Masterman v. Federal Commissioner of Taxation.Judges:
Supreme Court of New South Wales
In this matter there are eight appeals by the appellant, Matthew MacFarlane, and one by the appellant, Marie Masterman. They come to the Court pursuant to the provisions of sec. 187 of the Income Tax Assessment Act with the appellants having requested the Commissioner to treat their objections to assessments as appeals, and forward them to the Court. They relate in the case of Mr. MacFarlane, to the financial years 1972 to 1979 inclusive and, in the case of Miss Masterman, to the year 1979.
The relevant facts are as follows:
Mr. MacFarlane and Miss Masterman live in a de facto relationship and have lived in that relationship since about 1966.
In about December 1967, after discussions with Miss Masterman, Mr. MacFarlane purchased a service station business held under lease from the Shell Oil Company. Everything was in his name. From that date until August 1976, he and Miss Masterman worked in the business. He did the mechanical work and most of the buying and selling of petrol. She did the accounting, clerical and other paperwork. He took a weekly wage of about $200; she took one of about $150 per week.
The evidence regarding the circumstances in which the business was acquired and operated is that Miss Masterman contributed $2,000 of her savings towards the purchase price of $6,000. Mr. MacFarlane contributed $2,000 from his savings. The balance was borrowed from the Shell Oil Company in the name of Mr. MacFarlane. They claim there was a discussion before the purchase in which they agreed that the service station would be (sic) ``between them in the proportions 50/50''.
They used her wages for living expenses and took his wages home where some of it was kept as cash and some of it, from time to time, was banked in his name in the Rural Bank. Periodically, that money was transferred to the St. George Building Society where it was also kept in his name. Miss Masterman operated on the accounts with his permission. Some of the money acquired from or through the business and kept at home, was used for buying ``black petrol'' for subsequent sale. They also used it for other purposes, for example, Mr. MacFarlane purchased a boat and a car with cash. Investments were acquired by using the surplus money acquired from or through the business. The investments took different forms at different times as they were varied to maximise returns of interest. For example, moneys were transferred from St. George Building Society to a firm of solicitors for investment on first mortgage securities. Always, the investments were in the name of Mr. MacFarlane. The only bank accounts were in the name of Mr. MacFarlane.
Mr. MacFarlane's income tax returns, over the years, contain statements which can only be described as frauds on the Commissioner of
ATC 4017Taxation. The principal instance was his claim that he had employees who did not exist. It was part of a scheme to claim higher overheads and so evade tax. Miss Masterman was party to the frauds.
Similar frauds were practised on the Shell Oil Company in a successful attempt to improperly reduce the rent paid to that company. It, too, was told that there were persons employed in the business who were not employed. Mr. MacFarlane also broke his contract with the Shell Company by purchasing ``black petrol'' from strike-breaking truckdrivers during periods of strikes. That petrol was sold and extra income received.
Between 1972 and 1979, Mr. MacFarlane claimed in his tax returns, deductions for wages of approximately $85,000 in respect of persons who did not exist.
In August 1976, for reasons which, no doubt, were believed would advance their interests, they acquired an off-the-shelf company and changed its name to ``Matthew MacFarlane Pty. Limited''. From August 1976, the company conducted the business.
The company had four issued shares. Mr. MacFarlane had three and Miss Masterman had one. Mr. MacFarlane had the only two voting shares in the company. Save for the incorporation and matters incidental to it, the business was conducted as before. The company put in its returns for the financial years 1977, 1978 and 1979.
As part of the scheme to gain advantage by using the company, a superannuation scheme was brought into existence on 27 June 1977. A deed of trust was executed by the company and signed by Mr. MacFarlane as director, and Miss Masterman as secretary. They practised another fraud by claiming non-existent employees to be beneficiaries under the scheme.
Subsequently, on about 27 November 1979 the Commissioner, through his officers, became aware of what was going on.
A number of interviews took place with Mr. MacFarlane and Miss Masterman and their tax agent, a Mr. Eric Norman. At first, they denied that there were any fictitious employees at all. Similarly, they denied having received extra income from other activities such as the hiring of trailers. These facts were later accepted as true.
After the initial denials were withdrawn and admissions made, the appellants produced a selected number of documents and made certain disclosures. However, even then they made no attempt to make the claim they make now - that at all relevant times, their business activities were conducted in a way based on their domestic relationship and such as, to raise a constructive trust from Mr. MacFarlane to Miss Masterman of 50% of the investments and interest income that came from and had originated in the business and the investments and which were all in Mr. MacFarlane's name. This was only done after advice had been received to that effect. Mr. Bloom, for the Commissioner, says it is a ``recent invention'' and something that I should not accept.
The submission by the appellants is, that notwithstanding the legal forms given to the transactions, the reality was different. They say they cohabited over the entire period and entered into the business venture in a joint way and regarded the business as their joint business and regarded the investments and income from the investments as belonging to them equally. They say that the frauds having been discovered and the wrongly-induced assessments corrected, the assessments should now be corrected again and reduced to take account of the divided or ``split'' income of Mr. MacFarlane.
During the early stages of the investigation, one of the Commissioner's officers invited Mr. MacFarlane to put before him anything which might lead to a result that the undisclosed income should not all be taxed in Mr. MacFarlane's hands and should be split. Nothing was forthcoming and the explanation now is, ``Well we couldn't find one at the time''.
There is another point which I should note. Sometime after the investigations began in late 1979, Mr. MacFarlane wrote to the Commissioner's officers, a letter dated 4 July 1960. It is Ex. 3. In that letter, he gave an estimate of $30,000 which he had received as profit on distillate and petrol sales and which he had not disclosed in his income. This was apart from his failure to account for moneys claimed to have been paid as wages.
Armed with the information in his possession, the Commissioner proceeded as follows:
On 4 January 1981 and 2 February 1981, he gave notices of amended assessments for the
ATC 4018years 1972 to 1979 inclusive to Mr. MacFarlane. He reassessed Miss Masterman for the year 1979. The reassessments for the years 1972 to 1976 (the pre-company formation years) were reassessed to take account of the fraudulent deductions and the omitted income. The reassessments for the years 1977 to 1979 were made on the basis of adjustments to the income of the company. The Commissioner wrote back into the company ``returns'' for the years 1977 to 1979, the omitted items, and converted what had been shown as a loss into a taxable income. The company paid the tax on that income and the penalties that were imposed. The Commissioner then ``deemed'' the amounts received by Mr. MacFarlane and Miss Masterman in the years after the formation of the company to have been dividends paid by the company to them for the years 1977 to 1979. The deemed dividends are pursuant to sec. 108 of the Act. Section 44 was used to make it assessable income.
The case presented on behalf of the appellants is first that the income, by way of interest, that was received during the years 1972 to 1976 from the investments in the name of Mr. MacFarlane, was a joint income that went to them in equal shares. Such result is claimed to be a consequence of a constructive trust which ``governed'' the relationship between them and effectively halved the money received by Mr. MacFarlane during those years.
The second submission is that the amounts which the Commissioner deemed to be dividends paid to them by the company since its formation, were not justified because sec. 108, and particularly sec. 44, are not applicable.
I proceed to consider the constructive trust argument.
A threshold question is whether I believe the appellants. If I do not, then the case for a constructive trust fails. There is nothing attractive in the position they advance and it is tempting to dismiss their claim at the outset on the basis that I do not accept their evidence. They have lied to the Commissioner and they have lied to the Shell Oil Company. Mr. Gelski, who appears for them, accepts that the onus of proving a constructive trust is upon them. He accepts that given the previous frauds, it is a brave position to adopt. Notwithstanding all that can be said against them, however, on balance and with misgivings, I find myself accepting the basic description they give of their domestic, business and financial arrangements.
So the next question is, does the law permit them to raise successfully the constructive trust argument so that it has the result contended for? The argument begins with the nature of a constructive trust.
Paragraph 1301 of Jacobs' Law of Trusts, 4th ed., states:
``A constructive trust... is raised by operation of law without reference to the intention of the parties... Constructive trusts arise where no trust has directly or indirectly been declared, but where, according to the principles of equity, it would be a fraud for the person on whom the court imposes the trust to assert a beneficial ownership.''
Mr. Gelski cited, inter alia,
Pettitt v. Pettitt (1970) A.C. 777;
Gissing v. Gissing (1971) A.C. 886;
Olsen v. Olsen (1977) 1 N.S.W.L.R. 189 et seq. and
Allen v. Snyder (1977) 2 N.S.W.L.R. 685 per Glass J.A. at pp. 690-691 to support the proposition that a trust can be held to exist or operate when persons have a long history of cohabitation.
Mr. Bloom, for the Commissioner, basically submitted that the appellants' credit was such that I should not accept the evidence. He submitted that there is no such trust or if there was, it was only an inchoate trust. He submitted that the doctrine of constructive trusts was such that it would only be invoked by a Court of Equity on an application by Miss Masterman against Mr. MacFarlane, if Mr. MacFarlane sought to act unconscionably or inequitably against Miss Masterman and he submitted that until such a situation occurred, a Court would have to have regard to the legal forms adopted by the appellants. He also submitted that the principles of estoppel prevented the setting up of a state of affairs different from that which was represented to the Commissioner. I was referred to Spencer, Bower and Turner Estoppel by Representation, 3rd ed. (1977) at p. 27 and
Thompson v. Palmer (1933) 49 C.L.R. 507 at p. 537 and
Grundt v. The Great Boulder Pty. Gold Mines Limited (1938) 59 C.L.R. 641 at pp. 674-675. It was put that should the appellants now be permitted to assert (contrary to the represented facts) that the income should be divided because it was derived by both of them and succeed, the Commissioner would suffer detriment not because of the reduced tax but
ATC 4019because it would be necessary for him to amend again his assessments for the years 1972-1979. It was submitted that the Commissioner's power to make amended assessments was limited. I was referred to sec. 170 of the Income Tax Assessment Act.
No submission was put that an attempt to invoke a constructive trust is an attempt to seek an equitable remedy and that a person seeking such relief should come with clean hands or that there is any discretionary question involved which should be answered in the negative. Such questions are enticing and cannot be entirely disregarded, but I make no further comment on them.
From the authorities, I single out first, the words of Helsham C.J. in Eq., in
Pearce v. Pearce (1977) 1 N.S.W.L.R. 170 at p. 175 which was a case dealing with sec. 35 of the Defence Service Homes Act:
``I have already held in
Maurice v. Lyons (1969) 89 W.N. (Pt. 1) (N.S.W.) 385 at p. 393 et seq. that a transfer purported to be made in contravention of the section is illegal, in the sense that it is rendered by law ineffectual, and I see no reason to depart from that conclusion; s. 35(4) would tend to reinforce that view. A creation of an interest in land by way of trust is, I believe, a disposition of an interest in land; again I see no reason to depart from the views that I previously expressed as to this, and the authorities to which I referred to support it. An imputed trust, to use a modern expression, or an implied trust or a trust arising by operation of law in relation to land is no less a disposition of an interest in land than is an express trust.
I think it would be taking too narrow a view of s. 35 to label the creation of trust by an express declaration as a transaction by which a person disposes of an interest in land, which in my view it clearly would be, yet to say that a trust which arises from the acts of the trustee and cestui que trust with the intention that the trust property should be used for their joint benefit is not a transaction by which a person disposes of an interest in land. Lord Diplock seems to characterize it as such. In Gissing v. Gissing (1971) A.C. 886 at p. 905, his Lordship said: `A resulting, implied or constructive trust - and it is unnecessary for present purposes to distinguish between these three classes of trust - is created by a transaction between the trustee and the cestui que trust in connection with the acquisition by the trustee of a legal estate in land, whenever the trustee has so conducted himself that it would be inequitable to allow him to deny to the cestui que trust a beneficial interest in the land acquired. And he will be held so to have conducted himself if by his words or conduct he has induced the cestui que to act to his own detriment in the reasonable belief that by so acting he was acquiring a beneficial interest in the land.'
Lord Denning M.R. relied on this passage when using the expression imputed trust see
Eves v. Eves (1975) 3 All E.R. 768 at p. 771. It would be quite an unsatisfactory result for the section to operate so as to prevent an interest by way of trust from arising when an owner of land solemnly declared that he held it on trust for himself and his wife or mistress jointly, but not to prevent the trust from arising when he refrained from so expressing himself, and there was a common intention that he should be such a trustee. I do not believe that the section does operate in this way.
I am constrained, therefore, to hold that an interest by way of trust can arise after 1961 in circumstances such as the present where the so called trust property is land subject to a mortgage to the Director of War Service Homes.''
I also refer to
Commr. of Stamp Duties (Qld.) v. Livingstone (1964) 112 C.L.R. 12 where at pp. 22-23, it is said:
``... Equity... calls into existence and protects equitable rights and interests in property only where their recognition has been found to be required in order to give effect to its doctrines.''
That is a basic aspect of the problem that can be put in other ways. ``For example, Equitable Estates and interests arise because Equity acts in personam.'' In
Glenn v. F.C. of Land Tax (1915) 20 C.L.R. 490, Isaacs J. said at pp. 502-503:
``... the matter... can only be resolved on principle by recalling the true meaning of an equitable estate and by examining the ground upon which Courts of equity exercise the jurisdiction that was exercised in
Harbin v. Masterman (1896) 1 Ch., 351.
It is a fundamental rule (see, for instance, Butler's note III. to Coke upon Littleton, 290(b), and
Ewing v. Orr Ewing 9 App. Cas., 34, at p. 40 that equity acts in personam, and that the rights it recognizes, and enforces, are not rights in rem, but rights in personam. `Trusts,' says Lindley L.J. in In
re Williams (1897) 2 Ch., 12, at p. 18, are `equitable obligations to deal with property in a particular way'. Trustees have no equitable interest: that belongs to the person or persons for whom the benefit is intended. The right of any cestui que trust to have the property dealt with as the trust requires is regarded for the purposes of equity as equivalent to a right in the property itself, but only commensurate with his particular right in personam. In
Pearson v. Lane 17 Ves., 101, at p. 104, Sir William Grant makes this plain. He says: -
`The equitable interest in that estate must have resided somewhere: the trustees themselves could not be the beneficial owners; and, if they were mere trustees, there must have been some cestui que trust. In order to ascertain who they are, in such a case a Court of equity inquires, for whose benefit the trust was created; and determines, that those, who are the objects of the trust, have the interest in the thing, which is the subject of it'.''
Samuels J.A. in Allen v. Snyder (supra) at p. 697 referred to the same thought in the following way:
``It is commonplace legal technique to apply established concepts to new purposes. Disputes about family assets... invariably concerned a claim by one partner to a beneficial interest in property legally owned by the other... the device of the trust appeared to offer the appropriate methodology. In order to raise a trust, it was necessary to find evidence of an intention that the parties should share the beneficial interest... Evidence of express agreement was almost always lacking, but a common intention that the parties should share the beneficial ownership could be inferred from words or conduct of a less explicit kind. There were cases, however - or it was contemplated that there might be - where there was no material at all from which such an inference could reasonably be drawn. The parties had never thought about the matter; and their conduct was wholly equivocal. An attempt was made to solve this problem by the invention of what I might call the trust by imputation. Here the inquiry was: `What reasonable people in the shoes of the spouses would have agreed, if they had directed their minds to the question...' The answer might require `imputing to the parties an intention to agree to share even where the evidence gives no ground for such an inference'. Much the same solution might be furnished by less radical means by adopting the technique by which a contractual term is implied in order to accommodate an event which the parties have not expressly foreseen.
There remained a further problem which was not, however, if I may respectfully suggest it, clearly perceived. To what class of trust would this process of inference or imputation give rise? If it were regarded as an express or declared trust, that, in almost all cases, would fail for want of writing: Conveyancing Act, 1919. s. 23C(1)(a); Law of Property Act, 1925 (lmp.), s. 53(1). So it had to be a resulting, implied or constructive trust, none of which requires that formality. This necessity, recognized by Lord Diplock in Gissing v. Gissing, has led to some strange results. The first is the apparent amalgamation of resulting and constructive trusts into one congruent class. The second is the assumption that each of them is founded upon common intention. And the third is that a trust founded upon common intention, inferred from words or conduct, is to be regarded as an implied trust.
I approach any attempt at classification in this field with a marked degree of trepidation. I would, however, have thought it tolerably plain that there is a clear distinction between a resulting trust and a constructive trust. There is the classic definition of a resulting trust by Eyre C.B. in Dyer v. Dyer, which Lord Upjohn quoted with approval in Pettitt v. Pettitt. I add the statements by Jordan C.J. in Re Kerrigan; Ex parte Jones and by Professor A.W. Scott in his The Law of Trusts, 3rd ed., vol. V, s. 404.2. From this it appears that a resulting trust depends upon the presumption, or inference, that the settlor intended the legal owner to hold the beneficial title in trust for him: per Jordan C.J., or that he did not intend the legal owner to have the beneficial
ATC 4021interest in the property, as Professor Scott puts it. Whether affirmative or negative, it is still a matter of intention; and, whether the presumption which raises the inference of intention is strictly one of fact or law, the state of fact so arising is rebuttable by evidence to the contrary effect. A constructive trust, however, does not depend upon intention. In Jacobs' Law of Trust in Australia, 4th ed., p. 232 its character is described thus: `A constructive trust differs from an express trust in that it is raised by operation of law without reference to the intentions of the parties concerned and, certainly, in the cases which come before the courts, contrary to the intentions and desires of one of the parties; while it differs from a resulting trust in that, in the case of a resulting trust, although the resulting trust arises by operation of law, the courts imply that a trust was actually intended and in the face of evidence to the contrary will discard the implication. However, in the case of a constructive trust the intention of the parties is irrelevant. Constructive trusts arise where no trust has directly or indirectly been declared, but where, according to the principles of equity, it would be a fraud for the person on whom the court imposes the trust to assert a beneficial ownership.'
The definition offered by Professor Scott, op. cit., s. 404.2, is in much the same terms. Accordingly, not only are resulting and constructive trusts to be regarded as distinct, but the distinction mainly resides in the necessity for common intention in the one case, and its general irrelevance in the other. Whatever the precise sense in which the word `implied' is used in the collocation `resulting, implied or constructive' (and it probably means `presumed': see Jacobs, op. cit., at p. 47. Professor Scott does not recognize implied trusts as a separate classification: op. cit., vol. I, s. 2.1) it cannot. I would think, mean a trust raised by an intention yielded by inference from the words and conduct of the parties. An intention derived in this way would lead to the creation of an express trust. It is yielded by applying the same method as that which finds express intention to contract, or express contractual terms, by inference from conduct, or from language which is indirect. Moreover, if A holds property in which B claims a beneficial interest which A denies, recourse may be had to parol evidence in order prove the existence of a trust, because equity will not permit a statute requiring writing to be used as an instrument of fraud: Rochefoucauld v. Boustead; Cadd v. Cadd, per Isaacs J. In such cases, the constructive trust may represent the remedy by which the plaintiff seeks to vindicate an express trust founded upon a common intention which the defendant later repudiates. Or it may be seen as a separate class of trust raised by the existence of some fiduciary or other relevant relationship between the parties, or by the defendant's unconscionable conduct. The distinction is certainly not without importance and difficulty: see the ambiguity demonstrated in Bannister v. Bannister. It is, however, not of direct relevance in the present case, save in one respect. The failure to pay regard to the principles which govern the constructive trust has led to its employment as a device for the separation of family assets in circumstances where its doctrine has no plausible operation.''
All this reasoning is against the appellants and notwithstanding Mr. Gelski's submission that a constructive trust has been brought into being, I would have thought the opposite was the case. There is no evidence of any fraud being perpetrated by Mr. MacFarlane on Miss Masterman. There is no suggestion of any unconscionable behaviour by him towards her. If there was any trust, it was an implied trust although this has not been put. An equitable trust or interest does not vest in its owner rights that are maintainable against all the world although it may enable a person to enforce a claim against some definite person or persons. It is against a person bound by the equitable interest, that the person entitled to it can be regarded as being in equity, the owner (see Sir Frederick Jordan Chapters on Equity at p. 48). This would not assist Mr. MacFarlane. I note in passing another maxim that ``Equity looks to intent'' rather than ``form''. In this case, the ``intent'' of both appellants was to represent to the world that the income was owned and received by Mr. MacFarlane.
Behind the maxims I have referred to and the reasoning lies the need to soften and accommodate the rigours of the common law. The power of Equity does not displace the law.
ATC 4022it follows the law and modifies the operation of the law. The doctrine of ``constructive trusts'' has to be seen in that context.
In this case, there was no legally enforceable agreement between the appellants. There was a relationship that may or may not have permitted equitable relief being given if one or the other had used or abused his or her legal rights unconscionably but that is all. The Commissioner was a stranger to their relationship and their supposed true intentions and had no notice of them. He only knew of their stated intentions.
It would be an extraordinary thing if, after all these years of representing one state of affairs, the appellants could come to this Court and successfully argue against the legal forms that they had freely agreed should govern their business activities. There is no dispute between them. Their dispute is with the Commissioner and the doctrine of constructive trusts has no application. It only operates if it would be a fraud for the one of them, Mr. MacFarlane in this case, on whom the Court might impose a trust, to claim a beneficial ownership.
I find that no constructive trust can be raised such as would permit the appellants to use it in their dispute with the Commissioner and reduce tax, which would otherwise be due. It is an attempt to split an income by using a principle that has a proper role in other distinctly limited situations that are different from the one being considered. Mr. Bloom's description ``inchoate'' may not be totally apt, but it describes the flaw in the appellants' argument.
I move to consider the estoppel submissions.
The only obstacle said by the appellants to prevent the operation of an estoppel was that the false representations did not result in the Commissioner altering his position to his detriment. All the other elements required of an estoppel were accepted. It was submitted that the Commissioner suffered no detriment and it was put that, even at this late stage, he could reassess for the years in question. Mr. Gelski submitted that sec. 170(2) meant that there would be no detriment because of the fraud and evasion provision and he accepted that fraud was present. Section 170(1) and (2) is in the following terms:
``Amendment of assessments
170(1) The Commissioner may, subject to this section, at any time amend any assessment by making such alterations therein or additions thereto as he thinks necessary, notwithstanding that tax may have been paid in respect of the assessment.
(2) Where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax, the Commissioner may -
- (a) where he is of opinion that the avoidance of tax is due to fraud or evasion - at any time; and
- (b) in any other case - within 6 years from the date upon which the tax became due and payable under the assessment,
amend the assessment by making such alterations therein or additions thereto as he thinks necessary to correct an error in calculation or a mistake of fact or to prevent avoidance of tax as the case may be.''
The subject of detriment is dealt with in Spencer, Bower and Turner Estoppel by Representation, 3rd ed. at p. 104:
``What amounts to alteration of position?
110. The alteration of position which it is incumbent on the representee to establish must involve a change in the practical or business affairs or condition of the representee. Similarly the `damage', `loss', or `prejudice' which the representee must show to have resulted, in a natural chain of causation, from the alteration of position means, and means only, actual and temporal damage, - some loss of money or money's worth, which admits of quantification and assessment. But, provided the above characteristic is present, alteration of position to the prejudice of the representee may assume an infinite variety of forms: It is not limited to such changes as a direct, instantaneous, and palpable loss of money on a single payment or transaction, which is the most ordinary instance, but includes also those in which the detriment, though less gross and obvious and easily calculable, is equally real, such as (for example) the following; coming under a contractual liability to deliver property to a third person at a future date; registration by a corporation of a person as a member thereof, supply of goods on credit which otherwise would not
ATC 4023have been given, incurring responsibilities as a member of a mutual society to other members, buying back goods already sold; drawing cheques on the faith of a supposed balance which, there being no such balance are dishonoured, to the damage of the customer's commercial credit, and executing works and incurring expense upon, or in relation to, land which the representee is encouraged by the representor's conduct to believe that he is entitled to, or interested in. There should be added to this list of illustrations that very important type of case, presenting many varieties, in which the representor has secured for himself an advantage, involving a corresponding and proportionate disadvantage to the representee, by asserting (whether in words, or by acts) the validity, or (as the case may be) the invalidity of, or putting a particular construction upon, an instrument or transaction, such as a deed of assignment for the benefit of creditors, a deed of separation, a will, a provision of a statute, proceeding or step in the course or conduct of litigation, or a negotiation for a loan - in New Zealand the due forfeiture of shares for non-payment of calls - and other transactions.''
Fenner v. Blake (1900) 1 Q.B. 426, Div. Ct. Channell J. said:
``It seems to me... the facts raise an ordinary case of estoppel. The defendant, having agreed to give up the premises in June, assented to the landlord selling the premises with the right of the purchaser to possession in June. The landlord accordingly sold to a purchaser with a right to possession at that date, and thereby rendered himself liable to an action at the suit of the purchaser, if he was unable to give him possession at that date. Under these circumstances, it seems clear that the tenant is estopped from saying that his tenancy, whatever it was in fact, was not a tenancy ending in June.''
Being liable can mean being at risk. Spencer, Bower and Turner go on:
``... It is further to be noted that a representee is deemed to have altered his position, not only when he has adopted a positive course of action which he would not have adopted but for his belief in the truth of the representation, but also when he has abstained from taking measures for his protection, security or advantage which he had in contemplation, and which, but for the representation, he would have taken; or when he has persisted in a line of conduct which otherwise he would have abandoned, or was on the point of abandoning. This kind of change, indeed, may even in a strictly liberal sense be fairly described as an alteration of position, if the term `position' be understood as comprising a man's plans, schemes, and projects, as well as his possessions - his attitude towards the future as well as the state of his affairs at the moment. But, be this as it may, there is no doubt that, in contemplation of law, `laying to rest' or `quieting,' to use the expressions most frequently applied to this class of case in the authorities, is one of the recognised modes of altering a man's position. Illustrations are abundant. Thus, a representee has been held to have altered his position (in the above sense) where he has, on the faith of the representation, omitted to protect himself from the consequences of a void or frustrated transaction by effecting the object of that transaction elsewhere, or by other means, as he would have done but for his belief in its validity and efficacy; or where he has refrained from taking active measures to enforce payment against a person from whom there was some prospect of recovering the money, and has rested content with the liability of one from whom recovery is commercially and practically impossible, by reason of his insolvency, escape from the jurisdiction, or otherwise, or against whom the remedies available are imperilled or where, even though there is no such impossibility or improbability of recovering the money ultimately, trouble, expense, loss of interest and delay, in the meantime, are involved, as must generally happen where property in possession, or money in hand, or easily and certainly available, is converted into a mere chose in action; or where he has been lulled into a neglect of the steps necessary for his protection which were provided for in the instrument constituting the agreement between the parties. It will be noticed that in all the authorities from which the above illustrations have been taken, the `laying to rest' was of a nature to, and did, result in damage or detriment to the representee...''
Dixon v. Kennaway & Co. Ltd. (1900) 1 Ch. 833, Farwell J. at p. 838 said:
``It is plain that the phrase `alter his position' does not mean that an active alteration is necessary but that it is sufficient that the person to whom the statement is made rests satisfied with the position taken up by him in reliance on the statement, so that he suffers loss.''
Delay can obviously be a detriment. Wasted effort and thrown away costs can be a detriment. Delay produces the risk of a change of circumstances leading to risk of default in payment of subsequent correct assessments. Detriment can be the risks associated with litigation in proving fraud or evasion.
Commonsense would indicate that the appellants have benefited from the delay caused by their fraudulent representation and will continue to benefit by any further delay that results if the Commissioner is obliged to reassess on either the basis of sec. 170(2)(a) for fraud or evasion, or on perhaps the basis of undistributed profits tax. If delay is a benefit to a debtor taxpayer there is detriment to a creditor Commissioner.
The appeals in respect of the years before the incorporation of the company fail.
I move to the issue in the case that arises from the Commissioner's decision to impute taxable income to Mr. MacFarlane for the years 1977, 1978 and 1979 by including in the income, amounts deemed to be dividends by virtue of sec. 108 of the Act. The amounts for Mr. MacFarlane are $19,962 in 1977, $21,019 in 1978 and $5,716 in 1979. The same was done in Miss Masterman's case - the amount being $1,018 for the year 1979.
The appellant's primary submission is that, even assuming all the principal conditions set out in sec. 108 are complied with, the consequence is merely to deem an amount a dividend and not in itself sufficient to make it assessable income. The submission is that before it can be included in assessable income, sec. 44(1) requires that the deemed dividends be ``paid out of profits''. However, it was also submitted that no payment had been ``made by the company'' so that the sec. 108 argument failed in limine.
``Assessable income'' is defined in sec. 6. It means ``all the amounts which under the provisions of the Act are included in the assessable income''.
Dividends are also defined in sec. 6 as including:
- ``(a) any distribution made by a company to any of its shareholders, whether in money or other property;
- (b) any amount credited by a company to any of its shareholders as shareholders; and
- (c) the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits,
but does not include -
- (d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of sub-section (4), does not apply), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of a share premium account of the company;
- (e) moneys paid or credited, or property distributed, by a company by way of repayment by the company of moneys paid up on a share except to the extent that -
- (i) if the share is cancelled or redeemed - the amount those moneys or the value of that property, as the case may be, is greater than the amount to which the share was paid up immediately before the cancellation or redemption; or
- (ii) in any other case - the amount of those moneys or the value of that property, as the case may be, is greater than the amount by which the amount to which the share was paid up immediately before the repayment exceeds the amount to which the share is paid up immediately after the repayment; or
- (f) a reversionary bonus on a policy of life-assurance.''
Section 108 is as follows:
``Loans to shareholders
108(1) If amounts are paid or assets distributed by a private company to any of its shareholders by way of advances or loans, or payments are made by the company on behalf of, or for the individual benefit of, any of its shareholders, so much, if any, of the amount or value of those advances, loans or payments, as, in the opinion of the Commissioner, represents distributions of income shall, for the purposes of this Act other than the purposes of Division 11A of Part III and Division 4 of Part VI, be deemed to be dividends paid by the company on the last day of the year of income of the company in which the payment or distribution is made.
(2) Where the amount or value of an advance, loan or payment is deemed, under sub-section (1), to be a dividend paid by a company to a shareholder, and the company subsequently sets off the whole or a part of a dividend distributed by it in satisfaction in whole or in part of that advance, loan or payment, that dividend shall, to the extent to which it is so set off, be deemed not to be a dividend for any purpose of this Act.''
The terms of sec. 44(1) are:
``44(1) The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) shall, subject to this section and to section 128D -
- (a) if he is a resident - include dividends paid to him by the company out of profits derived by it from any source; and
- (b) if he is non-resident - include dividends paid to him by the company to the extent to which they are paid out of profits derived by it from sources in Australia.''
I was also referred to sec. 376 of the Companies Act which is in the following terms:
``376(1) No dividend shall be payable to the shareholders of any company except out of profits or pursuant to section 60.
(2) Every director or manager of a company who wilfully pays or permits to be paid any dividend out of what he knows is not profits except pursuant to section 60 -
- (a) shall without prejudice to any other liability be guilty of an offence against this Act; and
- (b) shall also be liable to the creditors of the company for the amount of the debts due by the company to them respectively to the extent by which the dividends so paid have exceeded the profits and such amount may be recovered by the creditors or the liquidators suing on behalf of the creditors.
Penalty: One thousand dollars.
(3) If the whole amount is recovered from one director or from the manager he may recover contribution against any other person liable who has directed or consented to such payment.
(4) No liability by this section imposed on any person shall on the death of such person extend or pass to his executors or administrators nor shall the estate of any such person after his decease be made liable under this section.
(5) In this section `dividend' includes bonus and payment by way of bonus.''
The appellants accept that sec. 6 contemplates a situation where there is a repayment of capital which can still be a dividend.
They rely first upon
R.W. Rutherford & Anor. v. F.C. of T. 76 ATC 4304, where at p. 4308 Sheppard J. [quoted Dixon C.J. as saying]:
``Section 25(1) begins so to speak at bedrock with the simple notion of income as a known legal and commercial term. Provision after provision of the Act then says that this or that shall be part of the assessable income. One such provision is sec. 44 which deals with dividends and says what dividends shall and what shall not be included in the assessable income. From the legal conception of `income' you can work forward through sec. 25(1), to `assessable income'. But the one thing which to may mind you cannot do is to work backward from what goes by express provision into `assessable income' and use it
ATC 4026to control the basal conception of `income'.''
[Sheppard J. continued at p. 4309:]
``It follows that unless the payments were in fact paid out of profits they ought not to have been included in the taxpayers' assessable income.
Support for this view is, I think, also to be found in the decision of the High Court in
F.C. of T. v. Uther (1965) 112 C.L.R. 630. Taylor J., who agreed with the conclusion reached by Owen J. at first instance (1964) 111 C.L.R. 318 thought the case was indistinguishable from
F.C. of T. v. Blakely (1951) 82 C.L.R. 388. Put shortly the case involved the question of whether or not a return of capital which fell within the definition of `dividend' in sec. 6 of the Act ought to have been included in the assessable income of the taxpayer. At p. 641 his Honour said:
- `On the assumptions which I have made there remains a difficulty in the way of the appellant which I regard as insuperable. This difficulty springs initially from the provisions of sec. 44(1) of the Act which provides that the assessable income of a shareholder, in the case of a resident, includes dividends paid to him by the company out of profits derived by it from any source. In short, to constitute assessable income the amount received by the shareholder must be not only a dividend within the meaning assigned to that term by the Act; it must be a dividend paid out of profits derived by the company.'
His Honour referred to sec. 47 which deemed the distributions there referred to to be paid out of profits and contrasted in the context of the then state of the Act, the situation which prevailed in relation to a sec. 47 payment and payments which were defined as dividends but which were not deemed to have been paid out of profits. It is to be noted that sec. 44(1B) was unquestionably inserted to overcome the effect of the decision in Uther's case.
In a situation such as this, one of course looks for a situation to which sec. 108 could be directed. The provisions of it operate for the purposes of the whole Act, other than for the purposes of the two Divisions which are excepted from its purview. I confess to an inability myself to perceive any provision of the Act to which it could apply except the provisions contained in Div. 7 of Pt. III of the Act in which sec. 108 itself appears. The provisions in question are those relating to the payment of additional tax by private companies upon undistributed profits for a particular year - see sec. 104 and 105A. If it had been the intention of the legislature that the section should operate only in respect of undistributed profits tax one would have expected sec. 108 to be limited to the purposes of Div. 7 of Pt. III. However, the same applies to the payments and distributions notionally included in the definition of `dividend' in sec. 6. I see no difference in effect in defining payments, which are not in ordinary language to be regarded as dividends, nevertheless to be dividends and a provision, such as sec. 108, which enables the Commissioner to deem certain payments to be dividends. Both involve legislative devices by means of which payments and distributions which are not, in ordinary language, of a particular kind are, for the purposes of the legislation, turned into payments or distributions of the kind in question.
It follows from what I have said that the taxpayers are entitled to succeed unless the payments in question were in fact paid out of profits. I am satisfied that they were not. It is to be emphasised that it is not enough that the payments be paid out of income; they must be paid out of profits. At the time that they were paid the profits, if any, of the companies in question had not been determined, it is probable that the sums of $19,800 and $5,000 were paid out of the earnings of the companies but it does not follow that they were paid out of profits. The moneys were paid during an income year and not out of any fund which could be regarded as a profit or dividend fund; see Principles of Company Law - H.A.J. Ford (1974) pp. 186-187, 4 Modern Law Review 273 et seq.
The taxpayers also relied upon F.C. of T. v. Blakely (1951) 82 C.L.R. 388 and upon Uther's case for the proposition that one has to look, in determining whether a payment was paid out of profits or not, at the nature or character of the payment in the hands of the payee. There is no question but that the payments of $19,800 and $5,000 are to be
ATC 4027regarded in the hands of the taxpayers as advances of capital. In the light of the decision to which I have come on the other matters argued it is not necessary for me to express a view on this submission and I do not.
For the reasons I have given, the payments made were not actually paid, nor can they be deemed to have been paid, out of profits. The taxpayers' appeals ought therefore be allowed.''
They refer also to the judgment of Lockhart and Fitzgerald JJ. in
Slater Holdings Ltd. v. F.C. of T. (No. 2) 83 ATC 4251 at pp. 4265 and 4268.
The passages relied on are as follows:
``It is also plain that in his Honour's view it was unnecessary to have regard to what the nature of the receipt would be in the hands of a taxpayer but for para.44(1)(a), and that a distribution by a company to a taxpayer forms part of the assessable income of a taxpayer insofar as it represents the profits as distinct from the capital of the company.
However, Fullagar J., with whom Dixon J. agreed, was of a quite different view. The importance of Fullagar J.'s judgment for present purposes is such that it is appropriate to set out the critical passages:
- `The Commissioner's argument may be stated shortly thus. When you look at the relevant balance sheet of the company, you see that the assets received by the shareholders represent in part capital originally paid up and in part accumulated profits of the company. What was received by each shareholder, therefore, represents in part profits made by the company, and to the extent to which it does represent those profits it is assessable income in his or her hands.
- I would not be prepared to deny that there was a `distribution' in this case. There was clearly a `distribution' in Stevenson's case. But the point in this case is, as it was in Stevenson's case, as to the nature of the receipt. There was not a distribution of profits, or a distribution out of profits. What was received was capital. There was no detachment or severance from the funds of the company of money or other assets as representing a profit made by the company. There was simply a realization of a share investment (per Starke J. in
Thornett's case (1938) 59 C.L.R. at p. 799). `The shareholders... receive nothing but the ultimate capital value of the intangible property constituted by the shares... The shareholder simply receives his proper proportion of a total net fund without distinction in respect of the source of its components, and he receives it in replacement of for his share'... There is, in my opinion, nothing in the Act which gives the character of income to this receipt, which was according to general principles, a capital receipt.'
In Uther's case a reduction of capital involving the cancellation of issued shares was duly confirmed by the Supreme Court of Victoria. The taxpayer, a shareholder in the company, received his due proportion of the amount distributed by the company in respect of the cancelled shares. The amount which he received in respect of each share exceeded the amount paid up thereon. The Commissioner contended that the effect of subsec. 44(1) when read with the former definition of `dividend' in subsec. 6(1) was to make what otherwise would have been capital receipts in the hands of shareholders receipts of income for the purposes of the Act. The then definition of `dividend', so far as relevant, was:
- ``Dividend' includes any distribution made by a company to its shareholders... but does not include a return of paid up capital.'
Owen J. in a judgment which contains a most useful review of many of the earlier cases, held, following Stevenson, Thornett and Blakely, that no part of the amount paid to the shareholders pursuant to the reduction of capital could be said to be paid out of profits derived by the company. His Honour's judgment was affirmed by Taylor and Menzies JJ., Kitto J. dissenting.
Taylor and Menzies JJ. held that no part of the amount paid to the shareholders pursuant to the reduction of capital could be said to be a dividend paid out of profits derived by the company.
... a distribution of an amount of assets, although in a coloquial sense representing or containing profits, is a distribution of capital.
Menzies J. was also of the opinion that the judgment of Fullagar J. in Blakely's case led to the conclusion that the distribution in Uther's case was not a distribution of or out of profits and that what was received by the shareholders was capital.
Kitto J., in a powerful dissent, took a fundamentally different view from the majority. In his view the test under subsec. 44(1) is not concerned with the nature of the receipt in the hands of the recipient/shareholder but with the nature of the source from which the company makes the distribution.
It is obvious that, even if there is room for criticism of the judgment of Fullagar J. in Blakely's case, this Court is bound to apply what was there decided. Indeed, in Uther's case the High Court declined to consider it.
... In our opinion the principles of Blakely's case and Uther's case apply...
The true nature of the payment made... to the taxpayer is of capital not income. The taxpayer simply received its proper proportion of the total available surplus of assets over liabilities without distinction as to the source of its components. There was no detachment or reverence from the funds of the company as representing a profit made by it... The taxpayer received an entire and indivisible sum representing the value of its interest in (the company).
The question whether profits spoken of by para. 44(1)(a) extend to capital as well as revenue profits is a matter of obvious importance... We respectfully agree with the view of the learned primary Judge that
Harrowell v. F.C. of T. (1967) 116 C.L.R. 607)... does not establish that para. 44(1)(a) of the Act operates only where a dividend is paid out of profits derived on revenue account.
There are express statements by Kitto J. in Uther's case at p. 637 that `profits' within the meaning of para. 44(1)(a) include capital profits as well as profit on revenue account... We question whether it is possible to separate Kitto J.'s dicta on this point from the foundation of his dissent on the meaning and operation of para. 44(1)(a) generally. We note that none of the other members of the High Court who addressed themselves to para. 44(1)(a) or its counterparts in the judgments to which we were referred attempted to differentiate between capital and revenue profits.
The real difficulty with this question... is that it cannot be entirely divorced from the reasoning which underlies the established view that certain distributions by companies to their members are not made assessable income by para. 44(1)(a) of the Act although paid out of profits. While the law remains as it presently is, any payment by a company to one of its members which is a capital receipt in the hands of the member according to ordinary concepts is outside the operation of para. 44(1)(a). It remains for us an open question whether, in these circumstances the nature of the profit derived by the company may not, in some circumstances at least, be a relevant consideration.''
Prompted by the facts in this case, I note that Latham C.J. in
Blakely's case (1951) 82 C.L.R. 388, said at p. 398:
``... in my opinion an appropriation by shareholders of the assets of a company by their own act cannot be regarded as a distribution by the company. The shareholders would be subject to estoppel inter se, but this would not alter the fact that the company did nothing. It did not make any distribution of anything to anybody. The shareholders took and wrongly took the assets of the company.''
Dixon J. agreed with Fullagar J. in Blakely's case and said at p. 406:
``I would not be prepared to deny there was a `distribution' in the case.''
Blakely's case was considered in
Uther v. F.C. of T. (1964) 111 C.L.R. 318. The judgment of Owen J. at p. 324 confirms that the majority in Blakely's case did not expressly accept the reasoning of Latham C.J. that there had not been a payment or a distribution. In other respects, Uther's case throws little light on my problem.
The majority decision in Blakely's case, is thus consistent with the submission that in the case I am considering, there was a distribution or a payment ``made by the company'', even though the moneys were ``received'' by the shareholders wrongly. Notwithstanding the illegality, the moneys were paid by the
ATC 4029company. The crucial question remains - were they moneys paid out of profits - of either a capital or revenue kind?
Mr. Bloom quoted from Lord Russell in
Hill v. Permanent Trustee Co. of N.S.W. (1930) A.C. 720 at p. 731:
``A limited company not in liquidation, can make no payment by way of return of capital to its shareholders except as a step in an authorised reduction of capital. Any other payment made by it by means of which it parts with money to the shareholders can only be made by way of dividing profits.''
He submitted that - whether the payment is called dividend or a deemed dividend or a bonus or given any other name, it still must remain a payment out of profits.
He submitted that the question was not whether a dividend of the ordinary kind had been paid out of profits; it was whether the amount in question in this case had been paid out of profits. If this was so, then as a deemed dividend, it was paid out of profits and was caught by sec. 44, and was taxable. He also submitted that it was for the appellants to show that the amounts had been paid otherwise than out of profits.
Most of the cases cited, with the exception of Blakely, arise out of and are based on a consideration of the affairs of properly run companies where there are no distinguishing features of fraud. Most of them deal with the interrelationship between sec. 44(1) and the dividends as defined in sec. 6.
In some of those cases, it was possible to say, as Sheppard J. did in Rutherford, that he was satisfied that the payments had not been paid out of profits. Sufficient facts were there to be considered. Similarly it was possible for Fullagar J. in Blakely, to say at p. 406:
``I would not be prepared to deny that there was a `distribution'... There was... But the point is... as to the nature of the receipt. There was not a distribution of profits... What was received was capital. There was no detachment or severance from the funds of the company of money or other assets as representing a profit made by the company. There was simply a realization of a share investment...''
I was referred to the article ``Aspects of the Law Relating to Company Dividends'' by Dr. Yamey, in the April 1941 Modern Law Review. It can be summed up as asserting a presumption of legality and a presumption against payment out of capital where payments are said to be in the form of dividends. Even that is not enough to make it a payment out of profits, although such an approach would require evidence for the presumption to be displaced. As such, it raises the question of on whom lies the burden of proof?
Profits is a very loose term. It generally implies an increase in wealth. As applied to a business enterprise it usually indicates an increase in the wealth of the business resulting from the conduct of the business. When a business enterprise speaks of its profits, it can be sometimes difficult to know exactly what it means because the meaning of the term depends to a considerable degree on the methods of accounting adopted by the particular enterprise. In business and accounting the term has a variety of meanings, and without some qualifying term the word is indefinable. Some of the more common terms are -
- Gross Profit. The difference between the cost of goods or services which have been sold and the proceeds of their sale without any deductions in respect of the expenses of distributing or management.
- Net Profit (or Loss). The result of the activities of an enterprise after taking into account revenue from all sources and expenses and losses of all kinds so long as they are properly attributable to the enterprise.
- Capital Profit. The profit made on the disposal of an asset not originally purchased with the idea of sale as distinguished from a profit made from trading operations.
- Trading Profit, Operating Profit (or Loss). The result of the operations of an enterprise in that field which forms the normal scope of its activities; the difference between operating revenue and operating expenses, the latter including, for trading and manufacturing concerns, the cost of goods sold and expenses of marketing distribution, finance, etc.
- Super Profit. The excess of the average profits of a business over the normal commercial profits of a business of the nature concerned.
- Taxable Profit. That on which taxation is levied.
- Unrealised Profit. Profit not yet realised e.g., the profit on sales by instalments should be treated as unrealised in proportion to the instalments outstanding.
In my opinion, it is not necessary to fit the moneys in question in this case into any particular category. The word ``profits'' should be given the general meaning given to it by businessmen which I take to be a general increase in the wealth of the business resulting from the conduct of the business. It is not necessary or essential that I restrict the term to the meaning that might be given to it by accountants.
Here the evidence is that the amounts were initially moneys that had been received by the company as income. Some had been revealed to the Commissioner as income, some had not. From the total income fraudulent non-existent deductions were made but proper deductions were also made. The company was solvent. There is no evidence of any additional deductions that would have had to be made as a consequence of taking account of the additional income and the setting aside of the fraudulent deductions. The extra amounts were paid to the appellants and became the deemed dividends. They were invested in the name of Mr. MacFarlane and he received the income from those investments. The evidence discloses no other sources from which the funds came than income which was ``surplus'' income. Commonsense would require that the company be kept solvent and that only surplus amounts not putting that requirement at risk be paid out. There is no evidence that the appellants were embezzlers. There is no evidence they took anything other than what would be called profits in the sense in which I have used that term. A company can only act through its servants. The money was paid out by company cheques as part of an ongoing process.
In passing, I note the words of Farwell J., dealing with dividends, quoted in Dr. Yamey's article in the Modern Law Review:
``... the real question for determination... is whether there are profits available for distribution and this is to be answered according to the circumstances of each particular case...''
A submission was made that no fund of profits was available for payment out because the company had only just been formed in 1977 and it would follow that any money paid or received could not be out of profits and not be assessable income pursuant to sec. 44. The answer is that a profit or surplus was being earned and was being set aside. I accept Mr. Bloom's submission that although there may have been an empty ``corporate jug'' in 1977 what probably happened was that instead of using the profits to pay tax, they used them to pay themselves. They cannot say, ``we should have used those profits to pay tax but we did not and as a result the payments were not out of profits''.
Another alternative submission was that I should accept the evidence of Mr. Temple, the accountant. This was that proper accountancy practice required that any amount capable of being a profit, out of which a dividend could be paid, was restricted to after tax profit. I find this unhelpful in this case because the proper tax was not being paid. The whole basis for an after tax profit approach was missing. The evidence of Mr. Temple, the accountant, is also consistent with the payments having been paid out of profits.
Another alternative submission was that if there was an amount that could come to tax via the operation of sec. 108 and 44, it ought not to be only the after tax profit but the after tax and after superannuation profit.
On the superannuation aspect, the appellants submitted that in the first year after the incorporation of the company, a sum of $8,250 (see Exhibit (Ci) and $2,500 in the second year and nil in the third year had been paid by the company pursuant to the Superannuation Deed of Trust to the Matthew MacFarlane Employees' Superannuation Fund. The submission was that those sums should be taken into account in assessing the after superannuation profit. The reality is that the company, per Miss Masterman, had cheques drawn for the superannuation contribution for both the real and non-real employees, paid them into the Matthew MacFarlane Employees' Superannuation Fund, and then had cheques drawn back from that Fund to the company. The Fund had no independent source of funds to meet the cheques. It had only the money that it received from the company. Technically, it may have been money that went from the company's
ATC 4031control and was not available for the payment of dividends but the reality was that the cheques drawn for the appellants (not the fictitious employees) were paid into the Superannuation Fund and within days, cheques for similar amounts were drawn out of the Superannuation Fund and reimbursed to the company. In due course, the money or part of it went to Mr. MacFarlane's ``investments''.
Notwithstanding that there was no ``profit'' or ``profit fund'' disclosed in the normal way as indeed was inevitable because of the fraud, I am not satisfied that the moneys were not paid out of profits. In fact, I find that they were.
To sum up:
I am not persuaded that there was any error in the approach of the Commissioner as far as the years 1977 to 1979 inclusive are concerned.
It was open to the Commissioner to find that the amounts were paid in such a way as to meet the requirements of sec. 108.
Similarly, there is nothing to show the amounts were paid otherwise than out of ``profits''.
All appeals are dismissed.
The appellants will pay the Commissioner his costs.