Doughty v. Commissioner of Taxes, [1927] AC 327 (PC)

On the formation of a partnership, the excess of the nominal value of the shares issued over the net book value of the assets transferred was assigned, in part, to goodwill, and the balance was applied to write-up the book value of the inventory. After finding that no profit had been realized on this transaction because it entailed the transfer of a business as a whole, Lord Phillimore went on to state (p. 336):

"The Crown is not entitled to take a mere bookkeeping entry as conclusive evidence of the existence of a profit. The two partners made no money by the mere process of having their stock in trade valued at a higher rate when they transferred to a company consisting of their two selves."

On the formation of a partnership, the excess of the nominal value of the shares issued over the net book value of the assets transferred was assigned, in part, to goodwill, and the balance was applied to write-up the book value of the inventory. In finding that this transaction did not give rise to a taxable profit on the transfer of the inventory, Lord Phillimore applied the principle (at p. 331) that:

"Income tax being a tax upon income, it is well established that the sale of a whole concern which can be shown to be a sale at a profit as compared with the price given for the business, or at which it stands in the books, does not give rise to a profit taxable to income tax."

On the incorporation of a partnership, the excess of the nominal value of the shares issued over the net book value of the assets transferred was assigned, in part, to goodwill, and the balance was applied to write-up the book value of the inventory. In finding that this transaction did not give rise to a taxable profit on the transfer of the inventory, Lord Phillimore applied the principle (at p. 331) that:

"Income tax being a tax upon income, it is well established that the sale of a whole concern which can be shown to be a sale at a profit as compared with the price given for the business, or at which it stands in the books, does not give rise to a profit taxable to income tax."