Income Tax: Meaning of General Partner in Limited Partnership

Introduction

The title of this case provides a certain degree of anonymity that its unofficial title does not. The title “Quigley v Harris” does not evoke interest, unless you are aware that the taxpayer, Mr. Harris, was a partner in a Limited Partnership which acquired the famous luxury yacht the “Christina O”, “Christina O” being the unofficial title of the case.

The Christina O has already been to the Supreme Court in December 2005 when the taxpayer sought repayment of tax after the Appeal Commissioners had found in his favour. The Revenue had challenged this view as they argued that they were entitled to retain the money until all appeals against the Appeal Commissioners’ decision had been heard. The Supreme Court had ruled that the Revenue must repay the taxpayer the tax overpaid.

The Facts

The Limited Partnership in this case, Christina Limited Partnership, was a limited partnership registered under the laws of the Cook Islands. The partnership was established by a partnership agreement dated 12 April 2000 made between Christina GP Limited, the general partner, and a limited partner. The business of the partnership was acquiring and operating high-class luxury cruise yachts and conducting all types of business incidental thereto. ‘

The taxpayer was admitted to the Partnership, together with two other partners, on 11 August 2000, when the partnership agreement was amended and re-stated. Under the terms of the Partnership Agreement the taxpayer held 4.142% of the assets of the partnership and was entitled to 82.85% of the partnership profits or losses up to 5 April, 2007. Thereafter he was entitled to 4.142% of the partnership profits or losses.

On 11 August 2000 the Partnership agreed to purchase the luxury yacht, Christina O. The partnership acquired, refurbished and marketed the Christina O at considerable expense. The venture was at all times planned as a profitable venture.

It was agreed by the parties that under the law of the Cook Islands the taxpayer was regarded as a limited partner in the partnership.

The taxpayer, an Irish resident, made a claim to set off against his general liability for income tax under Schedule E, capital allowances and other reliefs (losses and interest incurred) in respect of expenditure incurred by him in his capacity as a partner in the partnership. The Revenue disallowed the claim.

The Appeal Commissioner allowed the taxpayer's appeal. The Revenue appealed to the High Court in accordance with TCA97 s941.

The Issue

The question on which the opinion of the High Court was sought was “whether the taxpayer fell within paragraph (d) of the definition of limited partner in s. 1013(1) of the Act of 1997 as amended.”, i.e. whether the taxpayer was a “general partner” within the meaning of that expression in paragraph (d) of the definition at the material time.

If the taxpayer was a “general partner”, then the availability of capital allowances and other reliefs would be restricted.

Two other issues had been before the Appeal Commissioner:

• whether or not the partnership carried on trade with a view to a profit; and
• whether the Christina O had been put to use for the purposes of the trade by 5 April 2001.

It was noted in the judgement that the High Court was not concerned with the above two issues.

The Decision

The question concerned the construction of one provision of TCA97 s1013. It was noted in the judgement that the High Court was concerned with s1013 as amended with effect from 29 February 2000 by virtue of the provisions of FA00 but prior to its amendment by FA05.

S1013 provides that the right of limited partners to set off capital allowances and other reliefs (losses and interest paid) arising out of a limited partnership trade is restricted to the amount of the limited partner's contribution to the limited partnership; and then only against the profits of the partnership.

““Limited partner”, in relation to a trade, means –

1. a person carrying on the trade as a limited partner in a limited partnership registered under the Limited Partnerships Act 1907,
2. a person carrying on the trade as a general partner in a partnership who is not entitled to take part in the management of the trade but is entitled to have the person's liabilities, or those liabilities beyond a certain limit, for debts or obligations incurred for the purposes of the trade, discharged or reimbursed by some other person,
3. a person who carries on trade jointly with others and, under the law of any territory outside the State, is not entitled to take part in the management of the trade and is not liable beyond a certain limit for debts or obligations incurred for the purposes of the trade, or
4. a person who carries on the trade as a general partner in a partnership otherwise than as an active partner;”

It should be noted that there was no definition of the expression “general partner” in s1013.

Subsequent to the decision of the Commissioner, which was given on 29 October 2004, the definition of “limited partner” was amended by FA05 s37. By virtue of the amendment the following two paragraphs were inserted after paragraph (d) in the definition of “limited partnership”:

“(e) a person who carries on the trade as a partner in a partnership registered under the law of any territory outside the State, otherwise than as an active partner, or

(f) a person who carries on the trade jointly with others under any agreement, arrangement, scheme or understanding which is governed by the law of any territory outside the State, otherwise than as a person who works for the greater part of his or her time on the day-to-day management or conduct of that trade;”

It was submitted by counsel for the Revenue that the fact that s1013 had been amended by the insertion of paragraphs (e) and (f) in the definition of “limited partnership” was of no assistance to the taxpayer in construing the effect of the section in the years of assessment. The basis for this contention was Cronin (Inspector of Taxes) v Cork and County Property Company Limited [1986] I.R. 59

“ the court cannot in my view construe a statute in the light of amendments that may thereafter have been made to it. An amendment to a statute can, at best, only be neutral – it may have been made for any one of a variety of reasons ”

Laffoy J found that the taxpayer did not fall within paragraph (d) of the definition of “limited partner” in TCA97 s1013(1), as amended. Hence the availability of capital allowances and other reliefs was not restricted.

In reaching this ruling, the various Irish statutory provisions that deal with limited partnerships were considered.

The basis of the judgement was outlined as follows:

1. principles governing the interpretation of taxation statutes;
2. the construction of paragraph (d);
3. whether s. 43 of the Act of 1994 had any application to the issue with which the Court was concerned and, if so, what was its effect;
4. the application of the Memec principle; and
5. the comity of nations argument.

Principles governing the interpretation of taxation statutes

Counsel for the taxpayer suggested that s1013 operated like a charging provision, in that it takes away relief otherwise generally available; while counsel for the Revenue submitted that it was part of the relieving provision in that it imposed a boundary on relief that can be claimed.

It was the view of the Judge that the provision must be strictly construed.

The Judge agreed with the submission made on behalf of the taxpayer that the definition of “limited partner” in s1013(1) did not incorporate the definitions of general partner and limited partner contained in the Act of 1907 or the corresponding definitions contained in the Act of 1994 by reference, because those definitions were statute-specific.

In addition, she did not accept that the expression “general partner” in (d) was directed to a particular class as distinct from the public at large.

The construction of paragraph (d)

It was specifically noted that in enacting paragraph (d) in 2000 the Oireachtas chose an expression, “general partner”, which was not a term of art and the Oireachtas chose not to define it.

The nub of the Revenue's argument on the construction of paragraph (d) was that, as a matter of Irish law, all partners other than limited partners as defined in the Act of 1907 and in the Act of 1994 were general partners, actual or deemed.

Counsel for the taxpayer submitted in determining whether a person involved in a partnership was a general partner, the acid test was whether he had personal liability for the debts of the firm.

In construing the definition of “limited partner” in s1013, the Judge deemed that it was necessary to identify the type of agreements or arrangements recognised by Irish law under which a partner with limited liability can exist.

According to the Judge, the principal feature which distinguished a general partner from a limited partner under Irish law was that, in the case of the latter, his liability for the debts of the partnership was limited in amount, whereas, in the case of the former, it was unlimited.

On this basis, when it is recognised that the taxpayer's liability as a partner in the partnership was not unlimited, the conclusion that he was a general partner within the meaning of paragraph (d) was not open.

Whether s. 43 of the Act of 1994 has any application to the issue with which the Court is concerned and, if so, what is its effect

Section 43 of the Act of 1994 provides:

“In any proceedings involving a limited partnership established under, or by its terms governed by, the law of another state, the liability of the partners, its organisation and internal affairs shall be determined according to the law of that state.”

The taxpayer placed reliance on this provision in establishing that the taxpayer was a partner whose liability was limited; whereas the Revenue argued that s43 did not have application.

While the Judge found against the Revenue's argument, the taxpayer's reliance on s43, while determinative of the liability of the taxpayer as a partner under the partnership, was not determinative of his liability to tax under Irish law. In addition, the application of s43 had to be taken in conjunction with the Memec principle.

The application of the Memec principle

In the UK case of Memec, the principles to be applied by a court in applying the provisions of a taxing statute to an arrangement or entity which was governed by foreign law were dealt with.

“When an English tribunal has to apply the provisions of an United Kingdom taxing statute to some transaction, arrangement or entity which is governed by a foreign system of law, the tribunal must take account of the rules of that foreign system (properly proved if not admitted) in order to determine the nature and characteristics of the transaction, arrangement or entity. But having informed itself in this way, the tribunal must then apply the taxing statute as part of English law.”

The Judge noted that the application of the Memec principles to ascertain the characteristics, rights and obligations of the taxpayer as a limited partner under the partnership in accordance with the law of Cook Islands did produce a mismatch with the rights and duties of a limited partner under Irish law. However, the fundamental question was whether the taxpayer with the benefit of those rights and subject to the burdens of those obligations was a “general partner” within the meaning of paragraph (d).

For the reasons set out in considering the construction of paragraph (d), in the Judge's view, he was not.

The comity of nations argument

The comity of nations is the friendly recognition of each other's laws¹.

The Judge understood the real thrust of the taxpayer's argument based on the comity of nations principle was that under the common law, i.e. domestic law, the courts in this jurisdiction, where necessary, recognise and give effect to the rights and obligations of partners in a foreign limited partnership as determined in accordance with the law of the state in which the partnership is established. That proposition, in Judge's view, was correct. This was reflected in the Memec decision, although the principle of comity was not referred to in Memec.

It was seen that the Revenue's acceptance of the Memec principles was acceptance that those principles apply as rules of law in this jurisdiction.

The Judge summarised her conclusions as follows:

The determination of whether the taxpayer is a limited partner by reference to paragraph (d) was a two stage process:

1. Determine the characteristics, rights and obligations of the taxpayer as a partner under the partnership by reference to the law of Cook Islands. That approach was mandated by common law and by statute (s43 of the Act of 1994).
2. Determine whether, applying Irish law, the characteristics, rights and obligations of the taxpayer as a partner match the characteristics, rights and obligations of a general partner within the meaning of paragraph (d).

The outcome of the two stage process was that, as a matter of fact (including Cook Islands law), the characteristics, rights and obligations of the taxpayer as a partner under the partnership (primarily that his liability was not unlimited), meant that, as a matter of Irish law, he was not a general partner within the meaning of paragraph (d).

See Selected Judgments below for the full judgment. Alternatively, the judgment is available online from the website of the Courts Service of Ireland.

1. Murdoch's Dictionary of Irish Law, 4th Ed.