The High Court has upheld the legal basis for an income tax assessment on Raymond Hughes and his wife after share rights in a company they owned were shifted from another company under their control. Mr Justice Allen answered “Yes” to all five questions put to the court in a case stated from a tax appeal.
The dispute concerned a €1,999,900 assessment raised by the Revenue in December 2011. The Revenue said the transfer of assets at undervalue amounted to a distribution under section 130(3)(a) of the Taxes Consolidation Act 1997. The assessment was for income tax, not capital gains tax.
In January 2006, Hughes Chemical Corporation Limited subscribed €2 million for ordinary shares in Greenane Developments Limited. Mr and Mrs Hughes separately subscribed for A ordinary shares. A special resolution then removed voting and surplus participation rights from the ordinary shares held by Hughes Chemical and attached those rights to the A shares held by the couple. Greenane Developments later went into members’ voluntary winding up, and its liquidator paid a surplus of €1,981,470 to the couple.
The tax appeal was dismissed by the Tax Appeals Commission in 2016, and the Circuit Court also dismissed Mr Hughes’s further appeal. In the High Court, he argued that the share rights were not assets separate from the shares, that no transfer had occurred, and that any rights had moved from Greenane Developments rather than from Hughes Chemical. He also argued that the court should consider whether the transactions fell more appropriately under capital gains tax provisions.
Allen J rejected those arguments. He held that the rights to vote and participate in a surplus were valuable assets capable of being separated from the shares to which they were attached. The resolution, passed with Hughes Chemical’s vote as the sole shareholder entitled to vote, caused the rights it had enjoyed to be held instead by Mr and Mrs Hughes. The court concluded that this was a transfer by Hughes Chemical for the purposes of section 130(3)(a).
The judge said the correct question was whether that income tax provision applied; it was not necessary to decide whether another provision might also apply. He also agreed that section 130(3)(a) did not require the transfer to be made to the couple specifically in their capacity as members.
The High Court’s ruling addressed the questions of law in the case stated. It did not substitute a capital gains tax assessment for the income tax assessment. The court answered “Yes” to each of the five questions, leaving the Circuit Court determination undisturbed.