P.O. Cahill v Patrick O'Driscoll, Michael O'Driscoll and William F. O'Driscoll

JurisdictionIreland
JudgeMr. Justice Michael,Mr. Justice Clarke
Judgment Date14 June 2006
Neutral Citation[2005] IEHC 179
CourtHigh Court
Docket Number[2004 No.
Cahill (Inspector of Taxes) v O'Driscoll
(REVENUE)

BETWEEN

P.O. CAHILL (Inspector of Taxes)
APPELLANT

AND

PATRICK J. O'DRISCOLL MICHAEL O'DRISCOLL AND WILLIAM F. O'DRISCOLL
RESPONDENTS

[2005] IEHC 179

[Record No. 368R/2004]

THE HIGH COURT

TAXATION

Income tax

Solicitor - Clients' money in general deposit account - Whether funds in account remain property of clients - Whether interest earned on accounts income of solicitor or client - Whether income tax payable on interest by solicitor - Solicitors Professional Practice, Conduct and Discipline Regulations 1986 (SI 405/1986) - Tax not payable (2004/368R - Hanna J - 09/06/2005) [2005] IEHC 179; [2005] 4 IR 100

Cahill v O'Driscoll

TRUSTS: Fiduciary relationship

Duty to account - Solicitor's client account - Interest earned on account - Whether funds remaining property of clients - Whether fiduciary relationship ended by relief from obligation to account - Solicitors Professional Practice, Conduct and Discipline Regulations 1986 (SI 405/1986) - Funds remained property of client (2004/368R - Hanna J - 09/06/2005) [2005] IEHC 179; [2005] 4 IR 100

Cahill v O'Driscoll

Facts: The respondents were partners in a Solicitor's firm who deposited their clients' funds in a general client deposit account. The appellant was the inspector of taxes who in the tax year 1991-1992 raised income tax assessments on the interest earned on the respondent's general client account at the higher rate then applicable of 52%. The Appeal Commissioner took the view that the said interest was taxable at the standard rate of 29% in accordance with the provisions of s.2 of the Act of 1991. The respondents submitted that they were holding their clients' monies in trust and were acting in a fiduciary capacity thereby attracting the lesser rate of tax. Furthermore, they contended that the money and the interest earned thereon, at all times, belonged to the clients on whose behalf they were acting.

Held by Hanna J. in answering the question in the affirmative: That the client's monies and the interest thereon was the property of the client held in trust by the solicitor and there was a fiduciary relationship between the solicitor and client. Accordingly, the answer to the Appeal Commissioner's question as to whether he was correct in law in holding that interest earned on sums belonging to the respondents' clients was not the income of the respondents and, accordingly, was not liable to tax at 52% was yes.

Reporter: L.O'S.

TAXES CONSOLIDATION ACT 1997 S941

INCOME TAX ACT 1967 S428

TAXES CONSOLIDATION ACT 1997 S15

FINANCE ACT 1991 S2(1)

FINANCE ACT 1991 S2(2)

BROWN v INLAND REVENUE COMMISSIONERS 1965 AC 2

APLIN v WHITE 1973 1 WLR 1311

SOLICITORS PROFESSIONAL PRACTICE CONDUCT & DISCIPLINE REGS 1986 SI 405/1986 S5(2)

DELANY EQUITY & LAW OF TRUSTS IN IRELAND 3ED 2003

SOLICITORS PROFESSIONAL PRACTICE CONDUCT & DISCIPLINE REGS 1986 SI 405/1986 S5(1)(a)

SOLICITORS PROFESSIONAL PRACTICE CONDUCT & DISCIPLINE REGS 1986 SI 405/1986 S5(1)(b)

SOLICITORS ACT 1954 S68

SOLICITORS (AMDT) ACT 1960 S32

1

JUDGMENT of Mr. Justice Michael Hanna delivered on the 9th day of June, 2005

2

This case comes before me as a case stated by Mr. Ronan S. Kelly, Appeal Commissioner for the opinion of this Court pursuant to the provisions of s. 941 of the Taxes Consolidation Act, 1997 (formerly s. 428, Income Tax Act, 1967). The appellant is Mr. P. O'Cahill, Inspector of Taxes. The respondents are partners in the firm of Messrs P.J. O'Driscoll & Sons, Solicitors who carry on practice in Cork and Dublin.

3

The case involves the rate of income tax applicable to interest earned on clients' funds deposited by the respondents in the course of their practice as solicitors. Funds received from or on behalf of clients of the firm could properly be deposited in two ways. Firstly, there might be a designated, specific deposit account referable to one specific client. In those circumstances, it was straight forward for the firm to match client with the interest earned and to make payment accordingly. This case stated is not concerned with such deposits. Rather, we are concerned with interest earned arising from a general client deposit account with numerous in flows and out flows of monies concerning numerous clients which gave rise to obvious (though apparently, not insurmountable) problems in matching client to interest. In such cases, it is not difficult to understand that many clients might have only the briefest of visitations to the general deposit account and that, in many such instances, only the most modest sums of interest would accrue.

4

The tax year with which we are concerned is 1991–1992. The Inspector of Taxes had raised income tax assessments on the interest earned on the general client account at the higher rate then applicable of 52%. The Appeal Commissioner took the view that the said interest was taxable at the standard rate in accordance with the provisions of s. 2 of the Finance Act, 1991 (now s. 15 of the Taxes Consolidation Act, 1997). Subsections 1 and 2 of that section provide as follows:

5

2.—(1) Income tax shall be charged for the year 1991–92 and for each subsequent year of assessment and shall, subject to subs. (2), be so charged at the rate of tax specified in the Table to this section as the standard rate.

6

(2) Where a person who is charged to income tax for the year 1991–92 or any subsequent year of assessment is an individual (other than an individual acting in a fiduciary or representative capacity), he shall, notwithstanding anything in the Income Tax Acts but subject to section 5 (3) of the Finance Act, 1974, be charged to tax on his taxable income—

7

(a) in a case in which he is assessed to tax otherwise than in accordance with the provisions of section 194 (inserted by the Finance Act, 1980) of the Income Tax Act, 1967, at the rates specified in Part I of the Table to this section, or

8

(b) in a case in which he is assessed to tax in accordance with the provisions of the said section 194, at the rates specified in Part II of the said Table,

9

and the rates in each Part of that Table shall be known, respectively, by the description specified in column (3), in each such Part opposite the mention of the rate or rates, as the case may be, in column (2) of that Part."

10

In the Appeal's Commissioner's view and that of the respondents, the impact of that section was to cause tax to be levied at the then standard rate of 29%. The respondents, as solicitors, were holding their clients' monies in trust and were acting in a fiduciary capacity thereby attracting the lesser rate of tax. The respondents' contention is that the money and the interest earned thereon, at all times, belonged to the clients on whose behalf they were acting. On behalf of the respondents, Mr. McCann S.C. sought to rely on the decision of the House of Lords in Brown v. Inland Revenue Commissioners [1965] A.C. 244. That case involved a Scottish solicitor who sought to claim earned income relief against his liability for income tax. He did so by reference to interest earned on client's money which he had deposited. No issue arose as to any impropriety on the part of Mr. Brown. He was following a common but not invariable practice and called in aid a practice directive of the Scottish Law Society approving of what he had done. The mechanics of what occurred in Mr. Brown's case are, however, of secondary importance to the principles enunciated by the House of Lords and, in particular, by Lord Reid. He says, beginning at p. 256, that:-

"The general principle is well settled. A solicitor has a fiduciary duty to his clients and any person who has such a duty "shall not take any secret remuneration or any financial benefit not authorised by the law, or by his contract, or by the trust deed under which he acts, as the case may be"

11

(per Lord Normand in Dale v. Inland Revenue Commissioners [1954] A.C. 11, 27; [1953] 3 W.L.R. 448; [1953] 2 All E.R. 671, H.L.). If the person in a fiduciary position does gain or receive any financial benefit arising out of the use of the property of the beneficiary he cannot keep it, unless he can show such authority.

12

This interest was earned by using clients' money. It may be true that it could only have been earned by aggregating the money of a large number of clients and could not have been earned for each client by using the money of that client alone. But that does not appear to me to make any difference in law though it may remove any possible suggestion that the solicitor was simply appropriating for himself money which he could and should have credited to his clients. I can see that if clients' money is dealt with in this way it may be quite impracticable to determine with any accuracy what share of the interest should be credited to any particular client. One might, it is true, begin by assuming that if half the money in the clients' general current account is put on deposit receipt then half the money at the credit of each client is to be regarded as included in the sum put on deposit receipt. But the position changes from day to day. The whole of the money then at the credit of certain clients may have been paid out by the solicitor long before the deposit receipt is uplifted, the general current account having been kept in credit by money coming in from other clients. So notionally the ownership of the £ 5,000 on deposit receipt will change from day to day. No doubt an accountant could devise a fair method of apportioning the interest. But to make even a rough approximation might well cost more than the whole of the accrued interest. On the other hand, if the solicitor is deterred by this difficulty from putting such money on deposit receipt it must just remain on current account. No interest...

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