Reed v Young
| Jurisdiction | England & Wales |
| Judgment Date | 11 November 1983 |
| Date | 11 November 1983 |
| Court | Chancery Division |
Chancery Division.
Mr. J. Parker Q.C. and Mr. R. Carnwath (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. P. Millett Q.C. and Mr. M. Flesch Q.C. (instructed by Messrs. Joelson, Wilson and Co.) for the taxpayer.
Before: Nourse J.
Income tax - Relief - Trading losses - Limited partnership - Whether taxpayer entitled to allowance for 95 per cent of agreed losses - Whether taxpayer entitled to allowance of only 10 per cent of losses -Income and Corporation Taxes Act 1970 section 168Income and Corporation Taxes Act 1970. sec. 168.
This was an appeal by the Crown against a determination of the Special Commissioners that the taxpayer was entitled to loss relief of £41,423, her agreed share of the losses sustained by a partnership, to be set off against her general income.
The taxpayer entered into a partnership agreement in March 1978. She contributed some £10,000 to the partnership, known as Monday Films (3), which was a limited partnership for the purposes of the Limited Partnership Act 1907. Under clause 5(1) of the 1978 agreement, the profits and losses of the partnership were expressed to belong or to be borne as to 5 per cent to or by the sole general partner, South Street Films Ltd., and as to 95 per cent to or by the limited partners, who included the taxpayer, Mrs. Young.
The taxpayer claimed that the loss allowable to her underIncome and Corporation Taxes Act 1970 section 168sec. 168 of the Income and Corporation Taxes Act 1970 for the year 1977-1978 was £41,423, being 95 per cent of the proportion of the agreed losses of the partnership, for the period which the capital actually or notionally contributed by her during the same period bore to the total capital so contributed. The Crown claimed that the taxpayer's allowable loss was restricted to £10,068.49, being the amount of the capital actually or notionally contributed by her during the period in question.
The submissions were based upon the construction of the partnership agreement. For the Crown it was argued that cl. 1(1) of the agreement, which established a limited partnership, modified the provisions of a further clause, so as to limit a limited partner's liability to bear losses to the extent of the capital contributed by him. It was also submitted that a further provision, cl. 5(8), was intended to deal with a situation such as that in the present case, where a limited partner's share of losses exceeded the amount of the capital contributed by him. In that event the excess was to be borne by the general partner. The Crown further relied upon a proviso limiting the liability of the limited partners to the amount of capital contributed by them. It was submitted that although the proviso referred to limitation on the liability of a limited partner for the debts and obligations of the firm, it nevertheless carried a clear implication that a ceiling was also to be placed on losses.
Held, appeal dismissed.
1. The taxpayer was entitled to have her agreed share of the losses set off against her general income.
2. If the taxpayer had been a partner of an ordinary partnership there could have been no doubt that she would have been entitled to set off the whole £41,423 under Income and Corporation Taxes Act 1970 section 168sec. 168. There was no rational basis for any suggested difference merely because she was a limited partner. The incurring of the loss bore no necessary relationship to the discharge of the debts and the obligations of the firm, far less to their discharge out of capital.
3. Even without looking at the terms of the agreement, it would be expected to include machinery for debiting a limited partner's share of outstanding losses against his share of profits in subsequent years. Even without the machinery, the substance would be expected to be implicit in the relationship between general and limited partners. If this was right, how could it be that a limited partner did not sustain a loss for the purposes of Income and Corporation Taxes Act 1970 section 168sec. 168?
4. Further, after considering the material provisions of the partnership agreement, it was decided that they were either neutral or in favour of the taxpayer.
1. At a meeting of the Commissioners for the special purposes of the Income Tax Acts held on 28 and 29 January 1982 Mrs. Marjorie Young (hereinafter called "Mrs. Young") appealed against the decision of H.M. Inspector of Taxes on a claim in respect of income tax for the year 1977-78.
2. The question for our decision, the agreed facts, the additional facts found by us, the contentions of the parties, and the grounds on which we allowed the appeal are set out in our written decision, dated 17 March 1982, a copy of which is annexed hereto and forms part of this case.
3. We heard no oral evidence.
4. The following documents were proved or admitted before us.
(2) Deed of Partnership of Monday Films (3) dated 13 March 1978.
(3) Power of Attorney dated 10 March 1978 given by Mrs. Young.
(4) Letter of subscription dated 22 March 1978.
(5) Letter of acceptance dated 28 March 1978.
(6) Joint venture agreement relating to The Passage dated 29 March 1978.
(7) Audited accounts of Monday Films (3) for the period 2 November 1977 to 31 March 1978.
(8) Deed of variation of Partnership Agreement, dated 23 January 1979.
(9) Audited accounts of Monday Films (3) for the year ended 31 March 1979.
(10) Computation of loss for 1977-78 (exhibit A.1).
(11) Examples of anomalies resulting from anticipated Inland Revenue arguments (exhibit A.2).
(12) Reworking on behalf of H.M. Inspector of Taxes of example in A.2 (exhibit A.3).
None of the above is annexed hereto as an exhibit; they are available for inspection by the court if required.
5. Figures were agreed between the parties on 14 April 1982 and on 26 April 1982 we made our final determination.
6. The appellant immediately after the determination of the appeal declared to us his dissatisfaction therewith as being erroneous in point of law and on 26 May 1982 required us to state a case for the opinion of the High Court pursuant to Taxes Management Act 1970 section 56sec. 56 of the Taxes Management Act 1970 which case we have stated and do sign accordingly.
7. The questions of law for the opinion of the court are whether we have correctly interpreted and applied Income and Corporation Taxes Act 1970 section 168 subsec-or-para (1)sec. 168(1) of theIncome and Corporation Taxes Act 1970.
1. The question for determination, as agreed between the parties, is what proportion of the agreed trading losses of Monday Films (3), a limited partnership carrying on the trade of the production and exploitation of motion pictures, for the periods ended 31 March 1978 and 31 March 1979 were "sustained" within the meaning of Income and Corporation Taxes Act 1970 section 168sec. 168 of theIncome and Corporation Taxes Act 1970 by Mrs. Marjorie Young ("Mrs. Young"), a limited partner in Monday Films (3).
For Mrs. Young, it is claimed that her loss for 1977/78 is £41,423, i.e. 95 per cent of the proportion of the agreed losses for the period to 31 March 1978 which the capital subscribed by Mrs. Young (£10,000) bore to the total capital subscribed (£150,100) at 31 March 1978 plus 95 per cent of 5/365ths of the proportion of the agreed losses for the year ended 31 March 1979 which the capital subscribed by Mrs. Young (£5,000) bore to the total capital subscribed (£150,200).
For the Revenue it is claimed that Mrs. Young's loss is restricted to £10,068.49, i.e. the amount of capital subscribed by her at 31 March 1978 plus 5/365ths of the amount of capital subscribed by her in the year ended 31 March 1979.
2. The facts agreed between the parties are as follows:
(a) On 28 March 1978 Mrs. Young entered into a limited partnership agreement with South Street Films Ltd. (referred to hereinafter as "South Street") and certain other individuals.
(b) The partnership, known as "Monday Films (3)", is and has at all material times been a limited partnership for the purposes of theLimited Partnerships Act 1907.
(c) The terms of the partnership agreement were embodied in a Deed dated 13 March 1978 (exhibit 1). (The said Deed is hereinafter referred to as the "Limited Partnership Deed".)
(d) South Street has at all material times been and remains a general partner within the meaning of the Limited Partnerships Act1907.
(e) Mrs. Young has since 28 March 1978 been and remains a limited partner in Monday Films (3).
2.2. Mrs. Young became a limited partner in Monday Films (3) in the following manner:
(a) In accordance with the procedure provided for by cl. 4(3) of the Limited Partnership Deed, on 22 March 1978 Charles Godfrey Lewis Wooldridge, acting as Mrs. Young's attorney and on her behalf, signed a letter of subscription to Monday Films (3) and paid to South Street the sum of £10,000, being the amount of Mrs. Young's initial capital provided for by the letter of subscription. (The relevant power of attorney is exhibit 2 and Mrs. Young's letter of subscription is exhibit 3.)
(b) On 28 March 1978 South Street wrote to Mrs. Young a letter of acceptance (exhibit 4) of her letter of subscription, whereupon Mrs. Young became a limited partner in Monday Films (3).
(a) On or before 29 March 1978 the partners in Monday Films (3) began to carry on in partnership the trade of the production and exploitation of motion pictures.
(b) Mrs. Young has, since 28 or 29 March 1978, carried on this trade as a limited partner in Monday Films (3).
(c) On 29 March 1978 Monday Films (3) entered into a joint venture agreement with two other limited partnerships named Monday Films (1) and Monday Films (2) (exhibit 5). The only trading activity of Monday Films (3) in its accounting period ended 31 March 1978 was as a co-producer ofThe Passage, in which film the partnership participation was recorded by the terms of the said joint venture agreement.
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