(A) ADVICE FOR MONEYMAN tax consequences of receiving compensation.
ISSSUEMoneyman Limited got $600,000 compensation from Allbrand Limited because of cancellation of contract by Allbrand Limited.
STATE LAW(1)When there is income out of ordinary course of business, it should be treated as capital.
In this case, there is income (but of capital nature), which makes it capital rather than income. The capital has been raised by the cancellation of agreement which is a basic profit yielding structure.
Followings are the relevant cases that can be used.
Van den Berghs Ltd v Clark[1935]AC 431.: In this case, taxpayer Van den Berghs had an agreement with a Dutch company where profits and losses were to be shared and most matters were already finalised. Dutch company terminated agreement. As a result, Van den Berghs was entitled compensation. Court had decided that the compensation received by Van den Berghs was capital, not an income. Court's decision was based on the fact that income was generated by Van den Bergs by manufacturing margarine, not by such agreement.
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President's Advisory Panel for Federal Tax Reform
C.F. Murphy and W.H. Fitzpatrick (LOC)Such agreement was done to set up capital structure that can generate income in future.(Woellner,R.H., Barkoczy,S., Murphy, S., Evans,C. 2009, page 299)Evans Medical Supplies Ltd v Moriarty[1957] 3All ER 718;(1957) 37 TC 540 : In this case, court decided that taxpayer (who sold the confidential information to government and got 100,000 pounds ) was receiving the amount as capital structure because it was out of ordinary business transactions. (Woellner,R.H., Barkoczy,S., Murphy, S., Evans,C. 2009, page 235)(2) Compensation for loss of capital asset is not income. Compensation receipt replaces capital.
Followings are the relevant cases that can be used.
Glenboig Union Fireclay co Ltd v IR Commrs(1921) 21 TC 427: In this case, compensation received was permanently avoided taxpayer to trade on business, making the compensation receipt capital. (Woellner,R.H., Barkoczy,S.,