Jamieson v. Commissioner of Inland Revenue.

Judges: Wild CJ

McCarthy P
Speight J

Court:
Court of Appeal (New Zealand)

Judgment date: Judgment handed down 29 March 1974.

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McCarthy P.: The appellant, John Gideon Jamieson, was for some years a member of a partnership of barristers and solicitors in Auckland. The partnership ceased on 30 September 1968, pursuant to a notice to that effect given by the other partners on 24 August 1968. Later, a difference emerged between the Inland Revenue authorities and the appellant Jamieson concerning the proper calculation of his income for tax purposes for the year ended 31 March 1969, and that issue is now before us in the form of an appeal from a judgment of Woodhouse J. on a case stated by the Commissioner under sec. 32 of the Land and Income Tax Act 1954.

There is an agreed statement of facts. Unfortunately it is meagre, with very little information on aspects of the case which I think are important. Especially, it does not attempt to detail the terms of the partnership. It does not even disclose whether the partnership terms were embodied in a deed or some other form of writing, or whether they were verbal. But it is apparent that the partnership accounts were prepared for each tax year on an earning basis, that is to say, they showed the income of the partnership as the total of the amounts for which bills of cost had been rendered during the income year. No amounts were included for work in progress for which bills had not been prepared and sent out.

In furnishing his return for income tax purposes for the year ended 31 March 1969, appellant showed as his share of the partnership to 30 September 1968, a total of $13,440.28, from which he deducted the sum of $3,156.34, which he had been paid to cover work in hand but not costed at the date of dissolution, leaving as his stated income $10,283.94. The question we have to decide is his right to deduct the $3,156.34. So it is necessary to explain how it came about that that sum was paid him.

When the partners decided in September 1968 to dissolve the partnership, appellant's right to payment in respect of uncompleted work was discussed. As I have said the value of such work was not taken into account in the preparation of annual accounts, but the partners agreed that the appellant was entitled to a proportionate share of fees ``on uncompleted and current files for work done to the date of dissolution in respect of transactions or files not completed at date of dissolution''. The value of that work was therefore calculated, file by file and client by client, to the date of dissolution. It was finally agreed that the share which the appellant should receive was $3,156.34. Full accounts were then prepared for the partnership as at 30 September 1968, solely for the purposes of the dissolution.

The Commissioner contends that the $3,156.34 was taxable as part of the income for the tax year ended 31 March 1969. Mr. Downey, for the appellant, contends, however, that it was not income, for the work in progress at the date of dissolution was not an asset of the firm in the sense that any particular partner or partners could lay claim to it, but was an amalgam of inchoate

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rights against the clients whose work was in progress but incomplete; that appellant exchanged such rights as he might have to share in the amounts ultimately received when the work was completed for an immediate cash payment; and that this was a capital payment, not a payment of income, and hence not liable to income tax.

It is no doubt correct, as Mr. Downey submits, that a general rule applying in the conduct of professional practices by such people as lawyers and accountants, is that payment cannot be demanded of costs until the task for which the practitioner is engaged is complete, or at least has reached a stage which justifies the work done being regarded as having completed a definite component part of the final task, for which part it is reasonable that the practitioner be paid at that stage. This general rule is expressed by Sir Garfield Barwick C.J., in
Henderson v. F.C. of T. 70 ATC 4016, 4020; (1970) 119 C.L.R. 612, 650 , in the passage quoted by the Chief Justice in his judgment. This being so, in the ascertainment of the income of a member of a legal partnership for a particular year for tax purposes no sum may, in the ordinary course of events, be included by the Commissioner to cover work in progress. But there can be exceptional circumstances when it is proper to do so. This was recognised by Sir Garfield in his judgment in Henderson's case (p. 4020; 650), when he said ``It may be that a different course can be taken if an estimation of profits is being made for some other purpose than the present''. This, the Commissioner contends, is such a case.

I think that Mr. Downey places himself in a real difficulty in claiming that the present case is of the type discussed in Henderson v. F.C. of T. (supra) and the other cases to which he referred us, for example
Rutherford v. Commr. of I.R. (1926) 10 T.C. 683 , and
I.R. Commrs. v. Paget [1938] 2 K.B. 25 . If it be of that class, appellant had no rights at all in respect of uncompleted work; certainly until the work had reached the stage for which payment could be properly demanded. There is no evidence that any of the work had reached that stage, though some may have. If that were the position in this partnership at 30 September 1968, then the payment to Mr. Jamieson by his former partners of $3,156.34 must have been made as an act of grace. As such in the hands of appellant it would be a capital payment and non-deductible by the remaining partners. But this was never advanced as the situation by appellant. It has consistently been alleged by him and his former partners that he was entitled to a share of the value of work in progress at the date of dissolution. The agreed statement of facts says ``The Objector and [the continuing partners] agreed that the Objector was entitled to a proportionate share of fees on uncompleted and current files'' etc. Later, ``With the agreement of the Objector the continuing partners calculated the value...''. Then in a letter from the partnership to the Inland Revenue Department, which is annexed to the case stated and which has been relied upon by appellant in his argument, the remaining partners said on 20 March 1970, ``...there was no question in our minds of any goodwill or additional benefits being due to Mr. Jamieson. He was, of course, then entitled to immediate payment of his capital account and in our view there was no question about his also being entitled to his proportionate share of fees earned up to the date of dissolution but not received''. I can only read these statements as accepting that this right to payment flowed from a term of the total partnership arrangement, probably a tacit term, as it existed up to the date of dissolution. ``Entitled'' in my view must mean entitled as of right.

I have not overlooked that Mr. Downey placed considerable weight on the fact that the discussions relating to the payment by the remaining partners to appellant of the sum now in question continued after the effective date of dissolution and ran on till 8 October. Mr. Downey argued that whereas a change in the terms of a partnership effected during the currency of a partnership to provide for the payment to the retiring partner of a share of uncompleted work would make the amount received income in the retiring partner's hands (as the Supreme Court of South Africa held in
Sacks v. Commr. for I.R. [1945] South African Law Reports 31) , where on the other hand, a like

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variation is made after the effective date of dissolution, the change can only be effected as a matter of contract by a sale of existing accrued rights, where such exist. When that happens the amount so received is capital. There is certainly some support for this argument on the authorities, but that was not the position in this present case. True, the negotiations continued after the date of dissolution, but it was not those negotiations (which I suspect were wholly concerned with quantification) which gave appellant a right to payment for uncompleted work. As I have said, it is plain that all the partners accepted, at all times, that appellant had this right by virtue of his being a member of the partnership up to 30 September. That being so it seems to me that the amount received must be treated as income in the hands of the taxpayer in the year of receipt. That is what Woodhouse J. held.

I would dismiss the appeal.