Thornton v Revenue Commissioners; Paul McDermott v Revenue Commissioners

• Jurisdiction: Ireland
• Judge: Ms. Justice Egan
• Judgment Date: 01 July 2022
• Neutral Citation: [2022] IEHC 396
• Court: High Court
• Docket Number: [2020 61 R]

Between

Brendan Thornton

Appellant

and

Revenue Commissioners

Respondent

Between

Paul McDermott

Appellant

and

Revenue Commissioners

Respondent

[2022] IEHC 396

[2020 61 R]

[2020 67 R]

THE HIGH COURT

Case stated – Dividend income – Taxes Consolidation Act 1997 – Appellant appealing against amended Schedule D assessments raised by the respondent – Whether the appellant was carrying on a trade in financial instruments and securities

Facts: The appellant, Mr Thornton, was one of 32 individuals who had appealed to the Tax Appeals Commission (TAC) against amended Schedule D assessments raised by the respondent, the Revenue Commissioner, in respect of the tax years 2009 and 2010. It had been agreed that the High Court’s decision in relation to Mr Thornton would govern the outcome of the appeals of the other appellants. The appellant claimed that he incurred trading losses in 2009 and 2010 as a result of his participation in Liberty Syndicates 1 and 2 (the syndicates). The syndicates bought and sold various investments, the most significant of which was the purchase from a company incorporated in the British Virgin Islands (BVI) of the right to receive a dividend (the dividend right) declared by a second company, also incorporated in the BVI. The appellant claimed a tax deduction for the purchase cost of the dividend right on the basis that it was a trading loss which he was entitled to offset against his taxable income. As part of the same series of transactions, a dividend was declared, pursuant to which the appellant received a dividend payment roughly equivalent to the cost of the purchase. The appellant claimed that, based on the provisions of s. 812 of the Taxes Consolidation Act 1997 (TCA 1997), the dividend income is deemed not to have been received by him. The appellant’s case was that the purchase of the dividend right was an allowable trading loss but that the dividend income was excluded from his tax computation, resulting in substantially increased losses with which to shelter his other taxable income. These were appeals by way of a case stated under s. 949 AQ TCA 1997 from the determination of the TAC dated the 13th December, 2019 (the Determination). The Determination found that the appellant’s capital contribution to the syndicates was an investment and that his involvement therein constituted investing and not trading, and because the owner of the shares was a BVI company and was not therefore chargeable to Irish tax on the dividend income, s. 812 did not apply; accordingly the dividend income was taxable in the hands of the recipient, the appellant, in the usual way.

Held by Egan J that there were three issues before the court: First, was the appellant, through his involvement in the syndicates, carrying on a trade in financial instruments and securities? Second, although under Irish income tax law, a dividend, including a foreign dividend, is generally taxable in the hands of the recipient, does s. 812 deem the dividend to be the income of the owner of the shares, rather than the appellant? Third, the appellant submitted an “expression of doubt” with his tax returns pursuant to s. 955 (4) TCA 1997. The appellant challenged the TAC’s finding that he was acting with a view to the avoidance of tax and that the expression of doubt filed was ineffective on the basis that it failed to specify the doubt in the manner required and was not genuine.

Egan J answered the questions set out in the case stated as follows: (i) and (ii) yes; (iii) not necessary to answer in light of the answer to (ii); (iv) no; (v) no, in light of the answer to (iv); (vi) yes; (vii) not necessary to answer in light of the answer to (vi); (viii) yes.

Case stated.

JUDGMENT of Ms. Justice Egan delivered on the 1 ^st day of July, 2022

Table of Contents

General Introduction	2
Background	4
Court's jurisdiction on an appeal by way of case stated	5
Principles of law applicable to construing taxing statutes	6
The trading issue	7
Introduction	7
TAC findings and Determination on the trading issue	8
Approach of the court to the trading issue	10
Appellant's arguments	10
Impact of McGrath decision and of s.811 on the relevance of tax advantage purpose or motive	11
Is a tax advantage motivation irrelevant or was inappropriate weight afforded to this factor?	13
Did the TAC err in law in relying on Lupton?	14
Did the TAC misapply Lupton?	16
S. 812 of the 1997 Act	18
Parties' Submissions and TAC Determination	18
Consideration of the four authorities relied upon by the respondent	20
Literal interpretation of “ income”/“income for the purposes of the Tax Acts”	25
Words in parenthesis in s. 812	28
Consideration of the presumption against extraterritorial effect	28
Absurdity; consideration of the purpose and intendment of the provision	30
Consideration of the amendment	30
Closing remarks on s. 812 TCA 1997	31
Expressions of doubt	31
Conclusion	36

General Introduction

1 . These are appeals by way of a case stated under s. 949 AQ of the Taxes Consolidation Act, 1997 (“ TCA 1997”) from a determination of the Tax Appeals Commission (“TAC”) dated the 13 ^th December, 2019 (“the Determination”). Brendan Thornton (“the appellant”) is one of 32 individuals who had appealed to the TAC against amended Schedule D assessments raised by the Revenue Commissioner (“the respondent”) in respect of the tax years 2009 and 2010. Some of these individuals did not partake in or proceed with their appeals to this court. In respect of those that did, it has been agreed that the court's decision in relation to this appellant will govern the outcome of the appeals of the other appellants.

2 . The appellant claims that he incurred trading losses in 2009 and 2010 as a result of his participation in Liberty Syndicates 1 and 2 (“the syndicates”). In brief, the syndicates bought and sold various investments, by far the most significant of which was the purchase from a company incorporated in the British Virgin Islands (“BVI”) of the right to receive a dividend (“the dividend right”) declared by a second company, also incorporated in the BVI. The appellant claims a tax deduction for the purchase cost of the dividend right on the basis that it was a trading loss which he is entitled to offset against his taxable income. As part of the same series of transactions, a dividend was declared, pursuant to which the appellant received a dividend payment roughly equivalent to the cost of the purchase. The appellant claims that, based on the provisions of s. 812 TCA 1997 (“s. 812”, as to which see below), the dividend income is deemed not to have been received by him. Essentially, the appellant's case is that the purchase of the dividend right is an allowable trading loss but that the dividend income is excluded from his tax computation, resulting in substantially increased losses with which to shelter his other taxable income.

3 . Three issues were before the court:

4 . First, was the appellant, through his involvement in the syndicates, carrying on a trade in financial instruments and securities? If these transactions were not trading transactions, then they cannot be offset against taxable income. The respondent's case is that the appellant's capital contribution to the syndicates was an investment and that his involvement therein constituted investing and not trading.

5 . Second, although under Irish income tax law, a dividend, including a foreign dividend, is generally taxable in the hands of the recipient, does s. 812 deem the dividend to be the income of the owner of the shares, rather than the appellant? In brief, s. 812 applies when an owner of shares sells the right to receive a dividend declared on those shares, but does not sell the shares themselves. The section deems any dividend income to be that of the owner of the shares. The respondent's case is that, because the owner of the shares is a BVI company and is not therefore chargeable to Irish tax on the dividend income, s. 812 does not apply; accordingly the dividend income is taxable in the hands of the recipient, the appellant, in the usual way.

6 . It will be apparent that the appellant needs to succeed on both of these issues if he is to benefit from the tax write off sought. The Determination found for the respondent on both issues.

7 . This in turn led to the requirement to consider the third issue before the court. The appellant had submitted an “expression of doubt” with his tax returns pursuant to s. 955 (4) TCA 1997. This provides that, where a tax payer is in doubt as to the treatment of a matter for tax purposes, he may deliver a return specifying the doubt. Thereafter, if it is subsequently found that the view taken by the tax payer was incorrect, they will nevertheless be regarded as having made a full and true disclosure. Although any additional tax is still payable, the expression of doubt affords the taxpayer protection from interest and surcharges. The appellant challenges the TAC's finding that he was acting with a view to the avoidance of tax and that the expression of doubt filed was ineffective on the basis that it failed to specify the doubt in the manner required and was not genuine.

Background

8 . The appellant signed up for and contributed funds to the syndicate. Documents provided to the appellant pre-contribution, confirmed that persons who wished to participate in the syndicate must be individuals resident or ordinarily resident in Ireland for tax purposes, that the opportunity would be best suited to higher rate tax payers and that the initial capital contribution would not be returned. In the case of the appellant, his initial capital contribution was €25,000, half of which was immediately deducted by way of fees and charges. The appellant also contributed to other Liberty...