TMI Blog1967 (1) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... of them had as their main object, or one of their main objects, to enable tax advantages to be obtained. The facts, set out in full in the case stated, were summarised by Lord Upjohn as follows : The Aberdeen Coal and Shipping Co. Ltd. (hereinafter referred to as the company ) was incorporated in 1900 and carried on the business of coal merchants. It was, until the transaction presently to be mentioned, a public company with shares quoted on the Aberdeen Stock Exchange. Its capital was ? 60,000 divided into shares of ? 1 each and there were a large number of shareholders. But the respondent and five other shareholders were the principal and main shareholders (the group). In 1959 there was in the air what is normally called a take-over bid from an outside source, and an offer was made to all the company's shareholders to purchase the shares in the company at a price of 40s. 6d., although the market price was only 25s. The respondent was one of the directors of the company, and at a board meeting on February 22, 1959, the directors were unanimous that they could not allow it to be taken over and then, as they feared, broken up, for the reasons that most of the direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75,000 from the company at interest. The respondent, who, it appeared, was conducting matters on behalf of the group, with a view to extracting the necessary money, instructed Mr. Henderson, the accountant to the company, to prepare a scheme involving the liquidation of the company and the formation of a new company. This was done, but was found by the directors to be impracticable. Had it been practicable to extract the cash in this way, it was conceded that it would not have been taxable under section 28. A second scheme was stillborn, but the third scheme, which was adopted and is the one which the House of Lords had to consider, was that by a scheme of reconstruction sanctioned by the Court of Session in March, 1961, the capital of the company was increased to ? 135,000 by capitalising the available sum of ? 75,000 and then reduced by repaying to shareholders such a sum as was necessary to put the sum of ? 75,000 into their pockets. This return of capital was used by members of the group to reduce the loans they had received from the British Linen Bank for the purchase of the shares of the minority shareholders. The Special Commissioners, in paragraph VII(21) of the case sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and there could only be bona fide commercial reasons for them if it was established that there were facts leading the company to carry out the transactions in the furtherance of its commercial interests. The reasons bona fide adopted must be relevant to the commercial interests of the company. There was nothing in the capitalisation of the reserves which was in the company's interests. But the whole phrase bona fide commercial reasons relates to the company. The transactions carried out must be for reasons clearly implied in the circumstances of the company itself : see Inland Revenue Commissioners v. Fisher's Executors [1926] A. C. 395, 403 ; 42 T. L. R. 340 (H. L.). In the present case there was not only a return of capital but also an increase without any possible bona fide commercial reason. The question whether the commercial interests of the company were served may be different, but one must look at the reasons and see whether they were the reasons of the company. The tax advantage arose because the company had entered into certain transactions and the section is concerned with arriving at a view on the basis of those transactions. If the company had commercia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interests of the company. The only place of the capitalisation in the process of repayment was that it produced a receipt in a non-taxable form. The Special Commissioners misdirected themselves in finding that this was money received by the respondent as a result of a transaction which did not have the tax advantage as its main object. The shareholders got revenue tax-free, and the fact that the object was to get money to repay the loan does not nullify the significance of that. When a tax advantage is obtained it is presumed to be one of the objects of the transaction unless there is evidence to displace the presumption. J. Raymond Phillips following. It is not established that these transactions did not have as their main object the obtaining of a tax advantage. Even assuming that there were bona fide commercial reasons, which were to preserve the company in being, it does not follow from that that it is established that the transactions were not entered into to obtain a tax advantage. In order to succeed, there are two steps which the taxpayer must take, two hurdles which he must get over. Here there are bona fide commercial objects, but, if one looks at the minds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have treated these transactions as falling into two separate parts, the first commercial and the second aimed at a tax advantage, but they did not do so. The question whether one of the main objects of a transaction is to obtain a tax advantage is subjective. To decide it is essentially a matter for the Special Commissioners : Crown Bedding Co. Ltd. v. Inland Revenue Commissioners [1946] 1 All E. R. 452, 453, 454-455 ; [1942] 1 All E. R. 142 (H. L.). 34 T. C. 107, 115, 117 (C. A.). That case indicates that the test is a subjective one and that the task of identifying the main object must be left to the tribunal of fact, unless there is in its decision a clear error in law. In summary : (1) Section 28 has a very wide scope and may include a sale of shares in a controlled company to another controlled company, or a case where a company is reconstructed, or where the business of a company is sold to another company for shares and the old company is would up. (2) The method chosen to deal with the situation is that the taxpayer is allowed to show that, however black his deeds may appear, his motives were good. (3) The taxpayer may admit that his transactions have avoided tax but ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which the subsection was intended to provide. The complete series of events set out in the case stated was, in the view of the Special Commissioners, one consecutive whole ; see para. VII(21) : The respondent and all other members of the group were mainly concerned, by the acquisition of additional shares, to preserve the company in the line of business which it had carried on for many years ; a business, moreover, which had good prospects of continuing profitably. The money had to be borrowed from the bank by members of the group with a clause providing for early repayment, and (para. VII(13)) : It had been understood from the beginning by the members of the group that their repayments to the bank were to be effected as far as possible by taking assets out of the company, but at this early stage there had been no calculation as to how much cash could be extracted from the company, and the figure of 45s. per share was not based on any such calculation. The resulting transaction was prepared by their auditor to carry out their main purpose. It would be quite lacking in reality to draw a line between first part of the arrangement, namely, the purchase of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me to a reasonable conclusion on the evidence before them. They could have reached a contrary conclusion, which would have been equally unassailable, had they taken a different view of the evidence. But it was they who heard the witnesses, and I see no reason to suppose that their decision was not just and sensible. I entirely agree with the judgment of the Lord President. I would dismiss the appeal. LORD UPJOHN.-My Lords, this appeal from an interlocutor of the First Division of the Court of Session as the Court of Exchequer in Scotland dated February 22, 1966, is concerned with the short question whether the Special Commissioners for Income Tax were entitled to discharge a notice dated December 12, 1963, served upon the respondent by the appellants under subsection (3) of section 28 of the Finance Act, 1960. This depends entirely upon the words of that section, so that I must set out its relevant parts : Cancellation of tax advantages from certain transactions in securities. (1) Where-(a) in any such circumstances as are mentioned in the next following subsection, and (b) in consequence of a transaction in securities or of the combined effect of two or more such tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 28. It was then said that a second chapter opened and that the group then arranged that the available money for the payment of this project should be obtained from the coffers of the company as capital. Thus, by reason of a perfectly proper scheme of arrangement, but nearly two years later, the main object of the operation in this chapter was to enable a tax advantage to be obtained because, although it would have been possible to extract the cash from the company by a dividend (subject of course to the surtax consequences as to ? 58,500 of that dividend), the whole object of the reduction of capital was to extract the cash without paying tax ; that, it was strongly urged, showed it to be a main object. So, the argument proceeds, while the first chapter was carried out for purely bona fide commercial reasons without having as a main object the gain of a tax advantage, it must be regarded as purely introductory to the all-important second chapter two years later when the scheme was devised to extract the cash by a reduction rather than the declaration of a dividend, so that it became plain that one of the main objects of the transaction was to enable a tax advantage to be obta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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