McGrath v McDermott

JurisdictionIreland
CourtSupreme Court
JudgeMcCarthy J.,FINLAY C.J.
Judgment Date07 July 1988
Neutral Citation1988 WJSC-SC 1502
Docket Number[1986 No. 1200R]
Date07 July 1988

1988 WJSC-SC 1502

THE SUPREME COURT

Finlay C.J.

Henchy J.

Griffin J.

Hederman J.

McCarthy J.

276/87
MCDERMOTT (INSPECTOR OF TAXES) v. MCGRATH
J.E. McDERMOTT (INSPECTOR OF TAXES)
Appellant

and

PATRICK W. McGRATH, SEAMUS McGRATH and JOSEPHMcGRATH
Respondents

Citations:

WT RAMSAY LTD V IRC 1982 AC 300

FURNISS V DAWSON 1984 AC 474

IRC V DUKE OF WESTMINSTER 1936 AC 1

O'SULLIVAN V P LTD 3 ITC 355

PRACTICE DIRECTION 1966 3 AER 77

REVENUE COMMISSIONERS V DOORLEY 1933 IR 750

PARTINGTON V AG 1869 LR 4 HL 100

MCGRATH V MCDERMOTT 1988 ILRM 181

CAPITAL GAINS TAX ACT 1975 S12(1)

CAPITAL GAINS TAX ACT 1975 S33(1)

CAPITAL GAINS TAX ACT 1975 S33(5)

CAPITAL GAINS TAX ACT 1975 S33(5)(ii)

KNETSCH V THE US 364 US 361

GOLDSTEIN V CIR 364 F 2d 734 1966

INSPECTOR OF TAXES V KIERNAN 1982 ILRM 13

Synopsis:

STATUTORY INTERPRETATION

Ordinary meaning

Tax statute - Canons of construction - Standard canons applicable - Concepts such as fiscal nullity or the substance of the transaction not applicable - Decision of High Court (31/7/87) affirmed - ~ See~ Revenue, capital gains tax - (276/87 - Supreme Court - 7/7/88) - [1988] I.R. 258 - [1988] ILRM 647

|McGrath v. McDermott|

REVENUE

Capital gains tax

Chargeable gains - Allowable loss - Statute - Interpretation - Application of normal canons of construction of statutes - The taxpayer claimed that certain share transactions which he had effected in 1981 and 1982 gave rise to an allowable loss under the provisions of s. 33, sub-s. 5, of the Act of 1975 against an assessment to tax raised for the year 1981/82 - The inspector of taxes disallowed the claim on the ground that no real loss had been incurred and that view was upheld by the special commissioners, who decided that the taxpayer's transactions should be treated as a fiscal nullity - Nevertheless, the commissioners found that the taxpayer had succeeded technically in achieving his aim of creating an allowable loss by means of a scheme of share transactions consisting of steps which were not shams - At the hearing of a Case stated by the commissioners to the High Court, it was held that the ordinary canons of construction applied to a tax statute and that, applying those canons to the relevant enactments, the allowable loss claimed by the taxpayer was a loss for the purposes of those enactments - The inspector of taxes appealed against the order of the High Court - Held, in disallowing the appeal, that the ordinary canons of the construction of statutes applied to the interpretation of tax statutes, that an artificial method of calculation was specified by s. 33 of the Act of 1975 for the purpose of ascertaining the value of a gain and that s. 12, sub-s. 1, of that Act states that the amount of a loss accruing on a disposal of an asset shall be computed in the same way as the amount of gain accruing on a disposal - Held that, although the sole purpose of the taxpayer's scheme was the creation of an allowable loss, no step in that scheme was a sham and, accordingly, the taxpayer was entitled to an application of the ordinary canons of construction to the relevant enactments and to the benefit of the allowable loss claimed by him - Capital Gains Tax Act, 1975, ss. 12, 33 - (276/87 - Supreme Court - 7/7/88) - [1988] I.R. 258

|McGrath v. McDermott|

1

JUDGMENT delivered on the 7th day of July 1988by FINLAY C.J.[Henchy, Griffin, Hederman conc.]

2

This is an appeal by the Inspector of Taxes from the Order dated the 31st July 1987 made by Carroll J. on a case stated to the High Court by the Commissioners for the special purposes of the Income Tax Acts.

3

By that Order it was adjudged that the special commissioners were wrong in law in determining that the Respondents herein ("the taxpayers") were not entitled to an allowable loss as claimed for capital gains tax purposes in respect of gains assessed for the year1981/1982.

4

As appears from the case stated, each of the taxpayers had in the year 1981/1982 entered into a series of transactions which were identical as a scheme, although the amounts involved differed and it was agreed that the decision in law in one case accordingly ruled all three cases. The case of the first-named taxpayer was chosen to be the subject matter of the individual findings in the case stated.

5

Those relevant to the issues arising on this appeal may thus besummarised.

6

(1) The series of transactions was avowedly a tax avoidance scheme and had no other purpose;

7

(2) The steps taken were real as distinct from sham transactions;

8

(3) The scheme which is fully set out in the case stated involved

9

(a) the purchase for £110 sterling from Caversham Trustees Limited of 110 preference shares in Parapet Holdings Limited, which purchase made the taxpayer connected for tax purposes with thatcompany;

10

(b) the purchase from that company for £900 sterling of the entire issued ordinary share capital of a company named Garfish Investments Limited, which shares were subject to an option to purchase in favour of the holders of the preference shares in Parapet HoldingsLimited;

11

(c) the sale of these shares in Garfish Investments Limited at their true market value of £900 sterling to a company named London Law Securities Trustees Limited;

12

(d) the sale of the preference shares in Parapet Holdings Limited at their true market value of £110 sterling to London Law Securities Trustees Limited.

13

(4) The taxpayer had no connection with Caversham Trustees Limited or London Law Securities Trustees Limited other than that arising in connection with these transactions.

14

(5) Having regard to the assets and liabilities situation of Garfish Investments Limited at the time of the purchase of the shares in it, if the provisions of Section 12 andSection 33 of the Capital Gains Tax Act 1975("the 1975 Act") are applicable to these transactions, there was an allowable loss calculated in accordance with Section 33(5) of that Act in the sum of IR£1,341,484.

15

The expenses for legal and financial advice which were paid before the purchase of the shares exceeded the sum of £1,010 sterling paid in total for the shares.

16

In the course of their decision leading to the stating of the case the appeal commissioners found that the Revenue were unable to show that this scheme had not been effectively carried through and that it did not achieve its purpose. They further decided that it should be disregarded taxwise as totally artificial and fiscally a nullity producing neither a gain nor a loss.

17

Carroll J. in her reserved judgment held that the so-called doctrine of "fiscal nullity" was not part of Irish law and that on the facts of this case the Court should not intervene to render inapplicable the statutory provisions which on their face appear to apply to these transactions on the basis, as was contended, of the absenceof a "real loss".

18

With that decision and the reasoning by which it was reached, I find myself in full agreement.

The statutory provisions
19

The relevant provisions of the Act of 1975 are as follows.

20

Section 12 (1) which reads:

"Except as otherwise expressly provided, the amount of a loss accruing on a disposal of an asset shall be computed in the same way as the amount of a gain accruing on a disposal is computed."

21

Section 33 (1) which reads

"This section shall apply where a person acquires an asset and the person making the disposal is connected with him."

22

Section 33(5) which reads

"In a case where the asset mentioned in subsection (1) is subject to any right or restriction enforceable by the person making the disposal, or by a person connected with him, then (the amount of the consideration for the acquisition being, in accordance with subsection (2), deemed to be equal to the market value of the asset) that market value shall be - "

(a) what its market value would be if not subject tothe right or restriction, as reduced by -

(b) the market value of the right or restriction or the amount by which its extinction would enhance the value of the asset to its owner, whichever is the less:

23

Provided that if the right or restriction -

24

(i) is of such a nature that its enforcement would or might effectively destroy or substantially impair the value of the asset without bringing any countervailing advantage either to the person making the disposal or a person connected with him,

25

(ii) is an option or other right to acquire the asset, or

26

(iii) in the case of incorporeal property, is a right to extinguish the asset in the hands of the person giving the consideration by forfeiture or merger or otherwise,

27

that market value of the asset shall be determined, and the amount of the gain accruing on the disposal shall be computed, as if the right or restriction did not exist."

28

The market value of an asset coming within the provisions of subsection (5) (ii) of Section 33 is not its true or real market value but one artificially calculated by the ignoring of the existence of a restriction or right as defined. The amount of the gain accruing on thedisposalof such an asset is computed at a figure which is artificial and may not coincide with the real or any gain.

29

There being no express provision to the contrary contained either in the Act of 1975 or in any other statute, the...

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