Accent Management Ltd v Commissioner of Inland Revenue
[2007] NZCA 230
•11 June 2007
IN THE COURT OF APPEAL OF NEW ZEALAND
CA21/05
[2007] NZCA 230
AND BETWEEN ACCENT MANAGEMENT LIMITED
BEN NEVIS FORESTRY VENTURES LIMITED
BRISTOL FORESTRY VENTURES LIMITED
CLIVE RICHARD BRADBURY
GREENMASS LIMITED
GREGORY ALAN PEEBLES
ESTATE OF THE LATE KENNETH JOHN LAIRD
LEXINGTON RESOURCES LIMITED
REDCLIFFE FORESTRY VENTURES LIMITED
Appellants
ANDCOMMISSIONER OF INLAND REVENUE
Respondent
Hearing:4, 5, 6, 7 and 8 September 2006
Court:William Young P, O'Regan and Robertson JJ
Counsel:G J Judd QC for Accent Management Limited and Lexington Resources Limited
C R Carruthers QC, R B Stewart QC and G J Harley for Bristol Forestry Ventures Limited, C A Bradbury and Redcliffe Forestry Ventures Limited
M Hinde for Ben Nevis Forestry Ventures Limited, Greenmass Limited, G A Peebles and the Estate of K J Laird
D J White QC and J H Coleman for Respondent
Judgment:11 June 2007 at 3 pm
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellants are ordered (jointly and severally) to pay to the Commissioner costs of $30,000 and usual disbursements.
REASONS OF THE COURT
(Given by William Young P)
Table of Contents Para No
Introduction [1]
The factual background [3]
The way the scheme was meant to work – the taxpayers’ contentions [15]
The High Court litigation [21]
Were the insurance arrangements a sham? [24]
Overview [24]
The structure of insurance arrangements [25]
The set-up of the insurance arrangements [31]
The Parentis transaction and its impact on the funds available to CSI [41]
The approach of the Judge [44]
The arguments in this Court [48]
Our conclusions [54]
Were the taxpayers required to spread deductions associated
with the insurance premium payable in 2047? [66]
Was the licence fee premium payable in 2048 deductible under s EG1? [78]
The relevant contractual provisions [78]
The taxpayers’ arguments [83]
The relevant legislative provisions [84]
The approach of Venning J [88]
The arguments in this Court [94]
Discussion [97]
Is the scheme void for tax avoidance? [103]
The legislation [103]
Inconsistency between general anti-avoidance
provisions and specific tax rules – an overview [109]
The approach of the Judge [127]
The arguments of the taxpayers on appeal [132]
The Commissioner’s response [137]
Applying the principles to the facts [140]
The position of Greenmass, Ben Nevis and
Messrs Peebles and Laird [147]
Reconstruction [150]
Penalties [157]
Overview [157]
The issues [160]
Are the shortfall assessments premature? [161]
Did the taxpayers’ relevant tax position involve an
interpretation of s BG 1? [163]
Was the taxpayers’ interpretation unacceptable? [167]
Was the taxpayers’ interpretation abusive? [169]
In the case of the LAQCs was there any relevant tax shortfall? [171]
Should the shortfall penalties be withdrawn
because of settlements in the other cases?
The estate of Kenneth John Laird [177]
Orders [185]Introduction
[1] This case concerns a complex forestry investment which is usually referred to as “the Trinity scheme”. The scheme involves unusual insurance and licence to use land arrangements. The appellants (to whom we will generally refer as the taxpayers) were all investors and claimed substantial tax deductions associated with insurance premiums mainly payable in 2047 and fees for the licence which are due to be paid in 2048. The tax efficacy of the underlying scheme was challenged by the Commissioner of Inland Revenue and this, in the end, resulted in Venning J delivering a judgment ((2000) 22 NZTC 19,027) in which he found against the taxpayers on the deductibility issues and upheld the Commissioner’s assessments (which included substantial penalties). The taxpayers now appeal and the Commissioner challenges some of the conclusions reached by Venning J which favoured the taxpayers. The Commissioner’s challenge is formally by way of cross-appeal but in substance largely represents an attempt to uphold the conclusions of the Judge on grounds other than those relied on by him.
[2] We will discuss the case under the following headings:
(a) The factual background.
(b) The way the scheme was meant to work – the taxpayers’ contentions.
(c)The High Court litigation.
(d)Were the insurance arrangements a sham?
(e)Were the taxpayers required to spread deductions associated with the insurance premiums payable in 2047?
(f)Was the licence fee premium payable in 2048 deductible under s EG 1?
(g)Is the scheme void for tax avoidance?
(h)Reconstruction.
(i)Penalties.
(j)The estate of Kenneth John Laird.
(k)Orders.
Factual background
[3] The expression “Trinity scheme” applies to a series of related forestry investments associated with a douglas fir forest which has been planted and is now growing in Southland. The scheme was very much the brain child of Dr Gary Muir, a partner in the law firm Bradbury and Muir. The other partner in the firm, Mr Clive Bradbury has also been involved in the development and implementation of the scheme.
[4] This case concerns investments made through Trinity Foundation (Services No 3) Ltd (to which we will refer as “Trinity 3”) but similar investments forming part of the same general scheme were also made through Trinity Foundation (Services No 1) Ltd and Trinity Foundation (Services No 2) Ltd (“Trinity 1” and “Trinity 2”, respectively). Trinity 1, Trinity 2 and Trinity 3 are subsidiaries of Trinity Foundation Ltd (“Trinity Foundation”).
[5] Trinity Foundation is a non-trading charitable entity established to receive distributions from its subsidiaries, ie Trinity 1, Trinity 2 and Trinity 3. These companies were established to buy the land on which the forest was to be established. Trinity Foundation is itself owned by the Trinity Foundation Charitable Trust which was set up on the instructions of Dr Muir and which for practical purposes can be regarded as being under the control of Dr Muir and Mr Bradbury.
[6] Southern Lakes Forestry Joint Venture (SLFJV) is a syndicate in which the taxpayers were members. Its purpose was to take a licence from Trinity 3 and to participate in the development and eventual harvesting of the forest.
[7] Under the associated arrangements, the taxpayers assumed obligations to make a number of payments to Trinity 3. These were calculated on the basis of the plantable hectares in the licensed area and were as follows:
(a)On 21 March 1997, $1,350 per plantable hectare to establish the forest.
(b)Also on 21 March 1997, $1,946 per plantable hectare. The primary purpose of this payment was to acquire the land in 2048 for 50% of its then value.
(c)Also on 21 March 1997, $1,000 in relation to a lease option.
(d)Fifty dollars per annum per plantable hectare by way of licence fee.
(e)On 31 December 2048, $2,050,518 per plantable hectare as a licence premium.
We note that promissory notes were provided in relation to the licence premium.
[8] In return for this, the taxpayers were to receive the net stumpage derived from Trinity 3 on the sale of the forest and, as noted, an option to acquire the land for 50% of its then value. On this basis the profitability of the venture depends on whether the net stumpage which the taxpayers will receive on the sale of the forest will cover the costs (including the time value of money) of their investment.
[9] A striking feature of the way the scheme was financed was that the land used for the forest was acquired for approximately $600 a hectare. So the payment referred to in [7](b) above for an option to acquire the land at half its value in 2048 was three times more than what was required to purchase the land outright in 1997. This throws into stark relief the unusual nature of the licence premium which was also to be paid in 2048. In effect the taxpayers were agreeing to pay for the use of land the purchase of which had been funded with their own money.
[10] A complicating and very important feature of the case is the associated insurance arrangement. Under this arrangement, the taxpayers:
(a)Paid, on 21 March 1997, to CSI Insurance Group (BVI) Ltd (“CSI”) an insurance premium of $1,307 per plantable hectare; and
(b)Agreed to pay, on 31 December 2047, $32,791 per plantable hectare to CSI.
The ostensible purpose of the insurance arrangements was to cover the contingency that the stumpage to be received on the sale of the forest would be insufficient to enable the licence premium to be paid. We note that promissory notes were executed in relation to the obligations referred in (b) above.
[11] In their tax returns for the 1997 tax year, the taxpayers claimed deductions for $34,098 per plantable hectare for the insurance premiums (being the initial $1,307 paid on 21 March 1997 and the $32,791 which they agreed to pay on 31 December 2047). They also made a claim for depreciation on a proportionate part of the $2,050,518 per plantable hectare licence premium payable on 31 December 2048 amortised over 50 years. For the 1997 year, the depreciation claim was not particularly significant (as the transaction was entered into on 21 March 1997, only ten days before the end of the financial year). But for the 1998 tax year, the corresponding claim (based on 1/50th of $2,050,518) was of more moment, around $41,000 per plantable hectare. As we understand the evidence, the Trinity 3 phase of the Trinity scheme involves 484 plantable hectares from a total area licensed to the SLFJV of 538 hectares. So the total tax at stake is considerable.
[12] For the 1997 year, the taxpayers expended a total sum a little under $5,000 per plantable hectare and ostensibly achieved a tax deduction in excess of $37,000 per plantable hectare. For the 1998 income year, apart from allowable silviculture costs, the taxpayers paid $50 per hectare (being the annual licence fee) and ostensibly achieved tax deductions of approximately $40,000 per hectare.
[13] The Commissioner initially accepted the deductions but subsequently issued notices of proposed adjustment (NOPAs) to the taxpayers in respect of the insurance premiums for the 1997 year and the amortised licence premium for both years. In due course the Commissioner issued revised assessments disallowing these deductions and fixing penalties for the 1998 year.
[14] This case concerns investments made by Accent Management Ltd, Lexington Resources Ltd, Redcliffe Forestry Ventures Ltd, Bristol Forestry Ventures Ltd, Ben Nevis Forestry Ventures Ltd and Greenmass Ltd. Redcliffe Forestry is a loss attributing qualifying company (LAQC) associated with Dr Muir. Bristol Forestry is an LAQC which was owned by Mr Bradbury. Ben Nevis is an LAQC which was owned by Mr Gregory Peebles. Greenmass is an LAQC in which the late Mr Kenneth Laird was a shareholder. The significance of Redcliffe Forestry, Bristol Forestry, Ben Nevis and Greenmass being LAQCs is that the losses associated with their investments in the Douglas fir forest were transferred by s HG 16 of the Income Tax Act 1994 (“the Act”) to their shareholders.
The way the scheme was meant to work – the taxpayers’ contentions
[15] Under the arrangements two insurance premiums were payable by the taxpayers to CSI, first $1,307 per plantable hectare in 1997 and secondly $32,791 per plantable hectare on or before 31 December 2047.
[16] The taxpayers maintained that they were entitled to deductions in relation to the insurance premiums under s DL 1(3) or s BB 7 of the Act.
[17] Section DL 1(3) provided:
(3)A person who carries on a forestry business on any land in New Zealand shall, in calculating the assessable income derived by that person in any income year, be entitled to deduct any expenditure incurred by that person in that business in that income year, being expenditure which is not deductible otherwise than under this section,—
(a)By way of … insurance premiums … or other like expenses.
[18] Section BB 7 provided:
BB 7 Expenditure or loss incurred in production of assessable income—
In calculating the assessable income of any taxpayer, any expenditure or loss to the extent to which it—
(a) Is incurred in gaining or producing the assessable income for any income year; or
(b) Is necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income for any income year—
may, except as otherwise provided in this Act, be deducted from the total income derived by the taxpayer in the income year in which the expenditure or loss is incurred.
[19] In order for the scheme to work as intended, the 21 March 1997 payment of $1,307 per plantable hectare and the deferred payment of $32,791 had to be either:
(a)In the nature of an insurance premium and, as well, “expenditure incurred” in the 1997 tax year (for the purposes of s DL 1(3)); or
(b)An “expenditure or loss” which was incurred in the 1997 tax year for the purposes of gaining or producing assessable income (for the purposes of s BB 7).
[20] On the taxpayers’ argument, the licence was “a right to use land” for the purposes of the 17th Schedule to the Act and was depreciable under s EG 1. The taxpayers assert that depreciation was to be calculated on the basis of the “cost of the property to the taxpayer” (being the total amount of the licence premium) and using the straight-line method. On this basis they were entitled to annual deductions of 1/50th of the licence premium with an apportionment being necessary in relation to the 1997 tax year as the arrangements were put in place towards the end of that year.
The High Court litigation
[21] Venning J was confronted with a large number of issues most of which have been re-litigated in this Court. We have already identified the key issues which remain (see [2](d)-(j) above) and we will discuss the relevant parts of his judgment when we address each of those issues.
[22] There is, however, one aspect of the High Court litigation to which we should refer now. The present appellants were initially only some of a much larger group of investors who challenged the reversal of deductions associated with their involvement with Trinity 3. Shortly before trial, a number of documents associated with the set-up and operation of CSI were obtained by the Serious Fraud Office and made available to the Commissioner. When these documents surfaced, most of those challenging the assessments elected to settle with the Commissioner. The present appellants persisted with their challenges.
[23] These settlements are relevant (or possibly so) for three reasons:
(a)Those who settled with the Commissioner achieved financial outcomes which were far better than the appellants’. This forms the basis for an application by the appellant taxpayers to have the judgment of Venning J recalled. They maintained that the Commissioner should not discriminate between those who settled and those who went to trial. This topic is addressed in the recall appeal judgment which is being released simultaneously with this judgment, see Accent Management Ltd and others v Commissioner of Inland Revenue [2007] NZCA 231.
(b)A similar discrimination argument was also advanced in relation to the penalties imposed on the appellant taxpayers: see [157] below.
(c)The reaction of other litigants to the surfacing of the CSI documents might be thought to provide a measure of empirical evidence in relation to whether the tax position adopted by the appellants involved an “unacceptable interpretation”, see [157] and following below.
Were the insurance arrangements a sham?
Overview
[24] In the High Court the Commissioner claimed that the insurance arrangements were shams in relation to the LAQCs associated with Dr Muir and Mr Bradbury. This contention was rejected by Venning J and the Commissioner has cross-appealed on this point. Indeed in this Court the Commissioner sought to argue that the insurance arrangements were shams in relation to all taxpayers.
The structure of the insurance arrangements
[25] The policy issued by CSI provides for payment by CSI to the insured of the “loss of surplus” up to the figure of $1,230,311 per plantable hectare on the occurrence of “an affecting event”. This is defined as:
Any event or series of events which individually or cumulatively has the effect of preventing the market value of the net stumpage of Douglas Fir in New Zealand at any time during the Indemnity Period [period beginning with the occurrence of the affecting event and ending not later than 31 December 2048] reaching $2,050,518 (excluding GST) per hectare (being a Plantable Hectare), thereby causing loss of surplus to the Insured that is neither expected nor intended by the Insured nor subject to an exclusion, for which insurance is current and where liability is admitted or would be but for the application of an Excess.
[26] The insured are defined as Southern Lakes Forestry Ltd and Trinity 3 and the associated documentation makes it clear that Southern Lakes Forestry Ltd was contracting as bare trustee for the members of the SLFJV who were severally (and not jointly) liable to CSI. For ease of reference, we will omit future reference to Southern Lakes Forestry Ltd and treat the relevant contracting parties as the SLFJV and its members.
[27] The policy required the SLFJV to pay as premiums $1,307 per hectare (by implication forthwith) and $32,791 per hectare on or before 31 December 2047 and Trinity 3 to pay $410,104 per hectare on or before 31 December 2047. The last figure was to be adjusted by the amount of any negative difference between the assessed market value of the net stumpage and $2,050,518 per hectare but with the total amount to be paid not to exceed $1,230,311.
[28] There was a letter of comfort of 3 February 1997 from Trinity Foundation Charitable Trust to CSI under which the Trust undertook to provide funds to CSI to meet any claim under the policy, provided CSI had exhausted its resources and its ability to call on “contributors and/or insurers or reinsurers” in meeting claims. We see no reason why this undertaking by the Trust should not be construed as creating a binding legal obligation.
[29] The insurance arrangements thus created were, to say the least, unusual. As will become apparent, CSI was not expected to accumulate (at least to any significant extent) the premium income it received on 21 March 1997. Nor were any reinsurance arrangements entered into. Indeed, on the structure of the insurance arrangements there was no need for either accumulations of premiums or reinsurance. This was because the net effect of the arrangements was that either Trinity 3 would default in its obligations to CSI (thus releasing CSI from any liability to make payment) or alternatively the 2047-2048 wash up would occur in a way which was self-funding from the point of view of CSI. That this is so is apparent from a chart prepared by Dr Muir which, as explained and amplified in his evidence at trial, showed:
(a)At any net stumpage value in excess of $787,000 per plantable hectare, the wash up would be self-funding from the point of view of CSI which could perform and still make a profit; but
(b)At stumpage values of less than $1,230,000 Trinity 3 would not perform and on default would release CSI from its obligations.
The letter of comfort from Trinity Foundation Charitable Trust (the ultimate owner of Trinity 3) provided CSI with additional comfort as well as creating an additional element of circularity to the insurance arrangements.
[30] Against that background, it is useful to refer to some aspects of the way in which the insurance arrangement developed.
The set-up of the insurance arrangements
[31] As we have noted, shortly before the trial the Commissioner came into possession of a number of documents relating to CSI which had been obtained by the Serious Fraud Office from the British Virgin Islands. These documents caused Dr Muir much difficulty at trial. In the first place, the Judge concluded that he had been in breach of his discovery obligations. As well, the documents were not consistent with positions he had previously taken. His attempts to explain some of the documents did not impress the Judge. Indeed the Judge was extremely critical of Dr Muir. Counsel for the taxpayers did not invite us to revisit the Judge’s credibility findings and in light of this, the moral dimension to the non-production of these documents is of little moment for the purposes of this appeal and we see no need to discuss it further, save for one brief comment at [168] below. We should record, however, that even now the documentary trail associated with the set-up of CSI is far from complete and that this must be largely a function of the actions or inaction of Dr Muir.
[32] The first version of the eventual insurance arrangements was set out in a letter of 5 December 1996 from Dr Muir (on Bradbury and Muir letterhead) to Mr Barry Mitchell, a friend of Dr Muir who was based in the British Virgin Islands. This letter had obviously been preceded by prior discussion. The letter commenced in this way:
The insurer will receive a sum for writing the policy today of approximately NZ$40 per hectare of planted Douglas Fir. Since it is envisaged that there will be 2700 hectares planted that would be a net fee of NZ$108,000 for writing the policy. The term sheet actually provides for the insurer to be paid NZ$1027 per hectare (or NZ$2,272,900 for 2700 hectares) but almost all of this sum will either be paid in non-resident withholding taxes, or as introduction fees.
Mr Mitchell put Dr Muir in touch with Brian Jackson of AMS, a Virgin Islands based group of companies. He also wrote to Dr Muir advising him to make it clear to another AMS employee (Nigel Bailey) who was working on the proposal, “that there is no real risk in the whole thing”.
[33] On 13 January 1997 Mr Jackson wrote to Dr Muir noting:
It will be indisputable that this is a properly licensed BVI insurance company and there will be an annually issued licence to support this. It will be housed at our insurance management office, as are some thirty other such companies. In order to add “substance” to the company we can do any or all of the following:
(1) Install dedicated telephone and fax lines.
(2)Have signs made both to the main entrance directory and also the outside of the actual “office” that the company will use.
(3)Dedicate one employee as a full time employee of the company.
(4)Prepare stationery and letterhead for the company.
(5)Rent a dedicated “office” to the company within our overall office.
All of the above is not unusual for this type of company and can be carried out within the already agreed fee structure.
In addition Nigel said that I should emphasise the complete confidentiality that that this matter would receive from both ourselves and the BVI authorities. Once licensed here the company would be fully protected under BVI law. I should perhaps add that Nigel, before joining us was the Inspector of Insurance Companies here and was responsible for drafting the law in 1994.
If the above can offer a level of confidence that you are seeking then please let us know how you will wish us to proceed.
[34] On 16 January 1997 Dr Muir wrote to AMS authorising them to proceed with the application for the insurance licence previously discussed and identifying the proposed name for the company as CSI Insurance Group (BVI) Limited. In the course of this letter Dr Muir said:
We are happy for the application to proceed with you providing the shareholders and directors, acknowledging that the shareholder will be on a trustee/nominee basis. We note that we will provide you with the details of beneficial ownership at a later date.
[35] On 30 January 1997 Bradbury and Muir sent a hand-written fax to Mr Mitchell which showed that it was then proposed that:
(a)The shares in CSI be held either directly by the Christian Services Charitable Trust or by a nominee for the Trust based on the island of Nevis;
(b)The Christian Services Charitable Trust would need a one dollar settlor and a trustee;
(c)The one share in Trinity Foundation would be held by the Trinity Charitable Trust which had the same objects as Trinity Foundation and also needed an offshore one dollar settlor and an offshore trustee; and
(d)The Trinity Charitable Trust was not to do anything apart from “control” the directors of Trinity Foundation whose New Zealand objects would be “mainly Anglican charities”.
[36] On 31 January 1997 Dr Muir faxed to AMS draft deeds associated with Trinity Foundation (providing for its charitable purposes), Trinity Foundation Charitable Trust (vesting power to appoint trustees in Dr Muir and Mr Bradbury) and Christian Services Insurance Trust (again with Dr Muir and Mr Bradbury having power to appoint trustees). The draft trust deeds for the Trinity Foundation Charitable Trust and the Christian Services Insurance Trust are reasonably similar as, at least to some extent, are the objects. In each case there is specific provision for charitable purposes associated with the Anglican Church.
[37] On the same day Dr Muir wrote to AMS about a business plan which had been prepared for CSI. It is clear that the original business plan had been prepared by AMS from material originally supplied by Dr Muir. The evidence as a whole supports the inference that the draft business plan prepared by AMS (on which Dr Muir was commenting) included the following statement:
1.3The real benefits of the deal are tax concessions that can be obtained now by the investors and the foundation. One of the conditions required to gain the tax relief is that the insurance must be in place. The actual outcome of the deal in fifty years time is not considered material.
In his letter, Dr Muir did not comment on this part of the draft business plan which, in the end, was carried into the business plan as adopted. The information on which cl 1.3 was based must have come from Dr Muir and it is a striking feature of the case that its inclusion in the draft did not evoke any comment or complaint from him.
[38] In the same letter, Dr Muir indicated that the directors of CSI were to be Messrs Bailey and Jackson of AMS and that if the shareholder was not to be a Nevis associate of AMS, it was to be the trustee of Christian Services Insurance Trust.
[39] On 5 February 1997 Mr Mitchell sent Dr Muir a fax seeking clarification as to why his clients were reluctant to register the trust as a charitable trust in New Zealand and why the “Nevis company was in the structure”. He hypothesised that this was to achieve “extra confidentiality”. If there was a response, it was not produced in evidence.
[40] The detail of the ownership structures associated with CSI are of no great moment. The ultimate shareholder is the Christian Services Insurance Trust which is, for practical purposes, under the control of Dr Muir and Mr Bradbury. The directors of CSI are, for practical purposes, also under the control (or act on the direction) of Dr Muir and Mr Bradbury. And the same is true of the Trinity Foundation Charitable Trust which is the ultimate owner of Trinity 3.
The Parentis transaction and its impact on the funds available to CSI
[41] The initial premium of $1,307 per plantable hectare was first applied to cover the costs of establishing CSI and to provide the US$200,000 bond required by the inspector of insurance in the British Virgin Islands. A substantial part of the remainder (along with funds paid by investors associated with Trinity 1 and Trinity 2) was paid as a “finder’s fee” to Parentis Finance and Investment Inc (Parentis) and was then made available to trusts associated with Dr Muir and Mr Bradbury. The net result was that of the initial payment of $1,307 per plantable hectare, only $157 per plantable hectare was retained by CSI for possible accumulation.
[42] The transactions associated with all of this were murky. Parentis was incorporated in March 1997 at the instance of Dr Muir. Arawak Trustee Co Ltd, a trustee company in the British Virgin Islands, held the shares for Trinity Foundation. The settlor of the trust was an employee of a firm of solicitors in the British Virgin Islands. CSI paid Parentis approximately $3m (ostensibly as commission although Parentis in fact performed no services which could have justified such a payment) and Parentis advanced this money to family trusts associated with Dr Muir and Mr Bradbury. So the Muir and Bradbury family trusts have thus had the benefit of the vast bulk of the initial premiums.
[43] From the balance of funds left with CSI, around US$250,000 was invested. The investment failed. As at 28 February 2001, CSI’s audited accounts disclose that it has only US$16,773 in cash reserves to carry forward. CSI has no other business.
The approach of the Judge
[44] In the High Court, the Commissioner maintained that the arrangements involving CSI did not involve “true” insurance at all and that in any event they were a sham. The taxpayers maintained that the transactions were by way of insurance or that, in any event, they were deductible anyway.
[45] The Judge dealt with the first of these arguments in this way:
[184] The insured, SLFJV, have an insurable interest in the subject matter of the contract, namely the returns from the rotation of exotic Douglas fir trees on the plantable hectares by reason of their entitlement to the balance of the net stumpage proceeds in accordance with cl 21 of the licence agreement. The contractual arrangements prima facie satisfy the requirements for an insurance contract at law.
[185] Once it is established that CSI is a registered insurer that issued a policy to SLFJV and Trinity 3 and the arrangements satisfy the definition of an insurance contract at law (as they do) then absent sham, the financial obligations, namely the payments due in relation to the policies, are properly categorised as insurance premiums for the purposes of s DL 1(3). The Commissioner alleges sham in relation to the insurance arrangements, but only as against Dr Muir and Mr Bradbury. Whether the insurance taken overall was "real and effective" or alternatively was without economic substance or commercial credibility seem in my view to be matters more relevant to the general avoidance issue, rather than the black letter law issue.
[186] For present purposes I accept the premiums are prima facie deductible under s DL 1(3).
[46] He also concluded that they were primarily deductible under s BB 7:
[189] Although counsel focussed on s DL 1(3), s BB 7 precedes it in the Act. It is in more general terms. The premiums fall within the definition of "expenditure". I note s DL 1(3) applies where the expenditure "is not deductible otherwise than under this section". It follows the premiums would be deductible under s BB 7 primarily, or, if not, in any event under s DL 1(3).
[47] The Judge dismissed the sham arguments as well. In this regard he referred to the leading cases, Snook v London and West Riding Investments Ltd [1967] 2 QB 786 (CA), MacNiven (HM Inspector of Taxes) v Westmoreland Investments Ltd [2003] 1 AC 311 (HL), Paintin and Nottingham Limited v Miller Gale and Winter [1971] NZLR 164 (CA) and NZI Bank Ltd v Euro-NationalCorporation Ltd [1992] 3 NZLR 528 (CA). He discussed whether it was now possible to look at sham in a somewhat broader way, before concluding that the authorities just referred to were controlling. He then went on:
[222] The principal difficulty for the Commissioner in the argument that the insurance arrangements involving Redcliffe Forestry Ventures, Dr Muir, Mr Bradbury and Bristol Forestry Ventures Limited are a sham is that according to that settled test for sham, the parties to the documents must have had a common intention that the acts or documents were not to create the legal rights and obligations which they gave the appearance of creating. The insurance arrangements in issue are principally the proposals and policy. The parties to those documents are not only Dr Muir, Mr Bradbury and CSI. There were other parties to the insurance arrangements, namely the other investors in SLFJV. There is no evidence to suggest, and the Commissioner did not submit, that those other parties were parties to a sham or that those other parties shared a common intention that the documents did not create the legal rights and obligations that they purported to. The same policy issued to all SLFJV investors. Put shortly, the insurance contract or arrangements cannot be a sham insofar as they relate to Dr Muir and Mr Bradbury but not a sham in relation to the other investors.
[223] There are a number of the features relating to the establishment and operation of CSI that give cause for concern. It may be that CSI is under the control of Dr Muir and may not be in a financial position to be able to perform its obligations in 2047/2048 if called on. The insurance offered by CSI may not be recognised as insurance that experienced insurers would provide. However, none of those points mean the insurance is a sham in terms of the accepted principles, albeit that they may be relevant to the issue of tax avoidance.
…
[225] In the present case CSI exists. It has been issued with a licence to provide insurance. Contracts have been signed between CSI and Southern Lakes Forestry Limited for SLFJV. There is a douglas fir forest growing in Southland. The initial insurance premiums of $1,307 per hectare have been paid. It may be that CSI is not particularly sound financially, and also that Dr Muir (in particular) and Mr Bradbury had their own reasons for incorporating CSI and for fixing and controlling the insurance premiums to be paid to it but those reasons, while they may be relevant to other factors in the case, particularly the issue of whether the insurance arrangements are part of a tax avoidance arrangement, do not themselves support a finding of sham.
The arguments in this Court
[48] For the Commissioner, Mr White QC contended that the evidence showed clearly the arrangements were not in the nature of insurance and were properly categorised as a sham. The taxpayers, while not necessarily disavowing the conclusion of the Judge that the arrangements were by way of insurance (thus enabling s DL 1(3) to be invoked) placed their primary reliance on s BB 7. The Commissioner’s primary basis for rejecting their invocation of s BB 7 seemed to come down to the sham argument. We note in passing that the taxpayers’ caution about relying on s DL 1(3) may well have been associated with some awkward downstream consequences for them in terms of the accruals rules if the arrangements with CSI are properly to be regarded as involving insurance.
[49] The Commissioner’s argument was advanced most firmly in relation to Dr Muir and Mr Bradbury. Dr Muir was the architect of the scheme and party, as the Judge inevitably held, to the unhappily expressed cl 1.3 of the CSI business plan. By 2047 he will, if still alive, be a nonagenarian. The shareholders in Redcliffe Forestry (his LAQC) will, in all probability, have changed and its ability to make any payment will depend on the value of the harvest. No guarantee from Dr Muir was sought or offered. Mr Bradbury is in a broadly similar position, save that he is not tied so closely to the awkward CSI documents as Dr Muir (although his family trust was a beneficiary of the Parentis transaction). By 2047 he will be 93. His LAQC (Bristol Forestry) has no assets other than its interest in the forestry venture and he has not given a personal guarantee.
[50] Mr Christopher Verissimo (whose company is Accent Management) if still alive in 2047 will be 90. He is a close friend of Dr Muir and another of his companies, Sierra Developments Ltd, received the Parentis payment associated with Dr Muir, as it is the trustee of Dr Muir’s family trust. He did not give a guarantee although Accent Management has assets other than its investment in the forest. Mr Peebles (whose LAQC is Ben Nevis Forestry Ventures Ltd) will be 93 or 94 in 2047 (if he is still alive). He did not give a personal guarantee. Similar considerations apply in the case of Mr Algie and the late Mr Laird (who were both associated with Greenmass Ltd).
[51] Mr White also referred to us a line of authority that indicates that a finding of sham may be made against a party to a purported contract who goes along with a shammer either not knowing or not caring whether a transaction is genuine or otherwise not caring what he or she is signing, see Midland Bank Plc v Wyatt [1997] 1 BCLC 242 (HC), Re Esteem Settlement (Abacus (CI) Ltd as Trustee) [2003] JLR 188 (Royal Court of Jersey) and Hitch & others v Stone [2001] STC 214 (CA).
[52] Mr White maintained that in any event the contracts of insurance represented by the policy purported to create distinct policies between CSI and each of the investors in SLFJV and that accordingly he was entitled to run the narrow Snook sham argument against the LAQCs associated with Dr Muir and Mr Bradbury even if it could not succeed against the other taxpayers.
[53] Mr Stewart QC, who was primarily responsible for arguing this aspect of the case for the taxpayers, maintained that the argument now advanced went beyond what had been signalled by the Commissioner in the pleadings and at trial where the sham argument was only invoked against the entities associated with Dr Muir and Mr Bradbury. He generally adopted the conclusions of the Judge and maintained that there was no basis for concluding that the transactions were not intended to take effect according to their tenor.
Our conclusions
[54] At trial the argument against the taxpayers other than those associated with Dr Muir and Mr Bradbury was that the arrangements were shams because they were not true insurance arrangements. The conclusion does not follow logically from the asserted premise. A contract can be mislabelled without being ineffective. If the relevant arrangements were mislabelled as “insurance” but were nonetheless intended to create real legal obligations which were to be honoured, they would necessarily not be shams. But more significantly for present purposes, this line of argument did not directly engage with the relevant states of mind of the other taxpayers. In this Court, the Commissioner has maintained that the other taxpayers entered into the insurance arrangements neither knowing nor caring whether they were genuine and in this way were tainted by the shamming state of mind that he attributes to Dr Muir and Mr Bradbury. We are left with the view that this involves such a dramatic shift in the focus of the case against the other taxpayers (involving as it does an inquiry into their actual states of mind which was not made in the High Court) that it would be inappropriate to allow the Commissioner to run, as against them, the sham argument.
[55] On the other hand, we agree with Mr White that the structure of the insurance policy means that it would be possible on orthodox Snook principles to treat the insurance arrangements as a sham in relation to the taxpayers directly associated with Dr Muir and Mr Bradbury even though, as we have just held, it is not open to the Commissioner now to allege that the other taxpayers were implicated. This is because the policy in effect creates separate insurance arrangements for each member of the SLFJV. So we are in respectful disagreement with Venning J as to the primary basis upon which he rejected the sham argument in relation to Dr Muir and Mr Bradbury (see [222] of his judgment set out above).
[56] The aspect of the case presents two different problems. The first is the artificiality of the transactions and the second is whether they were intended to create genuine legal obligations.
[57] Our account of the transactions indicates clearly that they are highly artificial and indeed contrived.
[58] In substance they offer nothing to the parties which could not have been more easily, cheaply and directly achieved between the key participants in the forestry venture (assuming one leaves aside tax benefits and the Parentis transaction). The insurance premiums paid in 1997 have been almost entirely dissipated and, in any event, their retention was always recognised (at least by Dr Muir) as irrelevant to the ability of CSI to perform during the wash up. Also irrelevant to CSI’s ability to perform is payment of the premiums due from the taxpayers in 2047. Unsurprisingly therefore, no real steps have been taken to enhance the likelihood that the taxpayers will pay those premiums (for instance by taking personal guarantees or security other than over the forest). The ability of Trinity 3 to perform is entirely dependent on the value of the forest. So in all probability, the only “real” money in the system which will be available to fund the wash up payments will be the proceeds of sale of the forest. Those circumstances raise the question why the insurance arrangements were put in place, a question to which there is an obvious answer, albeit one which has nothing to do with the mitigation of risk.
[59] But artificiality and lack of commercial point (other than tax avoidance) are not indicia of sham. And the concepts of sham and tax avoidance are not correlatives. As well, while there are elements of pretence (and certainly concealment) associated with CSI transactions, these are explicable on bases other than sham; this given the nature of the Parentis transaction and the possibility of disallowance by the Commissioner for tax avoidance.
[60] The more difficult question is whether Dr Muir and Mr Bradbury intended the provisions as to the 2047-2048 wash up to be a dead letter.
[61] These obligations which are not required to be met for five decades may be defeated by a number of factors, for instance the liquidation of the taxpayers or further arrangements between the key parties (which are likely enough given the commonalities of interest and the over-arching control presently vested in Dr Muir and Mr Bradbury in relation to Trinity Foundation Charitable Trust and the Christian Services Insurance Trust). Relevant to this assessment is the assertion in cl 1.3 of the business plan to which we have referred. As well, as we have noted, the probabilities are that no money will be introduced into the wash up other than what will be associated with the value of the forest. It is thus unsurprising that no serious attempt has been made to ensure that Trinity 3 and the taxpayers will be able to perform their wash up obligations.
[62] We see this aspect of the case as closely balanced. Our impression is that Dr Muir and Mr Bradbury do not (and could not sensibly be thought to) have anything like a settled intention that their LAQCs will pay the 2047 insurance premiums as they fall due (or indeed meet the obligations to Trinity 3). Instead we are left with the view that in 1997 they regarded what is ostensibly to happen during the wash up as immaterial and as something which they (if they are still alive) or their successors can address when the times come. Their state of mind at the time the transactions were entered into can perhaps best be categorised as involving indifference to whether the wash up transactions occur. This is understandable as the whole scheme offered Dr Muir and Mr Bradbury very substantial immediate personal benefits whereas any possible down-side associated with the wash up is so far away as to be largely irrelevant. Given that their LAQCs are interposed between them and Trinity 3 and CSI and given as well their current control over Trinity 3 and CSI, they are presumably of the view that they can avoid, one way or another, the possibility that they (or their successors) will suffer any appreciable adverse consequences associated with the wash up obligations.
[63] By a narrow margin, however, we have reached the view that we cannot classify the transactions as shams. An obligation can be genuinely entered into even though subject to legal or practical defeasance or entered into on the basis that it might be replaced by another amended obligation. In a strange way, the very circularity which is involved in the transactions might be thought to be consistent with a desire that they be at least capable of achievement (or legally agreed variation) during or prior to the wash up. Whether these transactions are shams depends primarily on the states of mind of Dr Muir and Mr Bradbury as to their genuineness. Given that it is not to their advantage that the transactions be shams, it might be thought a little perverse to attribute to them states of mind which are inconsistent with their best interests.
[64] Accordingly we reject the contention that the insurance transactions are shams.
[65] Although the issue whether the contracts between the taxpayers and CSI were truly by way of insurance did not loom large in the arguments before us, we should say that we see no reason to differ from the conclusion of the Judge. No doubt the purpose of the arrangement (at least when viewed from the point of view of the architects of the scheme) was not mitigation of risk and, as well, the arrangements made for CSI meant that it incurred no practical risk in relation to the wash up transactions. But the contract did nonetheless, as Venning J recognised, satisfy the requirements for an insurance contract at law. As well, while there were no doubt other mechanisms which would have been cheaper and at least as effective for mitigating the risk the taxpayers were taking as to the value of the forest on maturity, the actual mechanism that was chosen was insurance. We see no reason to treat this as mislabelling.
Were the taxpayers required to spread deductions associated with the insurance premium payable in 2047?
[66] One of the striking features of the Trinity scheme is the way in which the taxpayers have sought to take advantage of timing differences. This is particularly so in relation to the insurance premiums for which the taxpayers sought full deductibility in the 1997 tax year even though most of the premiums are not to be paid until 2047. This aspect of the case not only is relevant to tax avoidance which we discuss later but also gives rise to the question whether deductions for the insurance premiums were required to be spread under the accruals rules. Venning J ruled against the Commissioner on this point and the Commissioner has cross-appealed.
[67] The key issue on this aspect of the case is whether the premiums should be regarded as “accrual expenditure”. If so, the effect of s EF 1 is that the taxpayers were required to spread the premium over the fifty year life of the policy.
[68] “Accrual expenditure” is relevantly defined by s OB 1 in this way:
Accrual expenditure … in relation to any person, means any amount of expenditure … by the person that is allowed as a deduction under this Act … , other than expenditure incurred—
…
(b) In respect of any financial arrangement …
It is common ground now that the 2047 premium is “accrual expenditure” unless incurred in respect of “any financial arrangement”.
[69] “Financial arrangement” is defined in s OB 1 in this way:
Financial arrangement—
(a) Subject to paragraph (b), means—
(i)Any debt or debt instrument; and
(ii)Any arrangement (whether or not such arrangement includes an arrangement that is a debt or debt instrument, or an excepted financial arrangement) whereby a person obtains money in consideration for a promise by any person to provide money to any person at some future time or times, or upon the occurrence or non-occurrence of some future event or events (including the giving of, or failure to give, notice); and
(iii)Any arrangement which is of a substantially similar nature (including, without restricting the generality of the preceding provisions of this subparagraph, sell-back and buy-back arrangements, debt defeasances, and assignments of income);—
but does not include any excepted financial arrangement that is not part of a financial arrangement:
The double negative at end of this definition obscures the meaning intended by Parliament. Further, the definition does not seem to make sense unless the word “wider” is interposed before “a financial arrangement”. We treat this part of the definition as if it read:
but does not include any excepted financial arrangement unless it is part of a wider financial arrangement.
[70] The expression “excepted financial arrangement” is defined as follows:
Excepted financial arrangement means any of the following arrangements:
...
(b) A contract of insurance or membership of a superannuation scheme:
The 2047 insurance premiums are payable under “an excepted financial arrangement” as the liability arises pursuant to a contract of insurance (as Venning J held). However it was common ground before us that Venning J was correct to conclude (at [204]) that this contract of insurance was part of a wider financial arrangement.
[71] That brings us to s EH 2 which provides:
EH 2 Excepted financial arrangement that is part of financial arrangement—
The amount of the gross income deemed to be derived or the expenditure deemed to be incurred by a person in respect of a financial arrangement under the qualified accruals rules shall not include the amount of any income, gain or loss, or expenditure, that is solely attributable to an excepted financial arrangement that is part of the financial arrangement.
[72] The Commissioner succeeds on this point. The premium is “solely attributable” to a contract of insurance and thus to an “excepted financial arrangement”. Accordingly, on the basis that the contract of insurance is “part of [a] financial arrangement” the premium is nonetheless not attributable to that financial arrangement given s EH 2 and thus not excepted from the definition of “accrual expenditure”.
[73] For the sake of completeness we note that the result is the same even if the contract of insurance is not “part of financial arrangement” (ie a wider financial arrangement). If this is so, it is not a “financial arrangement” at all, given the definition of “financial arrangement” and accordingly the relevant expenditure would not be excluded from the definition of “accrual expenditure”.
[74] In his judgment Venning J made a broadly similar analysis of the statute to the one we have adopted. He took the view that the insurance contract was part of a wider financial transaction and was thus required to consider the impact of s EH 2. But it was at this point that his approach differs significantly from the one we have adopted. Having set out the terms of s EH 2, he said (at [205]) that the insurance premium due in 2047 fell within the definition and was thus not required to be spread under the accrual rules.
[75] With respect to the Judge, he thereby misapplied s EH 2. If s EH 2 applies, the relevant expenditure is not incurred “in respect of a financial arrangement” and accordingly is not excluded from the definition of “accrual expenditure”. Instead the relevant expenditure is accrual expenditure and is required to be spread.
[76] Counsel for the taxpayers sought to defend the conclusion reached by the Judge, but, as we see it, the words of s EH 2 are too clear to admit any meaning other than the one we have placed on them.
[77] On this point we thus agree with the argument of the Commissioner albeit that this conclusion is of no ultimate importance given our findings as to tax avoidance.
Was the licence fee premium payable in 2048 deductible under s EG 1?
The relevant contractual provisions
[78] There are two relevant contracts, an agreement to grant licence and options entered into on 28 February 1997 between Southern Lakes Forestry Ltd and Trinity 3 and a licence agreement of 21 March 1997 between the same parties.
[79] Clauses 3.1 and 4.1 of the agreement to grant licence and options provide:
3.1 Grant of Licence
In consideration for the Purchaser's promise in clause 4.0 to pay the Licence Premium, the Vendor agrees to grant the Purchaser a licence to use the Property for the purpose of carrying on the Purchaser's forestry business on the Property for a term and on the conditions set out in the Licence Agreement.
4.1 Agreement to Pay Licence Premium
In consideration for the Vendor agreeing in clause 3.0 [sic] to grant the Purchaser a licence to use the Property on the terms described therein, the Purchaser agrees to pay the Licence Premium to the Vendor on the Final Expiry Date.
[80] Clause 2 of the licence agreement grants a licence to use the land:
2.0 GRANT OF LICENCE
The Land Owner hereby grants to the Licensee (for the consideration disclosed in the Original Agreement) a licence to use the Land for the purpose of carrying on the Licensee's business on the Land during the Licence Term and the Licensee accepts that grant. The Licensee acknowledges that while the within grant entitles the Licensee to possession of the Land the grant does not confer on the Licensee a legal right of exclusive possession (as that expression is discussed in paragraph 5.008 et seq. of Hinde, McMorland and Sim, Land Law 1978) or any estate or interest in the Land (whether by way of lease, easement or otherwise). The Land Owner further grants to the Licensee the authority to act as agent of the Land Owner to take all lawful steps to exclude trespassers from the Land. … Notwithstanding that the Land Owner will (subject to clause 20.2) have property in the trees in the Forest by virtue of its ownership of the Land, the Licensee shall have all rights to sell, lease or otherwise dispose of Biomass rights/pollution credits in respect of the Forest.
[81] Mr Stewart submitted the premium is payable for the right to go onto and use the land – a right which is necessary to enable the taxpayer to be able to grow the forest, which is its business.
[82] The key provisions of the licence agreement relate to the establishment, maintenance and harvesting of a Douglas fir forest on the land. Under these provisions, the licensee is required to establish, manage and protect the forest on the land in accordance with sound forestry principles (cl 12). The land can only be used for that purpose (cl 17). The licensee may not cut down, remove or dispose of any standing trees or naturally fallen timber except for production thinning (cl 20). Under cl 21 the licensee must arrange for the sale of the standing trees and naturally fallen timber from the forest between 1 January 2044 to 31 December 2048. The sale is to be by public tender or a process approved by the landowner, Trinity 3. The proceeds of sale are to be deposited into a bank account to be held with the landowner. In particular, after payment of:
(a) GST;
(b) costs in connection with the sale;
(c) the promissory note regarding the insurance premium; and
(d) the promissory note for the licence premium;
the balance (if any) is to be paid to the licensee on the licence expiry date, namely 31 December 2048.
The taxpayers’ argument
[83] On the taxpayers’ argument, the licence was “a right to use land” for the purposes of the 17th Schedule to the Act. Accordingly it was “depreciable intangible property” as defined in s OB 1 and in turn “depreciable property” which is also defined in the same section. On this basis a depreciation deduction was claimable under s EG 1. Under s EG 3(2) this deduction was to be calculated using the straight-line method and based on the “cost of the property to the taxpayer”, see s EG 2. The taxpayers maintain that the “cost of the property to the taxpayer” is the total amount of the licence premium and accordingly they were entitled to annual deductions of 1/50th of the licence premium with an apportionment being necessary in relation to the 1997 tax year as the arrangements were put in place towards the end of that year.
The relevant legislative provisions
[84] It is appropriate to discuss in a little detail just how this argument works in terms of the legislative scheme.
[85] For the 1998 tax year, s OB 1 defined depreciable property as:
(a) … any property of that taxpayer which might reasonably be expected in normal circumstances to decline in value while used or available for use by persons—
(i)In deriving gross income; or
(ii)In carrying on a business or the purpose of deriving gross income; but
(b) Does not include—
…
(ii)Land (excluding buildings and other fixtures and such improvements as are listed in Schedule 16):
(iii)Financial arrangements:
(iv)Intangible property other than depreciable intangible property:
The definition for the 1997 tax year was different but in a way which is not material for present purposes.
[86] As noted, the taxpayers maintain that the licence is “depreciable intangible property” which is itself defined in s OB 1 as meaning:
intangible property of a type listed in Schedule 17, which Schedule describes intangible property that has—
(a)A finite useful life that can be estimated with a reasonable degree of certainty on the date of its creation or acquisition; and
(b)If made depreciable, a low risk of being used in tax avoidance schemes …
Schedule 17 includes “the right to use land”.
[87] A noticeable feature of this analysis is that the deferred nature of the licence fee payment is irrelevant to the deduction arguments other than in respect of tax avoidance. If the taxpayers’ arguments are otherwise correct – and leaving aside the tax avoidance issue – the fact that the payment is not due until 2048 is irrelevant to the entitlement of the taxpayers to deduct 1/50th of the amount to be paid on an annual basis.
The approach of Venning J
[88] The taxpayers’ argument raised a number of questions:
(a)Was the licence “property … which might reasonably be expected in normal circumstances to decline in value” for the purposes of the s OB 1 definition?
(b)If not, did this matter if it was within the definition of “depreciable intangible property”?
(c)Was there a “low risk of [the licence] being used in tax avoidance” for the purposes of the definition of “depreciable intangible property”?
(d)If not, did it matter given that “the right to use land” is specifically provided for in Schedule 17?
(d)Was the licence fee truly payable for “the right to use land”?
[89] In his judgment, Venning J held that the licence fee was not paid for “the right to use land” but he otherwise answered these questions broadly in favour of the taxpayers. In his view, the inclusion of “the right to use land” in Schedule 17 meant that the risk of the licence in question being used for tax avoidance was irrelevant. As well, and perhaps more questionably, he held an asset which fell within the definition of “depreciable tangible property” was thus “depreciable property” even if not of a kind which “might reasonably be expected in normal circumstances to decline in value”. Mr White for the Commissioner supported the Judge’s conclusion that the licence fee was not paid for “the right to use land” and he did not seek to revisit in this Court the Judge’s other conclusions. For this reason we need only set out the Judge’s reasoning on the “right to use land” issue.
[90] Venning J identified the competing arguments in this way:
[133] The real issue on the question of whether the licence premium may be deducted under s EG 1 is the one I averted to earlier, namely whether the licence premium was paid for the right to use land. Mr White's principal submissions in closing for the Commissioner on this issue emphasised the contractual arrangements between Trinity 3 and SLFJV. Mr White submitted such an analysis led to the conclusion that the SLFJV investors agreed to pay the licence premium for the right to share in the balance (if any) of the net stumpage and not for the right to use Trinity 3's land.
[184] Despite Ms Hinde’s best efforts to argue to the contrary we regard that reasoning as impeccable. As well, given that the Court acted under s 138P, the time bar is inapplicable, see s 138P(5).
Orders
[185] Given the nature of the Commissioner’s cross-appeal and the outcome of the case generally, we see no need to make orders as to the cross-appeal. We dismiss the appeal. The appellants are ordered (jointly and severally) to pay costs of $30,000 and usual disbursements.
Solicitors:
Wynyard Wood, Auckland for Appellants
Crown Law Office, Wellington for Respondent
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