Sommerer v. The Queen

Sommerer v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2011-04-14
Neutral citation
2011 TCC 212
File numbers
2007-2583(IT)G
Judges and Taxing Officers
Campbell J. Miller
Subjects
Income Tax Act
Decision Content
Docket: 2007-2583(IT)G
BETWEEN:
PETER SOMMERER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on December 6, 7, 8, 9 and 10, 2010,
January 25 and 26, 2011, and February 7 and 8, 2011, at Ottawa, Ontario
Before: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Roger Taylor, Daniel Sandler and Louis Tassé
Counsel for the Respondent:
Luther P. Chambers, Q.C. and
Ryan Hall
____________________________________________________________________
AMENDED JUDGMENT
The appeals from the reassessments made under the Income Tax Act (the "Act") for the 1996, 1997, 1998, 1999 and 2000 taxation years are allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the Reasons for Judgment.
Costs to the Appellant.
Signed at Ottawa, Canada, this 13th day of May 2011.
"Campbell J. Miller"
C. Miller J.
Citation: 2011 TCC 212
Date: 20110513
Docket: 2007-2583(IT)G
BETWEEN:
PETER SOMMERER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
C. Miller J.
[1] Mr. Sommerer is one of those energetic individuals whose mind is so full of business ideas, specifically connected to the hi-tech industry, that he cannot seem to actuate them fast enough. He left me with the impression of someone who cannot sit still for long, evidenced by standing throughout his three and a half days of testimony. He sees one project up and going and is on to the next, be it a business venture or a Phd. With his strong Austrian roots he, with his father, took advantage of the newly minted Private Foundation legislation in Austria, and in 1996, the Sommerer Private Foundation ("SPF") was founded by Mr. Sommerer’s father. It is the tax treatment in Canada of the subsequent gains on the sale of shares held by the SPF, having purchased those shares from Mr. Sommerer at fair market value, that is the issue before me. The Government assessed on the basis there was a trust in Austria and that the attribution rules (subsection 75(2) of the Income Tax Act (the "Act")) attributed the gains on the sale of shares to Mr. Sommerer, or to his wife. The Appellant argues that there was no trust, and in any event if there was, subsection 75(2) of the Act was still not applicable. Further, even if subsection 75(2) of the Act was applicable, the Canada-Austria Income Tax Convention (the "Convention") precluded Canada from taxing the gains on the disposition of the shares. In the alternative, the Respondent argues that the SPF acted as agent for Mr. Sommerer on the disposition of the shares, triggering the tax on the gain from the sale of shares in Mr. Sommerer’s hands. Finally, there is an issue with respect to the timing of the sale of shares by Mr. Sommerer to the SPF, although this was not the Respondent’s initial assessing position. There is a smorgasbord of issues regarding trusts, corporations, agency, the definition of shares, Treaty interpretation and Austrian law all flowing into the determination of the correctness of the assessments before me.
Facts
[2] Mr. Sommerer grew up in Austria, the oldest of six children. He obtained an engineering designation and in the late 1960s went to work for IT&T in Austria. While working, he studied towards the equivalent of an MBA, which he obtained from the University of World Trade in 1975. In 1974, he married a United Kingdom citizen, who had one child, and together they had two children born in Austria in 1975 and 1977. The Sommerers lived in an apartment initially but moved to a larger co-op housing arrangement as the family expanded.
[3] While working in Austria with IT&T, Mr. Sommerer heard of Nortel. His interest was piqued in the North American way of business. In 1977, he applied to emigrate to Canada as a Landed Immigrant and, in 1978, the Sommerer family moved to Canada. According to Mr. Sommerer, they sold everything though kept the right to live in the co-op housing in Austria for a year, just in case he was unable to find work in Canada. This right was given up after a year. Mr. Sommerer kept a bank account in Austria to cover vacation expenses. He also kept his Austrian driver’s licence which is issued for life. Though he retained his Austrian citizenship, Mr. Sommerer took out Canadian citizenship in 1993.
[4] Mr. Sommerer did find work in Kanata working for Mr. Terry Matthews at Mitel. He eventually became project manager of a switching system that skyrocketed Mitel’s fortunes. He was asked to go to Germany to set up a Mitel subsidiary which he did for the period 1981 to 1984. He kept his home in Ottawa, simply renting it out. During this period of working for Mitel both in Canada and in Germany, Mr. Sommerer would occasionally visit Austria.
[5] On his return to Ottawa in 1984, Mr. Sommerer described the bloom being off the rose for Mitel, and he happily joined Mr. Matthews in a new venture, Newbridge. Again, being in charge of product management, revenues for Newbridge soared. Mr. Sommerer suggested that Newbridge get into internet products in the late 1980s. Upon Newbridge going public it faced some technical issues, and Mr. Sommerer was put in charge of solving them. He became chief operating officer in 1990. Over the next few years, revenues reached the billion dollar mark.
[6] In the late 1990s, a number of Newbridge affiliated companies were established, one of them being Vienna Systems Corporation ("Vienna"), positioned to operate voice over networks on the internet. It was incorporated in August 1995. Mr. Sommerer acquired 25% of the common shares of Vienna (1,770,000). Mr. Sommerer divided his time between Newbridge and Vienna. He hired a CEO for Vienna. Mr. Sommerer left Newbridge in 1998 and looked for something new, which he found in another internet type venture, Coventus.
[7] From 2004 to 2007, Mr. Sommerer studied and obtained a Phd from a University in Vienna. He acquired an apartment in Vienna where he would spend time while studying. He also acquired a house in the mountains in Austria in 1995. He owned his Ottawa residence as well as a cottage in Pakenham, Ontario and a MURB in Kingston. He expressed no interest to return to live in Austria.
The Sommerer Private Foundation ("SPF")
[8] In 1996, Mr. Sommerer and his father discussed the establishment of a Private Foundation in Austria. Such foundations had only recently been introduced by the Austrian Private Foundation Act of 1993 (APFA). On October 3, 1996, a Foundation Declaration was signed by Mr. Sommerer’s father, Mr. Herbert Sommerer, who paid 1,000,000 Austrian shillings of his own money into a foundation account. The Foundation Declaration is not lengthy and is worth reproducing in its entirety:
§ 1 Name and Registered Headquarters
(1) The foundation is a private foundation under Austrian law with the name ----
Sommerer Privatstiftung
(2) The foundation’s registered headquarters is located in Mitterbach ----
(3) Founder of the foundation is Mr. Herbert SOMMERER ----
§
2 Purpose, Beneficiaries
The purpose of the foundation is to promote the interests of those individuals indicated in the supplementary deed from the income generated by the foundation funds.
Engaging in investment activities, in particular the purchase of shares on credit, is also in line with this purpose.
Beneficiairies and those who may become beneficiaries based on the purpose of the foundation have no legal claim to grants from the foundation.
§ 3 Assets
(1) Foundation assets at the time the foundation was set up consist of a cash amount of ATS 1,000,000 (one million Austrian shillings). This is recorded as capital in the opening balance of the foundation. The rules of the Companies Act on capital stock apply to these foundation assets. ----
(2) The foundation is authorized to acquire and hold movable and immovable assets and rights of any kind (including securities), both domestically and abroad, to engage in legal transactions of any kind, and to accept any contributions and incur any debt that may be necessary of useful in maintaining or administering the foundation assets. ----
§ 4 Corporate Bodies
Corporate bodies of the foundation include the: ----
a) Executive Board---------------------------------------------------------------
b) Foundation Auditor-----------------------------------------------------------
c) Advisory Board----------------------------------------------------------------
§ 5 Executive Board
(1) The Executive Board shall consist of three members.----
(2) Members of the Executive Board are appointed and dismissed by the founder of the foundation as long as he is alive and capable of conducting business. Otherwise, in the event that a member leaves, the Executive Board decides on his/her successor. Re-appointment is permitted.----
(3) The Executive Board shall conduct the business of the foundation with the due care of a proper and conscientious business manager in accordance with the foundation declaration, any supplementary deeds, and rules of procedure that it decides upon. It represents the foundation externally in all matters; two representatives are authorized to act jointly for representational purposes.----
(4) Members of the Executive Board will leave the Board:----
- once the term of office, to be determined, has expired;----
- due to resignation, which shall be submitted in writing to the Chair of the Board or his/her deputy without requiring any reasons to be stated;
- due to death, incapacitation, or bankruptcy;
- due to dismissal by the founder or the Executive Board itself; the Executive Board shall decide by secret vote on dismissal for significant cause; the member to be dismissed has not right to vote in this case;----
- due to a decision of the court in accordance with § 27 (paragraph twenty‑seven) of the PSG (Private Foundation Act).
§ 6 Principles of Asset Administration
(1) The corporate bodies of the foundation shall always strive to maintain the value of the foundation assets. The Executive Board, with the consent of the Advisory Board, decides upon the level and allocation of the grants and upon the beneficiaries, with the consent of the Advisory Board.----
(2) Members of the foundation bodies are entitled to compensation commensurate with their activities and in line with foundation income. Moreover, they have a claim to reimbursement of any necessary cash outlays. The foundation auditor is required to provide an opinion on the appropriateness of the compensation annually in his/her report.----
§ 7 Accounting, Reporting, and Audit
(1) The Executive Board shall determine the foundation’s fiscal year.----
(2) The Executive Board shall prepare the annual financial statements and the management report and submit them to the foundation auditor within five months of the end of the fiscal year. The Executive Board shall report on the foundation’s performance and beneficiaries, as well as the activities and grants planned for the following year, in the management report.
(4) The foundation auditor is appointed by the court upon recommendation of the Executive Board for a period of three years. Re-appointment is permissible.
§ 8 Amendments to the Foundation Declaration
(1) The founder is entitled to revoke the foundation during his lifetime and to amend any points in the foundation declaration with the consent of the Advisory Board.----
(2) Upon the death or incapacitation of the foundation founder, the Executive Board is authorized to decide on an amendment of the statutes contingent upon a two-thirds majority and to submit such amendment to the court. An opinion of the Advisory Board shall be obtained in advance. A change in the original purpose of the foundation is permissible only if, due to a change in circumstances (changed economic or social circumstances or a shift in general moral concepts or a change in the legal situation, particularly related to tax law), the pursuit of the purpose of the foundation without change would no longer reflect the presumed intention of the founder. An adjustment for the purpose of more advantageous taxation is permissible in the interest of the maintaining the value of the foundation assets.----
§ 9 Supplementary Deed
The foundation founder may set up a supplementary deed.----
§ 10 Term, Liquidation
(1) The foundation is set up for an indefinite period.----
(2) The Executive Board may decide to liquidate the foundation based on a unanimous resolution and an endorsement by the Advisory Board in the event that it can no longer fulfill the foundation’s purpose as intended by the founder, and it does not appear that this purpose can be achieved by means of a change in the foundation declaration.----
[9] On October 4, 1996, Mr. Herbert Sommerer signed a supplementary deed, also worth producing in its entirety:
§ 1 Allocation of Assets
Mr. Herbert SOMMERER established the Sommerer Privatstiftung today by notarial deed.----
§ 2 Beneficiaries
The beneficiaries are Mr. Peter SOMMERER, his wife, Mrs. Dawn Elizabeth SOMMERER, as well as the children from their marriage, but only as of their eighteenth birthdays and, in the event of their death, their offspring, provided they are resident in Austria.----
§ 3 Ultimate Beneficiaries
(1) In case of liquidation under § 34 (paragraph thirty-four) of the Privatstiftungsgesetz (Private Foundation Act), Mr. Peter SOMMERER and Mrs. Dawn Elizabeth SOMMERER are the ultimate beneficiaries as interpreted under § 36 (paragraph thirty‑six), Section 4, (four) of the Private Foundation Act. ----
(2) In all other cases of liquidation, the offspring of Mr. Peter SOMMERER and Mrs. Dawn Elizabeth SOMMERER are the ultimate beneficiaries. In the event of multiple offspring, distribution should occur per head; offspring of still living offspring, however, will not participate. In the event that no children or grandchildren of the founder exist or can be identifies, the remaining assets are to be transferred in equal parts to the communities of St. Sebastian, Styria, and Wootton Basset, Wiltshire, England, on condition that the transferred assets are utilized to finance infrastructure accessible to the general public.----
§ 4 Revocation, Modification of the Supplementary Deed
The supplementary deed may be revoked by the Executive Board with unanimous approval by the Advisory Board, and all items may be modified or supplemented.--
§ Advisory Board
An Advisory Board consisting of three members shall advise the Executive Board in determining grants to beneficiaries and has the right to supervise the activities of the Executive Board.----
Members consist of the oldest two beneficiaries and the founder.----
[10] In accordance with the terms of the SPF Declaration Mr. Hebert Sommerer appointed Mr. Ketzer, a colleague of Mr. Peter Sommerer’s from college, Mr. Krammer, who Mr. Peter Sommerer did not know, though expressed confidence in his credentials and Mr. Grossbacher, a banker known well by Mr. Peter Sommerer, as the members of the Executive Board of the SPF.
[11] Mr. Sommerer explained that the reasons the SPF was established were:
a) he agreed fully with the concept of the Private Foundation in that it was to stem the flow of capital out of Austria to other European countries and to attract foreign capital, thus shifting capital stocks (shares of Vienna for example) into Austria;
b) from Mr. Herbert Sommerer’s perspective to establish family ties through the SPF in Austria with the hope that the family might return;
c) to make it easier to leverage financing from Austria;
d) to provide a safe haven for investments;
e) from his perspective, to, in some way, compensate Austria for the education he received, to make capital available for new start-ups, to create something for his children and use the income for charitable purposes.
[12] Coincidentally with the establishment of the SPF, Mr. Sommerer, as Seller, entered into a Sales Agreement with the SPF, as Buyer, dated October 4, 1996. It stipulated in part:
1. Object of the Agreement
1. The Seller owns registered shares in Vienna Systems Corporation, Kanata, Ontario, Canada (hereinafter termed the "Company").
2. The Seller hereby sells 1,770,000 of the shares detailed above to the Buyer. It is noted that voting, dividend and any subscription rights will remain to the Seller.
2. Purchase Price
1. The purchase price for the shares covered by this agreement is $1,177,050 CDN. …
3. Transfer and Guarantee
1. The Buyer acquires the shares covered by this agreement without voting, dividend and subscription rights. …
4. General Terms and Conditions
…
2. In the event that individual provisions of this contract are or become unenforceable, this does not affect the enforceability of the remaining provisions. In this event, the parties to the agreement will replace such provision with a new one that reflects the business purpose of the original provision.
[13] The SPF paid Mr. Sommerer cash of $117,705, with the balance of the purchase price of $1,059,345 remaining an amount owing on which interest accrued. Excerpts of the Vienna Board of Director’s meeting of September 20, 1996, indicate:
Upon motion duly made, seconded and carried, the following resolution was passed: Resolved that the transfer of 1,770,001 common shares of the Corporation from Peter Sommerer to Sommerer Privatstiftung be and the same is hereby approved.
Further, share certificates were ultimately issued in the name of the SPF, albeit some considerable time after October 1996.
[14] Mr. Sommerer indicated that he wanted to keep the vote to influence the future of Vienna. He believed the shares, without the voting, dividend, and subscription rights should be valued at half their value of $1.33 per share (the Appellant and Respondent agree that fair market value at that time was $1.33 per share), thus the price worked out to .665 cents per share. Mr. Sommerer had suggested in his examination for discovery that another possible reason to keep the vote was to avoid the possibility of Vienna losing its Canadian control private corporation (CCPC) status, as, if the non‑resident SPF and the public company Newbridge held greater than 50% of the shares there was a risk. Mr. Sommerer’s testimony in this regard is worth reproducing:
…
Q. You also acknowledged that the reasons why you sold the shares to the Foundation back in 1996 without the voting rights as to maintain the status of Vienna Systems as a CCPS?
A. I didn’t. Where did I say that? I think I indicated that I wanted to maintain the voting rights in order to continue to have a way when it came down to set the direction of the company.
Q. I’ll re-read the passage in the discovery. It’s volume 1 of the transcript. Page 152, you said in answer to question on page 152, line 2:
"Q: Private Corporation?
A: Private Corporation. Yes, Vienna Systems was a private corporation.
Q: But you acknowledge certain tax advantages flow from that?
A: Clearly, I am aware of the tax advantages of CCPC status.
Q: Which you did not want to lose?
A: Definitely, the company would not want to lose them, given the R&D.
Q: Yes. Is this the reason why you wanted to retain the voting rights to the shares?
A: That could very well have been one of the reasons."
This is the answer you gave us?
A. It says it could have been one of the reasons.
Q. But it wasn’t now?
A. Pardon?
Q. It wasn’t?
A. In 1996, no.
…
[15] On Canadian professional advice that it was not possible to split the rights in shares, Mr. Sommerer and the SPF entered an Addendum, dated March 3, 1997 that stated:
Addendum to the Purchase Agreement
dated October 4, 1996
Based on a purchase agreement dated October 4, 1996, Sommerer Privatstiftung, Waldrandsiedlung 5, 3224 Mitterbach, has acquired 1,770,000 shares of Vienna Systems Corporation from Mr. Peter Sommerer, 8 Murphy Court, Kanata, Ontario, Canada, without voting, dividend, or subscription rights.
Both contracting parties hereby agree that the aforementioned rights have in principle been transferred.
The Sommerer Privatstiftung explicitly transfers all of these rights (voting, dividend, and subscription rights) to Mr. Peter Sommerer.
Mr. Peter Sommerer grants the Sommerer Privatstiftung the right to transfer the voting, dividend, and subscription rights against payment of a consideration of CAD 0.66 per share.
Vienna, March 3, 1997
[16] It is unclear why this document is dated the 3rd of March 1997 as Minutes of the Executive Board of the SPF suggest that it was sometime after June 1998 and, perhaps, even as late as November 1998 that this Addendum was finally put in place. Indeed, the Minutes of the meeting of November 27, 1998 indicated a couple of things:
5. Voting, Dividend, and Subscription Rights of the Vienna Shares
Mr. Krammer explained that an amendment of the agreement regarding the purchase of shares in Vienna Systems Corporation has not yet been implemented and noted that he will soon send a respective suggestion for an agreement amendment to Mr. Peter Sommerer for signing.
…
10. Vienna Systems Takeover Offer
Mr. Sommerer informed the attendees that the company Nokia has approached the company Vienna in order to purchase all of the outstanding shares of the company Vienna. He gave the Executive Board a copy of a decision from the Advisory Board to recommend to the Executive Board that it comply with a possible offer from Nokia and offer for sale all of the shares in Vienna Systems that are in the possession of the Foundation, provided the price per share is approximately CAD 9 (Attachment G).
The Executive Board unanimously agreed to comply with this recommendation.
Mr. Peter Sommerer further explained that it is anticipated that Nokia will request a signed sales offer from the Executive Board of the Private Foundation before December 18 in order to complete the purchase before year-end 1998.
The Executive Board further unanimously agreed to buy back the voting, dividend, and subscription rights of the Vienna Systems shares still remaining with Mr. Peter Sommerer if Nokia accepts the sales offer.
…
[17] The parties are agreed that the fair market value of the Vienna shares in October 1996 was $1.33 per share.
[18] In April 1997, Mr. Sommerer, as a member of the Advisory Board of the SPF recommended to the Executive Board to sell 150,000 Vienna shares, but the Executive Board determined not to do so at that point, as Mr. Krammer believed, according to the Executive Board minutes that the shares "still have price increase potential". In December 1997, the Executive Board, again on recommendation of Mr. Sommerer as a member of the Advisory Board, resolved to sell 150,000 Vienna shares to Mr. Mikutta, 33,333 to Mr. Jenkins and 33,333 to Mr. Madsen at a price of $4.50 Cdn per share. It is interesting to note Mr. Sommerer’s correspondence of November 30, 1997 to Mr. Jenkins in connection with this sale of Vienna shares:
I will transfer to you upon issuance of the share certificate in your name any dividend and share allocation rights. Only the voting rights for these shares shall remain with me. These voting rights shall extend to any shares obtained by you through any share dividends, share splits and to any shares acquired subject to any pro rata allocation rights for newly issued shares. Immediately prior to an initial public offering, I will transfer to you the voting rights for any shares owned by you for which I hold the voting rights.
[19] On November 23, 1998, the directors of Vienna considered a proposal from Nokia to purchase Vienna for $134,000,000. Four days later, the Advisory Board of the SPF recommended to the Executive Board that the Nokia proposal be accepted at $9.00 Cdn per share. (see excerpt of Minutes in paragraph 16 of these Reasons) The Share Sale Agreement with Nokia was signed by Mr. Grossbacher on behalf of the SPF on December 18, 1998.
[20] Mr. Sommerer had, on December 21, 1998, responded to the SPF’s request for the transfer-back of the voting, dividend, and subscription rights to the 1,770,000 Vienna shares, by assigning such rights back to the SPF effective immediately at .665 cents per share. This appears to be in accord with the last paragraph in the Addendum of October 4, 1996.
Cambrian Shares
[21] With respect to the Cambrian Systems shares, on September 30, 1997, Mr. Sommerer entered into a written Subscription Agreement with Cambrian Systems Corporation for the purchase of 57,143 common shares of that company for $100,000.
[22] In a letter dated March 26, 1998, from Mr. Grossbacher, the chairman of the Executive Board of the SPF, to Mr. Sommerer, Mr. Grossbacher stated:
I am sending you a decision that indicates we have followed the request of the Advisory Board to acquire 57,143 pieces of the company Cambrian Systems Corp. at a price of Cdn $100,000. I request that you initiate the following:
- Establishment of the Acquisition Contract;
- Definition of the account number into which the money shall be transferred.
Mr. Sommerer delivered the stock certificate for the 57,143 shares of Cambrian Systems Corp. on April 5, 1998, to Mr. Grossbacher.
[23] Notwithstanding an earlier position of the Appellant, the Appellant conceded at trial that there was a transfer of the Cambrian shares from Mr. Sommerer to the SPF in 1998.
[24] On December 4, 1998, Nortel made an offer to the shareholders of Cambrian to acquire their shares at $14.97 US per share at closing with an additional $4.12 per share if certain milestones were met in 1999. The SPF received two cheques in the amounts of $316,584 and $539,007 in connection with this sale.
Changes to the SPF
[25] There were a number of changes to the SPF after 1998. Although these are not applicable to the relevant time period in the case before me, it does show a subsequent history that gives some insight into the individuals’ intentions and purpose of the SPF. I am, therefore, going to go over some of these changes briefly.
[26] At the June 17, 1998, meeting of the Executive Board of the SPF, attended by all three members of the Advisory Board, being Mr. Sommerer, Mr. Herbert Sommerer and Mrs. Sommerer, changes to the Supplementary Deed were discussed. The minutes indicate:
8. Amendment of the Supplementary Foundation Deed
…
Mr. Krammer expressed his willingness to work out a suggestion for an amended Supplementary Foundation Deed, present it to the Advisory Board and Executive Board as soon as possible for approval, and implement the necessary notary revision. It was agreed that a new Supplementary Foundation Deed (STD) should include the following changes:
· Adding of nonprofit organizations as beneficiaries in § 2 of the STD as unanimously suggested by the Advisory Board
· Changing the condition of an Austrian place of residence in § 2 of the STD to a condition of a place of residence in a country to be designated by the Advisory Board, with the designation of Canada as such a country being irrevocably excluded
· Adding the same domicile condition in Para. 1 and Para. 2 of § 3 of the STD in order to apply them analogously for the determination of the final beneficiaries
· Eliminating the explicit right of the Advisory Board expressed in the first paragraph of § 5 of the STD to monitor the activities of the Executive Board.
[27] On January 22, 1999, the Supplemental Deed was in fact amended to accomplish this. There was no longer any mention of the supervisory role of the Advisory Board.
[28] On December 6, 1999, after having received some professional advice, and having been contacted by the Canada Revenue Agency (CRA) with respect to his 1998 returns, Mr. Sommerer wrote to Mr. Krammer as follows:
…
The changes are targeted to avoid any specific names of beneficiaries. The new addendum certificate should only consist of three paragraphs:
§ 1. Benefited persons must be not-for-profit organizations determined by the Advisory Board.
§ 2. This addendum certificate can be revoked by the Executive Board and unanimous approval by the Advisory Board, and can be changed and amended on all points.
§ 3. An Advisory Board herewith assigned consists of three members and must advise the Executive Board for the determination of donations to the beneficiaries. At any given time, the membership consists of the oldest of the following persons: the founder, Mrs. Dawn E. Sommerer, Mr. Peter Sommerer, and the children and grandchildren of Peter Sommerer and Dawn E. Sommerer.
[29] This resulted in a further Amended Supplemental Deed dated January 7, 2000. In particular, I note:
Second:
The beneficiaries are specific charitable organizations;
Third:
1. In case of liquidation under § 34 of the Privatstiftungsgesetz (Private Foundation Act), Mrs. Dawn Elizabeth SOMMERER is the ultimate beneficiary as interpreted under § 36, Section 4, of the Private Foundation Act, provided she resides in one of the countries named by the Advisory Board, with the exclusion of Canada. The residence clause is irrevocable.
[30] Later in 2000, Mr. Sommerer felt that given the issues arising surrounding the Foundation Declaration and Supplemental Deed, and how the SPF conducted its business, he drafted some rules of procedure for both the Executive Board and the Advisory Board. This also led to some changes to the Foundation Declaration, which were effective July 24, 2000, primarily to add a provision that the SPF "shall promote the establishment or expansion of companies of individuals who may be considered for the function of members of the Advisory Board…".
[31] The Supplemental Deed was also amended at the same time to make a number of changes:
a) beneficiaries to be appointed by the Executive Board now included charitable organizations as well as groups of persons considered for the Advisory Board, provided there will be no such appointment if it would "give rise to a fiscal (taxable) position for the Private Foundation or such persons without contributions having been made".
b) With respect to the ultimate beneficiaries, this too was changed to persons being considered as members of the Advisory Board…in equal shares, again subject to a residency requirement.
[32] The provision dealing with the Advisory Board underwent a substantial overhaul providing more of a complete code for the Advisory Board. The Advisory Board’s purpose remained "to advise the Executive Board in certain matters and/or approve of certain decisions of the Executive Board or deny such approvals".
[33] There were further amendments in 2007, when Dr. Torggler became involved. This is long past the relevant time period and is of no consequence.
Executive Board – Advisory Board interactions
[34] Both parties spent considerable time reviewing the minutes of the Executive Board to give me a flavour of where control of the SPF rested. I do not intend to go through this in extensive detail but simply make a number of observations:
a) Apart from the minutes of February 22, 2000, where it was indicated Mr. Sommerer was contacted by phone, he attended all 25 Executive Board meetings, for which minutes were presented at trial; in many cases all members of the Advisory Board attended.
b) Mr. Sommerer acted as secretary of the Executive Board at the meetings and prepared the minutes.
c) Mr. Sommerer frequently presented investment strategies and recommendations. A good example are the minutes of the meeting of November 27, 1998, of the Executive Board where Mr. Sommerer recommended the acquisition of the Bridgewater stock options, as well as the sale to Nokia of the Vienna shares. The Board agreed unanimously with both recommendations.
d) Especially after the SPF came into funds from the sale of the Vienna shares, the Executive Board needed guidance on investments. For example, the Advisory Board communicated the following decision to the Executive Board in the fall of 1999:
Decision by the Advisory Board of the Sommerer Private Foundation relative to the Management of the Foundation Assets
The Advisory Board herewith communicates its concept relative to the management of the assets of the Sommerer Private Foundation as follows:
1. All proceeds earned from the sale of Foundation assets in the course of the year, including possible profits from speculation, must be reinvested as soon as possible while respecting the planned structure of the Foundation assets.
2. All interest or cash dividend earnings received in the course of the year must be kept as short-term cash assets. The total amount received from interest and dividends must be determined within three months after the end of a fiscal year.
3. The Executive Board shall, in coordination with the Advisory Board, put aside from this total amount a corresponding amount as cash reserve for payment of obligations of any type (taxes, other costs).
4. The remaining amount is to be paid to the beneficiaries in coordination with the Advisory Board.
5. A possible remaining amount must be reinvested in a way that it corresponds as closely as possible to the target structure of the Foundation assets.
6. The Advisory Board shall inform the Executive Board before the beginning of each fiscal year of the target structure of the Foundation assets and, if necessary or desired, propose any restructuring of specific investments.
e) It was the Advisory Board that proposed the distributions. Mr. Sommerer indicated he would value the Foundation’s capital each year to bring to the Executive Board’s attention the amounts available for distributions. This was in fact a two-prong test looking at both income and the inflationary value of the SPFs assets.
f) The Executive Board minutes indicate that the Executive Board, in conjunction with the Erste Bank, was involved in managing the portfolio investment.
Experts
[35] Before reviewing the testimony of the two experts, Dr. Torggler and Dr. Plesser, it is important to keep in mind the relevant provisions of the APFA, as published in October 1993. This legislation can be found in Appendix A to these Reasons.
[36] There are a number of elements of APFA that I wish to specifically note:
a) The Private Foundation is a legal entity;
b) The Foundation Declaration in the form of Deed must be recorded in the Register of Corporations;
c) A supplementary document need not be registered though the dates of the Deed and amendments must be;
d) Beneficiaries may be named in the Foundation Declaration or by a person or institution (Stelle) named for this purpose by the founder, or, if no Stelle, by the board of directors (Executive Board);
e) Ultimate beneficiaries are entitled to all assets remaining on dissolution;
f) There is provision for a supervisory board in specific circumstances (these circumstances are not met in the case before me);
g) The Foundation Declaration can provide for other Foundation organs;
h) The Executive Board ensures the purpose of the Foundation is achieved and must perform its duties frugally and prudently;
i) The founder may reserve the right to change the Foundation Declaration or revoke it; the founder in this case did reserve the right to revoke;
j) The beneficiaries have rights to information and inspection.
[37] Both Dr. Torggler and Dr. Plesser were well qualified to assist me in understanding the Austrian laws regarding the Austrian Private Foundation.
[38] Dr. Torggler not only acted as an expert witness, but he had also been retained by the SPF in 2007 to revise the Foundation Declaration. Before commenting specifically on the SPF, he opined as follows:
a) The Private Foundation is a "person";
b) The Executive Board owes a duty only to the Private Foundation and no fiduciary duty to the beneficiaries, unless provided in the Foundation Declaration;
c) An Advisory Board which is an additional organ cannot, according to the Austrian Superior Court, be dominated by beneficiaries if the rights and duties of such organ are similar to a supervisory board;
d) The legislation distinguishes between beneficiaries and ultimate beneficiaries. Austrian Courts have also distinguished actual from potential beneficiaries. Beneficiaries are considered actual beneficiaries only from the time of entitlement to endowments. Ultimate beneficiaries are considered actual beneficiaries only from the time of adoption of a resolution by the Executive Board to dissolve the Private Foundation;
e) An Austrian Private Foundation is subject to Austrian corporate income tax as a separate legal person, including a speculation tax on the disposition of shares held for less than a year.
[39] Dr. Plesser agreed with the above comments.
[40] With respect to the SPF, Dr. Torggler opined:
a) Peter Sommerer (and his wife and children) were potential beneficiaries only as they were not residents of Austria and there was no resolution to dissolve the Foundation. Dr. Plesser agrees.
b) Mr. Sommerer had no rights of a beneficiary under sections 29, 30 or 31 of the APFA, given he was only a potential beneficiary, but would have rights under subsection 35(3) and (4) regarding the dissolution of the Foundation. Dr. Plesser agrees.
c) Mr. Sommerer had no ownership rights in the SPF property. Dr. Plesser agrees.
d) Mr. Sommerer cannot transfer his position as a beneficiary to another person. Dr. Plesser agrees.
e) The SPF had no supervisory board as an organ.
f) The Advisory Board was not validly established in 1998 and had therefore no powers, as it was not provided for in the Foundation Declaration, only mentioned; only after a later amendment was it validly established and constituted.
g) Distributions from the SPF related to income from the property only and not the capital of the property. Although there was some considerable discussion in this regard, I conclude that distributions were income distributions.
[41] Dr. Plesser’s major disagreement with Dr. Torggler surrounded the powers of the Advisory Board. While he agreed it was not established as an organ as such of the SPF, he opined that it could either be a Stelle (authority named for the purpose of naming beneficiaries found in section 5 of the APFA), though only in conjunction with the Executive Board, or it could be a person to be given special responsibilities, in accordance with subsection 9(2) and (4) of the APFA.
[42] Dr. Plesser opined that the powers of the Advisory Board were as follows:
- its consent was required for determining the amount of grants and the beneficiaries (section 6 of the Foundation Declaration).
- its consent was required for a Founder to revoke or amend (section 8(1) of the Foundation Declaration).
- its opinion was required for amendments in event of the death of the founder (section 8(2) of the Foundation Declaration).
- its endorsement was required for liquidation (section 10 of the Foundation Declaration).
[43] Dr. Plesser also suggested, based on a 2002 Austrian Superior Court decision, there can exist an Advisory Board, though not an organ, that could have influence. In that case, the Superior Court stated:[1]
… As such, the grantors established a "secret" board that is not subject to any organizational status with respect to § 14 Section 2 PSG. A board established by the grantors (such as the Advisory Board), at any rate, is not a body of the foundation with respect to § 14 Section 2 PSG if the foundation deed, as in this case, merely contains the reserve for the establishment of further bodies and due to the total lack of information regarding the organizational structure and tasks of the board there are no points of reference that a body should be established for the protection of the purpose of the foundation. As such, the grantors have created a board in the present case that can influence the board of the foundation within the scope of the approval authorization;