Special Commissioners Cases
John T Newth FCA, FTII, FIIT, ATT summarises two recent cases heard by the Special Commissioners.
Expensive 'Freebie'
The former owner of the Freebie magazine appealed against two assessments to capital gains tax for the years 1988-89 and 1989-90, each in the sum of £284,468.
After the October 1987 stock market crash, the magazine got into financial difficulties. The appellant also needed money to complete the purchase of a property and to refurbish another property.
Special Commissioners Cases
John T Newth FCA, FTII, FIIT, ATT summarises two recent cases heard by the Special Commissioners.
Expensive 'Freebie'
The former owner of the Freebie magazine appealed against two assessments to capital gains tax for the years 1988-89 and 1989-90, each in the sum of £284,468.
After the October 1987 stock market crash, the magazine got into financial difficulties. The appellant also needed money to complete the purchase of a property and to refurbish another property.
He borrowed money from his parents, who agreed to lend £50,000. At about this time he had met someone who appeared to be a lawyer, but in fact was not professionally qualified who produced what purported to be a legal agreement and gave the appellant's parents 11 per cent interest on the loan and 60 per cent of the net proceeds of any sale value of the magazine, should this event occur. However, no transfer of shares in the Freebie magazine company took place.
Subsequently the appellant received a very good offer for the sale of the company, which realised £948,226. The solicitors instructed in connection with the sale were not informed that the appellant had effectively given 60 per cent of the shares to his parents and he held himself out as the sole owner of the shares.
Following receipt of the sale proceeds, sums were paid to the appellant's parents on the basis of the so-called legal agreement and he completed his tax returns for two years on the basis that he held only 40 per cent of the shares.
The matter was highlighted in 1997 when the appellant's father was summoned to the local office of the Ministry of Finance in the country where he and his wife resided and was asked certain questions about his connection with Company Free Magazine Limited. He confirmed that he had never held shares in the company and that in fact the £50,000 loan had been paid by his wife to his son. At the time of the interview in 1997, his wife was in fact seriously ill.
The Inland Revenue submitted that the facts showed clearly that the appellant never divested himself of ownership of shares in Freebie in favour of his parents and that when he sold the company he did so as sole beneficial owner.
Mr Everett observed that it appeared to him that the appellant was trying to have his cake and eat it. He needed financial support from his parents but he also wished the world and his fellow directors and employees to continue to believe that he was the sole owner of the company and in sole control.
In the judgment of the Special Commissioners the transaction which took place between the appellant and his parents was that of debtor and creditor. There was no evidence of the appellant completing a declaration of trust in favour of his parents or of his agreeing to hold shares for them as nominee. When he came to sell his shares, he held himself out both to the purchaser and to his own solicitors as the official owner of the company and in sole control of Freebie.
The appeals were therefore dismissed and the assessments confirmed, with the addition of interest under section 88, Taxes Management Act 1970.
(An Editor (SpC 247).)
No hope, Inspector!
A case came before the Special Commissioner, Mr T H K Everett, which arose from a partnership dispute and dissolution.
The appellant had been a partner in an accountancy practice since 1979 and in April 1981 three new partners were admitted to the partnership. The new partners paid £150,000 in total equally to the old partners for 20 per cent of what was described in the partnership agreement as 'goodwill'. The appellant received half of this amount, namely £75,000.
Following partnership disagreements, the new partners sought to dissolve the partnership and issued proceedings in the High Court against the appellant. The relief they sought was the repayment by the appellant of the £75,000 paid to him when the new partners were admitted. The basis of this claim was that the amount was a premium, not a payment for goodwill and as a premium it was returnable on the dissolution of the partnership.
The matter was settled in court in February 1983 when the judge gave his opinion that on the evidence before him the payment of £75,000 had been for goodwill and not a premium.
The appellant incurred legal expenses of £13,224 in defending the action brought against him by the new partners and claimed this sum as an expense under section 38(1)(b), Taxation of Chargeable Gains Act 1992 as deductible in computing the gain on the part disposal of goodwill.
It was this issue that came before the Special Commissioner. The Inspector of Taxes had submitted that the appellant was not defending his title to the asset disposed of, 'but rather his title to the cash he got for it'.
Basically Mr Everett gave short shrift to the Inspector's submissions. The documents connected with the new partnership in April 1981 each referred to goodwill and, tellingly, the reference to goodwill was repeated in a letter of 14 July 1982 written by the solicitors acting for two of the new partners to the appellant. Additionally, in the action following the partnership dissolution the judge at Newcastle gave his opinion that the payment was not a premium, but was for goodwill.
The Inspector's submissions depended almost entirely upon his stated rejection of the evidence of the appellant and his solicitor. The Special Commissioner was particularly impressed by the evidence of the solicitor, who had a clear recollection of the action brought against the appellant by the new partners. The appellant therefore succeeded in his claim.
(Mr Brian Lee (SpC 257).)
