First, then, is the 10 per cent. of the profits of the business of R. & J. Dick, provided by Mr Dick by his deed of arrangement, to be paid to certain of his employees, to have effect or be satisfied out of his personal or moveable estate? I think that it is. Mr Dick's business, including under that term not merely the capital at his credit in its books and the premises and plant, but also the goodwill, was certainly his. And that it remains an asset of his estate as long as profits continue to be divided among certain of his employees, by virtue of his settlement, has already been practically determined by the decision in Walker v. Reith , supra . It was open to him to direct that his business should continue to be carried on for the benefit of his estate, just as he might have directed that shares in an industrial company, constituted under the Companies Acts, should be retained and the dividends applied in some particular way for a series of years. So long as the business was carried on by his trustees the profits formed part of his estate, and it was open to him to direct, by his testamentary instructions, what was to be done with them.
Now, the deed of arrangement was not only of a testamentary nature in itself, but is adopted by reference by Mr Dick in his settlement as part of his testamentary writings. Are, then, the shares in the profits of the business to be taken by his employees as gifts, and therefore legacies by virtue of the deed of arrangement, or on some other footing? It was contended by Mr Clyde for the trustees that Mr Dick's deed of arrangement was an offer to sell his business to his employees at a price fixed by the amount of capital at his credit in the books, with facilities of a most generous nature to enable them to provide the price. But I cannot so regard what he has done. It is difficult to decide this question without committing oneself to some extent on the further questions, viz., whether the remaining 90 per cent. of the profits, and whether, ultimately, the power to acquire the goodwill of the business, are not also of the nature of legacies. But assuming that Mr Dick, at the point of time at which his capital has been paid out, and the accumulated profits credited to deceased, bankrupt and retired employees has been provided for, either makes a gift of his business to his surviving employees, or offers it to them for sale with such facilities that he has already provided them with the price, I am quite clear that he does not do either the one or the other as at
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Accordingly, I think that the 10 per cent. of profits which is annually to be paid in cash to the surviving employees, being a gift, is a legacy, and liable to legacy-duty.
I am not impressed by the consideration that as it is not possible to distinguish between the 10 per cent. to be paid in cash and the 90 per cent. to be credited in the books, and as the proceeds of the 90 per cent. are to go back to the estate to be distributed as residue, the same sum will apparently pay legacy-duty twice over. I think this is only apparent. The asset of the testator's estate is the business and all that that covers. Mr Dick might have directed annuities to be paid out of the profits for a certain number of years, and they would have been legacies and dutiable. Instead, he directs the whole profits to be divided among the objects of his bounty for an indefinite but terminable period. The sums so divided are as much legacies as the annuities would have been. By means of the 90 per cent. of the divisible profits bequeathed to them as a gift, and therefore dutiable, the objects of his bounty are put in funds at a future date to acquire the business, and when they have done so the business is realised and the proceeds become realised residue, to be applied in payment of his residuary bequests, and such realised residue also will then be properly liable in legacy or its equivalent residue duty. Whether at the date of such realisation there is any further gift to the objects of Mr Dick's bounty in respect of the good will of the business is a matter which I am not called to decide. It is a question which may still fall to be raised.
I shall therefore direct an account as craved, and find the defenders liable in expenses.”
The defenders reclaimed, and argued—The deed of arrangement was a scheme for getting the testator's capital paid out of the business by granting certain facilities to the employees to earn money for its purchase. They got a right to buy the business and, so to speak, help by a loan of money for the purchase at less than the market rate, or, put in another way, a lease on a hire-purchase agreement. These facilities might be dutiable, but their value could not be ascertained in this action, and the onus was on the pursuer to prove their worth. The business was carried on by the employees, not by the trustees. The 10 per cent. share of profits to the employees was remuneratory and was a safeguard to the trust against depreciation of the business. It was increased salary and an inducement to the employees to remain on in the service where their responsibility had been increased by the present arrangement and where their supervision was of great value if not indispensable. The benefit really accrued to the testator's capital in the hands of his trustees. The deed of arrangement was not a gift but an executry contract of sale, the price being what the testator deemed a fair equivalent for the business, and the property did not pass till conditions of sale had been fulfilled. Thus the case was distinguished from in re Thorley , [1891] 2 Ch 613 , where the question was of a gift with a condition adjected, that to the trustees being gratuitous since they were bound to discharge the office without reward, and was also distinguished from The Attorney-General v. Sharpe , 7 T.L.R. 165, for the same reason. The 10 per cent. share of profits here was remuneration springing from a contractual relation in the sense of Willis v. Kibble , 1 Beavan 559, and no gift. The Lord Ordinary's interlocutor should be recalled.
Argued for the pursuer and respondent—The questions here were—(1) Was this a gift by will? (2) Did it fall to be satisfied out of the testator's moveable estate? The 10 per cent. share of profits paid to the employees was not remuneration but a gift, being a conditional legacy of future profits with one condition, viz., that the employees should remain in the service. The employees were the servants of the trustees, who owned the business, and dismissable at pleasure— Walker v. Reith , January 12, 1906, 8 F. 381, 43 S.L.R. 245. As such their services were amply compensated by their salaries, which were calculated and regulated on a basis independent of the ten per cent. share of profits. The 10 per cent. and the 90 per cent. were both gifts, differing only in this, that the former had attached one condition and the latter two, viz., the same condition as to remaining in the service, and a second that the fund should be used to purchase the business. It was immaterial that the estate was benefitted as well as the employees. This was a bequest of future profits which but for this provision would have been merely prospective. That a more immediate benefit was given did not change its character. This case was a fortiori of in re Thorley , ut supra , which ruled it, as did Sweeting v. Sweeting , 1 Drew. Ch. Cas. 331. The interlocutor of the Lord Ordinary should be sustained.
At advising—
Lord Pearson —The late Mr James Dick, who died in 1902, was the sole partner of the firm of R. & J. Dick, gutta-percha boot and shoe and belt manufacturers in Glasgow. By his will, dated a few days before his death, he conveyed his whole estate to trustees, and of even date with his will he
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The business had been highly successful, and at Mr Dick's death his capital in it amounted to upwards of £351,000. In order to realise this large sum for his estate it was necessary that the business should be either carried on or sold; and as he had confidence in the heads of the various departments of the business, he devised a scheme by which they were to have a prospective interest in the profits and an opportunity of acquiring the business itself upon paying out this capital.
This was embodied in his deed of arrangement, by the first clause of which he named certain of his employees, to the number of fifteen, to each of whom he allocated a specified number of shares (making one hundred shares in all); and he declared that the provisions of the deed in their favour should not become vested interests until the whole of his capital and interest had been paid out, and that it should not be competent for them to sell or dispose of their interest in the profits or in the business itself on any ground whatever. Further, he directed that if any of them should cease to be an employee, his share should accresce to and be divided among the remaining employees. By the second clause, he directed that interest at the rate of 3 per cent. should be paid to his trustees yearly on the amount of his capital standing in the books; and after allowing for this and for depreciation, the profits were to be divided among the employees in proportion to their shares, “and 10 per centum of such profits shall be paid over to them in cash, and the remaining profits shall not be drawn by the employees but credited to their respective accounts” until the whole of the testator's capital and interest was paid out. It was declared that these remaining profits, being 90 per cent. of the whole, should be accumulated without interest, and form a fund available for the paying out of his capital from the business. By the subsequent clauses it was provided that on the death or bankruptcy of any employee his interest in the business should cease, and that his representatives should only be paid the amount standing at his credit in the books, but postponed to the paying out of Mr Dick's own capital with interest. It is of importance to note the position of the testamentary trustees under this arrangement. While the employees were to carry on the business as it was carried on at the testator's death, the trustees were vested with the exclusive right of granting authority to sign the firm name, of appointing managers and superintendents, and of settling questions as to salaries and wages. To them also was reserved the right to determine how much should be left in the business as working capital, to remove any of the employees from the business, and to decide whether it could no longer be carried on at a profit and ought to be wound up. It was contemplated that ultimately the whole business should be handed over to the employees, but not until the whole of the testator's capital and interest had been fully paid to the trustees, subject to a discretionary power in the trustees to lend part of the capital on the security of the business and assets.
Since the testator's death in 1902 the business has been carried on successfully under this deed of arrangement. The average yearly profits have exceeded £40,000; the testator's capital, which as I have said amounted to over £351,000, is in course of being paid out, and the 10 per cent. of the free profits, amounting to £10,760, has been paid to the employees in cash, over and above their fixed salaries such as they had been when the testator was alive.
It is in these circumstances that the Inland Revenue authorities make the present claim against the testamentary trustees for legacy-duty upon the amount of the 10 per cent. of free profits already paid. The claim is founded on the sixth section of the Legacy Duty Act 1796, read in connection with section 4 of the Stamp Act 1845, a legacy being thereby defined as a gift by the will of any person, which by virtue of such will shall have effect or be satisfied out of the moveable estate of such person. The Lord Ordinary has decided, and in my opinion has rightly decided, that the fund here in question falls within that definition, and that legacy duty is payable by the trustees.
In the first place, it cannot be disputed that the employees take their shares of that fund by and through the will of the testator, for not only does the deed of arrangement itself bear all the characteristics of a testamentary writing, but it is declared to form part of the settlement of his affairs as if it had been embodied in the trust-disposition and settlement, which again in its second purpose refers to the deed of arrangement as a separate testamentary deed, and directs the trustees to carry it out.
Again, the payment has effect and is satisfied out of the moveable estate of the testator. Whatever view may be taken as to the vesting of interests under the settlement, the business, including the goodwill, was and still remains an integral part of his estate, and is carried on by his trustees in pursuance of his testamentary directions. It is true that it is in a sense carried on by the employees. But from the description I have already given from the deed of arrangement, as to the relative positions of the employees of the trustees, it is clear that the business remains vested in and controlled by the trustees, and that the employees are still their servants, and will so remain until the event fixed not by the trustees but by the testator shall arrive and the business shall be transferred. This being so, I cannot accept the argument which was pressed on us by the trustees that the arrangement initiated by the testator is truly an offer of the business for sale to the employees, on favourable terms, and with generous facilities for its acquisition. I think that this view is not maintainable on the facts of the case, and that
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Then it is said that, assuming the fund in question to be fruits of the testator's estate, it cannot be regarded as a gift, seeing that it is part of the emoluments of the employees, who draw the 10 per cent. of profit only so long as they remain in the service of the firm and draw it year by year as salary. It is pointed out that these employees were in the service of the deceased during his life, and it is said that this new arrangement really amounts to an increased remuneration proportioned to their success in keeping the business going. Now, it must be kept in view that this participation in the profits is arranged not by the trustees but by the testator himself, and is operative by his will; and further, that any employee may leave when he pleases. They find that this very advantageous arrangement has been made for them by the testator to the effect that over and above their former salaries they shall be entitled to this proportion of the net profit so long as they continue at their posts. In other words, they are to share in the profits subject to the condition that they remain in the management of the departments. They draw their share not under any contract with the trustees but under and by virtue of the will, and it is none the less a legacy because it is coupled with a condition. This has been so held in England in a case very similar to the present—the case of in re Thorley ( 1891, 2 Ch. 613), referred to by the Lord Ordinary. In that case a manufacturer by his will directed his trustees to carry on his business in conjunction with his son, each receiving an annual sum of fixed amount out of the profits while they did so. It was held by the Court of Appeal, affirming the judgment of North, J., that the amounts so received were legacies and subject to legacy duty, and it was laid down that there was no difference in such a matter between an annual payment and a lump sum, such as a gift by will to executors for their trouble in performing the trusts of the will, which, it is well settled, is dutiable as a legacy.
For the reasons I have stated I am of opinion that the Lord Ordinary is right, and that we should adhere to his interlocutor.
Lord Kinnear —I concur.
Lord M'Laren —The Lord President authorised me to say that he concurred. I myself did not hear the case.
The Court adhered.
Counsel for the Defenders (Reclaimers) — Clyde, K.C.— Cullen, K.C.— Scott Brown. Agent— Henry Robertson, S.S.C.
Counsel for the Pursuer (Respondent) — The Solicitor-General ( Ure, K.C.)— A. J. Young. Agent—The Solicitor of Inland Revenue.