Armory v. Delamirie & the Evolution of Property Rights

Property Possession Right Law Priority
The Property Right of Possession

The evolution of our law is truly an amazing phenomenon. It is equal parts humbling and awe-inspiring to contemplate that many foundational legal concepts trace their origin to cases which occurred hundreds of years ago. To the casual observer, it may seem as though our law emerged just recently all at once as a finished product, the miraculous outcome of one act of divine intervention; in actuality, our system has come about through an exceedingly slow, gradual process of revision and refinement transpiring over the course of many centuries.

Take, for example, the very basic idea that a person who finds an object establishes some type of claim of ownership to the object. Colloquially, this principle is referred to as the rule of “finders, keepers.” This simple notion was not created by an American jurist, nor was it created within living memory. In point of fact, this idea first acquired legal significance through the famous English case of Armory v. Delamirie which was heard in 1722. Armory formally established the principle that a finder acquires a form of legal title by way of possession.


Armory (plaintiff) was the helper of a chimney sweep. While on the job, he found a jewel composed of gems embedded in a ring. Armory took the jewel to a goldsmith (Delamirie, the defendant) to have it appraised. The goldsmith’s apprentice took the gems from the ring so as to weigh them separately. The apprentice gave Armory an estimation of their value and then returned the ring without the gems. The apprentice made an offer for the jewel but Armory declined. Armory demanded that the gems be returned inside the sockets of the ring in the same condition as when they were initially brought to the goldsmith’s shop. The apprentice did not comply – presumably on the excuse that he “lost” the gems – and subsequently Armory brought a suit against the goldsmith (via respondeat superior) for the return of the jewel.

The issue before the court was whether Armory had a superior title to the jewel despite the fact that he was not the true owner. That is, whether the title he acquired through finding the jewel was sufficient to warrant the return of the jewel from the goldsmith.


In the hierarchy of ownership, the present possessor (or finder) has a superior title against everyone except the true owner.


The court (The Court of King’s Bench) ruled in favor of Armory. Since he found the jewel, Armory’s title was superior to all but the true owner; and since the true owner was unknown this effectively gave Armory true ownership. The court ordered Delamirie to pay Armory for the jewel at the highest possible estimation of the jewel’s value in the absence of any contradictory evidence as to the jewel’s value.

The importance of possession in acquiring property rights was understood prior to the case of Armory v. Delamirie; in fact, the rule of “finders, keepers” has existed in some form since ancient Rome. But it was Armory which caused this old idea to be codified in our common law. The fact that our common law was heavily impacted by a chimney sweep helper’s stroke of good fortune is nothing less than remarkable.

Image credit: Aleksey Gnilenkov

Readers who enjoyed this piece should view our presentation on the tax savings available to real estate owners given by our CPA Jessica Chisholm

United States v. Winthrop & the Test for Ordinary Income

Investment Property Real Estate Land Capital Gain
Investment Property

In our earlier article about the case of Byram v. United States (1983), we introduced the 7 pillars of capital gain treatment and discussed the recurring issue of distinguishing business sales from investment sales. In Byram, the court found the profits of multiple real estate transactions to be capital gains due to the peculiar facts which surrounded the transactions. In this article, we will discuss the specifics of an earlier case – United States v. Winthrop (1969) – in which the court rejected the capital gain classification and ruled that certain transactions were sales made in the ordinary course of business.

It is important that our readers have an understanding which is as clear as possible of what constitutes a capital gain so that they can avoid any unpleasant surprises. The facts of United States v. Winthrop contribute toward this understanding.

The case of United States v. Winthrop will also give readers a sense of the unpredictability in judicial reasoning. Prior to being heard by the Fifth Circuit Court of Appeals, the facts of this case were found to support a capital gain classification at the trial court; the Fifth Circuit actually had to overturn this finding to reach its conclusion. And given that there was no dispute between the trial court and appellate court over any matter of fact in the case, and that there were multiple potentially compelling cases cited by Winthrop, it follows that the outcome of even a strongly backed case cannot be predicted with mathematical certainty.


Over the course of a number of years, Mr. Winthrop (respondent in appellate case) inherited several pieces of real estate. Collectively, these pieces were referred to as “Betton Hills.” Mr. Winthrop inherited his first piece of land in 1932, and he began to develop that same piece a few years later in 1936. Mr. Winthrop inherited additional pieces of land at various other dates (1946, 1948 and 1960).

In 1936, Mr. Winthrop made his first sale by selling a portion of the land he had began developing earlier that same year. Mr. Winthrop continued to develop his land and sell portions of it to interested buyers up until his death in 1963. Hence, his sales operation spanned multiple decades. Though he did not create a business office, he devoted massive amounts of energy to developing the land so as to make it more marketable. What’s more, the income derived from real estate sales constituted the majority of his entire income for many years prior to his death. Mr. Winthrop also began to include “real estate” as his occupation for a number of years in official documents before his death. The question before the court was: should Mr. Winthrop’s activities receive capital gain treatment given the facts which underlay them?


There are a number of common law tests which have been developed to aid the court in its determination of capital gain treatment. Though this is true, the court must also be certain to view each case as an independent matter and provide each case with its own analysis.

In United States v. Winthrop, there was no disagreement made by the Fifth Circuit regarding the fact that the land was held “primarily for sale” by Mr. Winthrop. The only remaining issue was whether the sales executed could be classified as sales made in the ordinary course of business. The Fifth Circuit stated that the ordinary course of business determination depends on whether selling the land was Mr. Winthrop’s primary purpose in holding the land.


The Fifth Circuit overturned the trial court’s finding and determined that the sales made by Mr. Winthrop were made in the ordinary course of business and therefore should be disqualified from capital gain treatment. Mr. Winthrop clearly had a reasonably strong case given that he did not actively and aggressively advertise his properties, he did not maintain a sales office, did not reinvest his profits in other real estate (for the purpose of growing his business) and he initially acquired the real estate through inheritance rather than purchase. There were certainly many facts capable of supporting his position. Ultimately, the fact that Mr. Winthrop only used the properties for the purpose of selling to customers proved to be decisive.

Image credit: Mark Moz

Byram v. United States & the 7 Pillars of Capital Gain Treatment

Real Estate Property Transaction Sales Business
Real Estate Transactions

The tax code draws a distinction between ordinary income and income derived from the sale of a capital asset, or “capital gain.” In most instances, this distinction is straightforward and there is little confusion about whether income falls into one category or the other. Every now and then, however, a situation develops in which the classification of income is a difficult matter. There is much at stake in the determination of whether income is either ordinary or derived from the sale of a capital asset: capital gains can be taxed at substantially lower rates than ordinary income.

The case of Byram v. United States (1983) provides one example of the difficulty occasionally involved in distinguishing between a “business” sale – which would trigger ordinary income – and an investment sale. The tax code recognizes a number of general characteristics of business sales and investment sales; sometimes a transaction possesses characteristics of both a business sale and an investment sale, or it lacks enough characteristics of one type of sale to merit a definitive classification.

If you engage in real transactions with any kind of regularity, be sure that you’re aware of these characteristics so you can avoid any unpleasant surprises when tax time rolls around.


John Byram owned multiple pieces of real estate. Between the years 1971 and 1973, Byram sold a total of 22 pieces of real estate for a gross return of $9 million and a net profit of $3.4 million. He sold 7 pieces of real estate in 1973 alone.

Importantly, Byram did not have a business office; he did not advertise; he did not utilize the services of a broker; he did not subdivide the land; he spent only a small amount of time and effort engaging in the transactions; all of the transactions were initiated by the purchasers.


The question of whether a transaction – or set of transactions – can receive “capital gain treatment” (and therefore be subject to the rates applicable to capital gains) depends on the characteristics of the transaction. Courts recognize the 7 “pillars” of capital gain treatment when deciding whether a given transaction should be deemed either an investment sale or business sale.

The 7 Pillars of Capital Gain Treatment can be summed up as follows: (1) purpose of the acquisition of the property and duration of ownership; (2) extent of the efforts to sell the property; (3) number, extent, continuity and magnitude of the sales; (4) time and effort devoted to developing the land and advertising to increase sales; (5) use of a business office; (6) degree of supervision exercised by the owner over any representative selling the property; (7) overall time and energy dedicated to the sales.

The question before the court was: do the transactions made by Byram between 1971-1973 merit capital gain treatment based on the guidelines established through the 7 pillars?


The court (the Court of Appeals for the Fifth Circuit) affirmed the ruling of the lower court in favor of Byram. The transactions engaged in by Byram (and his buyers) possessed enough characteristics of an investment sale to trigger capital gain treatment. The determination of whether capital gain treatment is warranted requires an independent analysis for each individual case; in the Byram case it was clear that the evidence supported the conclusion that the properties were not sold as part of a business enterprise but as investments.

The Byram case is highly useful for people who own multiple pieces of real estate and who are considering selling these pieces in the future. It is important for these owners to be conscious of the facts of Byram so that they can be certain to receive capital gain treatment.

Image credit: PT Money

Readers who enjoyed this essay should check out our presentation of the tax benefits of real estate ownership by CPA Jessica Chisholm

Bailey v. Drexel Furniture Co. & the Child Labor Tax Law of 1919

Drexel Child Labor Tax Law Constitutional Penalty
Supreme Court

To most contemporary Americans, exploitative child labor practices seem like an ancient, prehistoric phenomenon far removed from the context of advanced civilization. But, crazy though it sounds to modern ears, such practices sadly occurred on a fairly regular basis in the not too distant past of our society. In fact, our society was grappling for ways to combat this problem less than 100 years ago. In 1919, Congress addressed this issue through its Child Labor Tax Law. The law imposed a tax of 10 percent on the net profits of companies which employed children (as defined by the age limits of the law).

With the Child Labor Tax Law, the Congress was attempting to curtail child labor by regulating business through its taxing power. In effect, Congress was “punishing” businesses for exploiting the labor of children through the tax.

One curious result of constitutional restrictions on government power is that occasionally good laws are thrown out. Obviously, no one in 1919 disputed the desirability of a law which aimed to prevent abusive child labor practices; the issue which arose in Bailey v. Drexel Furniture Co. (1922) was whether the Congress went beyond the bounds of its constitutionally delineated authority by using a “tax” to stop unethical behavior. As we will see, the Bailey case illustrates the difficulty involved with maintaining restrictions on government power even when such power is being tailored for good ends.


Drexel (plaintiff in original suit and respondent in appellate case) was a furniture manufacturing company which employed a child under the age of 14 during the 1919 tax year. In agreement with the Tax Law, Bailey (the tax collector for the government) assessed a tax of $6,312.79 for such behavior. Drexel paid the full amount and then sued for recovery.

Drexel argued that the tax was a covert “penalty” designed to punish undesirable behavior and that the law was therefore an unconstitutional attempt to regulate business. The government argued that the levying of the tax was fully consistent with its broad taxing powers as prescribed by Article One of the Constitution.


The Congress has the power to lay and collect taxes as outlined by the Constitution. However, this power is not unlimited and when the Congress attempts to step beyond its bounds such attempts must be struck down.


The Supreme Court ruled in favor of Drexel (as did the lower court). Although no issue was raised as to the desirability of the Tax Law, the court reasoned that the tax created by the law was in fact a disguised penalty and it was therefore impermissible. The court defined a “tax” as a source of revenue for the government, while a penalty is a punishment intended to deter certain behavior. Penalizing unethical behavior is not a function of the taxing power of the Congress but should be addressed through the criminal law of individual states.

The decision in Bailey was controversial in part because other taxes aimed at curtailing (or in some sense penalizing) certain behavior had been upheld. For instance, excise taxes on drugs and firearms have not been regarded as improper attempts by the Congress to regulate business. But the court in Bailey recognized that an overly broad reading of Congress’ taxing power could result in the obfuscation of its proper function and unfairly reduce the power of the states.

Image credit: Davis Staedtler

United States v. E. C. Knight Co. & the Scope of the Sherman Antitrust Act

Business Monopoly Law Antitrust Act Commerce
The Regulation of Monopolies

One of the chief functions of our government is to ensure a fair and equitable market in which businesses may compete to offer goods and services to consumers. Our law has been developed and shaped in accord with this function. In order for free enterprise to flourish, our government must see that the marketplace is kept competitive and that attempts to obstruct or excessively limit competitiveness be swiftly eradicated. In the late nineteenth century, one particular law – the so-called Sherman Antitrust Act of 1890 – was passed with the purpose of promoting business competitiveness. The law forbade individuals from creating (or attempting to create) a monopoly of any part of the trade or commerce among the states or with foreign nations. This law stood in its original form until 1914 when it was expanded in scope by the Clayton Antitrust Act.

Very soon after the Sherman act was passed, disputes arose which required that the scope of the act be clarified. The case of the United States v. E. C. Knight Co. (1895) was one of these disputes. As we will see, the ruling of this case showed that the scope of the Sherman act was not so far-reaching that it could suppress a monopoly of the manufacture of a good.


E. C. Knight Company (the defendant) was acquired by the American Sugar Refining Company. This acquisition gave the company control over approximately 98 percent of the sugar refining industry. The U.S. government (plaintiff) attempted to utilize the provisions of the Sherman act to prevent the acquisition and thwart the creation of the virtual monopoly. The key question was whether the Sherman act allowed the government to interfere with a monopoly of the manufacture of a good as opposed to its distribution across state lines.


The U.S. Constitution grants the Congress the power to regulate commerce among the states. The Sherman Antitrust Act included provisions which were ultimately in agreement with this basic power. The second section of the Sherman act reads as follows: “…Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony…”

The scope of the Sherman act clearly extends to monopolies of the distribution of a good; but did the Sherman act extend to monopolies of the manufacture of a good on a strictly local level?


The court ruled that the Sherman act did not apply to this type of locally defined activity. However, since the acquisition resulted in a monopoly over the manufacture of a “necessity of life” (in the words of the court), this meant that the acquisition could be subject to individual state regulation.

In effect, the ruling of this case significantly curtailed the authority of the Congress to regulate the national economy as it declared manufacturing monopolies to be local matters. This restrictive view on Congressional authority to regulate commerce would remain unchanged until the late 1930s.

The case of the United States v. E. C. Knight Co. shows clearly some of the difficulties involved in trying to balance the ideals of a competitive marketplace and limited government. And for this reason the legacy of E. C. Knight Co. represents different things to people on different places of the ideological spectrum. However it is interpreted in any individual instance, there can be no denying its stature as a pivotal case in U.S. judicial history.

Image credit: VasenkaPhotography

Brushaber v. Union Pacific Railroad Co. & the Rise of the Federal Income Tax

Congress Tax Power Constitution Law
U.S. Congress

As we have learned in previous installments, for most of its history, the United States has recognized a distinction between direct taxes and indirect taxes, and this distinction informed our law prior to the adoption of the sixteenth amendment. After the sixteenth amendment, the Congress was no longer bound to ensure that direct taxes follow the rule of apportionment outlined by Article 1, Section 9, Clause 4 of the U.S. Constitution. And given that this rule of apportionment was the main reason behind the distinction between direct and indirect taxes, it follows that subsequent to the sixteenth amendment such a distinction was essentially meaningless.

Immediately after the rule of apportionment had been lifted, the Congress passed the Revenue Act of 1913 (also referred to as the Underwood-Simmons Act). In addition to lowering tariff rates, this act implemented a progressive federal income tax system. This income tax was originally intended to compensate for the deficit created by the reduced tariff rates, but soon after its implementation it became the chief source of revenue for the U.S. government. Consistent with the language of the sixteenth amendment, the tax on income could be derived from any source (wages, dividends, interest, rents, etc.). Amazingly, in its first several years of application, the federal income tax only applied to roughly 1 percent of the population as the other 99 percent did not meet the income threshold to qualify.

Even though the language contained in the sixteenth amendment was quite clear, not much time passed before the validity of the Revenue Act of 1913 was challenged. As we will see, the case of Brushaber v. Union Pacific Railroad Co. (1916) upheld the ability of the Congress to tax income (whether direct or indirect) without the traditional constraint of apportionment.


Mr. Frank Brushaber (plaintiff) owned stock in Union Pacific Railroad Company (defendant). The railroad attempted to pay a tax on Brushaber’s income and Brushaber brought a suit to prevent the railroad from doing so. Brushaber based his suit on several grounds: he argued that (1) the Revenue Act of 1913 violated the due process clause of the Constitution, (2) that the act was unconstitutional because it exempted specific types of income, and (3) that the act was unconstitutional because it failed to follow the rule of apportionment put forth by Article 1, Section 9, Clause 4.


The Congress has always had the power to tax income. This power is derived from the Constitution and consequently there cannot be any conflict between this constitutionally conferred power and the due process clause.

The sixteenth amendment removes the requirement that direct taxes must be properly apportioned among the states according to population. Hence, the Congress is able to lay and collect taxes, both direct and indirect, without regard to the apportionment rule laid out by Article 1, Section 9, Clause 4.


The Supreme Court threw out all three arguments made by Brushaber and ruled that the federal income tax created by the Revenue Act of 1913 was fully valid and did not violate the Constitution. In essence, the court in Brushaber simply reaffirmed the clear language of the sixteenth amendment. Following Brushaber, challenging the validity of the Revenue Act would have been a pointless endeavor.

The early twentieth century saw two extremely important developments in U.S. taxation: the consolidation of the taxing power of the Congress by way of the sixteenth amendment and the creation of the federal progressive income tax system. In our next installment, we will look more closely at the provisions of the Revenue Act of 1913 and discuss how the federal income tax system evolved up to its present form.

Image credit: Daniel Mennerich

A Note on Direct & Indirect Taxes

Money Tax System Direct Indirect
Direct & Indirect Taxes

In recent installments, we have discussed some of the legal and political issues surrounding the income tax. Upon reviewing these installments, there can be little doubt that the history of taxation in these United States is quite complex. Though the Congress has always had a power to tax, the precise scope of its taxing power has evolved in tandem with various social, economic and military events. The taxing power of the Congress was clarified a great deal by the sixteenth amendment – by way of this amendment, the Congress gained the power to tax income “from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Before the sixteenth amendment, the Congress was limited in its ability to lay and collect “direct” taxes. Article 1, Section 2, Clause 3 of the U.S. Constitution states that direct taxes must be apportioned among the states according to their respective numbers; the rationale of this provision was to ensure that no state was disproportionately – and therefore unfairly – burdened by an oppressive tax system.

Every type of tax can be classified as being either a direct or indirect tax. Broadly speaking, a direct tax is one paid by the individual (or business entity) to the government; it is aimed specifically at the person who is paying the tax. By contrast, an indirect tax is one levied upon a transaction, it is not targeted to a specific individual. Sales tax, use tax and value added tax are all examples of indirect taxes. Historically, U.S. tax law regarded tax on labor (or wages) as an indirect tax.

Prior to the opinion made in Pollock v. Farmers’ Loan & Trust Co. (1895), tax on income derived from property (i.e. from real estate, stocks, bonds, etc.) was not considered a direct tax. The Pollock case overturned this consideration and ruled that such a tax was a type of direct tax and that therefore the income tax provision of the Wilson-Gorman act was unconstitutional. In effect, the Pollock decision made it essentially impossible for the government to impose a federal income tax without a constitutional amendment. The sixteenth amendment, which was ratified in 1913, was a direct response to the Pollock ruling: the politicians in the Congress came to understand the full implications of Pollock and so the sixteenth amendment simply did away with the longstanding requirements concerning direct taxes.

When viewed in proper historical context, the sixteenth amendment was a political act of truly monumental significance. Through this act, the dichotomy of direct and indirect taxes – a dichotomy which had shaped our system of taxation throughout our nation’s entire history – was suddenly made to have no meaning at all. Immediately subsequent to this act, the Revenue Act of 1913 was passed, and the progressive income tax system which we have come to know so well was implemented.

Image credit: Alejandro Mallea

Pollock v. Farmers’ Loan & Trust Co. and the Defeat of the Income Tax

Court Law Income Tax
The Supreme Court

In the previous installment of Huddleston Tax Weekly, brief reference was made to the case of Pollock v. Farmers’ Loan & Trust Company of 1895. The opinion in this case – which was a landmark decision in its time – held that the power granted by the Wilson-Gorman Tariff Act of 1894 to collect an income tax on interest, dividends and rents was unconstitutional. The opinion set forth in Pollock was effectively nullified by the sixteenth amendment, but if not for this amendment Pollock certainly would be regarded among the most important decisions in U.S. history. Given its significance as a historical matter, let’s look at the Pollock case in greater detail.


As we learned previously, the Wilson-Gorman measure imposed a 2 percent tax on income above $4,000. This tax was implemented in order to cover the deficit created from the reduced tariff rates put in place by the measure. After the measure was passed, the Farmers’ Loan and Trust Company (the defendant) announced to its shareholders that, in addition to paying the tax required by the law, it would furnish the names of the shareholders liable for the tax to the collector. Pollock (the plaintiff) owned only ten shares of stock in Farmers’ Loan, but he brought suit against the company to prevent it from paying the tax.


Article 1, Section 2, Clause 3 of the U.S. Constitution holds that direct taxes are permissible but they must be apportioned among the states of the union based on population. If a tax is found to be classifiable as direct, then it must contain a provision to be properly apportioned in accord with this rule.


The court (Supreme Court of the United States) ruled that the income tax imposed by the Wilson-Gorman act was a direct tax because of its substantial impact on personal property (i.e. stocks, bonds, etc.). Since it was a direct tax, it needed to be apportioned consistent with constitutional requirements. And because it was not apportioned in this manner it was invalid.

Pollock was an extremely important opinion because, in effect, it substantially curtailed the taxing power of the Congress. If every tax on income derived from property is regarded as a direct tax, then the rule of apportionment would need to be abandoned entirely to collect any tax other than excise taxes. This is precisely the function served by the sixteenth amendment: the sixteenth amendment holds that direct taxes need not be subject to the traditional rule of apportionment.

Image credit: DHuiz

Dickinson v. Dodds & the Legal Importance of Time

Time Law Contract Formation Property
Legal Weight of Time

In so many areas of life, timing is of extreme importance. Timing is particularly important in the business world. As so many stock brokers and other businesspeople are aware, small portions of time can mean the difference between many thousands – and even millions – of dollars. Smart businesspeople know that most – if not all – sound business decisions involve an element of time: a sound decision is not solely about what transpires, but when something transpires as well.

Unsurprisingly, business contracts follow this same rule: our law recognizes that time is something which naturally carries value of itself. In contract parlance, time has bargaining power, and as such it can be used to provide consideration for an agreement. The case of Dickinson v. Dodds (1876) should be required reading for every business professional: in this famous case, an offer was extended for a certain period of time, but because nothing of value was given by the prospective buyer, the seller was free to withdraw the offer prematurely and give a new offer to a third party. Dickinson v. Dodds provides clear evidence of the legal significance of time in contract formation.


Dickinson (the buyer and plaintiff) received an offer from Dodds (the seller and defendant) regarding a piece of real property. Dodds offered to sell his property to Dickinson for a sum of £800. Dodds made the offer on Wednesday and verbally agreed to keep the offer open until 9 am on Friday. On Thursday, while Dickinson was still contemplating the offer, a third party (Mr. Berry) notified Dickinson that the property had already been sold to another party (Mr. Allan). Dickinson, believing that the original offer was still viable, met Dodds at a railway station at approximately 7 am on Friday and attempted to accept the price of £800 for the property. Dodds informed Dickinson that the property had indeed already been sold to the other party and that, although the original offer was apparently still open until Friday morning, acceptance was no longer possible.

Dickinson brought suit against Dodds (and Mr. Allan) in order to nullify the sale on the grounds that a valid offer was still “on the table.”


In the formation of contracts, time has value, and therefore it must be bargained for in order for one party to benefit from it. Hence, if a buying party wishes to keep an offer open for a certain period of time while he contemplates its merits, he must give something of value in return otherwise there is no consideration for the period of time given by the selling party.


The court (the Court of Appeal of the Chancery Division in England) ruled in favor of Dodds. Dickinson’s interpretation of the communication from Dodds, which held that a third party could not purchase the property until after 9 am on Friday morning, was false. Though, on the surface, it may have seemed like Dickinson had the exclusive privilege of buying the property until Friday morning, this was not actually the case because the element of time had not been bargained for.

Dickinson’s acceptance at approximately 7 am on Friday was invalid given the fact that he had already received reliable communication of acceptance by another party. Dickinson’s attempted acceptance on Friday morning was predicated on the assumption that Dodds was unable to extend an offer to a different party until after 9 am on Friday. This assumption was false.

The lesson is clear: the significance of time is such that it is encoded in our law. Businesspeople must be aware of the fact that time has this type of legal importance as they engage in business negotiations.

Image credit: Sean MacEntee

Underhill v. United States Trust Company: An Introduction to Trusts

Financial Trust Law Trustee
Financial Trust

One of the chief goals of Huddleston Tax Weekly is to acquaint our readers with as many financial concepts as possible. The more financial knowledge our readers possess, the better they will be able to make sound decisions. Today we will discuss the concept of the financial trust. A trust is a legally recognized arrangement in which property is held by one party (referred to as the trustee) for the benefit of a different party (referred to as the beneficiary). Trusts are frequently established in wills in order to ensure that property is adequately managed and controlled for its beneficiaries. The terms of a trust can vary widely; one constant is that the trustee has a legal obligation to act in the interests of the beneficiaries.

With the creation of a trust, the individual who places the property into the hands of the trustee (known as the settlor) sacrifices a portion of his “bundle of rights” to the property. Consistent with this fact, typically a trust cannot be unilaterally removed by the settlor once it has been established. Hence, those thinking about setting up a trust should reason through the matter thoroughly and carefully because trusts are not the easiest things to do away with.

As we will see, the case of Underhill v. United States Trust Company (1929) provides good evidence for this last statement.


Ms. Evie Underhill (settlor) created a trust in which the trustee (United States Trust Company) was granted power to sell the property of the trust and then reinvest the profits at its discretion. Upon selling the property of the trust the trustee was supposed to receive a commission. Thus, due to the particular terms of the trust, the trustee acquired a “contingent interest” in its continuation because of its power to sell the property.

Both the settlor and the beneficiary attempted to dissolve the trust before the trustee had a chance to sell the property. The settlor and the beneficiary argued that dissolution of the trust was permissible because it was desired by both of them; the trustee argued that dissolution was impermissible because the terms of the trust granted him an interest in its continuation.


When the express terms of a trust create a contingent interest for the trustee it is not permissible for the court, settlor or beneficiary (or both the settlor and beneficiary together) to alter or terminate the trust without the consent of the trustee.


The court did not allow Ms. Underhill and the beneficiary to terminate the trust. The key aspect of the case was that the terms of the trust expressly conveyed an interest to the trustee. And since a trust is essentially a contractual agreement it follows that there must be consent from all parties in order to have the trust terminated.

Let this be a lesson: be sure that the terms you attach to your trust are such that they completely capture your full desire not only in the present moment but also the remote future.

Image credit: dbjtgomez