The Gazette 1986

GAZETTE

sep

BER 1986

(Inspector of Taxes)

-v-

Belvedere Estates*

At first

instance, the Appeal Commissioners had rejected the

Furniss-

type argument that they should ignore various

inter company transactions, and held that the

transactions were real transactions. In the High Court

the taxpayer company argued that the scheme was

effective since it involved real transactions creating legal

rights, and was within the literal wording of section

18(2)(B). However, Carroll J. pushed this argument to

its logical conclusion and looked at the actual

consequences of the scheme

"It is not possible to ignore the conveyancing

implications of the transaction. The taxpayer

cannot in one breath say that these are real

transactions creating legal rights and obligations

between the parties, and then claim that which was

in fact accomplished, must be ignored. Even

though in tax law artificial methods of valuation

are adopted, the tax code must nevertheless be

interpreted in the general legal context of the time

it is applied. The ordinary legal consequences of

the parties' acts must, in the absence of specific

statutory provisions to the contrary, be given full

effect."

She therefore held the scheme to have been

ineffective.

(C) Technical Arguments

The courts also seem content to strike down tax

avoidance arrangements on a technical basis rather than

resorting to the

Furniss

principle. Thus in the case of

Revenue Commissioners

-v-

T.F.Q.R. and I. McG.

(the

'Club 349' case)

the two taxpayers, a Solicitor and an

Accountant set up a club to fund their skiing and other

leisure activities, and lent the club £30,000. They

claimed that interest earned by the club on the money

lent was not liable to tax within section 349, Income Tax

Act, 1967, arguing that the club was a body of persons

established for the sole purpose of promoting athletic or

amateur games or sports within the section. The

Revenue Commissioners contended,

inter alia,

that two

persons did not constitute a 'body of persons' as

defined in section 1(1), ITA, 1967

and that the club

had not been established for the sole purpose of pro-

moting sport but also and mainly for the avoidance of

tax. It was not argued that the arrangement was a

"sham"

or was within the

Furniss

principle. In the

High Court, McWilliam J. held that two persons could

not constitute a "body of persons", and this was upheld

on appeal to the Supreme Court. Henchy J. said that

"Body" was a collective noun connoting an appreciable

number of persons, and not merely two, united by some

common tie.

Griffin J. said

"In the construction of a statute it is to be

assumed that words and phrases are used in their

ordinary and natural meaning, unless that is at

variance with the intention of the legislature, to be

collected from the statute itself, or leads to any

manifest absurdity or repugnance."

(D) Transactions not in the ordinary course of trade

The Irish Courts have also considered the application

of principles used in

pte-Ramsay

English decisions to

strike down tax avoidance arrangements.

McCarthaigh

(Inspector of Taxes)

-v-

Daly (the

Metropole case)

O'Hanlon J. upheld the effectiveness

of limited partnerships for tax purposes. In that case, a

limited partnership was formed to borrow funds from a

hotel company to purchase plant which was leased to

the hotel company qt a nominal rent. The partnership

claimed accelerated capital allowances in the first year

of trading, and the individual partners claimed to offset

the excess allowances against their personal income. The

Inspector of Taxes contended

inter alia,

that the scheme

was

"merely a colourable transaction advised for the

purpose of securing tax benefits to the partici-

pants and for no other purpose; that it did not

involve the carrying on of any trade or business in

the true sense of the term."

This argument was based on the principles expounded

in the U.K. cases of

Petrotim Securities

-v-

Ay res,

Sharkey

-v-

Wernher

and

Lupton

-v-

A.B.

Ltd.

O'Hanlon J. concluded that the arrangement was not

"so obviously devoid of commercial characteristics" as

to bring it within the

Petrotim

case. He said

"The scheme was not of such an extreme

character as to convince me that it should be

regarded as having no commercial reality, and I

think it may fairly be regarded as a trading

transaction which qualifies for the tax relief

claimed by the taxpayer."

The Judge felt that the arrangement was a real

business transaction. However, he was not prepared to

accept the taxpayer's argument that a trading loss may

be deliberately contrived solely for the purpose of

obtaining relief against taxation.

A similar approach was adopted by Carroll J. in the

High Court in the case of

Bellville Holdings Ltd.

-v-

Cronin (Inspector of Taxes)

In that case, an

investment holding company had charged its

management expenses to its subsidiaries up to the

accounts period ended 31 October, 1978. However, in

the next two accounting periods the company did not

charge its subsidiaries and incurred losses of about

£285,000 as a result. Two subsidiaries paid up

dividends, and the holding company claimed to treat the

dividends as taxable income for the purposes of

offsetting the dividend against the losses and reclaiming

the tax credit thereon. Neither subsidiary had paid

Corporation Tax due to group relief, and Advance

Corporation Tax was not payable at the time.

The Irish Appeal Commissioner held, following

Petrotim

, that the transaction was so outside the

ordinary course of business that it was not done in the

course of trade, and decided that notional management

fees equivalent to the market value of the services

should be taken into the computation. The company

appealed, claiming that

Petrotim

did not apply and that

226