Jamieson v. Commissioner of Inland Revenue.

Members:
Wild CJ
McCarthy P
Speight J

Tribunal:
Court of Appeal (New Zealand)

Decision date: Judgment handed down 29 March 1974.

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Wild C.J.: This is an appeal from the judgment of Woodhouse, J. delivered in the Supreme Court at Auckland on 6 November 1972 on a Case Stated under sec. 32 of the Land and Income Tax Act 1954.

The appellant (whom I will call ``the Objector'') was formerly a partner in a firm of solicitors. On 30 September 1968 he withdrew from the partnership and on or about 14 January 1969 he re-commenced practice on his own account. For the year ended 31 March 1969 he declared his assessable income as follows -

      Share of Partnership to

       30 September 1968             $13,440.28



      Less share of valuation of

       work in progress at

       30 September 1968               3,156.34



                                     ----------

                                     $10,283.94

      Less business loss                  55.46



                                     ----------

                                     $10,228.48

      Add Dividends                      838.05



                                     ----------

      Total assessable income        $11,066.53

                                     ----------
          

The first two items related to the partnership from which he had withdrawn on 30 September 1968 and the ``business loss'' related to his later practice on his own account from January to 31 March 1969.

The Commissioner considered that the amount of $3,156.34 deducted by the Objector from the share of partnership income represented assessable income and included it accordingly in the assessable income on which he assessed tax. The Objector lodged an objection on the ground that the $3,156.34 was not assessable income but a capital payment for the sale of a chose in action. Woodhouse J. decided that the Commissioner had acted correctly. The Objector now appeals.

The agreed statement of facts includes the following paragraphs -

``6. AS the result of negotiations between the Objector's solicitor and the continuing partners between the 3rd day of September 1968 and the 8th day of October 1968 the Objector and the continuing partners agreed that the Objector 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. With the agreement of the Objector the continuing partners calculated the value, file by file and client by client, of all work done, to the date of dissolution, on transactions and files on which, at that date, work was still in progress and had not been completed and costed out to the clients. The share of the Objector in the total value of such `work in progress' at the date of dissolution was calculated by the continuing partners to be $3,156.34, and was accepted by the Objector as having been correctly assessed. The

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Objector accepted payment of this sum in full settlement of his share of the `work in progress' which was essentially based on valuation there being no adjustment required by him or by the continuing partners to cover

• (a) The possibility that the fees ultimately charged for the work done for any particular client may be greater or less than the then valuation of the fee,
• (b) The possibility that the continuing partners may not in fact ultimately receive a fee from any particular client whose work had been valued.

7. DURING the time that the Objector was a partner in the firm the partnership accounts were taken annually as at the 31st March in each year and no provision being made for work in progress. Accounts were taken as at the 30th September 1968 solely for the purpose of the dissolution of the partnership. Pursuant to the agreement referred to in paragraph 6 hereof these accounts contained an amount for work in progress of which the Objector's agreed share was $3,156.34.

9. WITH regard to the said amount of $3,156.34 -

• (a) It represents the Objector's share of the calculated value of `work in progres' as at the date of dissolution of the partnership, viz. 30 September 1968;
• (b) Such `work in progress' had not been costed out to clients at the date of dissolution but was to be costed out when in due course the work which was in progress had been completed by the continuing partners;
• (c) The `work in progress' comprised all the kinds of legal work normally found in a general practice.''

The question is - what was the real character of the payment in the hands of the Objector.

It is implicit in para. 7 of the agreed statement of facts that, since no provision was made for work in progress, the partnership accounts taken annually in the years up to 31 March 1968 were based on bills of costs rendered. The purpose of taking the accounts was, of course, to determine the profits of each partner according to their agreed shares. That profit was income.

During the year ended 31 March 1969, however, there was, by reason of the Objector's withdrawal from the firm on 30 September 1968, a departure from that course of dealing. As at that date and solely for that reason accounts were taken which included an amount for work in progress. The earlier course of dealing was therefore varied by agreement in two respects -

• (a) Accounts were taken at the half year instead of at the end of the firm's normal accounting year.
• (b) In taking those accounts an amount for work in progress was included along with the amount of bills of costs rendered.

In my view it is clear from the paragraphs quoted from the agreed statement of facts that those accounts were taken by agreement and that the purpose was to determine the Objector's share of the partnership profits to 30 September 1968. That share, as appears from the Objector's return of income, was $13,440.28 and its character, as determined by the agreement between the Objector and the continuing partners, was income. In my view no other conclusion is possible.

The Objector's contention that the part of that sum that represented his share of the valuation of work in progress was capital cannot stand in the face of the agreement recorded in para. 6 that he ``was entitled to a proportionate share of fees... for work done to the date of dissolution in respect of transactions... not completed''.

Counsel for the Objector submits that the amount in question was the price which the continuing partners agreed to pay the Objector for the vesting in them of a disposable asset which was an amalgam of inchoate rights against the clients whose work was in progress but incomplete. I see nothing in the agreed statement of facts to support the suggestion of a price being paid for a disposable asset. On the contrary the statement in para. 6 is merely that the Objector ``accepted payment... in full settlement of his share of the work in

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progress'' without requiring any adjustment for the two possibilities mentioned in that paragraph. It is no doubt true that one of the results of the agreement, though not expressed in terms, was that the continuing partners alone would receive the fees ultimately charged on the work in progress. But counsel's submission ignores the fact that there was no asset and no rights, inchoate or otherwise, against the clients until the bills were rendered. That, indeed, was the point made by Wilson J. in
Robertson v. Brent and Haggitt [1972] N.Z.L.R. 406 when he said at p. 407 -

``...with regard to work uncompleted on 31 March 1970, no moneys were owing to the firm as at that date, and therefore no asset was then in existence. All that existed at that time in respect of the unfinished work was the probability of future income. It could not become income of the firm until the work was completed, at the earliest. As at 31 March 1970 it had no value as an asset, or as income.''

In explanation of that reference to income it should be noted that the firm there in question had ceased its earlier practice of valuing uncompleted work and including its value in making up their annual accounts. Nor was Wilson J. in that judgment concerned with any question of liability for income tax.

The same reasoning was applied by Barwick C.J. in
Henderson v. F.C. of T. 70 ATC 4016; [1970] 119 C.L.R. 612 when, referring to the services of an accountancy practice, he said at p. 4020 -

``When the service is so far performed that according to the agreement of the parties or in default thereof, according to the general law, a fee or fees have been earned and (sic) it or they will be income derived in the period of time in which it or they have become recoverable. But until that time has arrived, there is, in my opinion, no basis when determining the income derived in a period for estimating the value of the services so far performed but for which payment cannot properly be demanded and treating that value as part of the earnings of the professional practice up to that time and as part of the income derived in that period.''

Barwick C.J. was speaking of the determination of income for the purpose of assessing tax or income from a continuing professional practice, and it is noteworthy that he was careful to add -

``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.''

In the present case the agreed statement of facts shows that the Objector and the continuing partners did take a different course for a different purpose - namely, to arrive at their respective shares of profit from their practice up to the Objector's withdrawal on 30 September 1968.

Mr. Downey referred to
Rutherford v. Commr. of I.R. [1926] 10 Tax Cases 683 where the Court of Session upheld the Revenue's refusal to allow as a deduction from the assessable income of a continuing partner a lump sum paid during the income year to a retiring partner. In that case, however, no accounts were taken at the dissolution and the amount of the payment was agreed quite independently of what might turn out to be the actual profits of the business down to the date of dissolution or during the year as a whole. Here the amount in question and, indeed, the whole share of the Objector from the partnership as returned for tax purposes, was calculated to the day of his withdrawal from the firm.

Even if, in closer accord with the construction Mr. Downey seeks to place upon their agreement, the Objector and the continuing parties had purported to declare in terms that the $3,156.34 was the price for transferring the Objector's right to share in bills of costs to be rendered for work in progress at the date of his withdrawal, I doubt whether the Court would have accepted that because it is a fundamental principle of income tax law that the Court must look to the true nature of the payment.

``...the name given to a transaction by the parties concerned does not necessarily

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decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it.''

(I.R.C. v. Wesleyan and General Assurance Society [1948] 1 All E.R. 555 , 557 per Viscount Simon.)

Mr. Downey sought to attach weight to the fact that the negotiations between the Objector and the continuing partner extended from 3 September to 8 October, submitting that the agreement was therefore not reached until the latter date. But it is clear from the agreed facts that the Objector withdrew from the partnership on 30 September and I cannot see that the fact that negotiations continued for eight days thereafter can effect the conclusiveness of the agreement reached as to his share of profits up to that date.

In my opinion Woodhouse J.'s reasoning and conclusion were correct and I would dismiss the appeal with costs.

The Court being unanimous the appeal is dismissed with costs, $250., and appropriate disbursements to the respondent.