Supreme Court rules against O'Flynns in tax case
Builder brothers lose appeal over IR£600,000 of dividends
BUSINESSMAN brothers Michael and John O'Flynn have lost their appeal against a ruling that a scheme which netted them IR£600,000 in tax-free dividends was a tax-avoidance scheme.
The brothers, who are directors of O'Flynn Construction Ltd (OFC), of Kilcrea, Owens, Co Cork, had challenged a High Court finding that the scheme amounted to tax avoidance involving a misuse of the export sales relief scheme (ESRS).
The Revenue Commissioners had claimed that the scheme was a "far from normal use" of tax-free export sales relief provisions.
However, the Appeals Commissioner of the Revenue later found that the scheme was not a tax-avoidance transaction.
The High Court overturned that decision and the Supreme Court has upheld that ruling. The decision involves important findings on the meaning of section 86 of the Finance Act 1989 -- the only anti-avoidance measure in Irish law. That provision was yesterday described by Mr Justice Donal O'Donnell as being "of almost mind-numbing complexity".
In a ruling, the judge said it was possible to admire the ingenuity and efficiency displayed in the creation and execution of the scheme, but also possible to lament the fact that those skills were used for the sole objective of avoiding tax.
The scheme involved the brothers receiving payments of IR£298,000 each in January 1992.
In 1997, the Revenue found that it was a disallowable tax-avoidance scheme entered into by OFC and the O'Flynns to extract funds from OFC in a way which would avoid liability both to advance corporation tax by the company and income tax by the O'Flynns on dividends.
The disputed scheme involved export-relief reserves in a company in the Dairygold group being transferred, via 40 separate steps, to OFC. Michael O'Flynn and John O'Flynn each received IR£298,000 in tax-free ESR dividends, funded by the write-off of a loan of IR£650,000 by OFC.
Mr Justice O'Donnell, with whom both Mr Justice Nial Fennelly and Mr Justice Joseph Finnegan agreed, said the scheme was "highly artificial" and contrived, involving more than 40 steps between December 5, 1991 and January 24, 1992. However, Mr Justice Liam McKechnie and Ms Justice Fidelma Macken dissented.
The scheme involved profits of OFC -- which would attract tax if distributed to shareholders -- being paid by a "circuitous route" to those shareholders without attracting tax. All of this was done via "a series of steps devised for the sole purpose of achieving that result". This was "the antithesis" of the export reliefs scheme.
Mr Justice O'Donnell said this was a tax-avoidance transaction, which could be disallowed as it was a misuse and/or abuse of the export-relief scheme, he ruled.
The main issue in the case was whether section 86 permitted the Revenue to find that the disputed transaction was a tax-avoidance transaction which could be disallowed.
Section 86.3.b allows the Revenue withdraw a tax advantage where a transaction can be said to result directly or indirectly in "misuse or abuse" of the relevant relief -- in this case, the ESRS.
Mr Justice O'Donnell said section 86 sought to make "a decisive change in the approach to taxation schemes".
The fact that a transaction gives rise to a tax advantage was not sufficient to disallow it but the Revenue could have regard to the "results" of the transaction and its "form and substance".