APPEAL from the Third Division of the Appellate Court for the
First District; heard in that court on appeal from the Superior
Court of Cook County; the Hon. JOHN J. LUPE, Judge, presiding.
MR. JUSTICE DAILY DELIVERED THE OPINION OF THE COURT:
Rehearing denied March 24, 1953.
This action was brought in the superior court of Cook County by the trustee of an inter vivos trust created in 1916 by David B. Jones, now deceased, of Chicago. The complaint filed seeks directions with respect to whether the income or corpus should be charged with the payment of the Federal tax on certain capital gains.
The trust was created for the benefit of the settlor's five children and their issue, and, by subsequent amendment, the issue of the settlor's brother and Princeton University were made contingent remaindermen. The terms of the trust divided the corpus into five equal funds and the trustee, United States Trust Company of New York, was directed to administer each fund as a separate trust for the benefit of each of the five children. In 1948 the trustee sold 1400 shares of stock, belonging equally to the five funds, at a profit or gain over acquisition price of approximately $300,000. This capital gain was distributed equally to each of the five trusts, increasing the corpus of each by more than $62,000. The Federal tax liability attributable to the capital gain totaled approximately $60,000, or about $12,000 for each of the separate trusts.
Article six of the trust instrument contains the following direction:
"Article Sixth. Out of the income of the principal of the trust estate the Trustee shall pay all taxes, assessments or other governmental charges which it may be required to pay or to retain because or in respect of any part of the principal of the trust estate or the income therefrom or the interest of the Trustee therein or the interest of any beneficiary or other person therein, under any present or future law of the United States, or of any state, county, municipality, or other taxing authority therein, any and all such taxes, assessments or other governmental charges lawfully imposed being charged as a lien upon the said income, and in case of deficiency of said income upon the principal of the trust estate."
The trustee paid the capital gains tax described above, then initiated this action to obtain a judicial determination as to whether the proportionate shares of the tax should be charged against the income or capital account of each of the five trusts. The chancellor concluded that article sixth compelled a holding that the tax was chargeable to income and not to corpus. Following this the income beneficiaries were granted leave to file a counterclaim wherein it was maintained that the construction which charged such taxes to current income would cause an invalid accumulation of income in violation of the act restraining directions in conveyances, etc., commonly known as the Thellusson Act. (Ill. Rev. Stat. 1951, chap. 30, par. 153.) The chancellor also decided this issue against the income beneficiaries, who then appealed to the Appellate Court where the decisions of the chancellor were affirmed. (United States Trust Co. of New York v. Jones, 346 Ill. App. 365, 105 N.E.2d 122.) We have granted leave to appeal to this court, and in the briefs filed here it is only the guardian ad litem for minor defendants and trustee for persons not in being who opposes the contentions of the appellants.
It is significant to note at this point that the tax liability on the $300,000 capital gain can be satisfied by the payment of approximately $60,000 if paid out of the corpus in one payment; whereas, if the tax is chargeable to income, it will actually cost each of the five trusts well in excess of $15,000. In the latter case the total cost of satisfying the tax becomes approximately $77,000, or about $17,000 more than it would be if the tax were to be paid outright from the corpus. This incongruous result is due to the intricacies of the Federal income tax law dealing with the taxation of trusts, which, when applied to this case and to payment of the tax from current income, would require the trustee to withhold distribution of income in each of the trusts for 1950 and three years following, until the total tax liability assessed in 1949 has been paid. The amount of income so withheld in each of the years to pay the capital gains tax is not deductible in each year as distributed income in determining the trust's yearly income tax liability, and accordingly it becomes taxable income upon which the trustee must pay tax. The result is a tax upon a tax and an increase of more than $17,000 in the capital gains tax for the trust entity as a whole. In addition the beneficiaries are deprived of a substantial portion of the income the settlor intended they should have.
A further factor to be considered is that the bulk of the trust corpus is comprised of New Jersey Zinc Company stock which, under the terms of the trust, cannot be sold without the written consent of two of the trust beneficiaries. As income beneficiaries it is not to be expected that they would consent to sale, even though sound business practice motivated the trustee to seek the sale of the stock, when the result of their consent would be to subject themselves to the burden of paying the tax on the fruits of the sale, which do not belong to them, and at the expense of depleting the income they would otherwise enjoy.
It was the stress of these circumstances which prompted the trustee to commence this action for construction and directions, and it is upon these facts that the appellant income beneficiaries ask a reversal of the decisions of the lower courts that the capital gains tax must be paid from current income rather than corpus. In the alternative, they urge that if the trust is construed to expressly direct the payment out of income, such direction creates an invalid accumulation of income.
There is little dispute between the parties here or the authorities that, in the absence of express provisions to the contrary, the profits or increments of corpus belong to the corpus of the trust and are not income. (DeKoven v. Alsop, 205 Ill. 309; Vanatta v. Carr, 229 Ill. 47.) The same may be said for the proposition that, barring the presence of explicit trust language directing otherwise, taxes and impositions levied on account of gain realized on capital will be charged against and payable out of capital. (Warren v. Lower Salt Creek Drainage Dist. 316 Ill. 345; Huston v. Tribbetts, 171 Ill. 547; Bogert, Trusts and Trustees, chap. 38, sec. 804, note 71.) Therefore, the tax under consideration here should be paid out of corpus unless article six of this trust is construed to direct the payment out of income with such unequivocal clarity as to preclude the application of the general rules set out above.
Before it can be said that no ambiguity exists, we must conclude that the questioned words or language are capable of but one interpretation. Such conclusion must be determined from a consideration of the entire trust instrument and not from a single portion thereof. (Williams v. Swango, 365 Ill. 549; Wise v. Wouters, 288 Ill. 29; Wilkin v. Citizens Nat. Bank, 298 Ill. App. 38, 18 N.E.2d 251.) Contrary to the decision of the lower courts, we do not believe that the terms of article six, or of the trust instrument as a whole, point with compelling clarity to an intention of the settlor to require the beneficiaries of the distributable income to pay the tax on capital gain which could in no event profit such beneficiaries.
The object of judicial construction of a written instrument is to ascertain the true intent of the parties and to carry it out if it does not conflict with any rule of law, or good morals, or the public policy of the State. (Olson v. Rossetter, 399 Ill. 232; Plast v. Metropolitan Trust Co. 401 Ill. 302.) Unfortunately, the law provides no precise scale with which to measure the meaning of words in interpreting written instruments, leaving courts to depend on general rules of construction which look to the manifest intention of the one who uttered the words and to results which avoid the unreasonable and impractical. Even the application of general rules must be tempered by the language used in the particular instrument under consideration. The problem presented is of the sort described by Judge Learned Hand, speaking in United States v. Klinger, 199 Fed.2d 645, as follows: "The issue involves the baffling question which comes up so often in the interpretation of all kinds of writings: how far is it proper to read the words out of their literal meaning in order to realize their overriding purpose? * * * When we ask what * * * [was] `intended,' usually there can be no answer, if what we mean is what any person or group of persons actually had in mind. Flinch as we may, what we do, and must do, is to project ourselves, as best we can, into the position of those who uttered the words, and to impute to them how they would have dealt with the concrete occasion."
In construing a written instrument, its letter should be controlled by its spirit and purpose, bearing in mind that the terms employed are servants and not masters of an intent, and are to be interpreted so as to subserve, and not to subvert, such intent. To this end courts are sometimes required to restrict the meaning of words. (See, 12 Am. Jur., Contracts, sec. 236.) A very applicable decision of this court is McCoy v. Fahrney, 182 Ill. 60, which involved the construction of a trust agreement where a man in difficulty conveyed his property to a trustee to pay his debts, after which the trustee was to pay the annual proceeds of the land to Elizabeth Ankeney, wife of the settlor, during her natural lifetime, and after her decease to convey the lands to all the children of the said Elizabeth Ankeney. The wife subsequently obtained a divorce from the settlor, married again, and also had children by the second husband. Though it is obvious that the literal meaning of the words "all the children of the said Elizabeth Ankeney" would include children born by the second husband, this court said: "The word `all' must, in view of the manifest intention of the grantor, be so limited in meaning as to refer only to all of the class of children intended to be benefited by the instrument." Before making the aforesaid conclusion, we said: "A narrow and unreasonable construction, and which would work a result different from that manifestly intended, should not be adopted. (Dunlap v. Chicago, Milwaukee and St. Paul Railway Co. 151 Ill. 409.) `The language used may be enlarged or limited by the attendant circumstances and the objects had in view, and more regard is due to the real intention of the parties than to some particular word that may have been used in the expression of that intention.' (Chicago, Madison and Northern Railroad Co. v. National Elevator Co. 153 Ill. 70.) `The experience of human affairs teaches courts that this ...