De Pol v Cunningham (HM Inspector of Taxes)
| Jurisdiction | Northern Ireland |
| Judgment Date | 22 January 1974 |
| Date | 22 January 1974 |
| Court | Court of Appeal (Northern Ireland) |
COURT OF APPEAL (NORTHERN IRELAND)-
Income tax, Schedule D-Short-term gain-Money advanced by third party to member of partnership firm to buy out other partners-Conditional on formation of company to carry on the business in which third party would have a half share- Company formed accordingly six weeks after former partners bought out- Whether purchasing partner acquired the business beneficially-Whether a resulting trust for third party in property purchased-Finance Act 1962 (10 & 11 Eliz. 2, c. 44), s. 10, Sch. D, Case VII.
The Appellant had many years' experience in terrazzo and mosaic work. From 1961 to 1966 he and two others each held a one-third share in a partnership business doing such work. At the end of 1965 he became desirous of buying of buying out his partners. Having no money of his own, he came to an understanding with his friend K that K would advance him £10,000 for that purpose and would take an equal interest with him in the business. After the possibility of a partnership between them had been considered, it was decided to form a company with a capital of £20,000 in £1 shares, of which the Appellant and K would each hold 10,000, £10,000 being contributed in cash by K and £10,000 representing the value of the Appellant's eventual interest in the business, which he was to bring in as a going concern. The Appellant gave notice of dissolution of the partnership in January 1966. Between 4th April and 8th June correspondence took place between his and K's solicitors in which a draft memorandum and articles for the proposed company (including the foregoing terms) were agreed. On 28th June K's solicitors sent the Appellant's solicitors a cheque for £10,000 to enable him to buy out his partners, on condition of his undertaking to promote the new company on the agreed terms. On 4th July 1966 an agreement was executed between the partners whereby the partnership was deemed to have been dissolved from 30th April 1966 and the Appellant was to carry on the business from that date, the other partners transferring their shares to him in consideration of the payment to each of them of £5,250. On 18th August 1966 the company was incorporated with a capital of £20,500 in £1 shares, 9500 shares being issued to the Appellant, 9500 to K and 1500 to the former office manager of the partnership (who paid £500 for 500 of them, and was given 500 by each of the Appellant and K). The company made up its first accounts for a period commencing on 1st May 1966.
The Appellant was assessed to income tax under Case VII of Schedule D in respect of the short-term gain realised on the disposal to the company of the interest acquired by him from his former partners (and to capital gains tax in relation to such disposal of his original share in the business) on the footing that immediately before the formation of the company he was the sole beneficial owner of the business. On appeal, the Appellant contended, inter alia, that in the negotiations to buy out his partners he had been acting as K's agent and he did not purchase the partnership business on his own behalf. For the Crown it was contended that under the agreement of 4th July he became absolutely entitled as beneficial owner to the two one-third shares of his former partners and that on or after 18th August he transferred the business, with all its assets, to the company. The Special Commissioners found that there was no agency but a contractual arrangement whereby the Appellant was to acquire the interests of his partners by means of a loan from K made subject to the condition of the formation of the company, and they confirmed the assessments.
Held, (Curran L.J. dissenting), that K acquired a beneficial interest (by way of a resulting trust) in the property acquired by the Appellant with the £10,000 paid to him by K.
Stated under the Taxes Management Act 1970, s. 56, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the Court of Appeal in Northern Ireland.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held in Belfast on 18th and 21st June 1971 Angelo De Pol (hereinafter called "the Appellant") appealed against the following assessments to income tax and capital gains tax respectively:
Short-term gains (Schedule D, Case VII) 1966-67 £11,273
Chargeable gains (capital gains tax) 1966-67 £597
2. Shortly stated, the questions for our decision were:
(i) whether the Appellant was the sole beneficial owner of a business at the date of transfer of that business to a company, or alternatively whether he was beneficial owner of a lesser interest therein at that date; and
(ii) whether, on the transfer to the company of that business, the assets transferred to the company comprised the whole of the assets of the business or only a part thereof.
3. The Appellant gave evidence before us.
4. The following documents were proved or admitted before us:
(2) Copy balance sheet of the partnership hereinafter mentioned as at 30th June 1962, dated 9th April 1964.
(3) Bundle copy correspondence between Appellant's solicitors and his partners or their solicitors (7th January 1966 to 5th July 1966).
(4) Copy agreement dated 4th July 1966 hereinafter referred to.
(5) Bundle copy correspondence between the Appellant's solicitors and Messrs. John W. T. Watters & Sons, solicitors (4th April 1966 to 11th August 1966).
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(6) Copies of closing balance sheets of the said partnership
(a) as at 30th April 1966, unadjusted;
(b) as at 30th April 1966, based on accountants' balance sheet but adjusted;
(c) as at 30th April 1966, based on accountants' balance sheet but adjusted;
(7) together with a copy opening balance sheet expressed to be that of A. De Pol & Co. Ltd. as at 1st May 1966, unadjusted and uncertified.
(8) Copy balance sheet of the said partnership as at 30th April 1966, certified 24th May 1966.
(9) Copy letter dated 11th April 1966.
Copies of the above are not annexed hereto as exhibits, but are available for inspection by the Court if required.
5. As a result of the evidence, both oral and documentary, adduced before us we find the following facts proved or admitted:
(2) From 1930 to 1961 the Appellant had been employed in a marble and terrazzo business in Scotland, and he was appointed manager of its Northern Ireland branch in 1949. In 1961, as a result of an illness, he resigned that employment. He had become acquainted with Ian Laing (hereinafter called "Mr. Laing") and Bronislaw Molski (hereinafter called "Mr. Molski"), who were partners in a firm called the Magnesite Flooring Co. (hereinafter called "Magnesite" or "the partnership" as the case may be). The business of the partnership was that of magnesite flooring manufacturers and contractors. The Appellant learned that the partnership business was falling off, and so he joined the firm as a partner with a view to putting to good use his knowledge of terrazzo and mosaic work. During the years 1961 to 1966 the partnership's turnover increased annually, and the Appellant considered that the increases were due to his efforts.
(3) Mr. Molski found it hard to change from the partnership's former business of magnesite to terrazzo work, and Mr. Laing was absent for a long time through illness. Towards the end of 1965 the Appellant became dissatisfied with the manner in which the partnership was being carried on and with his share of the profits. Accordingly, by letter dated 7th January 1966, notice of determination of partnership to take effect from 1st February 1966 was served by the Appellant's solicitors (Messrs. Joseph O'Hara & Son) on Mr. Laing and Mr. Molski. Correspondence then ensued between the Appellant's solicitors and Messrs. S. & R. Crymble, solicitors instructed to act for Mr. Laing and Mr. Molski.
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(4) Eventually, by an agreement dated 4th July 1966 and made between (1) the Appellant (therein called "the Continuing Partner") and (2) Mr. Laing and Mr. Molski (therein called "the Retiring Partners"), the partnership was dissolved upon the following terms:
1. The partnership between the parties hereto in the businesses of terrazzo, mosaic, marble, tiling and flooring manufacturers and contractors heretofore carried on by them in equal partnership under the title of Magnesite Flooring Company shall be deemed to have been dissolved by mutual consent so far as the Retiring Partners and each of them is concerned as from the thirtieth day of April One thousand nine hundred and sixty six and the said businesses shall as from that date be carried on by the Continuing Partner.
2. The Continuing Partner shall pay to each of the Retiring Partners the sum of Five thousand two hundred and fifty pounds as the purchase money for and in full satisfaction of the share and interest of each of them the Retiring Partners in the said late partnership and the capital effects and the goodwill thereof and in respect of all monies and credits whatsoever standing to the credit of or due to the Retiring Partners and of each of them in or by the said late partnership.
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3. The said purchase moneys shall be paid to each of the Retiring Partners as follows that is to say:
(i) To Ian Laing (a) The sum of Two thousand pounds (£2,000) upon the execution of this deed (b) The sum of two thousand pounds (£2,000) on the first day of July One thousand nine hundred and sixty six (hereinafter called "the Completion Date") on completion of all formalities in connection with this agreement and (c) The balance of One thousand two hundred and fifty pounds due to Ian Laing shall be paid by being placed on Deposit Receipt in the Joint names of Joseph O'Hara & Son, Solicitors and S. & R. Crymble, Solicitors. Such sum shall remain on Deposit Receipt until payment of the Income Tax and Surtax due by Ian Laing to the Commissioners of Inland Revenue or other authority in respect of his share of all profits and earnings...
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