Dunnes growth left trust with huge liabilities for tax

Family feared tax bill put group's future in doubt writes Colm Keena, Public Affairs Correspondent.

The affairs of the Dunnes Stores group have again taken centre stage at the Moriarty (payments to politicians) tribunal.

This week the tribunal revealed that the Dunne family and the trustees of the family trust feared for the future of the company in the 1980s because of the massive potential tax bill that had built up within the trust during its 21-year life span.

It was while this issue was dominating the thinking of the then head of the group, Ben Dunne, that Charles Haughey was elected once again to the position of Taoiseach (March 1987). Shortly afterwards - it was also revealed this week - Haughey requested the head of the Revenue Commissioners, Séamus Pairceir, to meet Ben Dunne to discuss the problem.

In the background to this are a number of payments to Haughey from Dunne, which followed a request from his long-time financial adviser Des Traynor in early 1987.

In January of that year, Dunne was involved in the giving of £32,000 (€40,630) to Haughey, by way of a number of cheques. On May 20th, 1987, a cheque for £282,500 sterling (€426,000) was written for the benefit of Haughey. They are part of a series of payments totalling around over €2 million paid to Haughey by Dunne over the years.

The Moriarty tribunal is investigating whether the interventions made by Haughey with the Revenue Commissioners around the time he was getting payments from Dunne benefited the Dunnes. The tribunal is focusing on the request from Haughey to Pairceir that he meet with Dunne to discuss the tax issue.

This request had not been previously disclosed by Haughey, Dunne, Pairceir or the Revenue, or by Dunne's adviser Noel Fox, who attended some of the meetings.

Although Pairceir was asked by the McCracken tribunal, which preceded the Moriarty Tribunal, if any representations or submissions had been made to him concerning Dunnes, he decided that the request from Haughey did not fall into that category.

It has now emerged that the first meeting between Pairceir and Dunne occurred in April 1987, a month after Haughey's election, and subsequent meetings followed.

Fox attended with Dunne on occasion but Pairceir seems to have attended these meetings on his own. No minutes were taken of the meetings, although some Revenue officials, to whom Pairceir reported back, took notes.

The tribunal has said that it is going to inquire into why Haughey had to ask Pairceir to meet with Dunne when the request could have simply been made by Frank Bowen or Fox, Dunnes trustees with whom Pairceir was already in regular contact during the 1985-1986 period.

Dunnes Stores Trust

The late Bernard Dunne and his late wife, Norah, established a trust in 1964 and gave it the shares in Dunnes Holding Company. The trust was to have a lifetime of 21 years and if, at the end of that period, it still held ownership of the shares, they were to go to the six Dunne children.

Liam Horgan, a retired tax partner with Touche Ross, Cork, told the tribunal yesterday that the trust was not set up for tax reasons but because Bernard Dunne wanted the group to last for 50 years after his death. He wanted the children to be "tested" before ownership of the group was passed on.

He also said that, with the benefit of hindsight, he believed the establishment of the trust was a mistake because it had led to the huge tax bill that had now accumulated within the trust and which one day would have to be paid.

By the mid 1980s, the Dunnes group was the largest privately owned business in the State, making the Dunne children enormously wealthy. At the time, it was only surpassed in size by the banks and plcs such as Cement Roadstone and Smurfits.

The huge growth in the value of the group meant that, when the trust came to the end of its life and the shares were transferred to the beneficiaries, a huge tax bill would be incurred. The exact size of the bill would be dictated by the valuation put on the Dunnes group.

The taxes involved would be capital gains tax for the trustees, and capital acquisitions tax for the beneficiaries, although one tax could be set off against the other.

By 1985, the trustees were: Fox, Bowen, Oliver Freaney, Bernard Uniacke and the late Edward Montgomery.

In February 1985, Bowen was introduced by the late Hugh Coveney to the then minister for finance, Alan Dukes, and a meeting was set up between Pairceir and some his officials and the trustees to discuss this tax issue.

The trust was facing a second, smaller tax bill, for discretionary trust taxes (DTT). Prior to the meeting with Pairceir, the trust made a £500,000 payment on account in relation to DTT, basing its return on a valuation for the Dunnes group, as of January 1984, of £33.4 million.

However, at the meeting with Pairceir and the Revenue, it was made clear that £80 million would be a minimum valuation that the Revenue would be putting on the group.

The DTT bill was appealed by the trust to the Appeal Commissioners and the hearing was listed for March 16th, 1987. (Haughey had become Taoiseach six days earlier.) The DTT bill had been based on a January 1984 valuation of £100 million for the Dunnes group.

On the day of the appeal hearing, the two sides agreed a settlement, based on a valuation of £82 million. The DTT was to be paid within 21 days or, if not paid in that period, interest would begin to accumulate at 1.25 per cent per month. The settlement was agreed by barristers for both sides and approved by Pairceir for the Revenue.

There was a delay in paying the bill and interest accumulated. On May 25th, Pairceir, following contact with Fox, agreed to write off the £62,500 in interest that had accumulated since the settlement had been agreed. The final bill was £3.54 million and was paid on that date. Pairceir has told the tribunal that conceding some interest in this way is not unusual.

However, it was clear from early meetings with Pairceir over the DTT that the valuation put on Dunnes Stores by the Revenue would lead to a capital taxes bill, in the event of the trust being wound up, that Bowen has told the tribunal would have been beyond the capacity of the group to pay.

Such a tax bill could have forced the trust to sell off part of the group, a move that the family would have found difficult to stomach.

The trustees decided instead to set up a new trust, with five of the Dunne children being the beneficiaries, and to move the shares to it. The ordinary shares were moved to the new trust. The preference, or voting shares, were transferred to three of the Dunne siblings.

However, the Revenue decided the transfer of the shares to the new trust was a disposal, triggering a capital gains tax assessment for the trustees and Pairceir informed Bowen of this.

At this stage, Pairceir had assumed a lead role in the Revenue's dealings with Dunnes and assembled a group of officials to work on the issue of the valuation to be put on the Dunnes group and that would dictate the size of any tax bills.

"On November 27th, 1986, an assessment to capital gains tax was raised by the Revenue in the sum of £38.8 million," Jacqueline O'Brien SC, for the Moriarty tribunal, said this week. It was based on a chargeable gain of £97 million by reference to a valuation for the group of £120 million as of March 1985.

Four months after this assessment was raised, Haughey was back in power.

Pairceir and Dunne

Pairceir has told the tribunal in a statement of intended evidence that his meetings with Dunne and Fox at the request of Haughey had to do with the capital taxes issue. The meetings may have been an attempt to restart the negotiations that had taken place with the trustees and which had led to nothing.

Notes taken by Revenue officials based on reports back from the meetings by Pairceir indicate that he eventually told Dunne that the Revenue would be willing to reduce its £38.8 million capital taxes bill to £16 million. The offer was not taken up and the matter went before the Appeal Commissioners, with Dunnes Stores claiming that the transfer of shares to a new trust was not a disposal.

The last meeting took place on the September 10th or 11th, 1987. Pairceir resigned on the 11th

The trust won the case before the Appeal Commissioners. The Revenue, acting on advice from senior counsel, decided not to appeal the matter to the High Court. No capital taxes were paid.

The issue the commissioners ruled on was not the issue of value but whether a disposal had occurred. Horgan said the trust was convinced of its case and ready to go all the way to the Supreme Court.

It also emerged this week that, following his departure from the Revenue Commissioners, Pairceir became an adviser to the Dunnes trust at the request of Fox. He asked Pairceir if he would help in researching matters connected with the pending capital gains tax hearing before the Appeal Commissioners and Pairceir agreed.

He was in time paid £10,000 plus Vat for this work. Fox, in a statement of intended evidence, said it was Dunne who engaged Pairceir and not the trust. Bowen has said, in a statement of intended evidence, that the trustees never engaged Pairceir.

In 1990, the Revenue revised their valuation for the Dunnes group, upping it to £220 million. Horgan said that, in the 1980s, Dunnes re-invested every available pound in the building up of the group. There was an "explosion" in the size of the group in the late 1980s and 1990s.