Kearns v Dilleen

JudgeBARRON J.,Mr Justice Francis D Murphy
Judgment Date28 July 1997
Neutral Citation1998 WJSC-SC 8635
CourtSupreme Court
Docket Number[S.C. No. 12 of 1994]
Date28 July 1997

1998 WJSC-SC 8635


Murphy J.

Lynch J.

Barron J.




JUDGMENT delivered on the 28th day of July 1997by BARRON J.


The question which has arisen for decision in the events which have occurred is whether liability to tax arose pursuant to the Provisions of the Capital Gains Tax, Act, 1975.


These facts were as follows. The appellant owned 5,000 shares in a company and his wife owned 11,000 shares in the same company. On the 2nd December 1975 the appellant granted to his wife an option to purchase his holding, the sum of £841,666 being payable on the grant of the option and £15,000 on its exercise. His wife granted to him an option to purchase her holding, £1,686,834 being payable on the grant of the option and a further sum of £27,500 when the option was exercised.


On the 19th December 1985 the appellant's wife then sold her 11,000 shares to a different company for £27,000 but subject to the option which she had granted to her husband. The appellant sold his 5,000 shares to.the company which had bought his wife's shares for £15,000 again subject to the option which he had granted to his wife.


On the same day the purchasing company wrote to the appellant's wife offering to pay her the sum of £843,166 in consideration of her abandoning her rights under the option to buy her husband's.5,000 shares. By letter on the same day the appellant's wife accepted the offer and was paid £843,166. The company made an offer to the appellant to pay to him the sum of 1,689,334 in consideration of his abandoning the option granted to him by his wife for her 11,000 shares in the company. He accepted this offer and the company paid him the sum of £1,689,334.


The Revenue claimed that the total of the sums so paid to the appellant and his wife was a chargeable gain on which the appellant was required to pay Capital Gains Tax (the appellant and his wife not being separately assessed).


The main issue which arises for determination in this case is whether or not the provisions of s. 8(2)(iii) of the Capital Gains Tax Act, 1975is overborne by the provisions of s. 47 (3) of the same Act.


The former provision is as follows:

"Subject... to the exceptions in this Act, there is for the purposes of this Act, a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum, and this paragraph applies in particular to -

(iii) capital sums received in return for forfeiture or surrender of rights, or for refraining from exercising rights".


S. 47 (3) is as follows:

"The exercise or abandonment of an option by the person for the time being entitled to exercise it shall not constitute the disposal of an asset by that person."


What had to be considered in the instant proceedings was a tax avoidance scheme under which options to purchase shares were releasedinconsideration of the payment of sums of money. What occurred was clearly a disposal of assets within the meaning of the provision in s. 8(2)(iii) and the question which arose was whether or not the provisions of s. 47 (3) prevailed so that the transactions had to be treated as if they did not constitute the disposal of an asset.


The same question arose for consideration in two English cases: Golding v. Kaufman 1985 STC 152 and Powlson v. Weelbeck Securities Limited 1986 STC 422 and on appeal 1987 STC 468. The English statutory provisions which were being considered in those cases are identical to our statutory provisions and in order to avoid confusion when referring to the English statutory provisions I will do so as if they were the Irish provisions.


In Golding v. Kaufman money had been paid to the taxpayer to relinquish an option. The questions which arose were whether what hadoccurred was an abandonment for the purposes of s. 47 (3) and whether that provision was sufficiently clear to include an abandonment for consideration. Vinelott J. took the view that whereas abandonment of a chattel is the voluntary giving up of possession without any intention of transferring possession by sale or gift to another, the extinction of a right or interest in the nature of a chose in action by its release or surrender, whether for value or not, is aptly described as the abandonment of it. Nevertheless he held that the wording of s. 47 (3) was not sufficiently clear to include an abandonment for a consideration. This judgment was followed in the High Court in Powlson v. Wellbeck Securities Limited and upheld on appeal in that case. Save for Bingham L.J. on appeal in the latter case all the judges were of the view that the payment of a consideration for the release of the option did not prevent the transaction from being an abandonment of the option. However, the view was takenthat it was not the release of the option which gave rise to the disposal but the receipt of the capital sum derived therefrom and that on a proper statutory interpretation of s. 47 (3) that provision did not operate to override the provisions of s. 8(2)(iii) as regards the receipt of the capital sum.


In Powlson v. Wellbeck Securities Limited the plaintiff held an option to participate in a property development. The developer refused to allow the option holder to participate. He then instituted proceedings to enforce his option. These proceedings were compromised upon terms that the option holder should be paid a sum of money to release his option. In determining that there was no abandonment of the option Bingham L.J. said at p. 479j:

"There are certain fields of law, such as contract and crime, in which abandonment is a term of art. In the law of options and capital gains tax it is not. So one must conclude that the draftsman deliberately chose a word of ordinary and untechnical meaning. He did not simply mean "non-exercise". Had he done so, he would have used that expression as the obvious antonym of "exercise". But he did not do so, no doubt because the wasting asset provisions made such a provision in practice futile. Faced with this ordinary and untechnical word, I think the correct approach is simply to apply it to the facts of a particular case and ask whether the taxpayer has abandoned his option. On the facts here the only possible answer is that the taxpayer company did no such thing. It brought an action to assert its claim to the option and agreed to "release and abandon" the option only on payment of two million pounds. There is no reason to suppose that that outcome was any less advantageous to the taxpayer company than exercise of the option or sale to a third party would have been. To regard this transaction as an abandonment of the option is in my view to mistake its form for its substance. In my view, therefore, the taxpayer company falls at the first fence and does not reach the second."


Mr. McCann for the appellant submits that the Court should be slow to follow the English decisions since the principles upon which taxing statutes are to be construed is approached differently in both jurisdictions. This submission is based upon McGrath v.MacDermott 1988 I.R. 258. In that case the Supreme Court was not prepared to accept the doctrine of "fiscal nullity" which had been laid down by the House of Lords in England in WTRamsay Limited v. Inland Revenue Commissioners 1982 A.C. 300.In effect the Court accepted that the construction of tax statutes was not to be affected by any consideration that a transaction which it had to consider was part of a series of transactions designed to lessen liability to tax. The Court expressed the view that the manner in which tax avoidance schemes should be dealt with by the courts was a matter for the legislature and one which was frequently dealt with in FinanceActs.


At the same time the Court reaffirmed the principles of statutory construction applicable to Finance Acts. Finlay C.J. said at p.276:

"It is clear that successful tax avoidance schemes can result in unfair burdens on other taxpayers and that unfairness is something against which courts naturally lean.

The function of the courts in interpreting a statute of the Oireachtas is, however, strictly confined to ascertaining the true meaning of each statutory provision, resorting in cases of doubt or ambiguity to a consideration of the purpose and intention of the legislature to be inferred from other provisions of the statute involved, or even of other statutes expressed to be construed with it. The courts have not got a function to add to or delete from the express statutory...

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