The High Court has ruled that a €239,867 tax surcharge imposed on Dermot O’Rourke is a pre-bankruptcy debt provable in his bankruptcy. It concluded that he was not liable to pay the surcharge after his discharge.
The dispute concerned capital gains tax on gains exceeding €121 million from property and shares disposed of in 2006. In December that year, O’Rourke entered a transaction involving German bonds. His 2007 self-assessed return claimed the transaction reduced his capital gains tax by €2,693,799.
Revenue began an audit under section 811 of the Taxes Consolidation Act in 2010. O’Rourke was adjudicated bankrupt in July 2011. Later that year, a Revenue nominated officer issued an opinion that the transaction was tax avoidance and determined that the claimed tax advantage should be withdrawn, with a surcharge payable.
An appeal was rejected by an Appeal Commissioner in December 2015. After the Official Assignee withdrew the appeal in May 2016, Revenue notified O’Rourke that the opinion was final and conclusive. It said the surcharge, calculated at €239,867, had then become due. Revenue issued a final demand for that amount in February 2017.
O’Rourke argued that the surcharge was provable in his bankruptcy because it arose from a tax event before his adjudication. Revenue argued that the obligation arose only when the opinion became final in 2016, making it a post-bankruptcy debt. The motion asked the court to require the Official Assignee to compromise the claim or seek the court’s directions on whether it was a pre-adjudication debt.
Justice Costello applied the approach in the UK Supreme Court’s *In re Nortel GmbH*, which asks whether pre-insolvency steps had legal effect and left a person vulnerable to a real prospect of the liability. She found that the taxpayer’s transactions and tax return, followed by Revenue’s commencement of its investigation before the bankruptcy, met that test. The later final opinion made the surcharge payable, but the underlying obligation had been incurred before adjudication.
The court also considered that the surcharge depended on the additional tax liability, which Revenue accepted was a pre-adjudication debt. It concluded that both the tax and surcharge liabilities were provable under section 75 of the Bankruptcy Act 1988. The judgment states that the discharged bankrupt is not liable to pay the surcharge. The source does not state whether the court made a separate order on the motion’s requested reliefs.