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TMI Blog1969 (5) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... processors and smelters. The shareholders were all members of a family named Gill. The group had prospered exceedingly. They had made large profits on which they had paid tax. But they had not paid those profits to the shareholders. (This was, no doubt, because the shareholders did not wish to be charged with surtax on them.) In round figures they had made profits of pounds 1,360,000, on which they had paid tax of pounds 560,000, leaving a sum of pounds 800,000 available for distribution as dividend net of tax. This was a dividend ripe to be stripped. The Gill family early in 1960 went to a firm of dealers in stocks and shares, called F. A. A. B. Ltd. The specialised in dividend-stripped. They thought up a most ingenious scheme by which the dealers hoped to recover pounds 400,000 of tax from the revenue and to split it between the Gill family and themselves. That is, pounds 200,000 apiece. It was not possible early in 1960 to recover tax by means of backward stripping such as was described in J. P. Harrison (Watford) Ltd. v. Griffiths because that had been stopped by section 4 of the Finance (No. 2) Act, 1955. So the dealers thought of doing it by means of forward stripping ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds 1,500,000 in cash or its equivalent, and paid the pounds 200,000 to stakeholders to await the tax recovery. A year later, on March 30, 1961, Elm Tree declared a dividend of pounds 800,000 net of tax and paid it to Oakroyd : and Oakroyd in turn declared a dividend of pounds of 800,000 net of tax and paid it to the dealers (who were, of course, the owners of all the shares in Oakroyd). The dealers did not sell the shares in Oakroyd. They were advised not to do so, lest they fell foul of section 28 of the Finance Act, 1960. Afterwards the dealers made out their accounts for year 1960-61. They, of course, omitted the dividend they had received because share dealers are allowed by law to omit it. The upshot was : Cost of Oakroyd shares (March, 1960) 1,700,000 Value of Oakroyd shared (March, 1961) 700,000 Loss : 1,000,000 Seeing that the accounts showed a loss of pounds 1,000,000, the dealers prayed, in aid section 341 of the Income Tax Act, 1952. They claimed to recover the tax which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing in the nature of a trade. Neither in the other four, nor in this one, were they carrying on a trade. They were engaged, as the commissioners found, in dividend-stripping transactions. I decline to elevate dividend-stripping into a trade. It is dividend-stripping and nothing else. I find myself in agreement with the judgment of Megarry J. and I would dismiss this appeals. Sachs, L. J. - The appellants, who at all material times was genuinely trading as dealers in shares, on March 30, 1960, purchased all the 353,957 issued pounds 1 shares (ordinary, deferred and preferred) - of which 99,702 had been issued and allotted that day - in Oakroyd Investments Ltd. The nature of the business of that company is indicated by its name. The contract under which the purchase was made involved payments to the extent of pounds 1,678,932 including expenses. It was a dividend-stripping transaction in that the price for the shares was largely dependent on the degree of ability to strip the dividends with which the shares were pregnant. After a dividend of pounds 800,000 had been stripped on March 31, 1961, Oakroyd Investments Ltd. was still a going concern and its relevant share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with dividend money to the extent of pounds 15,900 - it was simply a company pregnant with dividend. The dividend was duly stripped on January 26, 1964, and the shares were on June 24, 1964, re-sold for pounds 1,000. That was the Harrisons only purchases of shares in the relevant financial year. The commissioners had held that the transaction was not entered into as part of any trade of dealing in shares and was not an adventure in the nature of trade. But Lord Morris of Borthy-Gest said, at page 23 : It seems to me that a trading transaction does not cease to be such merely because it is entered into in the confident hope that, under an existing state of the law, some fiscal advantage will result. And later on, at p. 24 : 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 description if those taking part in it had their eyes fixed upon some fiscal advantage. My Lords, on the facts found in the present case I am driven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue. In truth was no transaction in the nature of share trading. As regards the three other cases ( the Mantern type ), there is little about them in the report in [1966] 1 W.L.R.1402. Mr. Monroe, however, pointed out that the relevant facts were to be found stated in the report in 43 T C. 591; in particular he referred to page 594, where the case is set out, and to pages 602 and 603, where Buckley J. considers this series. It was pressed on this court that the Mantern type case could be distinguished from the Warshaw type case and showed an affinity with the one at present under consideration. The essence of the Mantern type case was that the vendor sold to the dealer for pounds 100 all the shares in a company which owned a building lease and assets in the shape of house under construction. In addition to the pounds 100, the dealer contracted to pay to the vendors 85 per cent, of the net profits made in the year ending March 31, 1960, by the sale of the assets of the company whose shares were thus sold. (By net profits was meant the gross profit after deduction of expenses but before deduction of income tax.) At the end of a relevant period (a year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of the transaction. Then, after stating that the submissions for the company depended mainly upon the argument that the shares were acquired as part of their stock-in-trade, he went on to say at page 1417 : For the reasons I have already given, this transaction on the particular fact was not, within the definition of section 526, an adventure or concern in the nature of trade at all. It was wholly artificial device remote from trade to secure a tax advantage. Previously he had referred to the element that in Harrisons case the vendors, after selling the shares, had no further concern in what happened, and I will discuss later whether that is of itself an element which without more affects the nature of the transaction. I turn now to the judgment of Megarry J. as reported in [1968] 1 WLR. 1401. There is much in the judgment with which I respectfully agree not least where he says that one must look at the transaction as a whole, and adds at page 1422 : So regarded the question for me in whether these five transactions are on the Harrison side of the line or the Finsbury side. But to my mind he did not adhere to that approach in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en difficult for the above reason to strike a share-dealing bargain at all if there had been no such expectation, whilst in the instant case there would prima facie have been no such difficulty. So far the comparision of the salient features of the transactions in Harrisons case and the instant case quite clearly show that the latter not merely falls on the right side (from the taxpayers point of view) of the line, but a great deal further on that side than Harrisons case itself. Is it, however, brought over on to the wrong side of that by the provision in clause 5(d) which varies the price of the shares by an amount up to pounds 200,000 according to the degree of success or otherwise of the tax recovery claim? That in essence is the pounds 310,000 (or the pounds 380,000) issue in this case : it is the issue on which the Crown founded its case. I accept Mr. Monroes contention that this clause gave the vendors in an important sense a substantial interest in the recovery of tax and that it matter not in what form that interest is dressed up. I do not accept that his calculation as to the percentage of that interest (a calculation which seemed based on speculation ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of the arrangements. But those passages should to my mind be read in the context of the facts of a transaction in which there was no other element than tax-recovery machinery. This seems implicit in the words a wholly artificial device already cited. So if the dealer insures himself against the risks above recited this does not seem to me to affect the answer to the critical question. Once the shares are shown to be brought by the dealer for resale; are and remain capable of resale at a substantial price; and there is nothing to prevent such a resale at any material time, Harrisons case govern the situation. In the instant case those factors are present : the shares could have been stripped and resold at once-another. though not decisive, distinction from the Finsbury case : see page 1417D; the fact that the dealers were bound to do their best to effect a tax recovery did not preclude a sale - though later fears as to the effect of section 28 of the Finance Act, 1960, resulted in them being retained, a point which Mr. Monroe rightly conceded to be immaterial. The fact that major, or indeed the major, attraction of an acquisition is dividend stripping is shown by Har ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also happened in the Finsbury case : so I have not examined in detail the findings of the commissioners in the instant case - more especially as they had perforce to be reached without the assistance of the House of Lords decision in the Finsbury case and thus without having in mind the criteria which affected that decision. Secondly, there is to my mind simply no evidence upon which it can properly be inferred that the pounds 182,980 commercial loss was other than it purported to be. It is to be noted that the use over the relevant period of assets totalling over pounds 1,500,000 (i.e., including the pounds 800,000 used for dividends) can well result in a loss or a profit of that order : that would depend on the management of the funds. Thirdly, it is to noted that from first to last the Crowns case was that the relevant transaction was not a trading transaction at all. At no stage was it suggested that if contrary to that contention it were such a transaction then that part (pounds 310,000) of the years loss could be severed and treated none-the-less as not being a trade loss. I have assumed the Crown had good reason for not making any such admission - stem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and I would dismiss this appeal. At the date of this transaction at the end of March, 1960, backward stripping had been stopped by section 4 of he Finance (No. 2) Act, 1955. A few day later, and this deals, which involved forward stripping, would have fallen foul of section 28 of the Finance Act, 1960. The essence of this transaction was that the taxpayers chances of a substantial profit really depended on recovering pounds 400,000 from the revenue and that they and the vendors were to share the benefit of the pounds 400,000 as and when this sum was obtained. Thus both vendors and purchasers were looking to the tax advantage and the whole deal was geared to this. Since the issue turns entirely upon the facts, I hope I may be forgiven for restating them in my own way. The background to this transaction by which the taxpayers bought all the shares in Oakroyd Investments Ltd. from the members of the Gill family who owned them was as follows : Oakroyd Investments Ltd. had three wholly-owned subsidiaries - Spencer of Wakefield Ltd., Spencers Equipment Ltd., and Elm Tree Industrial Finances Co. Ltd. These subsidiaries were of little importance in them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liquidated damages - in other words, the purchase price was reducible by that amount. In the event, after a decent interval of one year, so that the strip should be a forward one. Elm Tree duly declared the dividend of pounds 800,000 net which passed to Oakroyd and thence under the provisions of the agreement to the taxpayers, who proceeded to claim recover pounds 400,000 tax in view of the reduced value of the shares. What then was the position ? The taxpayers had paid pounds 659,946 for the shares in Oakroyd of which pounds 200,000 was held by the bank pending the claim to recover tax. They had also paid a few thousand pounds for the shares in Spencer Wire not owned by Elm Tree. In return for what they had paid, the taxpayers had which no doubt were largely derived from the sale by Spencer Wire of its manufacturing capacity. Thus the taxpayers had received pounds 1,495,952, and if their claim to tax failed, they would be repaid the pounds 200,000 held by the bank. If, on the other hand, the claim succeeded, the bank would pay the pounds 200,000 to the vendors who would thus have received the full pounds 1,659,946, and the taxpayers would add the pounds ..... X X X X Extracts X X X X X X X X Extracts X X X X
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