Hughes v The Revenue Commissioners
| Jurisdiction | Ireland |
| Judge | Mr. Justice Allen |
| Judgment Date | 29 November 2019 |
| Neutral Citation | [2019] IEHC 807 |
| Docket Number | [2018 No. 290 R] |
| Court | High Court |
| Date | 29 November 2019 |
IN THE MATTER OF A CASE STATED PURSUANT TO SECTION 941 TAXES
CONSOLIDATION ACT 1997
[2019] IEHC 807
[2018 No. 290 R]
THE HIGH COURT
REVENUE
Case stated – Tax appeal – Income tax – Appellant seeking to appeal from the determination of a tax appeal – Whether the Circuit Court judge was correct in law in his determination
Facts: The appellant, Mr Hughes, appealed to the High Court by way of case stated from the determination by Judge Comerford of a tax appeal. The issue, as expressed in the case stated, was whether the appellant, who was jointly assessed for tax with his wife, was liable for income tax on a benefit which they obtained when shares which they held in a company, Greenane Developments Ltd, became more valuable by reason of the actions of another company, Hughes Chemical Corporation Ltd, which was also owned and controlled by Mr and Mrs Hughes. The net legal issue was whether the enhancement in the value of the shares in Greenane Developments was chargeable to income tax as a distribution to them by Hughes Chemical.
The case stated asked for the opinion of the High Court as to whether the Circuit Court judge was correct in law in his determination: (a) That the court should not conduct an enquiry to see which provisions of the Taxes Acts better catches the actions on 31st January, 2006; that the correct approach being to consider whether s. 130(3)(a) of the Taxes Consolidation Act 1997 applied even if another provision might apply? (b) That the share rights in issue were “assets” within the meaning of s. 130(3)(a)? (c) That the actions of Hughes Chemical through voting through the special resolution of 31st January, 2006 was a transfer of rights which were assets for the purposes of s. 130(3)(a)? (d) That the transfer was a distribution and chargeable to income tax as at the time the appellant and his wife were members of Hughes Chemical? (e) That s. 130(3)(a) does not require the transfer of assets to the appellant to be in his capacity as member?
Allen J held that the answer in each case was “Yes”.
Cases stated.
This is an appeal by way of case stated from the determination by his Honour Judge Francis Comerford of a tax appeal.
The issue, as succinctly expressed in the case stated, is whether the appellant, who is jointly assessed for tax with his wife, is liable for income tax on a benefit which they obtained when shares which they held in a company, Greenane Developments Limited (“ Greenane Developments“) became more valuable by reason of the actions of another company, Hughes Chemical Corporation Limited ( “Hughes Chemical”), which was also owned and controlled by Mr. and Mrs. Hughes.
The net legal issue is whether the enhancement in the value of the shares in Greenane Developments was chargeable to income tax as a distribution to them by Hughes Chemical.
In January, 2006 a scheme was devised to liberate €2 million from Hughes Chemical and to put the money into the hands of the shareholders, the appellant and his wife.
Mr. and Mrs. Hughes bought another company, Greenane Developments, off the shelf. The plan was first, that the money would be transferred to Greenane Developments, and then that Hughes Chemical - the person having control of Greenane Developments - would exercise that control so that the value passed out of the shares owned by Hughes Chemical and into other shares in or rights over Greenane Developments owned by Mr. and Mrs. Hughes.
The scheme was devised to avoid capital gains tax. By s. 543(2)(a) of the Taxes Consolidation Act, 1997 the exercise by Hughes Chemical of its control of Greenane Developments was to have been a disposal of the shares out of which the value passed. By s. 547(l)(a) of the Act of 1997 the assets of Greenane Developments acquired by Mr. and Mrs. Hughes by means of a bargain made otherwise than at arm's length, would be deemed to be for a consideration equal to the market value of the assets. The hope and expectation was that the disposal would be chargeable to capital gains tax under s. 543, but the liability would be nil.
By the means which I will describe in detail, the €2 million which originated in Hughes Chemical came into the hands of Mr. and Mrs. Hughes.
On 6th December, 2011 Mr. Hughes (who is jointly assessed with Mrs. Hughes) was assessed to income tax on the amount of the distribution on the basis that there had been - according to the Revenue - a transfer of assets at undervalue, such as came within s. 130(3)(a) of the Taxes Consolidation Act.
Greenane Developments was incorporated in September 2004. Its sole shareholder immediately prior to 30th January, 2006 was Hughes Chemical, which held 100 ordinary shares. Those shares carried the right to receive notice of, to attend, and to vote at general meetings of the company and to participate in profits and any surplus of capital.
On 30th January, 2006 the memorandum and articles of association of Greenane Developments were amended to increase the nominal share capital from €1 million to €3 million by the creation of 2 million A ordinary shares of €1 each. There were no voting rights attached to the A ordinary shares. The articles provided that on a winding up the holders of the A ordinary shares were entitled in priority to the return of capital paid up on those shares but not to participate in any share premium account or surplus of capital.
On the same day, Hughes Chemical subscribed for 100 ordinary shares at €20,000 each and Mr. & Mrs. Hughes respectively subscribed for 94 and 6 A ordinary shares, at par.
On 31st January, 2006 the articles of association of Greenane Developments were again amended by special resolution so that the voting rights and the right to participate in surplus capital were vested in the holders of the A ordinary shares, to the exclusion of the holders of the ordinary shares.
On 1st February, 2006 a special resolution was passed for a members' voluntary winding up of Greenane Developments. The winding up produced a surplus of €1,981,470, which was paid to Mr. and Mrs. Hughes as the holders of the A ordinary shares.
On 6th December, 2011 the Inspector of Taxes raised an assessment for tax on the distributions amounting in total to €1,999,900. The assessment was not to capital gains tax on a disposal of the shares, but to income tax said to be chargeable on the value of the benefit of a transfer of assets by Hughes Chemical to its members by the passing of the special resolution on 31st January, 2006.
Mr. Hughes appealed the assessment to the Tax Appeals Commission but on 21st June, 2016 his appeal was dismissed. Mr. Hughes' further appeal to the Circuit Court judge was also dismissed.
The appeals to the Tax Appeals Commission and the Circuit Court judge turned, and the questions posed by the case stated turn, on the correct construction of s. 130(3)(a) of the Taxes Consolidation Act, 1997.
The case was argued on both sides with great conviction. For all that the court was presented with two folders of authorities, there was little between the parties as to the applicable principles of law.
As to the correct approach to be taken by the High Court in considering a case stated on a question of law, the appellant relies on the decision of the High Court (McWilliam J.) in Mara (Inspector of Taxes) v. Hummingbird [1982] I.L.R.M. 421, which, as counsel for the respondent point out, was approved by the Supreme Court in Ó Culacháin v. McMullan Brothers Ltd. [1995] 2 I.R. 217 and Mac Cárthaigh (Inspector of Taxes) v. Cablelink Ltd. [2003] 4 I.R. 510.
In McMullan Brothers Ltd. Blayney J. (O'Flaherty and Denham JJ. concurring) distilled from Hummingbird and the English authorities five principles of law which were endorsed in Cablelink Ltd. These were:-
“(1) Findings of primary fact by the judge should not be disturbed unless there is no evidence to support them.
(2) Inferences from primary facts are mixed questions of fact and law.
(3) If the judge's conclusions show that he has adopted a wrong view of the law, they should be set aside.
(4) If his conclusions are not based on a mistaken view of the law, they should not be set aside unless the inferences which he drew were ones which no reasonable judge could draw.
(5) Some evidence will point to one conclusion, other evidence to the opposite: these are essentially matters of degree and the judge's conclusions should not be disturbed (even if the court does not agree with them, for we are not retrying the case) unless they are such that a reasonable judge could not have arrived at them or they are based on a mistaken view of the law.”
In this case there is no dispute as to the primary facts but there is an argument as to the Circuit Court judge's “interpretation of the facts”, which I will deal with in due course. The substance of the appeal is that the Circuit Court judge erred in his construction of the relevant provisions of the Taxes Consolidation Act.
As to the principles of law applicable to construing taxing statutes, there was some difference of emphasis.
Counsel for the appellant submitted, generally, that the determination of the Circuit Court judge “failed to adhere to the strict construction of taxation statutes” and instead took a purposive approach. The submission was not really developed or focussed and in one significant respect the appellant's complaint is that the Circuit Court judge took a literal approach to s. 130(3)(a) rather than a purposive approach to the Act as a whole, specifically the interaction between s. 130(3)(a) and section 543.
In Revenue Commissioners v. O'Flynn Construction Ltd. [2013] 3 I.R. 533, O'Donnell J.,...
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