Gaming court processes backfires on taxpayers
Accent Management Limited v CIR (2013) 26 NZTC 21-016 (CA)
This is the latest episode in the Trinity tax avoidance litigation. After having lost the challenge litigation over the tax avoidance issue (the Supreme Court dealt with this in Ben Nevis Forestry Ventures Ltd v CIR  2 NZLR 289) some of the investors in Trinity, some also connected with the development of the structure, have fought a collateral battle to unseat the judgments as to tax liability.
These proceedings in the Court of Appeal related to efforts by the taxpayers to bar the Crown Law Office from representing the CIR in challenges against other tax assessment s related to the Trinity structure. The High Court had dismissed the taxpayers’ applications which were based on allegations of misconduct of the CIR in which the Crown Law Office had colluded. Those allegations stemmed from the taxpayers’ belief that the substantive liability on Trinity ought to have been resolved, not on the basis of tax avoidance, but on the basis that deductions should have been allowed and spread under the accrual rules. They had tried to raise these arguments in the Supreme Court but that had not been permitted. The taxpayers argued that the CIR had, with the collusion of Crown Law, presented a false or fraudulent case based on tax avoidance which was not available to the CIR. From this they argued that Crown Law could not act with the degree of independence expected of counsel in litigation.
The High Court had concluded that nothing in the past conduct of the proceedings on Trinity meant that Crown Law should be debarred from acting for the CIR and essentially that, because most of the likely future argument would be as to the law, it was clear that all relevant legal arguments, including those about accrual spreading, would be raised and dealt with. Moreover it held that because of findings in a judicial review already concluded the taxpayers could not establish a factual basis for the allegations of misconduct. The Court awarded indemnity costs against the taxpayers saying that the application was gaming the system and tantamount to an abuse of process.
The High Court judgment went to the Court of Appeal, although it is noteworthy that there was no appearance by appellants other than Dr G Muir, the architect of the Trinity structure. The other appellants chose to adopt Dr Muir’s arguments and sought to be excused appearance.
The unanimous decision of the Court rejected the appeal and upheld an indemnity costs award below and on appeal as a joint and several liability of all the appellants.
The issue of Crown Law’s ability to fulfill its professional obligations was considered having regard to the Lawyers and Conveyancers Act and the Client Care Rules under that Act. It was also assessed having regard to a protocol between Inland Revenue and Crown Law. That protocol has been the subject of debate and uncertainty quite apart from these proceedings, chiefly because of a perception that Crown Law has sometime run arguments which are at odds with IRD practice and the IRD and Crown Law are not in a usual client/counsel relationship.
The appellants argued that the protocol meant that Crown Law was effectively deciding what an assessment should be and so was not independent from the CIR. This was rejected by the Court because under the protocol there was no delegation by the CIR of her assessment power. It remained always for the CIR to decide how the law should be applied. Secondly the Court held that the protocol expressly allowed Crown Law to determine how it conducted crown litigation and this permitted Crown Law to meet its obligations to the Court. The protocol set out boundaries of a consultative working relationship between IRD and Crown Law. Nothing in the protocol meant there was a risk Crown Law could not meet its obligations.
The appellants also ran an estoppel argument, saying that the High Court had found that the Court could not consider whether the LCA applied to Crown Law. This seems to have been an attempt to elevate comments by the High Court judge that the taxpayers could not establish a reasonably arguable factual position into an argument which the High Court had expressly not taken up.
The indemnity costs award was upheld on the basis that the appellants were seen to be gaming the system. In the High Court the judge had said that the proceedings were not brought with a genuine concern that the taxpayers’ affairs would not be dealt with properly but to create delay and inconvenience for the CIR. The Court of Appeal chose not to weigh in this, save to say that the findings were open to the Judge and that the appeal was a continuation of the gaming.
© G D Clews 2013