The Gazette 1986

GAZETTE

sep T em BER 1986

(Inspector of Taxes) -v- Belvedere Estates* 1 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 48 : "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. 49 (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) 50 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 51 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" 52 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. 53 Griffin J. said 54 "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. In McCarthaigh (Inspector of Taxes) -v- Daly (the Metropole case) 55 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 56 : "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. 51 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 58 : "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) 59 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