Supreme Court of Ireland Decisions

1. The issue in this case was whether certain periodic payments made by Crosspan Developments Limited (Crosspan) to South City and County Investment Company Limited (South City) pursuant to an agreement in writing dated the 26 May 1983 (the Contract) were, or any part thereof was, subject to Corporation Tax in the hands of the recipient.

By the Contract Crosspan agreed to grant to South City what was therein described as "an annuity" on the terms and conditions set out therein. Those terms provided that monies, described as "the Annuity Sum", would be payable to South City on the 27 May 1983 and the anniversary of that date in each of the two following years. The Annuity Sum was defined as meaning in respect of each payment an amount equal to the sum of:-

(i) IR£500 plus

(ii) 95% of the profits before taxation disclosed in the unaudited management accounts, of Crosspan prepared by Crosspan's accountant for the 11 month period to the 30 April 1983 and for the year ended the 30 April 1984 and 1985.

The offer by Crosspan was conditional upon South City paying in consideration therefor the sum of IR£1,290,000 on or before the 27 May 1983.

It is common case that the consideration aforesaid was duly paid and that the Annuity Sums were discharged. As the Contract is a short document and its terms are of vital importance to the understanding and resolution of the issues herein I have annexed a copy of it as a schedule to this judgment.

The Appeal Commissioners decided that the annuity aforesaid was liable to Corporation Tax. From that decision the Respondent, South City, appealed to the Circuit Court where Circuit Court Judge Martin reheard the appeal pursuant to the provisions of Section 429 of the Income Tax Act, 1967, and set out his conclusion thereon in the following terms:-

"I considered the several authorities referred to by Counsel and the provisions of the Income Tax Act, 1967 and the Corporation Tax Act, 1976, as well as the statement of agreed facts. I consider there is nothing sacrosanct in the manner in which accountants treat any particular transaction in the accounts. Furthermore, I do not feel bound by the attitude taken by the Revenue in other cases. I am looking only at what happened between the contracting parties in this instance and, in the circumstances, the arguments put forward on behalf of (Southcity) are those which I feel I should accept. I am allowing the appeal."

The Inspector having expressed dissatisfaction as required by statute the learned Circuit Court Judge agreed to state a case for the opinion of the High Court raising the following question:-

"The question of law for the opinion of the High Court is whether, on the facts as proved or admitted as aforesaid, I was correct in law in holding that part of the annuity receipt represented a capital receipt and was not chargeable to Corporation Tax."

In his judgment dated the 11 January 1995 Mr Justice Carney having set out the history of the transaction and the propositions for which the parties contended gave his judgment on the question raised in the following terms:-

"I am satisfied that the learned Circuit Court Judge was correct in law in his determination and that there was evidence before him to support the same."

It is from the judgment of Carney J and the order made thereon that the Appellant/Inspector appeals to this Court. The Appellant contends that the learned High Court Judge erred in fact and in law on a variety of grounds of which I quote four as being of particular assistance in defining the matters in issue between the parties, namely,:-

"(c) In failing to hold that the monies payable to the Respondent pursuant to the said annuity contract were within the definition of "any interest of money, or any annuity or other annual payment" within the provisions of Section 53 of the Income Tax Act 1967 and, therefore, taxable under the provisions of case III.

(d) In failing to take into account or, in the alternative, in failing to apply the authorities to which the learned High Court Judge was referred by Counsel on behalf of the Respondent;

(e) In failing to take any or, in the alternative, failing to take any proper account of the following important characteristics of the annuity contract, namely:-

(I) That the contract does not contain any provision for the calculation of interest;

(II) That the contract does not state that the receipt represents the payment of any antecedent debt;

(III) That the annuity contract does not refer to the purchase price of any item of property (other than the purchase of a right to receive the annual income);

(IV) That there is nothing in the annuity contract which states or implies that any of the sums received were by way of the return of capital;

(f) Failing in all the circumstances to hold that the true legal nature of the transactions was the expenditure of capital in consideration of the purchase of an annuity comprising pure income."

To a generation familiar with income tax at the rate of 80p in the Pound and inflation at 20% per annum, the purchase or creation of fixed rate annuities would seem an unusual and imprudent investment. It was different in Victorian times. With income tax, when imposed, less than 10% even in times of war and the maintenance of the Gold Standard perceived as a requirement and achievement of civilised society, the position was otherwise. Fixed Rate annuities managed by the National Debt Commissioners were a common method by which the wealthy provided for their dependants. In the economic climate that existed the need to develop "financial products" which might escape the burden of taxation or the ravages of inflation did not exist. It is unlikely that confusion was caused among taxpayers when the Income Tax Act of 1842, Section 102, provided that:-

"Upon all annuities, yearly interest of money, or other annual payments, whether such payments shall be payable within or out of Great Britain, either as a charge on any property of the person paying the same by virtue of any deed or will or otherwise, or as a reservation thereout, or as a personal debt or obligation by virtue of any contract, or whether the same shall be received and payable half yearly or at any shorter or more distant periods, there shall be charged for every twenty shillings of the annual amount thereof the sum of seven pence without deduction, according to and under and subject to provisions by which the duty in the third case of schedule (D) may be charged."

Moreover it was clear in 1842 -- and it is clear now -- that tax was imposed on the annuity as such and not by reference to the source from which it arose. Changed economic circumstances and the emergence of important principles applicable in the interpretation of the income tax code may have rendered less obvious the interpretation of Section 53 of the Income Tax Act, 1967, which replaced and re-enacted, in virtually identical terms, the material provisions of Section 102 of the 1842 Act. Furthermore both parties were in agreement that the provisions and principles applicable to income taxable under the Income Tax Code were equally applicable under the Corporation Tax Act, 1976, in so far as the same concerned the liability or otherwise of South City to Corporation Tax on the annuity.

The Income Tax Acts have not at any time attempted to provide a definition of "an annuity". It would seem clear that the word connotes, first, payments which are expected to continue over a period of more than one year, secondly, a requirement that the payments are not mere gifts but are made and repeated by virtue of a commitment or obligation and, thirdly, are not made in return for goods supplied or services rendered.

As the legislation expressly imposes tax on what the section describes as "an annuity" tax is prima facie payable on the monies paid by Crosspan to South City and which the parties themselves chose to describe as "an annuity". Indeed it was at one time thought that the terminology used in the document creating the periodic payment was decisive (see IRC v Ramsey [1935] 20 TC 79 at 98). That view was rejected in Vestey v IRC [1962] 2 WLR 221 in England.

In this jurisdiction the principles applicable in the interpretation of taxation statutes have been laid down clearly by this Court in McGrath v McDermott [1988] IR 258. The Court in rejecting the doctrine of "fiscal nullity" which had been developed by the House of Lords in Ramsey v IRC [1982] AC 300 and Furniss v Dawson [1984] AC 474 explained (in the judgment of Finlay CJ) at page 276 that:-

The function of the Courts in interpreting a statute of the Oireachtas is, however strictly confined to ascertaining the true meaning of each statutory provision, resorting in cases of doubt or ambiguity to a consideration of the purpose and intention of the legislature to be inferred from other provisions of the statute involved, or even of other statutes expressed to be construed with it. The Courts have not got a junction to add to or delete from express statutory provisions so as to achieve objectives which to the Courts appear desirable. In rare and limited circumstances words or phrases may be implied into statutory provisions solely for the purpose of making them effective to achieve their expressly avowed objective."

As to the construction of documents I would adopt the clear exposition by Carroll J in Waterford Glass (Group Services) Limited v The Revenue Commissioners [1990] 1 IR 334 at 337 of the relevant and well established principle that:-

"The Court is entitled to look at the reality of what has been done. Just because the parties put a particular label on a transaction the Court is not obliged to accept that label blindly."

The foregoing is a principle of general application. It is encountered frequently in relation to transactions which might fall into one or other of two categories and the parties to the transaction wish to have the legal rights attaching to one category and the practical advantages of the other. It is understandable that labels have been challenged where they seek to define a lease as a licence (see Irish Shell and John Costello Limited [1981] ILRM 66); a mortgage as a conveyance (see Kent and Sussex Sawmills Limited [1947] Ch 177); a fixed charge as a floating charge (see Keenan Bros [1985] IR 401) or a sale as a retention of title (see Carroll Group Distributors Limited v G and JF Bourke Ltd [1990] IR 481). In many cases in which a tax payer has attributed a particular description to a document executed by him it is usually the Revenue who question the accuracy of the definition. The present case may be one in which it would be the tax payer rather than the Revenue who would argue for the substance rather then the form of the relevant transaction.

Whilst it is not possible to reconcile fully or satisfactorily the many decisions as to the taxability or otherwise of periodic payments it has been established that they may fall into three categories. First, payments of capital which are not liable to tax at all. Secondly, payments of income which are liable to tax and, thirdly, payments which can be analysed so as to ascertain the constituent elements of capital and the interest thereon of which the latter only is taxable.

In Foley v Fletcher [1858] 3 H&N 769 certain buildings and mines had been sold for a sum of £99,000. A down payment of £6,770 was made by the purchaser and the balance was payable by half-yearly instalments on specified dates with the proviso that in the event of the instalment not being paid on the due date or within one calendar month thereafter that interest should be payable at a rate of 4% per annum on such instalment. Pollock CB dismissed the suggestion that these instalments were liable to tax (at page 779 of the Report) in the following terms:-

"These instalments are payments of money due as capital: the Act (the 1843 Act) has made no provision for such a case. It professes to charge profits only, and we cannot say that capital is liable to the income tax because found in company with profits. If payments such as those in the present case are subject to income tax, wherever any debt of any sort is to be repaid by annual payments, or by instalments at 3 or 6 months, it would be subject to income tax."

The decision in Secretary of State in Council of India v Scoble [1903] 1 KB 494 and [1903] AC 299 is instructive and important. It sets out the unanimous views of five judges of the Court of Appeal and the five speeches of the Law Lords affirming their judgment on the issue as to the nature of annuities which are and are not subject to taxation. By contract made in 1849 the Great Indian Peninsula Railway Company granted to the East India Company an option to purchase all of the shares in the Railway Company at the full value thereof at the expiration of 50 years of a term of 99 years from the date of the agreement. The contract contained an express provision in the following terms:-

". . . It shall be lawful for the East India Company, instead of paying a gross sum of money in respect of the premises, to declare by notice to the said Railway Company in London their option to pay an annuity from the time when the gross amount would be payable and to continue during the residue of the said term of 99 years, and in that case such annuity shall be payable in London on such two half-yearly days in the year as shall be selected by the East India Company in that behalf . . ."

The powers of the East India Company subsequently vested in the Secretary of State in Council for India who gave notice to the railway company of his intention to purchase the premises. The amount to be paid by the Secretary of State was ascertained at a sum of approximately £35,000,000 and he thereupon gave notice in accordance with the provisions of the contract of his election to pay an annuity for the residue of the term of 99 years. The annuity was calculated on the basis of interest at £2.17.0 per cent and amounted to £1,268,000 approximately. The issue in that case was whether the Secretary was entitled to deduct income tax in paying the "annuity".

In the High Court Phillimore J held that the tax was deductible. That decision was reversed in the Court of Appeal and their judgment unanimously upheld in the House of Lords. In the Court of Appeal Vaughan Williams LJ at page 501 summarised his views in the following terms:-

"When I come to look at clauses 23 and 26, it seems to me that, there having come into existence a debt payable by the East India government for the purchase of this railway, and there being an option to pay off the debt by annual instalments instead of by paying down a gross sum, the government elected to take the former course. This mode of payment, though called an annuity, is really the purchase of the railway by annual instalments, plus the interest on the amount remaining unpaid. In my opinion no tax is payable on the annual payments made under this arrangement insofar as they are repayments of the purchase price of the railway."

Stirling LJ and Mathew LJ both expressed very firmly the view that in the circumstances in which they came to be payable the instalments or "annuities" were payments of capital and not of income and accordingly were not subject to tax. However each of those judges made comments in relation to the distinction between instalments of capital and annuities which are material having regard to the argument put forward on behalf of the Respondent in the present case. Stirling LJ (at page 504) said:-

"In the case of the purchase of an annuity the legislature has said in terms that the annuity shall be chargeable with income tax, and that has been recognised in the Courts. The case is different where it is apparent on the face of the transaction that each instalment covers payment of a principal sum as well as interest, and this case closely resembles that of the repayment by instalments of a loan, in which case it has been admitted that it is not the practice to tax any part of the instalments except that representing interest."

Again Mathew LJ said:-

"In my judgment the instalments payable under the agreement in this case are not chargeable with income tax as annuities in respect of their full amount. An annuity means generally the purchase of an income and usually involves a change of capital into income, payable annually over a number of years. Has such a case any analogy with the present?" (emphasis added)

In the House of Lords, Lord Halsbury (at page 302) summarised the position as follows:

". . . Looking at the whole nature and substance of the transaction (and it is agreed on all sides that we must look at the nature of the transaction and not be bound by the mere use of the words), this is not the case of a purchase of an annuity; it is a case in which, under powers reserved by a contract, one of the parties agrees to buy from the other what is their property, and what is called an "annuity" in the contract and in the statute is a mode of making the payment for that which had become a debt to be paid by the government. That introduces this consideration: Was it the intention of the Income Tax Acts ever to tax capital as if it was income? I think it cannot be doubted, upon the language and the whole purport and meaning of the Income Tax Acts, that it never was intended to tax capital -- as income at all events."

I would then quote finally from the judgment of Lord Lindley (at 305) as follows:

"The difficulty which exists is attributable entirely to the ambiguity of the word "annuity". The annuity in this case is to my mind proved to demonstration to be nothing more than the payment by equal instalments of the purchase money for the railway with interest to the rate of £217 shillings per cent."

Perrin v Dickson 14 TC 608 represents the intermediate position between payments which are capital and payments which are income. It is also the case in which payments which the parties had expressly described as being "an annuity" were held not to be taxable as such. The issue arose in this way. The tax payer had taken out a policy of insurance in pursuance of which he agreed to pay a premium of £90:15:0 to the Assurance Society in each of the 6 years from 1912 to 1917 in return for which the Assurance Society agreed to pay what was described in the policy as "an annuity" for the lifetime of the tax payer's son or the period of 6 years from 1920 whichever was the shorter. Perhaps today it would be described as an educational endowment policy. In any event the issue was whether or not the "annuity" was taxable in the hands of the tax payer. It was held by Rowlatt J in the High Court and affirmed unanimously in the Court of Appeal that the so called annuity was not taxable as such. Lord Hanworth, MR, identified the problem (at page 619) in the following terms:-

". . . It matters not whether in the contract it is, or is not, called an annuity. If in truth and in fact it is an annuity no dressing of the transaction can alter its character. Stripped of its form, the transaction is a method of saving up money for future use. It is a method whereby, upon a series of payments being made, provision for the repayment of a series of larger sums at a later date can be secured."

The Master of the Rolls concluded his judgment by a reference to how his decision would impact upon annuities for fixed terms of years (at page 623) in the following terms:-

"I do not feel at all impressed with the observations that the effect of the decision will be to release all annuities for a fixed terms of years from income tax. The immunity will be given only in proper cases in which an attempt is being made wrongly to tax capital under statutes which are intended to charge income and income only . . ."

In his judgment Lawrence LJ expressed the opposing arguments in the following terms:-

"The case presented by counsel on behalf of the Crown is extremely simple. They contended that the effect of the contract as expressed in each policy was that the respondent, for a money consideration, agreed to purchase a deferred annuity for a fixed term, and that, as (according to the decision in In re Engelbach [1924] 2 CH 348) such annuity was payable to the respondent for his personal use, it became chargeable with income tax.

Counsel for the respondent on the other hand, whilst not challenging the effect of the decision in In re Engelbach, contended that the substance of the contract was that the assurance company undertook to repay to the respondent the amount paid by him in premiums, together with compound interest thereon at the rate of 3% per annum, in instalments at certain fixed dates, and that therefore he was only liable to be assessed to income tax in respect of so much of each instalment as represented interest, the balance of such instalments representing repayments of capital which were not chargeable with income tax."

Having analysed the decisions in Foley v Fletcher and the Scoble's case (already referred to) Lawrence LJ went on to express his conclusion on the particular case and his observations in relation to purchased annuities generally in the following terms:-

"The principle upon which both these cases were decided is that it never was the intention of the Income Tax Acts to tax capital as if it were income, with the result that even although a contract may provide for the payment of annual sums of fixed amount and may call such payments "an annuity" the Court will in each case enquire into the real nature of the transaction, and if it appears that in fact part of such sum represents payment of capital such part will not be chargeable with income tax. Both these cases, however, distinctly recognise that in the case of a simple purchase of an annuity in consideration of a money payment the full amount of the annuity is chargeable with income tax."

The nature of the "annuity" to which Lawrence LJ referred was taken up again by Slesser LJ at 629 of the report in the following terms:-

"But regard must be had to the number of cases in the books which decide without any ambiguity that where the substance of the transaction is in the nature of loan, although the money is paid back by equal annual instalments with interest to the lender, yet, if his capital has not gone the mere fact of the repayments being annual does not make such annual payments taxable under the Income Tax Acts."

The phrase "if his capital has not yet gone" (or words to a similar effect) is one to which considerable attention has been directed both in this and in other cases. The decision in In re Hanbury (heard in 1939 but reported in 1959 38 TC 588) is distinguished for the analysis made by Sir Wilfred Greene MR of annual payments and his conclusion that an essential attribute of such payments is that they represent "pure income profit" in the hands of the recipient.

In fact no payments were made annually in the Hanbury case. What happened was that the Court held that the Appellant should be paid a proper sum for the use by the respondent over a period of 7 years of certain properties to which the appellant was entitled. The "proper sum" was assessed by a Special Referee in a sum of £20,000 approximately and it was contended by the respondent that he was entitled to deduct tax on paying that sum. The decision of the Master of the Rolls was given, as he pointed out, on the assumption that the capital sum represented annual amounts and he decided that annual payments if made in those circumstances would not have had the requisite character of "being pure income profit" of the recipient as she had, unwillingly and unknowingly, provided the use of her property in return for those payments. Again the much quoted example given by Sir Wilfrid Greene as to what does not constitute an annual payment for the purposes of the income tax code (at page 590) is in the following terms:-

"The type of example (Scutton LJ) gives is that of a yearly payment made, for instance, to the proprietor of a garage for the hire of a motor car. Nobody would suggest that on making that payment the hirer would be entitled to deduct tax, and yet it is annual payment, the reason being that the very nature of that payment itself, having regard to the circumstances in which it is made, necessarily makes the sums paid in the hands of a recipient an element only in the ascertainment of his profits."

The decision in Essex County Council v Ellam [1989] STC 317 is, in my view, no more than a particular application of the rule enunciated by Sir Wilfrid Greene in Hanbury's case. What happened there was that the Essex County Council sponsored a young man for a training course at a society for mentally handicapped children on terms that the child's father effectively indemnified them from the fees payable for the course. The father entered into a deed of covenant with the Council to cover the amounts which the Council would have to pay for the course. The father sought to deduct tax from the covenant payments but it was held he was not entitled so to do. Effectively the payments by the father were being made ultimately in consideration of the education of the child and immediately in consideration of the agreement by the Council to discharge the fees payable in respect of the course.

The decision in Sothern-Smith v Clancy 24 TC 1 is helpful for the assistance which it gives in reconciling and attempting to explain apparently conflicting judgments in an area of law where very fine distinctions have been made. Basically the facts of that case were that Mr Sothern (the annuitant) had paid the Equitable Life Assurance Society (the Society) a sum of approximately $65,000 (called in the contract "the capital invested") in consideration of which the Society agreed to pay to him the annual sum of $6,500 (approximately) during his life time. The policy of assurance had certain additional and perhaps unusual provisions. It was provided that if the aggregate amount of the annual payments did not equal the capital invested during the lifetime of the annuitant that the annuity would be continued in favour of the appellant until the total of the annual payments amounted to the capital invested. It appears that the contract or policy was described as "a refund annuity" and expressly guaranteed "a return, which may be more, but cannot be less, than the amount of the capital invested".

It was in pursuance of that contract, that subsequent to the death of the annuitant, three further periodic payments of $6,500 were made to the appellant and the issue was whether those payments were taxable in her hands. On her behalf it was contended they were capital and not income. In his judgment in the High Court Lawrence J expressed his conclusion -- so far as material -- in the following terms:-

"In my opinion it is clear that the contract contemplated that the capital invested should be refunded in any event; that is the form and that is the substance of the contract. It can, in my opinion, make no difference that there was no pre-existing debt. In the case of a contemporaneous loan repayable in instalments there is no pre-existing debt; the only question is whether the contract creates a debt which is repayable.

. . . Here the capital never ceased to exist nor did the appellant's brother everadventure it, for the contract in express terms guarantees that the capital invested shall be refunded or returned and the payments in question have been made in performance of that guarantee. The argument for the Crown that the payments to the appellant are merely measured by the amount paid by the annuitant and not a refund thereof, appears to me to be highly artificial and to give no meaning to the very name of the contract viz "refund annuity"' or to the words "with continuation of payments until capital invested has been returned"."

The judgment of Lawrence J was unanimously reversed in the Court of Appeal although the reasons given by Sir Wilfrid Greene MR and Clauson LJ differed from those given by Goddard LJ. The Master of the Rolls having analysed Scoble's case went on to refer to Perrin v Dickson in respect of which he commented as follows:-

"I must confess that I find the reasoning of the judgments in that case difficult to follow."

He then (at page 7) summarised the law in the following terms:-

"If the law were that in the ordinary case of an annuity for a term of years, the nature of the financial calculation involved stamped part of the payment as a capital payment, leaving only the interest element to be taxed on the ground that an annuity is only taxable in so far as it is a profit, the position would be simple and perhaps not unjust. In truth there is a basic distinction between such an annuity and a life annuity, since in the latter case the sum of the payments which fall to be made may prove to be less or greater than the sum paid by the annuitant, while in the former case it will be the same as the amount paid together with an addition for interest. Upon this basis Perrin's case would have been a clear one. But I do not feel myself at liberty in this Court to adopt any such principle. I feel bound to regard the purchase of an annuity of the kind to which I have referred as the purchase of an income and the whole of the income so purchased as a profit or gain notwithstanding the way in which the payments are calculated. The sum paid for the annuity has ceased to have any existence and the fact that at the end of the annuity period the recipient will have received an amount equal at least to what he paid I feel bound to treat as irrelevant. Nor do I think it can make any difference if this result is stated on the face of the transaction. Perrin's case decides at any rate that the absence of such a statement cannot prevent the annual sum paid being capital, since extrinsic evidence was admitted: It appears to me to follow that the presence of such a statement cannot prevent them being income."

Again Clauson LJ having referred to the principle enunciated in Scobles case went on (at page 10) to say:-

"Applying to the present case this statement of the principles applicable it appears to me that the only possible conclusion is that the payments made by the company under the contract are all taxable. It seems clear that if the contract had merely been to pay $6,500 for the number of years and the fraction of a year which were requisite for making up the total payments of $65,000 this would create a taxable annuity. The addition to such a contract of a further liability to pay the same nominal sum to the contracting party for the rest of his life if he should survive that period can surely not alter the character of the payment especially when it is borne in mind that no one has ever doubted that a contract to pay an annuity for a period measured by life, whether in consideration of lump sum down or a series of successive periodical payments (usually called premiums), must be taken to be an annuity chargeable to tax. The view I have expressed was, as I understand, the view taken by the Special Commissioners."

Clauson LJ went on to analyse and reject a particular argument based on a possible distinction between a fixed annuity and a life annuity. He dealt with the matter as follows:-

"The first line of attack made on this position by counsel for Mrs Sothern-Smith was to argue boldly that the term "annuity" in the acts meant and meant only "life annuity", and he pointed out that the present contract involved obligations on the company which were not terminated by the falling of a life, if the life fell before the period when the sums paid by the company reached the figure of the original cash consideration. It seems to me to be a sufficient answer that if "annuity" in the Acts means "life annuity" there was a short and conclusive argument available both in Foley v Fletcher and in Scoble's case to defeat the claim that the periodical payments in question in those cases, which had no reference to life, were taxable as annuities, and the elaborate arguments in those two cases were superfluous and unnecessary."

He went on to consider what he regarded as more plausible arguments based on the distinction between capital and income:-

"There was however a further and, if I may say so, far more plausible argument put forward, and it was as follows. It was said that if the premiums or the sum of the premiums paid by the so called annuitant must, under the terms of the contract, in any event be returned to him, that circumstance must be taken to show that the transaction was not the purchase of an annuity but a mere investment of capital money with the company, to be repaid in due course with, in certain events, interest or other benefits. The payment made by the so called annuitant was, it was said, capital of which it was not true to say that it ever had gone or had ceased to exist; it retained throughout its character of capital which passed away for a period from the so called annuitant but was in due course returned to him: it was a mere loan to the company repayable on terms, and the sums paid (or rather, it was said, repaid) to the so called annuitant were, to the extent of the sums paid by him, payments (or rather repayments) of capital; any monies in excess of that amount paid under the contract might well be profits and taxable."

That argument was rejected on the following grounds:-

"In my judgment it is not possible to treat the present contract as one of mere investment. It will be observed that if the contracting party dies before the time when the total amount of $65,000 has come back to him or to those claiming under him in the form of annual payments, the net result is that he and those claiming under him have been out of the money for the period, roughly ten years, with no allowance of interest at all. That does not look much like an investment from the contracting party's point of view. So if the contracting party lives beyond the same period the company comes under an obligation, limited only by the duration of the contracting party's life, to keep up the annual payments. Such an obligation is, of course, an ordinary incident of an annuity contract, but it seems wholly alien from a mere arrangement for accepting money on loan."

I might then refer to the judgment of Goddard LJ who was clearly concerned by the similarities that existed between the facts in Sothern-Smith v Clancy and those which arose in Perrin v Dickson. Such was his concern that he preferred to rest his judgment on the finding that the annuity was taxable as one payable for life whatever might have been the position if it was for a fixed or terminable period.

Whilst legislative changes here and in the UK make the decision of the House of Lords in IRC v Plummer [1979] 3 AER 775 inapplicable to the facts of the present case the observations of their Lordships on the principles stated in Sothern-Smith v Clancy are helpful. At page 780 Lord Wilberforce said:-

"The classic analysis of this type of transaction is the judgment of Greene MR in Sothern-Smith v Clancy. There, on the facts, there was a strong case for saying that the annuitant or the annuitant plus the named recipient was simply receiving his capital back. But the Court of Appeal would not have this. Greene MR thought that there could be much to be said for regarding a purchase of an annuity for a term of years as being one for purchase of instalments consisting mainly of capital and partly of interest, but did not feel himself at liberty to adopt any such principle."

Again Lord Fraser of Tullybelton (at page 793) referred to the Sothern-Smith decision in the following terms:-

"The argument for the Crown here was that they did not have to attach any particular label to the payments and that it was enough for them if they could show that the payments were of a capital nature. It is of course true that purchase of an annuity always consists of paying out capital and receiving back in exchange money which, in a general sense, represents, at least in part, the capital purchase price. But it is accepted in that in principle the whole annuity is income in the hands of the recipient: (See Sothern-Smith v Clancy) and I did not understand that counsel for the Crown disputed that this was the general rule."

It is in that legal framework that argument was made on behalf of the Respondent (and, without distinguishing the onus of proof it is more helpful to analyse the transaction by reference to the contentions put forward on behalf of the Respondent,) that the three annual payments received by it were necessarily capital (plus an identifiable sum for interest) on the basis that they had been purchased for a capital sum. It was contended that any and every annuity purchased for a capital sum was in principle (though not necessarily by statute) exempt from tax as constituting a repayment of capital. The logic of this proposition is attractive. It has appealed to a number of judges but has been rejected by the overwhelming majority of them. It is difficult to see why the purchase of an annuity resulting in a stream of income should differ from an equal series of instalments of a similar amount representing the unpaid balance of a purchase price which would be calculated on precisely the same actuarial basis as the annuity and yet be treated exclusively as capital for tax purposes. The need to keep annual payments untarnished by any quid pro quo moving from the recipient to the donor so as to permit deduction of tax on the payment supports the logic of the Respondent's case. If, however, the logic is with the Respondent the law is against them. All of the authorities from Foley v Fletcher through Sothern-Smith v Clancy to IRC v Plummer have stated clearly that purchased annuities are in principle captured by schedule D of the Income Tax Acts for the time being.

I would therefore reject the first submission made by the Respondent.

The alternative argument made on behalf of the Respondent was that if, as I have held to be the case, that purchased annuities are in general liable to tax that this is only so where the capital or the purchase price has ceased to exist and that, it is said, has not occurred in the present case.

The concept of "preserving the capital" has been referred to in many of the cases which I have quoted. It can be identified fairly readily where a sum of money is lent and that sum of money is to be repaid with or without interest whether by instalments or in a lump sum. It is, however, difficult to distinguish between a sum which is laid out in the purchase of an annuity and the balance of a purchase price which is taken by instalments. Where it can be demonstrated that the transaction in its own terms will result in the investor, vendor, lender or annuitant being entitled to have his loan, investment or purchase money repaid to him with interest over a period of years there may be difficulties in applying the principles established by all of the decided cases and in particular the decision in Perrin v Dickson. However it seems to me clear that on any basis the monies paid to and received by South City constituted an annuity and not the mere repayment of an investment or loan with interest. In the first place the parties clearly and carefully chose to describe the periodic payment as "an annuity" and, secondly, the transaction was not structured so as to ensure by its provisions that the annuitant would be returned his investment with interest. For their investment of £1.290 million South City were guaranteed a total return by the contract of £1,500. It is of course true that the contract provided for the payment by Crosspan of 95% of its profits for the eleven month period to the 30 of April 1983 and that a sum of £1.140 million was paid on the 30 of May 1983 in respect thereof. No doubt both parties were confident, and had every right to be, that this substantial sum would be paid but the contract did not provide for any particular amount and no analysis of the contract itself would have shown the transaction as being one analogous to a loan under which the lender was being repaid his loan with interest over a period of years. In form it was a speculative transaction in which the investor might have made a handsome profit or a serious loss. The fact that the inside knowledge of the parties and the particular purpose for which the transaction was designed rendered this unlikely in the nth degree is not in my view material. This was not a case in which South City were preserving or retaining their capital, they were expending it so as to receive an income over a period of 3 years which they might have hoped would be substantial and had reason to expect would equate with their investment. It seems to be clear on the authorities that the return which they so derived was correctly described by them as an annuity and taxable as such. In my view the appeal should be allowed and the question posed by the learned Circuit Court Judge answered in the negative.

Lynch J Concurred.

Schedule to judgment

Crosspan Developments Limited,

89 Lower Leeson Street,

Dublin 2.

26 May 1983

The Directors,

South City & County Investment Company Limited,

59 Fitzwilliam Square,

Dublin 2.

Re: Annuity, Crosspan Developments Limited to South City & County Investment Company Limited

Gentlemen,

We hereby offer to grant to you an annuity on the terms and conditions set out below:

1a) 'The Company' means Crosspan Developments Limited (CDL).

b) 'The Annuity Period' means the period commencing on the date hereof and ending one day after the date of the expiration of three years from the annuity date.

c) 'The Annuity Date' means the 27 May 1983 and each anniversary thereof during the Annuity Period.

d) 'The Annuity Sum' means in respect of each of the annuity dates an amount equal to the sum of:

(i) IR£500 plus.

(ii) 95% of the profits before taxation disclosed in the unaudited Management Accounts of the Company prepared by the Company's Accountant for 11 months period to 30 April 1983 and for the year ended 30 April 1984 and 1985.

e) 'An Election' means a valid election duly made jointly by you and us under the provisions of section 105(i) of the Corporation Tax Act 1976, (or such legislation corresponding thereto as is from time to time in force with regard to all such payments as are referred to in that section).

f) 'The Capital Sum' is the amount specified in Clause 2(a) hereof.

2 a) In consideration of the payment by you to us on the sum of IR£1,290,000, as provided below, we shall pay to you on each annuity date the annuity sum applicable to that date and such payment shall be paid to you gross and without deduction of Income Tax.

b) The Capital Sum shall be paid by you to us on or before 27 May 1983.

3 As security for the due payment of the Annuity Sum, we are prepared to take out a life policy on the life of Michael Leddy, a director, or Kenneth Lawless, director, in the sum of IR£1,000,000 or such other figure to be agreed from time to time between us, and such policy will be paid for by the company and shall be assigned to you during the continuance of the annuity contract.

4 We confirm that there is an election in force at the date hereof. We and you undertake each to the other not to exercise our respective rights to revoke such election under section 106(4) of the said Act (or such legislation corresponding thereto as is from time to time inforce) or knowingly to do any other thing which would cause the election to cease to be valid or effective at any time prior to payment of the Annuity Sum.

5 Acceptance of this offer will be effected by you paying to us the Capital Sum as provided in paragraph 2(b) above whereupon we will be bound to provide the security and pay the Annuity Sum to you as set out above, and you shall be bound by all the above terms and conditions.

Yours faithfully,

BY ORDER OF THE BOARD,

DIRECTOR

BARRON J: I agree with the judgment delivered by Murphy J.

This case illustrates that the ruling in McGrath's case is not universally understood. It is undoubtedly decided that the Court should not hold against a taxpayer because the transactions to be considered may only have come into existence to take advantage of a loophole in the tax code.

But at the same time, the Court confirmed that transactions had to be considered in the light of what they did and not in the light of why they were carried out.

The issue in the present case was whether annual payments for which consideration had been given were to be treated purely as income or as repayment of capital together with interest.

I have no doubt but that is what the taxpayer assumed it to be. An actuary was instructed to make an appropriate calculation of the proper purchase price on this basis. But the test is not why the transaction is carried out -- in this case to obtain as was assumed a return of capital with interest -- but what it achieves and the rights and duties which it creates.

The real question when annual payments are made is to answer the question, what do such payments represent? They can for example be the payment of a purchase price or a loan by instalments. In such a case, the payments represent a return of capital. But where a capital sum is paid to obtain annual payments without any right to obtain a return of such sum the latter represents income. Nor could this predicament be overcome as counsel submitted by treating the annual payments as the price for the receipt of the capital sum. That merely indicated the lengths of unreality to which the taxpayer had to go to support its submissions.

I would allow the appeal. The question posed by the case stated will be answered in the negative.