, as the House of Lords held in the Government of India v. Taylor.⁷ These courts will not enforce such laws at the instance of the foreign country. It is quite another matter to say that we will take no notice of them. It seems to me that we should take notice of the laws of a friendly country, even if they are revenue laws or penal laws or political laws, however they may be described, at least, to this extent, that if two people knowingly agree together to break the laws of a friendly country or to procure someone else to break them or to assist in the doing of it, then they cannot ask this court to give its aid to the enforcement of their agreement."

It is unnecessary for me to find in this case - and I do not propose to embark on that task - that there was anything in the nature of an agreement between the husband and the Irving Trust Company improperly to evade the Federal tax laws of the United States. But the principle underlying the passage which I have read from the judgment of Denning L.J., and which was part of the ratio decidendi of his judgment, applies, in my view, to such a case as this where a non-resident alien of the United States has so arranged his affairs that he has avoided payment of the withholding tax which he ought to have paid, and which he would have had to pay if the beneficial interest had been, as it should have been, disclosed to the American authorities.

Counsel for the husband argued that all the husband had really done was to arrange his affairs legitimately so as to lessen the tax which otherwise would have been payable, and he referred to the Commissioner of Stamp Duties v. Byrnes,⁸ a decision of the Privy Council. In that case the testator had purchased some properties which he put into the names of his two sons by way of advancement, and subsequently received the rents and paid for rates and repairs. The Commissioner of Stamps made a claim against the executors in respect of the properties, contending that the gifts were made with an intent to avoid "payment of duty" within the meaning of the New South Wales Stamp Duties Act, 1898. But the case turned purely on the evidence, and it was held that the transactions in question were not colour-able but gifts out and out passing the properties to the sons to the exclusion of all interest in the father. That was therefore quite a different case from the present.

7 [1955] A.C. 491; [1955] 2 W.L.R. 303; [1955] 1 All E.R. 292.

8 [1911] A.C. 386; 27 T.L.R. 408.

In the course of his judgment, Lord Macnaghten said⁹: "It may be that in making these advances Mr. Byrnes was not insensible to the advantage of diminishing the burthen of death duties, but there is nothing wrong in that. No one may act in contravention of the law. But no one is bound to leave his property at the mercy of the revenue authorities if he can legally escape their grasp." There is the nub of the whole thing - "no one may act in contravention of the law." But there was a clear breach of the Federal law in the way these transactions were carried out by the husband's non-disclosure of his beneficial interest in the securities and in the dividends paid thereon. He comes to this court seeking the aid of equity, and in the state of the authorities, and on that evidence, it appears to me that it is impossible for this court to help him.

There was an alternative claim for return of half the proceeds of the sale of the securities on the basis that that half was money had and received by the wife to the use of the husband. But once the equitable presumption of advancement arises, there is no room to entertain that common law claim. Either the presumption of advancement is rebutted, in which case the husband is entitled to his half share in the property, or, as I hold, it is not rebutted and the presumption remains. In the result, for the reasons which I have given, this action will be dismissed with costs.

Solicitors: Bull & Bull; Malkin, Cullis & Sumption.

I. G. R. M.

9 [1911] A.C. 386, 392.