One was that profit arising from any realisation of property should be declared by law to be taxable income if the property had been acquired with a view to profit-seeking. This seems to have been the kind of test envisaged by the 1920 Commission where they speak of “any profit made on a transaction recognizable as a business transaction, i.e. a transaction in which the subject matter was acquired with a view to profit-seeking”1. The difficulty about applying this is that, in any normal sense of the words, a “view to profit-seeking” may accompany many transactions that would not be called business transactions. Since few investors can expect that their investment will remain exactly stable in value in their hands they are bound to contemplate the probabilities of rise or fall and it is hardly to be expected that they will not choose one for which they hope or expect a rise. Yet hitherto the law has refused to treat the presence of this expectation as conclusively identifying a taxable profit. “An accretion to capital”, said Lord Buckmaster in the House of Lords2 “does not become income merely because the original capital was invested in the hope and expectation that it would rise in value”.
Lord Buckmaster’s dictum is perhaps too frequently invoked, since it is expressed in very guarded form. But we regard a trust that depends on the motive or view of a person at the date of acquisition (which may have occurred years before the question comes under review) as a bad general test for the purpose that we have in mind. There are many fields in which the law has to concern itself with ascertaining motive, but a tax appeal is not well suited for this kind of enquiry. We are afraid that the result would be not to achieve a more even-handed application of the tax charge but to give a helping hand to the person who can make a plausible defence of himself in the witness chair. Indeed the Revenue’s experience in the administration of those provisions of the excess profits tax (“E.P.T.”) and profits tax which make certain tax consequences depend on motive suggest that, if motive is to be ascertained, it is better ascertained by being imputed as the automatic result of prescribed conditions than by an attempt to search the mind of the taxpayer himself. When we add to this the inescapable vagueness of any such phrase as a “view to profit-seeking”, we feel no doubt that it would be a mistake to introduce any general rule that sought to solve the matter by the presence or absence of a particular motive in the taxpayer’s mind.
If, as we conclude, the only useful test must be one of an objective kind, there is much to be said for a rule that treats as taxable income every profit that arises from a realisation made within some fixed period after the acquisition. It is natural to think of a period of 12 months. Such a rule would go a very long way towards identifying the “deal”, which is just the “adventure in the nature of trade” that we have in mind. For if a person has become and ceased to be the owner of some piece of property within the space of 12 months, he is unlikely to have been concerned with it as an investment or as an asset for personal enjoyment and he is much more likely to have been engaged in that employment of resources for the purpose of making profit which constitutes the basis of a deal.
But, on the whole, the drawbacks of such a fixed rule seem to us to outweigh its advantages. If all profitable realisations achieved within the period are income then unprofitable realisations are losses which according to our present conceptions would be allowable against other income: and this would amount to an invitation to take the losses within the 12 months and to defer the gains. If on the other hand the scheme was to be that a profit made after the close of the period might still be, though would not necessarily be, a taxable profit, depending on its circumstances, there would be no simple general rule for deciding such cases and the position as a whole would not be much advanced. Moreover, it is likely that the introduction of a 12 months’ rule would give rise to a presumption – even if an unreasonable presumption – that a realisation effected outside the period was not taxable; and on balance the hand of the Revenue would be weakened instead of being strengthened by the recognition of the fixed period. Finally, there would be some cases of hardship in which an unexpected change of circumstance had brought about a forced sale shortly after purchase; and the further problem of dealing with settled property where a surplus on realisation is reinvested as part of the capital and is not available to be paid to the life-tenant who receives the income.
We concluded that it was better that there should be no single fixed rule. This means that each case must be decided according to its own circumstances. The general line of enquiry that has been favoured by appeal Commissioners and encouraged by the Courts is to see whether a transaction that is said to have given rise to a taxable profit bears any of the “badges of trade”. This seems to us the right line, and it has the advantage that it bases itself on objective tests of what is a trading adventure instead of concerning itself directly with the unravelling of motive. At the same time we have noticed that there has been some lack of uniformity in the treatment of different cases according to the tribunals before which they have been brought. This seems to us unfortunate and, for the sake of clarity, we have drawn up and set out below a summary of what we regard as the major relevant considerations that bear upon the identification of these “badges of trade”.
The subject matter of the realisation. While almost any form of property can be acquired to be dealt in, those forms of property, such as commodities or manufactured articles, which are normally the subject of trading are only very exceptionally the subject of investment. Again property which does not yield to its owner an income or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does.
The length of the period of ownership. Generally speaking, property meant to be dealt in is realised within a short time after acquisition. But there are many exceptions from this as a universal rule.
The frequency or number of similar transactions by the same person. If realisations of the same sort of property occur in succession over a period of years or there are several such realisations at about the same date a presumption arises that there has been dealing in respect of each.
Supplementary work on or in connection with the property realised. If the property is worked up in any way during the ownership so as to bring it into a more marketable condition; or if any special exertions are made to find or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of dealing. For when there is an organised effort to obtain profit there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way.
The circumstances that were responsible for the realisation. There may be some explanation, such as a sudden emergency or opportunity calling for ready money, that negatives the idea that any plan of dealing prompted the original purchase.
Motive. There are cases in which the purpose of the transaction of purchase and sale is clearly discernible. Motive is never irrelevant in any of these cases. What is desirable is that it should be realised clearly that it can be inferred from surrounding circumstances in the absence of direct evidence of the seller’s intentions and even, if necessary, in the face of his own evidence.
1 Cmd. 615, para. 91
2 Leeming v. Jones, (1930), 15 T.C. 333, at p. 357.
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