HARMAN L.J. There are occasions, even in revenue cases, when what one comes to look for is substance and not form. Here were corporators owning a first-class educational business which paid 800 per cent. on its ordinary shares and made a living also for the majority shareholders. It paid tax, of course, like any other commercial concern. The object of the corporators was to sell this business at is full value without losing control of it. They left it to their accountant to find the best means, and what we have is his plan, which smells a little of the lamp. His plan was (1) to sell the goodwill to a concern still controlled by the vendors; (2) to find the price out of the profits of the business; (3) to get back the income tax which was being paid by the vendors, thus accelerating the payment of the purchase-money.
What were the steps taken to carry it out The first was that a trust was set up, a trust for educational purposes only, and, therefore, a charitable trust, but as its name implies, it was to be tied to Daviess the name of the business. The object of the charitable trust was to take over the business from Daviess. The second step in this was the covenant which Tutors entered into the day after its formation, which was a covenant for seven years to pay 80 per cent. of its profits to the trust. The third step was that the trust was to use the money to pay for the business. I care not at all, like my Lord, whether this was a legally binding transaction or merely one that was morally binding on everybody. After all, all the participators in this scheme were on one side of the table. They were the corporators in this business. They were the people who were making a living out of it and who were hoping to get a good price for it. There is nothing wrong with that. But it makes a formal agreement quite unnecessary because it was to everybodys interest and it was everybodys intention to carry it out in this way of it would get back Tutors income tax. The fourth step was that the trust, being a charity, was to apply to get back the income tax payable by the vendors and return it to the vendors directly it was got back and so hasten the payment of the purchase price.
It is on this last rock that the ship founders. If I pay my college at Oxbridge income payments over seven years, these are annual payments because I expect and get no return from my outlay. If I make conditions, such as a free place for my son, no tax is reclaimable. Judge the present case by this test. The covenantor makes his payment to the trust. Every one concerned knows the object of it : it is to get back the payments as instalments of the purchase-money for the business-item to recover through the trust the tax it has paid and return it to themselves as further instalments. No doubt when the seven years are up, there is to be a further covenant on a further understanding that the covenanted sums will go to pay for the vendors physical assets, freeholds and leaseholds. The prospect is that no one in this business will pay any tax for years. It is a splendid scheme. Meanwhile the business will remain under the control of the majority shareholders and provide them with salaries as managers of the business. It is almost too good to be true. In law quite too good to be true. It wont do.
That is enough in my opinion to deal with this appeal. I follow the judge until he reaches this point precisely; but his further reasoning I cannot follow, and so far as I can follow it, I do not accept it; but it makes no difference.
As to the second point, that the payments were applied for charitable purposes only, being payment made to buy an educational business, when looked at it is essentially the same point at a different stage. The payments to be made by the covenantor are not in my opinion for charitable purposes only because they are paid in pursuance of the understanding that they shall be devoted to the purchase of the business. Therefore it does not matter that the business is an educational business and therefore within the object of the charitable trust because the objects of the charitable trust because the objects of the charitable trust are not wholly charitable in this case putt to pay for a business, of which they themselves are the controllers.
On both points, therefore, I would dismiss the appeal.
SALMON L.J. I have heard it said that golf is essentially an easy game made difficult. It seems to me that the question that arises in this case is essentially an easy question made difficult. It has been made difficult only by the irrelevant complexities and ingenuity under which it has been almost submerged.
Tutors covenanted to pay 80 per cent. of its annual profits to a charitable rust called the Daviess Educational Trust for a period of seven years. Tutors deducted income tax from those profits before paying them to the trust. The trust seeks to recover the tax that has been so deducted. The covenant was part of an arrangement found by the special commissioners to have been made between the directors and shareholders in Tutors and the trustees. There were only two trustees; one was a director of Tutors and the other was Tutors secretary. It was the common intention of all those parsons, and part of the arrangement between them, as found by the special commissioners, that every penny paid under the deed of covenant to the trustees should be returned to Tutors enriched by the tax that had been recovered, and that in return Tutors would transfer all its assets to the trust. The first asset to be so acquired was to be Tutors good will valued at some pounds 50,000. It is conceded that there was a moral obligation on the trustees to return the money to Tutors in the way I have indicated, but it is argued that there is no legal liability upon them to do so. There was, of course, no formal agreement between the parties interested because, as my brother Harman has said, they were all on the same side of the fence : their interests were common and there was no need for any formal agreement.
For my part I agree with the judge that each payment became the subject of a trust in the hands of the trustees and accordingly they were under an equitable duty to deal with those payments in accordance with the common intention of all the parties and the arrangements made between them. I should think it very remarkable if, in the highly unlikely event of the trustees using the money they received in breach of the understanding and for the purpose, say, of financing a school which was in competition which one of the schools belonging to Tutors, the Court of Chancery would be unable to intervene. I have no doubt that it would intervene to prevent what I think would be a clear breach of trust. But in my view it does not matter very much whether there was such a trust in respect of the money paid under the covenant or whether there was merely a moral obligation on the part of the trustees to return it. In no circumstances can it be regarded as pure bounty.
The case for the appellants, as I understand it, is that the money which they receive is an 'annual payment' within the meaning of those words in the Income Tax Act despite the fact that that money is to be returned to Tutors; this, they say, is so because it is returned in payment for Tutors assets and the price being paid for the assets is a fair and reasonable price. In order for the money paid under the covenant to constitute 'annual payments' in the hands of the trustees so that they can recover the tax that has been deducted it is clearly established by such authorities as the Epping Forest case and the National Book League case that the money must have been paid to the trustees without 'conditions' or 'counter-stipulations' and as a 'pure gift' or 'pure bounty'. There may well be cases in which it would be difficult to decide whether what was paid to a trust was by way of pure gift or whether there was any counter-stipulation which prevented the money from being a pure gift or pure bounty. But this, in my view, is not one of hose cases. Every penny which the charity received it had to return to those who gave it. It was certainly under a moral duty to do so, and in my view would be committing a breach of trust should it fail to do so. It seems to me to be entirely beside the point that once the trustees had returned the money, they were going to receive in exchange as asset which would be of the same value as the money being returned. May I illustrate this point by an example A enters into a covenant to pay a charitable trust, B, pounds 10,000 a year for seven years. He does so, deducting tax. There is an understanding between A and B that B will pay pounds 70,000 back to A as consideration for a house which A will then transfer to B. As I understand Mr. Millers argument, providing the house is worth the pounds 70,000, that is all right : the payments by A to B are pure bounty. If, however, the house is worth only, say, pounds 10,000, Mr. Miller concedes that it would be ridiculous to regard the money paid by A to B as bounty. To my mind, however, the value of the houses would be wholly irrelevant to the question with which we are concerned. A is not giving away any money : he is getting it back, plus the tax which he has deducted from it. What he is giving away is the house. Suppose the circumstances postulated but that the house is worth pounds 200,000. If anyone asked the question : What was As bounty to B, no one would think of saying that A had made a gift to B of pounds 70,000. Any ordinary man would say : It is true that A has, for some mysterious reason, parted with that sum less tax and received it back plus tax but he has not given it away. He has been much more charitable than if he had given away a mere pounds 70,000. What he has done in fact is to give away a property worth pounds 200,000. So here, the most that can be said in favour of the appellants is that Tutors is in fact giving away its assets to the trust-certainly its goodwill. Unfortunately, from the point of view of everyone concerned, except the Inland Revenue Commissioners, that gift does not afford them any tax advantage.
There is only one other point I should like to mention and it is this. According to the findings in the case, the goodwill, which was the first asset to be 'purchased,' has been correctly valued at pounds 50,000. The case is not, however, particularly illuminating on this point because it does not deal with the circumstances in which the goodwill could be said t be worth pounds 50,000. When a business is sold, the usual form of the transaction is for the shares in the company carrying on the business to be sold either on a profit-earning basis or on an assets value basis; and one of the assets, of course, is the goodwill. In the present case there is no question of selling Tutors shares to the trust. The idea was for the company to transfer its assets to the trust. One of those assets was the goodwill valued at pounds 50,000. Naturally, if all the assets are made over and the company transferring them is a company such as this is, with a good name and a good profit record, the goodwill is no doubt worth a lot of money. When the goodwill is included amongst the assets sold, there is in the ordinary course always a covenant by vendors not in future to trade under the same name or any name like it and quite often a covenant against competing with the purchasers. Having had some experience of contracts relating to the sale of assets of a business, I confess that I have never heard of anyone finding a purchaser who was prepared to buy goodwill alone. As far as I can see, the purchaser would be getting absolutely nothing - however valuable the goodwill might be if acquired with the other assets and subject to the usual covenants. In the present case Tutors can still carry in the business under the old name. The trust gets no share of the profit; it gets nothing except the chances of making some use of the goodwill if and when it receives sufficient money from Tutors to acquire Tutors other assets with which the business is carried on. These include a large number of freehold and leasehold premises in London which will cost a great deal of money. It is inconceivable that any sane person entering into an ordinary commercial transaction would buy goodwill in such circumstances. It seems to me, although perhaps it is not very relevant, that in this respect also Tutors and its corporators were, no doubt perfectly properly, receiving a real benefit by reason of this arrangement. They were receiving cash down for a goodwill in circumstances in which it would be unsaleable on the open market.
However that may be, once the so-called benefactor is parting with his money under a covenant on the basis that the money is to come back to him, it seems to me to be obviously impossible, in any circumstances, if words have any meaning, to regard the payment of the money by the so-called benefactor as pure bounty.
I agree that the appeal should be dismissed.
Appeal dismissed with costs. Leave to appeal refused.
Solicitors : J. S. Fairfax-Jones, Hampstead; Solicitor of Inland Revenue.