Question

Explain the respective outcomes reached by the courts in the following case involving sales of land: Californian Copper Syndicate Ltd v Harris

Answer 1

Answer:

Fact of the Case:

Company formed for the purpose, inter alia, of acquiring and reselling mining property; after acquiring and working various property, it resells the whole to a second Company, receiving payment in fully paid shares of the latter Company.

It is held, that the difference between the purchase price and the value of the shares for which the property was exchanged is a profit assessable to Income Tax.

The Californian Copper Syndicate referred to as the Company appealed against the following assessments made upon them under Schedule D of the Income Tax Acts, in respect of the profits of the business carried on by them, that is to say, an assessment of £10,000 (duty £625) for the year ending the 5th April 1903, and an assessment of £20,000 (duty £916 ) for the year ending the 5th April 1904.

Court's Judgements:

In the concerened case there are two judgements given by the respective judges:-

1. Judgement by Lord Trayner:

I agree with your Lordships that the determination of the Commissioners is right. This is not, in my opinion, the case of a company selling part of its property for a higher price than it had paid for it, and keeping that price as part of its capital, nor a case of a company merely changing the investment of its capital to pecuniary advantage. My reading of the Appellant Company’s Articles of Association along with the other statements in the case satisfy me that the sale on which the advantage was gained, in respect of which Income Tax is said to be payable, was a proper trading transaction, one within the Company’s power under their Articles, and contemplated as well as authorised by their Articles. I am satisfied that the Appellant Company was formed in order to acquire certain mineral fields or workings–not to work the same themselves for the benefit of the Company, but solely with the view and purpose of reselling the same at a profit. The facts before us all point to this. The properties were bought for £24,000, leaving only a share capital of less than £6,000 a capital quite inadequate (even if all subscribed which it was not) to enable the Company to work their minerals and bring them to market. It is said the Company commenced business shortly after its incorporation in February, 1901, and continued to carry it on till the sales which were effected in April, 1902, and August, 1903, but it is not said that in the course of that time–and the period was short–the Appellants worked any part of the minerals. The business they carried on may have been solely connected with their efforts to sell the property –and selling it was part of the business which the Company was formed, and directly authorised, to carry on. The price obtained, namely, £300,000, for a subject which cost £24,000 points in the same direction.

  But it was said that the profit–if it was profit–was not realised profit, and, therefore, not taxable. I think the profit was realised. A profit is realised when the seller gets the price he has bargained for. No doubt here the price took the form of fully paid shares in another company, but, if there can be no realised profit, except when that is paid in cash, the shares were realisable and could have been turned into cash, if the Appellants had been pleased to do so. I cannot think that Income Tax is due or not according to the manner in which the person making the profit pleases to deal with it. Suppose, for example, a seller made a profit on a trade transaction, but leaves the price (including the profit) in the hands of the buyer at so much per cent. interest. That he so deals with it, rather than take the cash into his own pocket, would not affect the claim of the Revenue for the tax payable on the profit. No more, in my opinion, does it affect the liability for the tax that the Appellants left their profit in the hands of the company they sold to and took the company’s shares as their voucher.

2. Judgement by Lord Justice Clerk:–

It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of  p. 166 →  the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for Income Tax.

  What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being–Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?

  This Syndicate was formed with a capital of £30,000, inter alia, to acquire copper and other mines, and certain mines named in particular, and to prospect and explore for the purpose of obtaining information, and to enter into treaties, contracts, and engagements with respect to mines, mining rights, and a number of other matters in the United States and elsewhere. It was also to carry on mercantile, commercial, financing and trading businesses, and to work minerals, to establish and form companies for such objects, to subscribe for purchase, or otherwise acquire, shares or stock of any company, and accept payment in shares for property sold or business undertaken or services rendered, and to hold, sell, or dispose of the same, to promote companies for the purpose of acquiring the undertaking, property, and liabilities of the Company, or carrying on business deemed conducive to the prosperity of the Company.

  These are shortly some of the main purposes of the Company, and they certainly point distinctly to a highly speculative business, and the mode of their actual procedure was in the same direction. Of the £28,332 realised by shares which were subscribed for, £24,000 was invested in a copper-bearing field in the United States, and the balance was spent in development of the field, and in preliminary and head office expenses.

  The Company then were successful in selling the property to the Fresno Company–£300,000 in fully paid up shares being given by the Fresno Company for the property. Although that was a sale, the price to be paid in shares, I feel compelled to hold that this Company was in its inception a Company endeavouring to make profit by a trade or business, and that the profitable sale of its property was not truly a substitution  p. 167 →  of one form of investment for another. It is manifest that it never did intend to work this mineral field with the capital at its disposal. Such a thing was quite impossible. Its purpose was to exploit the field, and obtain gain by inducing others to take it up on such terms as would bring substantial gain to themselves. This was that the turning of investment to account was not to be merely incidental, but was, as the Lord President put it in the case of the Scottish Investment Company, the essential feature of the business, speculation being among the appointed means of the Company’s gains.

  In these circumstances I am of opinion that the finding of the Commissioners was right.