| 6/1/2009 |
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| Board of Special Commissioners - Cases |
| Case No. 16/67 |
Decided: 16 April, 1969 |
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Status of company when all shares are acquired by one person - article 1738, now 1644, Civil Code; nature of profit on subsequent transfer of "shares" and immovable property - article 5, now 4, Income Tax Act
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Appellant, an entrepreneur, set up a company, which acquired property on long lease and put it up for sale when partly developed. Before the property was disposed of, shares in the company were sold at a profit over the total outlay. Appellant claimed that he was making a capital profit on the sale of shares, which was not taxable. The Commissioner decided that the company did not exist at the time of the sale, so the profit constituted income chargeable to tax in the hands of appellant.
The Board held, in the first instance, that as soon as the number of shareholders of a commercial partnership was reduced to one the partnership lost its separate corporate existence, as the essential element of the "contract" which gave rise to the company no longer existed.
Commercial partnerships were (then) regulated by the Commercial Code which, in turn, provided that contracts of partnership were to be governed by the Civil Code, the Commercial Code itself and by the agreement between the parties. Article 1738, now 1644, of the Civil Code defines a contract of partnership as one "whereby two or more persons agree to place a thing in common, with a view to sharing the benefit which may derive therefrom".
As a result, any commercial activity carried out thereafter constituted the private business of the sole shareholder - the appellant - in whose hands all the assets of the company were concentrated. The Board examined in detail the activities of the company as such and those carried out by appellant after he purchased all the shares himself. The speculative manner in which the transactions in land development were carried out evidently gave rise to the existence of a "profit making undertaking or scheme". The Board ruled, in the circumstances, that the Commissioner was correct in considering the profits to be chargeable to tax in the hands of appellant.
An appeal was entered before the Court from this decision (see case no. 76).
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