TaxTMI 
TaxTMI 
1962 (3) TMI 92
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....son (Watford) Ltd. (hereinafter called the 'company') was incorporated in 1948 and carried on business as merchants up to some date in the year 1953-54 when that business ceased...For the year 1952-53 the company incurred in the said business a loss of GBP 13,585, which was admittedly available for carry forward to 1953-54 for the purposes of relief under...section 341... 3. At an extraordinary general meeting of the company held on October 8, 1953, the following resolutions were passed..." (1) Resolved that the provisions of the memorandum of association of the company be altered by inserting...the following new paragraph, namely: To carry on the business of buying or...selling...or dealing in...or otherwise turning to account...shares, stocks, bonds, debentures or other securities of any company...which may seem capable of profitable handling. (2) Resolved that the articles of association of the company be altered in that clause 66 of Table A to the Companies Act, 1929, shall henceforth not apply to the company...' 4. On December 4, 1953, the company purchased all the issued share capital (1,000 GBP 1 shares) of Julius Bendit Ltd. for GBP 16,900 borrowing for th....
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.... in paragraph 13 hereof." In the company's balance sheet as at March 31, 1954, there was listed among current assets: "Income tax recoverable (not yet agreed) GBP 13,010 14s. od." Sir Jocelyn Simon Q.C., S.-G. and Allen Orr for the Crown. The submissions for the appellant are: (1) The criterion of trade is (in general) the objective of making a trading profit: Brighton College v. Marriott [1925] 1 K.B. 312, 319, 321-322, 326-327; 41 T.L.R. 165, C.A.; [1926] A.C. 192, 203-204; 42 T.L.R. 228, H.L.; Inland Revenue Commissioners v. Livingston 1927 S.C. 251, 255, 256; 11 Tax Cas. 538, 542, 543.; Smith's Potato Estates Ltd. v. Bolland [1948] A.C. 508, 517, 520, 527; 64 T.L.R. 430; [1948] 2 All E.R. 367; [1949] 17 I.T.R. (Suppl.) 1, H.L.; Johnson v. Jewitt [1961] 40 A.T.C. 109, 117, 121-125; [1961] 40 A.T.C. 314, C.A.; Jenkinson v. Freedland 1960] 39 A.T.C. 452; [1961] 40 A.T.C. 190, C.A. This was in fact the criterion applied by the Court of Appeal. (2) In determining whether a trading profit has been sought, it is net profit, not gross profit, which is relevant: Edwards v. Bairstow [1956] A.C. 14, 37; [1955] 3 W.L.R. 410; [1955] 3 All E.R. 48; [1955] 28 I.T.R. ....
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....tion to secure a trading profit out of their acquisition and resale. The intention of the transaction was rather evisceration of the shares and tax recovery: Inland Revenue Commissioners v. Livingston.( 1927 S.C. 251, 256; 11 Tax Cas. 538, 543.) (6) No inference can be drawn from the fact that Parliament subsequently legislated specifically to ensure that a transaction such as this would not result in repayment of tax, since; (a) the beliefs and assumptions of those who frame legislation do not make the law: Dowdall O' Mahoney & Co. Ltd. v. Inland Revenue Commissioners([1952] A.C. 401, 414-417, 421, 426.); Kirkness v. John Hudson & Co. Ltd.( [1955] A.C. 696, 713-714; [1955] 2 W.L.R. 1135; [1955] 2 All E.R. 345, H.L.) (b) In the sphere of tax avoidance Parliament must act expeditiously, and from abundance of caution and in advance of adjudication: Johnson v. Jewitt 40 A.T.C. 109. (c) There may be dividend stripping operations where a commercial profit is sought as well as a tax repayment; the subsequent legislation would in any event have been needed to deal with such transactions. This is a sphere where it would be particularly unsafe to make assumptions as to Parli....
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.... here in the year 1954-55 were different from those in the year now before the House. Roy Borneman Q.C. and P.J. Brennan for the respondent company. The case has now been put differently from the way it was put in the Court of Appeal. All the evidence was directed to the Crown's contention that the appellant company was not carrying on a trade or an adventure in the nature of trade of dealing in shares in 1953-54. That was the Crown's only contention. By reference to the decision in Edwards v. Bairstow [1956] A.C. 14; [1955] 28 I.T.R. 579., the Crown does not submit that the decision of the Special Commissioners was perverse, but it is said that the only reasonable conclusion would have been that there was not here either trading or an adventure in the nature of trade: see Lord Radcliffe in Edwards v. Bairstow. Ibid. 36, 39. On the facts before the Special Commissioners everything points to trade or an adventure in the nature of trade unless as a matter of law the company's activities cannot amount to trade because the trader had his eyes wholly or mainly on the fiscal results of the transactions. That confuses the transactions themselves with the results of th....
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....n as a matter of words. The net profit is taxed, that is, the balance: see section 127 of the Act of 1952. One may also agree to the Crown's third proposition, but it does not affect the result in this case, for the recovery of tax is the result of the trading activities of the company. The cases of Smith's Potato Estates([1948] A.C. 508; [1949] 17 I.T.R. (Suppl.) 1.) and Rushden Heel([1948] L.J.R. 1570; [1949] 17 I.T.R. (Suppl.) 19.) do not advance the matter because they are not relevant to the issue. The Crown's fourth and fifth propositions are extensions of its earlier propositions. The fifth harks back to the first. Trading activities are not vitiated as such because the intention is not to make a profit but to recover tax. One must see what is done, and if what is done is in the usual line of business concerned, there is a strong inference that it is an activity of trade. Farming is nonetheless a trade because a man carries on a dairy farm for pleasure, because he likes animals or because he likes fresher butter than he can get in the shops, even if he makes a loss. Men go into "hobby farming" regularly assuming that they will make a loss. The only reason w....
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....y. The transaction was a mere piece of machinery. Save for the taxation aspect, there would not be much difficulty about this case. The transaction was normal. There was no fact found from which the commissioners could have come to their conclusion. Sir Jocelyn Simon Q.C., S.-G. in reply. The respondent company also is not arguing here the same case as it did in the Court of Appeal([1961] 40 A.T.C. 132, 134.). The commissioners were not precluded in law from considering the fact that no trading profit was sought here. If it is objected that the object of making a profit is not the "criterion" of trading, I am content to say that it is "of the very essence of trade": Livingston v. Inland Revenue Commissioners(1927 S.C. 251, 256; 11 Tax Cas. 538, 543.). One is not shut out from considering the purpose of the transactions: see the Brighton College case([1925] 1 K.B. 312. 579.), the Smith's Potato case([1948] A.C. 508, 527; [1949] 17 I.T.R. (Suppl.) 1.) and the Stonehaven case() 1930 S.C. 206, 211-212; 15 Tax Cas. 419, 426.). Rutledge v. Inland Revenue Commissioners(1929 S.C. 379; 14 Tax Cas. 490.) is a useful illustration, because the only way to tell whether a man buys a pictu....
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.... or an adventure in the nature of trade. As the commissioners made no other finding than that which I have mentioned, it must be assumed that their determination can only have been based on the facts (1) that the Claiborne transaction was an isolated one in the year of assessment, and (2) that the shares were purchased with a view to obtaining a dividend against which it could claim to set off its losses. The first of these reasons, if not formally abandoned, was not seriously maintained before your Lordships and appears to me quite unsustainable. It was the second reason that was urged as justifying the commissioners' determination. I hope that I do no injustice to the argument for the Crown if I say that it rested entirely on the proposition that the essence of a trading transaction is that its object is to make a profit and that the found object of this transaction was the ulterior one of obtaining a dividend against which it could claim to set off its losses. This proposition was supported by the fact that the shares were bought for GBP 15,900 and sold for GBP 1,000, a transaction which, thus baldly stated, could not be regarded as a favourable or even a normal one fr....
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....trade but it held accumulated profits which had borne tax amounting to some GBP 15,900. On December 4, 1953, the respondents bought these shares for GBP 16,900. The commissioners found as a fact, and it is not disputed, that they bought the shares with a view to obtaining a dividend against which they could claim to set off losses. Claiborne, now controlled by the respondents, duly declared a dividend on January 26, 1954, and the net sum of GBP 15,901 19s. 3d was received by the respondents. The shares were then immediately sold for GBP 1,000. So the respondents made neither profit nor loss beyond having to pay any expense involved in carrying through these operations: they spent GBP 16,900 and they got back GBP 15,901 19s. 3d. plus GBP 1,000. But they got what they had planned to get, a large dividend paid out of money which had borne tax. If this was a trading operation, that enabled them, as the law then stood, to recover from the Revenue a large amount of income tax which they had never paid. The respondents were originally merchants. In that trade they incurred substantial losses. They ceased to carry on that trade but were entitled to carry forward a loss which was availab....
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....when buying property are very relevant. And where, for example, a company which trades in property buys property to be used for its office, its object and intention are certainly relevant to show that the price was not a trading expense. The respondents relied on what was said in five cases. In each the question was whether there was trading or an adventure in the nature of trade. Certainly these cases establish that operations of the same kind and carried on in the same way as those which characterise ordinary trading should be held to be trading, though there may be no intention to earn profit or though the transaction may be an isolated one. In Inland Revenue Commissioners v. Incorporated Council of Law Reporting([1888] 22 Q.B.D. 279, D.C.), Carnoustie Golf Course Committee v. Inland Revenue Commissioners(1929 S.C. 419; 14 Tax Cas. 489.) and Inland Revenue Commissioners v. Stonehaven Recreation Ground Trustees(1930 S.C. 206; 15 Tax Cas. 419.) there was no intention or attempt to earn a profit, but profit was in fact made. Inland Revenue Commissioners v. Livingston(1927 S.C. 251; 11 Tax Cas. 538.) and Edwards v. Bairstow([1956] A.C. 14; [1955] 28 I.T.R. 579.) were cases of iso....
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....is concluded by authority, ultimately depend on its knowledge of the usage of the English language in ordinary affairs of the kind with which the particular Act is concerned. The court or tribunal may be assisted by legal principles or by so-called rules of construction, but these cannot solve the question. The question whether the words of an Act apply to particular facts is generally called a question of law. But, to my mind, it is in reality neither a question of law nor a question of fact. It cannot be solved either by the application of legal principles or by evidence. A court or tribunal could, no doubt, proceed by first translating the words of the Act into other words (whether or not those other words be called the "meaning" of the words of the Act) and then seeing whether those other words apply to the particular facts. But we have been warned time and again that it is dangerous and wrong to proceed in that way. The question is whether the words of the Act apply to the facts of the case. In some exceptional cases the question whether a particular word or phrase in an Act applies to particular facts has come to be regarded, for reasons that I do not fully understand, as ....
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....y that the opinion of the commissioners is unreasonable, and, if that be so, this appeal ought, in my judgment, to be allowed. I would add that what I have said does not mean that it would never be unreasonable to say that a case of dividend-stripping was not trading. There may well be elements of trading involved in other cases to such an extent that it would be unreasonable to deny that there was trading. The question may be one of degree. But in the present case almost the whole of the money put out, some 95 per cent., was transformed into a dividend, and the commissioners were, I think, well entitled to say that was not trading. LORD DENNING. My Lords, your Lordships are here faced for the first time with a "dividend-stripping" transaction. What is it? To put it bluntly it is a way of getting money out of the Revenue authorities. To succeed in it the prospectors must get into their hands: (1) a dividend on which tax has been paid; and (2) losses sustained in trade. They then claim repayment of the tax on the ground that it is relief due to them on account of the losses. The best way to understand it is to take first a straightforward case of "relief against losses." Su....
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....ught the 1,000 shares in Claiborne for GBP 16,900 (GBP 15,900 plus GBP 1,000); they used their control of Claiborne so as to distribute a dividend to themselves of GBP 15,901 19s. 3d., and with that sum they paid back the GBP 15,900 they had borrowed, and then resold the shares for GBP 1,000. Now, what was the net result of that "dividend-stripping" operation? In point of fact (apart from tax benefits) Harrisons made a gross profit of GBP 1 19s. 3d. This trifling sum was, of course, not the object of the exercise. The object was two-fold: first, to get a dividend in hand on which tax had already been paid, secondly, to get losses in hand which would serve as a basis for a claim for repayment of tax. The losses of Harrisons came to GBP 29,485 as follows:-- Losses on merchandise ... ... 13,585 Loss on the shares of Claiborne Bought for ... ... 16,900 Sold for ... ... ... 1,000 Loss ... ... ... 15,900 15,900 29,485 The dividend in hand came to 28,912 13s. 3d. gross :- Net dividend ... ... ... ....
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.... for the judge to rule whether the inference could reasonably be drawn, but a question of fact for the jury whether it ought to be drawn. Likewise we have nowadays the cases before magistrates whether a speed was "dangerous," or before the Lands Tribunal whether part of a plant was "in the nature of a structure," or before the Commissioners of Inland Revenue whether a transaction was an "adventure in the nature of trade." It is a question of law for the judge whether the conclusion could reasonably be drawn, but, given that it could reasonably be drawn, it is a question of fact for the tribunal whether it ought to be drawn. Mr. Borneman urged your Lordships to say that on the undisputed facts the commissioners could not reasonably have come to the conclusion they did. There was only one true and reasonable conclusion to which the commissioners could come, namely, that the transaction was "an adventure in the nature of trade." Here was a company, he said, which was authorised to deal in shares. It bought shares, received a dividend from those shares, and then sold them. What detail does it lack, he asked, that prevents it being an adventure in the nature of trade? To this I wo....
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....ad, as its object, the making of profit and was therefore an "adventure in the nature of trade." Thus Danckwerts J. Said [1969] 39 A.T.C. 287, 290 that Harrisons acquired "the shares in question for the purpose of making a profit out of those shares." Holroyd Pearce L.J. said 40 A.T.C. 132, 134., that "the object was a substantial profit through repayment of tax. "Upjohn L.J. said Ibid. 135 the purpose was "making a profit on the adventure, a profit by recovery of tax." Mr. Borneman did not seek to support this reasoning. He was reluctant to accept the gift thus held out to him. He feared the dangers of it. He had to admit that the object of Harrisons was not to make trading profits. It was to get repayment of tax, which is a very different thing. Can repayment of tax be properly described as profits of a trade? Surely not. If it were so, the repayments of tax which a dividend-stripper received would be profits of his trade which he would have to bring into computation for tax. That would be absurd. It would mean that the Revenue could levy tax on its own repayments to the dividend-stripper. Whoever heard of such a thing? Pushing aside the proffered gift, Mr. Borneman sought ....
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....issued share capital of Julius Bendit Ltd. Shortly afterwards Julius Bendit Ltd. changed its name to Claiborne Ltd. When on December 4, 1953, the company bought the shares the memorandum of association of the company as altered showed that among the objects of the company was that of carrying on the business of buying or otherwise acquiring and selling or dealing in and disposing of shares and stocks of any company. On January 26, 1954, Claiborne Ltd. declared a dividend. The net dividend was received by the company. On June 4, 1954, the company sold the shares. There was no evidence that in the year 1953-54 the company bought or sold any other shares, but it was not disputed that in the following year the company was carrying on a trade of dealing in shares. There has never been any doubt as to what was the motive or reason which inspired the decision of the company to enter into the transaction in regard to the shares. It was expressed by the commissioners in the words "The company purchased the shares with a view to obtaining a dividend against which it could claim to set off its losses." The company considered that if it bought the shares and obtained a dividend the resul....
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....it cannot be said that if this intention is lacking there is no carrying on of a trade. A trade may be carried on with the knowledge that losses will result. Equally it seems to me that if on any ordinary examination of them certain transactions must be regarded as trading transactions or adventures in the nature of trade they do not cease to be such because those conducting them have embarked upon them with a view to obtaining some fiscal benefit. It was urged in the present case that the transaction in the shares of Claiborne Ltd. ought to fail to be regarded as a trading transaction because in its real nature it was a fiscal transaction. My Lords, I cannot regard these as alternative descriptions. There may be trading transactions which can be the prelude, if the state of the law so allows, to tax-recovery activities. If tax recovery is possible it is as taxpayers and not as traders that the recovery is obtained. The possibility of tax recovery may be a result made possible by the trading activity but I am unable to accept that if a transaction fairly judged has in reality and not fictitiously the features of an adventure in the nature of trade it must be denied any such descrip....
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....art of any trade of dealing in shares and was not an adventure in the nature of trade, and that the company was not carrying on any such trade in 1953-54. Danckwerts J. and the Court of Appeal reversed the determination of the commissioners and held that the company was carrying on trade during the relevant period. The finding of the Commissioners cannot be disturbed unless it was arrived at upon a view of the facts which could not reasonably be entertained: Edwards v. Bairstow [1956] A.C. 14; [1955] 28 I.T.R. 579. --Viscount Simonds Ibid. 29 and Lord Radcliffe Ibid. 30, 39. The commissioners give no reasons for their finding: they simply state the facts and their conclusion. One is therefore left in doubt as to the reasons which led them to their conclusion. It can, of course, be said that their finding was upon a review of all the facts. But if it can be substantiated that any reason which they might have had for holding that the company was not trading is not a good reason in law their finding cannot stand. The test put in the Edwards case would then be satisfied. I therefore proceed to examine the grounds put forward by the Crown for supporting the decision of the commiss....
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....1927 S.C. 251, 256; 11 Tax Cas. 538, 543.); Inland Revenue Commissioners v. Stonehaven Recreation Ground Trustees(1930 S.C. 206; 15 Tax Cas. 419.), Lord President Clyde(1930 S.C. 206, 211-212; 15 Tax Cas. 419. 426.). No doubt if it is established that a transaction is entered into with the evident intention of making a profit, that may be a strong indication that the company was trading. But the corollary by no means follows that the absence of an intention to make a profit or the intention to make a loss negatives trading. The test is an objective one. The question to be asked is not quo animo was the transaction entered into but what in fact was done by the company: see Inland Revenue Commissioners v. Incorporated Council of Law Reporting(22 Q.B.D. 279.), Lord Coleridge C.J.( Ibid. 293-294.); Carnoustie Course Golf Committee v. Inland Revenue Commissioners(1929 S.C. 419; 14 Tax Cas. 498.), Lord President Clyde(1929 S.C. 419, 424-425; 14 Tax Cas. 498, 510.). I therefore conclude that neither the fact that the company intended to make a loss nor the fact that the company intended to make a fiscal advantage out of the transaction negatives trading. In my opinion one has to loo....