1992 P T D 1224

[(1986) 1 WLR 1343]

[Chancery Division]

Before Sir Nicolas, Browne- Wilkinson V. C

MARSON (INSPECTOR OF TAXES) v. MORTON (BRIAN)

SAME v. MORTON (KENNETH)

SAME v. MORTON (FRANKLYN)

SAME v. MORTON (DENNIS)

Income-tax---

----Profits of trade (Schedule D)---Purchase and sale of land---Isolated transaction---No intention to use or derive income from land---General commissioners' finding that transaction not amounting to trading---Whether commissioners decision unreasonable---Income and Corporation Taxes Act, 1970 (c.10), Ss.108, 526.

In June, 1977 the taxpayers, who were brothers, having taken advice from an estate agent, purchased an area of land with the benefit of planning permission for 65,000 Sterling. 35,000 Sterling of that purchase price was provided by the taxpayers and the balance was borrowed at a commercial rate of interest. One of the taxpayers subsequently said in evidence that their intentions in making the purchase was to acquire an investment and that they had no intention of using the land, developing the land, or of receiving income from it. None of the taxpayers had ever before invested in land. In September, 1977, again acting on the advice of the estate agent, the taxpayers sold the land for 100,000 Sterling. They were each assessed to income tax under Case I of Schedule D in respect of the profits arising on' that transaction. Their appeal against the assessments were upheld by the general commissioners who found that the transaction was far removed from the normal trading activities of the taxpayers and did not amount to an adventure in the nature of trade and was accordingly not within the charge to Case I of Schedule D income tax under section 108 of the Income and Corporation Taxes Act, 1970 (Income and Corporation Taxes Act 1970, S.108; " I Tax under this Schedule shall be charged in respect of (a) the annual profits or gains arising or accruing-- ....(ii) to any person residing in the United Kingdom from any trade ....")

On appeal by the Crown:---

Held, dismissing the appeal, that the question of whether a transaction constituted an adventure in the nature of trade depended on the particular facts and circumstances of the case; that common sense guidance in reaching a conclusion was to be found from the decided authorities from which certain factors could be identified as being compatible with trading; but that, on the unusual facts, it could not be said that the commissioners' decision was contrary to the only proper conclusion nor that they had misdirected themselves as to the law and accordingly their decision that the transaction was not trading by the taxpayers could not be interfered with.

Inland Revenue Commissioners v. Fraser, 1942 SC 493; Inland Revenue Commissioners v. Reinhold, 1953 SC 49 and Johnston v. Heath (1970), WLR 1567 considered.

Per Curiam. In 1986 it is not any longer self-evident that unless land is producing income it cannot be an investment. Since the arrival of inflation and high rates of tax on income new approaches to investment have emerged putting the emphasis in investment- on the making of capital profit at the expense of income yield.

Edwards v. Bairstow (1956) A.C. 14; (1955) 3 W.L.R. 410; (1955) 3 All ER 48; 36 TC 207, HL (E); Inland Revenue Commissioners v. Fraser, 1942, SC 493; 24 TC 498; Inland Revenue Commissioners v. Reinhold, 1953 SC 49; 34 TC 389; Johnston v. Heath (1970) 1 WLR 1567; (1970) 3 All ER 915; 46 Tr 463; Leeming v. Jones (1930) AC 415; 15 TC 333; HL (E); Rutledge v. Inland Revenue Commissioners 1929 SC 379; 14 TC 490. ref.

Cooper v. C & J Clark Ltd. (1982) 54 TC 670; Emanuel (Lewis) & Son Ltd. v. White (1965) 42 TC 369; Iswera v. Inland Revenue Commissioners 1965) 1 WLR 663; PC Jenkinson v. Freedland (1960) 39 TC 636; CA.; Purchase v. Tesco Stores Ltd. (1984) S.T.C. 304; Simmons (as liquidator of Lionel Simmons Properties Ltd. v. Inland Revenue Commissioners (1980) 1 WLR 1196; (1980) 2 All ER 798; 53 TC 461, HL (E); Taylor v. Good (1974) 1 WLR. 556; (1974) 1 All ER 1137; 49 TC 277; Turner v. Last (1965) 42 TC 517; Wisdom v. Chamberlain (1969) 1 WLR 275; (1969) 1 All ER 332; 45 TC 92, CA. cited.

Case stated by the Commissioners for the General Purposes of Income Tax for the Division of Witham.

At a meeting of the Commissioners on 17th January 1985 the taxpayers, Brian Robert Morton, Kenneth Edwin Morton, Franklyn Lawrence Morton and Dennis Joseph Morton, appealed against assessments to income tax made under Case I of Schedule D in respect of a dealing in land. The taxpayers and the inspector of taxes agreed that there should be a joint hearing. The assessments were for the year 1977-78 in the sum of 7,345 Sterling in each case. The question for the Commissioners' determination was whether the purchase and sale of land forming part of the Hadley Estate by the taxpayers was an adventure in the nature of trade the profits from which were assessable under Case 1 of Schedule D. The Commissioners determined the case in favour of the taxpayers. The Crown appealed.

The facts are stated in the judgment.

Alan Moses for the Crown.

Christopher Sokol for the Taxpayers.

Dates of hearing: 29th to 31st July, 1986.

JUDGMENT

These are four appeals by way of case stated from the decision of general commissioners for the division of Witham in the county of Essex. The commissioners discharged assessments on each of the four taxpayers for income tax under Case I of Schedule D for the year ending, 1978, in the sum of 7,345 Sterling. The assessments related to each taxpayer's share of the profits arising from a transaction involving the purchase and sale of certain land. The question which the commissioners had to determine was whether the profit arising from that transaction was income received by the taxpayers in respect of any trade within the meaning of that word in Case I of Schedule D. Section 526 of the Income and Corporation Tax Act, 1970 defines trade as including, "adventure... in the nature of trade". This is the question the commissioners had to decide. .

The facts are fully set out in the case and I will only seek to summaries them to the extent it is necessary to explain my decision. The exact nature of the transaction is far from clear. It appears that there was a company Kayworth Property Development Ltd. which had the benefit of a contract to buy certain land at a price of 65,000 Sterling; that land had the benefit of planning permission. The director and the majority shareholder in Kayworth was a Mr. Lucas, who was himself an estate agent and land developer. Mr. Lucas arranged that the taxpayers should take the benefit of that contract fromKayworth, at nil consideration. In June, 1977 the taxpayers, pursuant to that contract, purchased the land which was part of the Hadley Estate for 65,000Sterling. The purchase price was financed in part by a loan of 30,000 Sterling from a Colonel Austin, such loan bearing interest at the rate of 17 per cent. Per annum. It is not clear to whom that loan was made. The balance of 35,000 Sterling was raised by the taxpayers from personal resources. The case says: "From the personal resources of the (taxpayers) including their loan accounts with Warrell Morton & Co. Ltd." On 15th September, 1977 the land was resold by the taxpayers for 100,000 Sterling to a company called Firstore Ltd. Firstore was again a company in which Mr. Lucas was a director and had an equal shareholding. Firstore had only been incorporated on 11th August, 1977.

The four taxpayers are brothers and they are equal shareholders in Warrell Morton & Co. Ltd. which carries on trade as wholesale potato merchants. None of the taxpayers has apparently previously bought land. The background to the transaction is found by the commissioners in the case and very unusual it is too. The findings of the commissioners are primarily related to the evidence of Mr. Brian Morton. They find that his interest in land as an area of investment arose from a gathering of farmers early in 1977 which he attended and where he met Mr. Lucas. That was the first occasion on which he had thought of purchasing land of this kind and it arose after a discussion with Mr. Lucas. His interest in investing in land arose because the company, Warrell Morton & Co. Ltd. had recently completed a successful trading year and had surplus funds available. Some time after that meeting, possibly a matter of weeks or possibly two months, Mr. Lucas got in touch with him and told him there was a suitable parcel of land. Mr. Brian Morton consulted with his brothers and decided to invest. The commissioners found that Mr. Brian Morton thought he was putting money into an investment in land recommended by Mr. Lucas; he had no intention of using the land and the intention was to make a profit. He had no idea of the time scale involved and thought it might take one or two years. He did not expect to receive any income from the land but he thought he was putting money into a safe investment with a good return later. The period of one to two years, mentioned in part of the case, is to be contrasted with another passage where there is a finding that the intention originally was to make a medium to long-term investment. The commissioners also found that he would not have considered acquiring the land if it did not have planning permission but that he had no intention of developing the land himself. Before purchasing the land he had no advice, no solicitor acting for him, and the documents of purchase, whatever they were, were signed at Mr. Lucas's office. He did not even know what the land was costing him. He knew that he and his brothers were not good enough for the full price but did not even know of the existence of a loan until he came to sign the documents. That was the purchase transaction.

Having acquired the land he took no steps to sell it he was content to leave the matter to Mr. Lucas whom he regarded as the expert in these matters. The resale of the land arose when Mr. Lucas visited the taxpayers at the company's offices a few months later and said he had the opportunity of selling the land. No resale price was quoted for the land but he was led to believe he might double his money. Again, he did not have any independent advice on the resale. He did not see a solicitor and did not remember signing any sale documents, but in fact the sale did go through.

Those are the very unusual facts found by the commissioners. From them they had to make up their minds as a question of fact whether the transaction in question was or was not an adventure in the nature of trade by the taxpayer. They had the doubtful benefit of no less than nine authorities cited in reaching their decision on fact. At the conclusion of the hearing and having withdrawn for a time they gave their reasons:

"The Chairman accepted that a single transaction can be an adventure in the nature of trade. He commented that all of the tax cases quoted were for transactions prior to the introduction of capital gains tax and that they felt this to be important as there was from that date an alternative available to the revenue."

He referred to quotations from two cases, the first being Inland Revenue Commissioners v. Fraser, 1942 SC 493; 499, the following passage:

A man may purchase land with a view to realizing it at a profit, but it also may yield him an income while he continues to hold it. If he continues to hold it, there may be also a certain pride of possession. But the purchaser of a large quantity of a commodity like whisky, greatly in excess of what could be used-by himself his family and friends, a commodity which yields no pride of possession, which cannot be turned to account except by a process of realisation, I can scarcely consider to be other than an adventurer in a transaction in the nature of a trade; ...."

The Chairman also quoted from Inland Revenue Commissioners v. Reinhold, 1953 SC 49, 55, the following passage:

"If, however, the subject of the transaction is normally used for investment -- land, houses, stocks and shares -- the inference is not so readily to be drawn from an admitted intention in regard to a single transaction to sell on the arrival of a suitable pre-selected time or circumstance and does not warrant the same definite conclusion as regards trading or even that the transaction is in the nature of trade."

Having quoted those two passages from the authorities the Chairman went on as follows:

"The commissioners had found that (Mr. Brian Morton) had not instructed Lucas to sell at any particular price or time and they therefore felt the transaction was in the same category as a normal investment in stocks and shares. The Commissioners found that the transaction was far removed from the normal trading activity of the (taxpayer) and for all of these reasons they decided it was not an adventure in the nature of trade and not therefore subject to tax under Schedule D."

The Crown appeal against that decision. Whilst accepting that the question whether or not a particular transaction is an adventure in the nature of trade is a question of fact, they claim that this case falls within that exceptional class dealt with by the House of Lords in the well-known passage, in Edwards v. Bairstow (1956) AC 14, in which the Court, though having jurisdiction only to deal with questions of law, found that on the facts found by the Commissioners the true and only reasonable conclusion they could have reached was that it was an adventure in the nature of trade, and accordingly the decision disclosed a misdirection in point of law. Alternatively, even if that is not right, Mr. Moses submitted that in two respects the reasons given by the commissioners disclose misdirection in point of law, which invalidates their decision on the question of fact.

I will deal first with the submission that the true and only reasonable conclusion in this case was that the taxpayers were entering into an adventure in the nature of trade. It is well established in dealing with appeals of this nature that there is a band of cases, sometimes referred to as "no-man's-land", in which different minds might come to different conclusions in the circumstances on the question of whether or not there was an adventure in the nature of trade. There are some cases where the position is so clear, one way or the other, that there is only one true and reasonable conclusion. If so, then if the commissioners reached something other than that conclusion, an error of law was disclosed. But if the case falls within the band where more than one conclusion is possible on the basis of the facts found, then in the absence of misdirection on the face of the decision the Court has no jurisdiction or right to intervene. Against that background one turns to consider what the position is so far as the law on this matter is concerned. Like the commissioners I have been treated to an extensive survey of the authorities. But as far as I can see there is only one point which as a matter of law is clear, namely that a single, one-off transaction can be an adventure in the nature of trade. Beyond that 1 found it impossible to find any single statement of law which is applicable to all cases in all circumstances. I have been taken through the cases and invited to compare the facts in some cases with the facts in the case here before me. I fear that the commissioners may have become as confused by that process as I did. The purpose of authority is to find-principle, not to seek analogies on the facts.

It is clear that the question whether or not there has been an adventure in the nature of trade depends on all the facts and circumstances of each particular case and depends on the interaction between the various factors that are present in any given case. The most that I have been able to detect from the reading of the authorities is that there are certain features or badges which may point to one conclusion rather than another. In relation to transactions such as this, that is to say a one-off deal with a view to making a capital profit, there do seem to be certain things which the authorities show have been looked at. For convenience I will refer to them in a moment. But I would emphasise that the factors I am going to refer to are in no sense a comprehensive list of all relevant matters, nor is any one of them, so far as I can see, decisive in all cases. The most they can do is provide common sense guidance to the conclusion which is appropriate. The matters which are apparently treated as a badge of trading are as follows: (i) That the transaction in question was a one-off transaction. Although a one-off transaction is in law capable of being an adventure in the nature of trade, obviously the lack of repetition is a pointer which indicates there might not here be trade but something else. (ii) Is the transaction in question in some way related to the trade which the taxpayer otherwise carries on? For example, a one-off purchase of silver cutlery by a general dealer is much more likely to be a trade transaction than such a purchase by a retired colonel, (iii) The nature of the subject matter may be a valuable pointer. Was the transaction in a commodity of a kind which is normally the subject-matter of trade and which can only be turned to advantage by realisation, such as referred to in .the passage that the chairman of the commissioners quoted from Inland Revenue Commissioners v. Reinhold, 1953 SC .49. For example, a large bulk of whisky or toilet paper is essentially a subject matter of trade, not of enjoyment. (iv) In some cases attention has been paid to the way in which the transaction was carried through was it carried through in a way typical of the trade in a commodity of that nature? (v) What was the source of finance of the transaction? If the money was borrowed that is some pointer towards an intention to buy the item with a view to its resale in the short term; a fair pointer towards trade. (vi) Was the item which was purchased resold as it stood or was work done on it or relating to it for the purposes of resale? For example, the purchase of second-hand machinery which was repaired or improved before resale. If there was such work done, that is again a pointer towards the transaction being in the nature of trade. (vii) Was the item purchased resold in one lot as it was bought, or was it broken down into saleable lots? If it was broken down it is again some indication that it was a trading transaction, the purchase being with a view to resale at profit by doing something in relation to the object bought. (viii) What were the purchasers' intentions as to resell at the time of purchase? If there was an intention to hold the object indefinitely, albeit with an intention to make a capital profit at the end of the day, that is a pointer towards a pure investment as opposed to a trading deal. On the other hand, if before the contract of purchase is made a contract for resale is already in place, that is a very strong pointer towards a trading rather than an investment. Similarly, an intention to resell in the short-term rather than the long-term is some indication against concluding that the transaction was by way of investment rather than by way of a deal. However, as far as I can see, this is in no sense decisive by itself. (ix) Did the item purchased either provide enjoyment for the purchaser, for example a picture, or pride of possession or produce income pending resale? If it did, then that may indicate an intention to buy either for personal satisfaction or to invest for income yield, rather than do a deal purely for the purpose of making a profit on the turn. I will consider in a moment the question whether, if there is no income produced or pride of purchase pending resale that is a strong pointer in favour of it being a trade rather than an investment.

I emphasise again that the matters I have mentioned are not a comprehensive list and no single item is in any way decisive. I believe that in order to reach a proper factual assessment in each case it is necessary to stand back, having looked at those matters, and look at the whole picture and ask the question and for this purpose it is no bad thing to go back to the words of the statute was this an adventure in the nature of trade? In some cases perhaps more homely language might be appropriate by asking the question, was the taxpayer, investing the money or was he doing a deal? If that approach is right, then it seems to me that this is essentially a case which falls in the "no-man's land" where different minds might reach different conclusions on the facts found. It was a one-off deal and it was a deal for land, which was right outside the ordinary trade of the taxpayers as wholesale potato merchants. The taxpayers to an extent used their own money which had recently become available to them as a result of the profit in the company. On the other hand, they had also borrowed nearly half the money required at a fairly high rate of interest. In relation to that borrowing, however, it has to be noted at the time they did not know they were borrowing as such; they knew they were not good enough for the whole purchase money but until they signed the document they did not know of the borrowing. The property was in due course resold in one lot, without anything having been done to the land or any other land bought in to improve its value. These factors, if anything, point towards the transaction being one of investment rather than a trade deal. However, the property was resold very swiftly after the purchase, which in the ordinary case would point to an intention to trade rather than invest But, notwithstanding that, it must be remembered that the commissioners accepted the evidence that at the inception of the scheme the taxpayers were looking for a sale, long-term investment-long-term in this sense being apparently in the area of one to two years. The subject-matter was land with planning permission, which is an item of property which I would have thought was neutral, namely it could have been bought for investment purposes. On the other hand, it is of course manifestly a commodity which is dealt with by way of property deals. It is not to my mind the same as whisky or toilet paper, in relation to which profit is incapable of being realised other than by a quick sale.

Mr. Moses suggested either than it was a decisive factor or, at the least, a critical factor, and one ignored by the commissioners, that the land in question was not producing income. He said, as I understand it, that at least in relation to land the lack of rents or other income is a factor of major importance indicating strongly that the transaction is not an investment but is a trading creature. He pointed to the decision of Goff, J. in Johnston v. Heath (1970) 1 WLR 1567, in which the Judge distinguished Inland Revenue Commissioners v. Reinhold, 1953 SC 49, on the ground that in the Reinhold's case the house purchase produced income, whereas in Johnston v. Heath no income was produced. In the Reinhold's case the Court of Session was considering the purchase of houses with a view to capital profit but producing income in the meantime. It is true in the Reinhold case the Court did rely on the fact there would be income in rents as a relevant factor, and in my judgment it plainly is a relevant factor. But in my judgment in 1986 it is not any longer self-evident that unless land is producing income it cannot be an investment. The legal principle of course cannot change with the passage of time; but life does. Since the arrival of inflation and high rates of tax on income new approaches to investment have emerged putting the emphasis in investment on the making of capital profit at the expense of income yield. For example, the purchase of short-dated stocks giving a capital yield to redemption but no income has become common place. Similarly, split-level investment trusts have been invented which produce capital profits on one type of share and income on another. Again, institutions now purchase works of art byway of investment. In my judgment those are plainly not trading deals; yet no income is produced from them. I can see no reason why land should be any different and the mere fact that land is not income-producing should not be decisive, or even virtually decisive, on the question whether it was bought as an investment.

Taking that approach and standing back and looking at this case as a whole, the facts are, as I have said, highly unusual. The procedure was extremely unconventional, to say the least of it. Whether the taxpayers were meaning to trade or to invest they seemed to rely on one man, who came to them out of the blue and whose motives seem to me wholly obscure, to carry through an extraordinary transaction without knowing or understanding what was going on. It may be they were doing so as dealers trying to turn a quick profit. It may equally be that they were doing it with a view to investing money. It seems to me essentially one of those cases which fall in "no-man's-land" and the commissioners had to reach a conclusion as best they could. My conclusion that it is one of those "no-man's-land" cases receives some support from the decision at first instance in Leeming v. Jones (1930) A.C. 415, where the factual background, although more conventional, is similar to the one here, and where, if anything, there were more pointers towards it being a trading transaction. Yet at first instance Rowlatt, J.-- and I am not clear whether by concession or otherwise -- held that it was not an adventure in the nature of trade.

For those reasons, in my judgment, the attack by the Crown on the ground there was only one true, proper conclusion in this case cannot be established.

Mr. Moses, on this aspect of the case, also suggested that as the Chairman gave only three specific grounds for his decision he had ignored all the other factors in the case to which I have referred. I think that is doing an injustice to the commissioners. Having set out all those facts I find it impossible to believe they were not in the commissioners' minds when they reached those conclusions. Having given reasons I think it would be unduly harsh to say those were the only factors they had in mind.

I turn then to the second attack by the Crown, namely that there are here identifiable misdirection s in law given by the Commissioners in their reasons. If that is right, then the decision cannot stand and the case would have to be remitted for rehearing in the light of the correct principles. The first attack is on the passage in the reasons where the Chairman said:

"He commented that all of the tax cases quoted were for transactions prior to the introduction of capital gains tax and that they felt this to be important as there was from that date, an alternative available to the revenue:"

I confess that at first sight I felt very uneasy about that passage. 1t seemed to me, as Mr. Moses submitted, that what they were saying there was that because capital gains tax had been introduced so the old authorities of what is "in the nature of trade" have to be given some different meaning. However, I am satisfied by Mr. Sokol's argument that that would be an unfair reading of that passage, because in. fact they immediately go on and refer to and rely on earlier decisions. 1 think what they were saying, perhaps unfortunately put but not as a misdirection, is that they think it important that this was not an all-or-nothing case; even if it were not an adventure in the nature of trade, the profit would be susceptible to capital gains tax. Given the fact it is a case of possible investment, I do not think that constitutes misdirection in the law. The second misdirection alleged arises from this passage, which follows immediately on the quotations from the Fraser and Reinhold cases:

"The commissioners' had found that (Mr. Morton) had not instructed (Mr. Lucas) to sell at any particular price or time and they therefore felt the transaction was in the same category as a normal investment it stocks and shares:'

Mr. Moses said that they were treating those cases as authority for saying that land necessarily constitutes an asset of an investment nature as opposed to a trading nature, at least where there is no fixed time for resale. He said that overlooks the fact, which I have already dealt with, namely that in the earlier cases there was the fact that land was income-producing during the period pending sale and that it was that factor which led the Judges quoted to treat the land as being of an investment nature similar to stocks and shares.

For the reasons I have given I do not think that is a decisive factor one way or the other. I think what they are saying is that they are treating those cases as authority for saying that the land is capable of being a commodity the subject matter of an investment and not necessarily a commodity of the kind, which is traded. Having found that that is a possible conclusion and that no particular price or time for resale had been fixed, they reached the conclusion that it was a transaction very akin to investment in stocks and shares. I again do not find that a misdirection in law. For those reasons I think the appeal must fail and be dismissed.

Appeal dismissed with costs.

Solicitors: Solicitor of Inland Revenue; Aughterson, Keeble and Passmore, Colchester.

M.B.A./ 1598/T