Dermot Hanrahan v Revenue Commissioners

• Jurisdiction: Ireland
• Judge: Ms. Justice Stack
• Judgment Date: 14 January 2022
• Neutral Citation: [2022] IEHC 43
• Court: High Court
• Docket Number: [Record No. 2021/2R]

Between

Dermot Hanrahan

Appellant

and

Revenue Commissioners

Respondent

[2022] IEHC 43

[Record No. 2021/2R]

THE HIGH COURT

Case stated – Tax avoidance – Taxes Consolidation Act 1997 – Appellant seeking to appeal by case stated – Whether the Appeal Commissioner was correct to find that a transaction was a tax avoidance transaction within the meaning of s. 811 of the Taxes Consolidation Act 1997

Facts: The appellant, Mr Hanrahan, appealed to the High Court by way of case stated pursuant to s. 949AQ of the Taxes Consolidation Act 1997 (the TCA) from the determination of the Appeal Commissioners dated 2 July 2020. The determination arose out of a notice dated 23 December 2009, issued by a nominated officer of the respondent, the Revenue Commissioners, pursuant to s. 811(6) TCA, which informed the appellant that the nominated officer had formed the opinion that a particular transaction was a “tax avoidance transaction” within the meaning of s. 811(2) TCA. The Appeal Commissioner stated the following questions of law for the opinion of the Court: question (b) - whether the notice of opinion is prohibited as being out of time by reason of s. 955(2) TCA; questions (c), (d), (e), (f), (g) and (h) - whether the Appeal Commissioner was correct to find that the transaction was a “tax avoidance transaction” within the meaning of s. 811 TCA, such that the appellant should be restricted to deducting his actual loss of €258,591 rather than the much greater loss arising from the operation of the deeming provisions in s. 549; and question (a) - whether the notice of opinion was void by reason of an error in the description of the component parts of the transaction. In addition, the following issue was raised in argument before the Appeal Commissioner and again before the Court: whether the Appeal Commissioner ought to have dealt with double taxation.

Held by Stack J that the time limits in s. 955(2) TCA did not apply to the notice of opinion or any part of it, by reason of s. 811(5A), and, in the case of any tax sought to be recovered in respect of the relief against capital gains allowed in the 2005 tax year, on the alternative basis that the notice of opinion would not become final and conclusive until the determination of the proceedings and the said return did not contain any material non-disclosure which would preclude the application of s. 955(2). Stack J held that there was an error in the description of the put option which was identified as part of the “tax avoidance transaction” by the nominated officer. Stack J held that were the opinion to be upheld, it might be necessary to amend that error. Stack J reserved to a future case in which it was necessary to decide the issue, whether the Court enjoyed a power to amend the notice of opinion or whether the Court should remit the matter to the Appeal Commissioner for the purposes of effecting such amendment as is required. Stack J held that the transaction as described at para. 7 of the case stated was not a “tax avoidance transaction” within the meaning of s. 811(2) TCA, as the claiming of relief pursuant to s. 31 TCA was not a misuse or abuse of that provision. Stack J held that, in particular, the tax advantage was achieved by utilising provisions of the TCA which were anti-avoidance provisions specific to the question of which artificial losses would be accepted for the purposes of deducting losses pursuant to s. 31. Stack J held that, as a consequence, the notice of opinion of 23 December 2009 should not stand. Stack J held that double taxation relief did not apply in the case.

Stack J held that she would list the matter before her in early course for the purpose of making the relevant order and to deal with the costs of the case stated.

Case stated.

JUDGMENT of Ms. Justice Stack delivered on the 14th day of January, 2022.

Introduction

1 This is an appeal by way of case stated pursuant to section 949AQ of the Taxes Consolidation Act 1997 (“the TCA”) from the Determination of the Appeal Commissioners dated 2 July 2020 (“the Determination”).

2 The Determination and consequently this appeal arises out of a Notice dated 23 December 2009 (“the Notice of Opinion”), issued by a nominated officer of the Revenue Commissioners (“Revenue”) pursuant to s. 811 (6) TCA, which informed the appellant that the nominated officer had formed the opinion that a particular transaction, to which I will refer in more detail below, was a “tax avoidance transaction” within the meaning of s. 811 (2) TCA.

3 The Notice, after setting out the details of the transaction to which it related, then stated that the nominated officer considered that it had resulted in a tax advantage to the appellant by the reduction of his Capital Gains Tax liability in 2004 and 2005 in the total sum of €531,471 (being 20% of the total losses claimed, which were €2,657,358).

4 The Appellant was then informed:

“The tax consequence that would arise in respect of the transaction should this opinion become final and conclusive shall be that the Revenue Commissioners will (a) make an assessment to Capital Gains Tax for 2004 to withdraw the capital loss relief claimed by you in the sum of €1,408,469 and (b) amend the 2005 Capital Gains Tax assessment to withdraw the capital loss relief claimed by you in the sum of €1,248,889.”

Findings of fact of the Appeal Commissioner

5 The case stated contains a section headed “ Material Findings of Fact”, comprising paras. 7–11, which appears to indicate that all of the contents of these paragraphs constitute material findings of fact. While the introductory phrase to para. 7 of the case stated indicates that the subparagraphs of para. 7 contain the material findings of fact, I am satisfied that all of the contents of paras. 7–11 contain material findings of fact, with para. 7 containing the material findings as to the component parts of the tax avoidance transaction the subject of the Notice of Opinion and subsequent Determination and case stated.

6 The tax avoidance transaction as so identified consisted of the following component parts:

• a) The beneficial interests in the issued share capital in CapPartners (“CapPartners”) were held by CapPartners Tax Advisors and CapPartners Holdings Limited.

• b) The beneficial interest in the issued share capital in CapPartners Securitisation (“Securitisation”) was held by CapPartners Tax Advisors.

• c) CapPartners and Securitisation were commonly owned and therefore connected pursuant to TCA, section 10 and section 432.

• d) CapPartners Parnell Investments Limited (“Parnell”) was formed on 2 June 2004 with CapPartners holding the single share entitling it to all voting rights. As a consequence, CapPartners, Securitisation and Parnell were connected pursuant to TCA, section 10 and section 432.

• e) On 25 August 2004, the Appellant acquired 30,000 non-voting non-cumulative preference shares of €1 each in Parnell. The Appellant was therefore connected with Parnell again pursuant to TCA, section 10 and section 432.

• f) On 7 October 2004, Parnell Purchased a German Government Bond (“Bond”) with a nominal value of €2,939,466 for €2,977,466 from Davy Stockbrokers.

• g) By Call Option Agreement dated 7 October 2004 for a premium of €2,677,000, Parnell granted a call option to Securitisation with the entitlement to purchase the Bond having a nominal value of €2,939,466.

• h) By Bond Purchase Agreement dated 7 October 2004 between Parnell, Securitisation and the Appellant, whereby Parnell undertook to sell the Bond having a nominal value of €2,939,466 to the Appellant for €578,529.00 subject to the Call Option Agreement between Parnell and Securitisation dated 7 October 2001. At Clause 5 of that agreement, Securitisation granted a put option to the Appellant to sell the Bond to Securitisation on the same terms as set out in the Call Option Agreement between Parnell and Securitisation dated 7 October 2004.

• i) On 7 October 2004, the Appellant acquired the Bond with a nominal value of €2,939,466 from Parnell for €578,529 financed by an interest free loan of €280,000 provided by Parnell and €298,529 from his own resources.

• j) Pursuant to Clause 5 of the Bond Purchase Agreement, the Appellant, by letter dated 22 October 2004, notified the directors of Securitisation of his intention to exercise his put option requiring Securitisation to acquire the Bond from him.

• k) On 22 October 2004, Securitisation issued a Confirmation Note confirming the purchase of the Bond with a nominal value of €2,939,466 from the Appellant for €319,938.

7 I will refer to the transaction as described in paras. (a) to (k) above throughout this judgment as “the Transaction”. Para. 8 sets out the tax consequences of the aggregate arrangements as follows:

• a) The sale of the Bond by Parnell to the Appellant was a transaction between connected persons otherwise than by means of a bargain made at arm's length.

• b) The acquisition of the Bond by the Appellant was deemed to be for a consideration equal to €2,977,446, as Parnell and Securitisation were connected persons. As a consequence, the market value of the Bond was calculated as if the option did not exist notwithstanding that the Appellant only paid €578,529 to Parnell for the Bond.

• c) Having acquired the Bond from Parnell for €578,529 which he sold to Securitisation for €319,938, the Appellant made an actual loss of €258,591. However, the Appellant asserted that in accordance with the combined effect of TCA, sections 31, 547 and 549, the disposal of the Bond gave rise to a capital gains tax loss calculated as follows:

  Market Value of Bond on date of Disposal	€2,977,446
  Consideration Received by the Appellant	€319,938
  Capital Loss Claimed	€2,657,508

8 It should be noted that the two key provisions which resulted in the deemed loss to the appellant are s. 31 and s. 549 TCA, as the deductible loss under s. 31(a) resulted...