A € 2.3m payment by private equity firms to veteran businessman Gary McGann while he was chief executive of packaging giant Smurfit Kappa, for "gratitude, appreciation, admiration and friendship", was not a gift and must be taxed as income, the Tax Appeals Commission has ruled.
Mr McGann and three other Smurfit Kappa executives were allotted a € 5.8m payment from US private equity firm Madison Dearborn Capital and a Cayman Islands-based feeder fund controlled by Cinven and CVC in June 2007.
The payment was made just months after the packaging group successfully listed on the Dublin and London stock markets earlier that year, raising € 1.5bn.
The payments made to executives were equivalent to twice their respective annual salaries at the time.
A Madison Dearborn Capital executive told the Tax Appeals Commission in a hearing that the global financial crash of 2008 had delayed the firm's sale of shares until Smurfit Kappa's share price recovered in 2011. The payment reported to them in 2007 was made to executives in March 2011.
Mr McGann received just over € 1m from a Madison Dearborn vehicle and € 1.2m from the Cinven-CVC vehicle.
Mr McGann is a hugely respected figure in Irish and international business. He is currently chairman of the Swiss-Irish food group Aryzta, chairman of Flutter Entertainment, owner of Paddy Power and Betfair. He is a former chief executive of Aer Lingus.
He is no longer a director of Smurfit Kappa. The ruling also notes that Mc McGann also received a € 1.38m loan from Anglo Irish Bank in June 2008 to buy shares in Smurfit Kappa. Mr McGann was a non-executive director at the failed bank from 2004 to 2009.
Mr McGann was appointed chief financial officer of the Jefferson Smurfit Group in 1998. In 2002, the company was acquired in a € 3.7bn buyout led by Madison Dearborn.
Mr McGann became CEO that year. In 2005, Jefferson Smurfit acquired Dutch packaging group Kappa, which brought Cinven and CVC on board as investors in the enlarged Smurfit Kappa group. Mr McGann was confirmed as the group's CEO in early 2007 as he prepared for his flotation that year.
In a letter received by Mr McGann in 2007 from a Madison Dearborn executive, he said of his "deep appreciation" for his efforts and commitment during the private equity investment firm Smurfit Kappa, which culminated in the flotation.
He added that everyone at Madison Dearborn Capital Partners is "aware of the sacrifices you have made in this period of your life to deliver the exceptional return we have achieved to date".
"In recognition of this and as a concrete expression of our gratitude, we have decided to make a gift to you of € 1,075,150," added the letter.
"We will, of course, expect that you will comply with all of your obligations as to disclosure and taxation in respect of our gift."
Mr McGann said he treated the total € 2.3m payment to him from private equity firms as a gift and later paid capital acquisitions tax of € 596,350 on the amount.
“The background to this gift is the admiration which I felt in respect of[MrMcGann}andtherestoftheteamfortheirimmensededicationandcommitmentThiswassomethingextraordinaryandveryrare”aMadisonDearbornexecutivetoldtheTaxAppealsCommission[MrMcGann}andtherestoftheteamfortheirimmensededicationandcommitmentThiswassomethingextraordinaryandveryrare”aMadisonDearbornexecutivehadtoldtheTaxAppealsCommission
“At the core of the dispute in this appeal is the question of whether to pay the € 2.3m to the appellant [Mr McGann] by the shareholders arose from his employment or whether it was made for personal reasons forming part of his personal equity or whether it arose from something else, ”noted Tax Appeals Commissioner Lorna Gallagher.
She determined that the € 2.3m payment to Mr McGann "constitutes a taxable emolument assessable to income tax".
McMcGann has been contacted for comment.
Neither Mr McGann nor any of the other parties were expressly named in the Tax Appeals Commission ruling.
However, the parties were identifiable from the details surrounding the company flotation and other matters contained in the ruling.