Kearns v Dilleen

JurisdictionIreland
JudgeMr. Justice Costello.
Judgment Date01 January 1994
Neutral Citation1994 WJSC-HC 337
CourtHigh Court
Docket Number18R/1993,[1993 No. 18R]
Date01 January 1994

1994 WJSC-HC 337

THE HIGH COURT

18R/1993
DILLEEN v. KEARNS
(REVENUE)

BETWEEN

T.A. DILLEEN INSPECTOR OF TAXES
APPELLANT

AND

EDWARD J. KEARNS
RESPONDENT

Citations:

CAPITAL GAINS TAX ACT 1975 S8(2)(a)(iii)

CAPITAL GAINS TAX ACT 1975 S47(3)

CAPITAL GAINS TAX ACT 1975 S3

CAPITAL GAINS TAX ACT 1975 S7

CAPITAL GAINS TAX ACT 1975 S8

CAPITAL GAINS TAX ACT 1975 S2

MCGRATH V MCDERMOTT 1988 IR 258

GOULDING (INSPECTOR OF TAXES) V KAUFMAN 1985 STC 152

WELBECK SECURITIES V POWLSON 1986 STC 423, 1987 STC 468

FINANCE ACT 1965 S22(3) UK

CAPITAL GAINS TAX ACT 1975 S8(2)

CAPITAL GAINS TAX ACT 1975 S47

CAPITAL GAINS TAX ACT 1975 S8(2)(a)

FINANCE ACT 1965 7TH SCHED PARA 14 UK

FINANCE ACT 1965 7TH SCHED PARA 14(3) UK

Synopsis:

OPTION

Purchase

Company - Shares - Rights - Release - Consideration - Shares held subject to option - Option exercisable by another shareholder - Release of option in consideration of payment of capital sum - Whether disposal of an asset by person releasing right to exercise option - Whether an abandonment of an option - (1993/18 R - Costello J. - 26/11/93) - [1994] 2 I.R. 210 - [1994] 1 ILRM 503

|Dilleen v. Kearns|

1

Judgment of Mr. Justice Costello. Delivered the 26 November 1993

2

For the year 1985/86 the taxpayer was assessed in respect of the sum of £2,532,500 which was said by the Revenue to be chargeable gains under the provisions of the Capital Gains Tax Act, 1975. The taxpayer appealed this assessment. The Appeal Commissioner determined the appeal in favour of the Revenue but on appeal from this decision the learned trial judge found in favour of the taxpayer. The matter now comes to this court by way of appeal by Case Stated from that determination.

3

The facts of the case can be briefly stated.

The Facts
4

(1) Mr. Edward Kearns owned 5,000 shares in a company called QK Coldstream Limited. His wife Mena owned 11,000 shares. On 2nd December 1975 Mr. Kearns 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. Mrs. Kearns granted to her husband 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.

5

(2) On the 19th December 1985 Mrs. Kearns then sold her 11,000 shares to a company called The Industrial and Farming Finance Co. Ltd. for £27,000 but subject to the option which she had granted to her husband. Mr. Kearns sold his 5,000 shares in the company to the same company for £15,000, again, subject to the option which he had granted to his wife.

6

(3) On the same day the purchasing company wrote to Mrs. Kearns 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 Mrs. Kearns accepted the offer and was paid £843,166. The company made an offer to Mr. Kearns 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.

7

(4) The Revenue has claimed that the total of these two sums, namely £2,532,500 is a chargeable gain on which Mr. Kearns has to pay capital gains tax, (Mr. and Mrs. Kearns not being separately assessed).

8

(5) A few days later the purchasing company sold the shares it had acquired (now free of options) to an Industrial and Provident Society owned by Mr. and Mrs. Kearns for £2,577,200. And shortly after this the shares were again sold on, this time for the sum of £2,583,000 to another Industrial and Provident Society owned by Mr. and Mrs. Kearns.

9

These transactions in fact took place. They constituted, it is frankly, indeed, willingly, admitted, a tax avoidance scheme. The answer to the question in the case stated will decide whether it was a successful scheme or not. That question is whether the receipt of the capital sum of £2,532,500 constituted a "disposal of an asset" by virtue of Section 8(2)(a)(iii) of the Capital Gains Act, 1975, or whether the transaction was excluded from the ambit of Section 8 as being the "abandonment of an option" under Section 47(3) of the Act. I will begin this judgment by considering the relevant provisions of the 1975 Act.

10

The following are the provisions of the 1975 Act relevant to these proceedings.

Section 3
11

This provides that:-

"Tax shall be charged in respect of capital gains accruing to a person on the disposal of an asset".

12

It will be noted that liability to tax arises "on the disposal of an asset". (By Section 7 all forms of property "including options" are deemed to be assets for the purposes of the Act.)

Section 8
13

This section provides that certain transactions are to be treated for the purposes of the Act as the "disposal of an asset". Section 2 declares;

"2(a) Subject to the exceptions in this Act (emphasis added) 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 persons paying the capital sum, and this paragraph applies in particular to -

...........

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

14

The Revenue argues, and this is not contested, that the payments received by the taxpayer and his wife were "capital sums". The taxpayer submits that there was no "disposal of an asset" in this case because of the provision of Section 47 no tax liability arose.

Section 47
15

This sections deals specifically with options and provides in subsection (3) as follows:-

"(3) 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.".

16

The taxpayer relies on this subsection and argues that:-

17

(i) the transaction of the 5th December 1985 amounted to an"abandonment of an option" and accordingly is not within the meaning of Section 47(3) to be treated as the "disposal of an asset" and so the capital sum is not a chargeable gain. The Revenue submits (i) that the transaction on the 5th December 1985 did not amount to an "abandonment" by Mr. and Mrs. Kearns of their options because they received valuable consideration for them; alternatively (ii) that section 47(3) only exempts from the provisions of Section 8 a transaction which amounts to an abandonment of an asset - it does not exempt a transaction in which a capital sum is paid as well as an option abandoned.

Conclusions:
The first issue:-
18

In deciding whether the transaction in which the taxpayer engaged in December 1985 resulted in "an abandonment of an option" within the meaning of Section 47(3) it is irrelevant that the taxpayer was engaged in a tax avoidance exercise. The Supreme Court has made clear how the court should approach the task of construing the 1975 Act. In Mc Grath -v- McDermott (1988) I.R. p. 258 the Chief Justice explained that the function of the Court in construing taxing statutes is 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 (p. 276). Approaching the construction of the section in this way what I have to decide is whether in the true meaning of the term used it can be said that when the taxpayer and his wife in December 1985 agreed to abandon their options to purchase shares in the company in consideration for the payment of a capital sum to induce them to do so this amounted to an "abandonment" within the meaning of the section.

19

The statutory provisions which I am now...

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