The Court of Appeal has dismissed appeals by Dr Brendan Thornton and Paul McDermott over income tax assessments for 2009 and 2010, finding that dividend-right transactions in which they participated did not amount to trade. The court also allowed Revenue’s cross-appeal on section 812 of the Taxes Consolidation Act 1997, concluding that the provision did not deem the dividend income they received not to be theirs.
The appeals followed a Tax Appeals Commission determination, upheld by the High Court, that the assessments should stand. The Court of Appeal judgment, delivered by Mr Justice Allen on 21 December 2023, was agreed by Ms Justice Faherty and Mr Justice Butler. It arose from a case stated under section 941 of the 1997 Act.
The participants joined syndicates that bought rights to dividends from British Virgin Islands companies without buying the underlying shares. The transactions were funded largely through limited-recourse loans, with dividends used to repay the loans. Participants claimed trading losses that could be set against other taxable income. The Tax Appeals Commission found that the arrangements lacked commercial rationale and that the dividend transactions were structured to generate tax losses. The High Court found no error in the Commission’s conclusion that the participants were not trading.
The Court of Appeal rejected arguments that tax motives should be ignored when deciding whether transactions amounted to trade, and that the Irish courts should apply the English decision in Harrison rather than Lupton. It held that the Commission was entitled to weigh the transactions’ features, including their lack of risk, short duration and tax effect. The court said it was unnecessary to decide whether the participants’ involvement should otherwise be classified as investment.
On section 812, the High Court had ruled that it deemed the dividend income to be that of the overseas share owner. The Court of Appeal held that this did not mean the income was also deemed not to belong to the participants. It said the 2006 deletion of words that had expressly excluded income from being treated as another person’s income removed that fiction. The court did not need to decide whether section 812 could deem income to belong to a foreign company; whatever its theoretical effect on overseas entities, it had no effect on the Irish-resident appellants in these appeals.
The court also dismissed the appeals concerning expressions of doubt in tax returns. It held that the expressions did not identify doubt about whether the dividend-right transactions constituted trade, a necessary issue for the claimed loss relief. A ticked box or reference to section 812 did not specify that issue. The court said protective notifications could be relied on where a return expressly referred to them, but that did not cure the failure to specify the trading doubt.
The court affirmed the High Court’s answers on the trade and expression-of-doubt issues and allowed Revenue’s cross-appeal on section 812. It directed that the appeals be listed for brief submissions on the final order and costs; the judgment did not itself settle those matters.