The Revenue Commissioners v Walsh (Approved)

Factual and Procedural Background

The appellant, Company A, appealed a determination of the Tax Appeals Commission ("the TAC") dated 17 July 2020, which held that the grant by Company B to the respondent of a right to subscribe for shares in Company B, and/or the exercise of that right by the respondent, did not give rise to an income tax liability. The respondent owned and operated a dairy farm in The City and was a member of Company B, holding ordinary shares. During the relevant milk quota year, the respondent supplied a substantial quantity of milk to a nominated purchaser associated with Company B. Under the rules of Company B, the respondent was entitled to subscribe for patronage shares based on the volume of milk supplied. The respondent subscribed for such shares, paying the par value, and received a Patronage Shares Statement confirming the allocation.

Company A issued a notice of assessment asserting that the market value of the patronage shares should be included as additional trading income subject to income tax. The respondent appealed this assessment to the TAC. The TAC focused on the core issue of whether the receipt of patronage shares was a trading receipt subject to income tax or a capital receipt outside the charge to income tax. Other grounds of appeal were stayed pending resolution of this core issue.

Legal Issues Presented

1. Whether the receipt by the respondent of patronage shares for which he subscribed constituted a receipt of his trade as a milk supplier and was thus within the charge to income tax, or was instead a capital receipt outside the charge to income tax.
2. If the benefits were a consequence of trading activities, what precisely were those benefits?
3. Whether any benefits received pursuant to the rules had a value to be taken into account when calculating the respondent's profits or gains for the year of assessment.

Arguments of the Parties

Appellant's Arguments

• The appellant contended that the receipt of patronage shares was income arising from the respondent's trade and should be subject to income tax.
• It argued that there was no real distinction between the right to subscribe for shares and the actual subscription and allocation, asserting these were effectively one transaction.
• The appellant claimed that the manner in which the respondent's entitlements were administered demonstrated that the shares themselves were the relevant benefit and thus taxable.
• The appellant contended that the commissioner should not have proceeded to determine the nature of the benefit without evidence or argument on its value.

Respondent's Arguments

• The respondent argued that neither the invitation to subscribe for patronage shares nor the acquisition of those shares constituted income from trade under the relevant tax provisions.
• The respondent submitted that the relevant benefit was a capital receipt and that the shares were acquired by way of a separate investment decision rather than as trading income.
• He contended that the right to subscribe was personal, non-assignable, and did not have a marketable value and thus did not constitute a trading receipt.
• The respondent challenged the finding that the benefit was received as a consequence of trading activities, arguing it arose from contractual rights under the company rules.

Table of Precedents Cited

Court's Reasoning and Analysis

The court considered the three questions posed by the TAC commissioner. First, it agreed that the relevant benefit—the right to subscribe for patronage shares—was received by the respondent in consequence of his trading activities supplying milk to Company B's nominated purchaser, rather than merely as a member of the cooperative. This conclusion was based primarily on the wording of the company rules, which linked the entitlement directly to the volume of milk supplied, and the nature of the relationship governed by those rules.

Second, the court accepted the commissioner's finding that the benefit was the personal, non-assignable right to receive an invitation to subscribe for patronage shares at par value, distinct from the actual subscription and allocation of shares, which was a separate transaction and an investment decision by the respondent. The court emphasized that the legal characteristics of the benefit must be derived from the rules themselves, not from administrative practices or subsequent conduct.

Third, the court noted that the commissioner concluded the right to subscribe had no marketable value and thus did not constitute a trading receipt. However, the court found that this issue had been "parked" for further argument and evidence, and the commissioner had trespassed on this parked issue by making a determination on value without hearing full submissions. The court declined to decide this value question, as it was unnecessary to resolve the core issue.

Overall, the court endorsed the commissioner's approach and reasoning on the first two questions but reversed the commissioner's determination on the value issue, remitting that matter for further consideration if necessary.

Holding and Implications

The court held that the receipt by the respondent of patronage shares for which he subscribed was a capital receipt and was outside the charge to income tax. The entitlement to receive an invitation to subscribe for shares arose from the respondent's trading activities, but the actual receipt of shares was a separate investment transaction and not a trading receipt.

The direct effect of this decision is that the respondent is not liable to income tax on receipt of the patronage shares themselves. The court did not establish any new precedent beyond applying existing principles to the facts. The issue of whether the right to subscribe for shares has a value for tax purposes is remitted for further argument and evidence but does not affect the core holding.