Key statements of the judgment
- For buildings completed before January 1, 1925, the statutory depreciation rate of 2.5% generally applies; this can only be deviated from if an actual shorter useful life of less than 40 years is established with sufficient probability for the specific building (Section 7 (4) sentence 2 EStG, Section 11c EStDV).
- The decisive factor is no longer the "total useful life of the building" as such, but the useful life in the hands of the respective owner; there is therefore no fixed upper limit of 100 years for the total useful life, and the total useful life can increase beyond 100 years due to a change of ownership.
- A higher depreciation rate than 2 or 2.5% requires a concrete, factual determination/estimate of the actual (possibly economic) useful life; a mere link to general empirical principles (e.g. "100 years") is not sufficient. The tax office and court have a corresponding duty to clarify the facts; if there is no evidence of a remaining useful life of less than 40 years, the rate of 2.5% remains.
- Against this background, the BFH overturned the previous decision and referred the case back because the actual useful life of the buildings in dispute had not been sufficiently established; without reliable findings, the standardized depreciation rate of 2.5% remains.
Wording of the judgment
Facts:
1
The amount of depreciation for buildings is in dispute.
2
In 1961, the plaintiff and defendant in the appeal (taxpayer) acquired the rented residential property X in B at a price of DM 73,565 with a building value share of DM 53,315 and, at the end of 1964, the rented residential property Y in B for DM 243,135 - building value DM 179,760. The buildings were constructed in 1886 and 1890. The defendant and appellant (FA) recognized a building depreciation of 4% as income-related expenses up to and including 1964. In the 1965 income tax assessment, the FA reduced the depreciation to 2.5%, citing § 7 para. 4 sentence 1 EStG in the version of the law on the new regulation of depreciation for buildings of June 16, 1964 (BGBl I 1964, 353). In the objection lodged against this, the taxpayer argued that the useful life of the buildings could not exceed 25 years because they were already no longer suitable for residential use. The FA, on the other hand, assumed in the objection decision that the application of depreciation rates higher than 2.5 percent presupposed the existence of special circumstances, which the taxpayer had to prove. However, damage to load-bearing elements of the building had not been established. The aspects presented by the taxpayer were not sufficient for the assumption that the buildings could no longer be rented out in the foreseeable future.
3
As a result, the action was successful. The judgment of the tax court essentially states:
4
While according to § 7 para. 4 EStG 1965, 2 % [meaning 2.5 %] of the acquisition or production costs of buildings completed before January 1, 1925 were to be deducted annually up to the full deduction, according to § 7 para. 4 sentence 2 EStG 1965, correspondingly higher depreciation could be applied if the useful life was shorter than 40 years. In contrast, pursuant to § 7 para. 1 EStG a. F., buildings were to be depreciated according to the estimated total useful life, whereby the useful life was regularly estimated at 100 years, with the exception of business buildings. Even after the new statutory regulation, the total useful life of a building could be assumed to be a maximum of 100 years (reference, inter alia, to Herrmann-Heuer, Kommentar zur Einkommensteuer und Körperschaftsteuer, § 7 note 24a, § 21 note 29j; Hanraths, Die steuerliche Betriebsprüfung 1969 p. 41). According to the explanatory memorandum to the government draft of the StÄndG 1965, when estimating the useful life of residential buildings, it had to be expected that residential buildings would have to be demolished or converted a considerable time before the end of their technical useful life due to the rapid change in living habits. In the present case, the building had been depreciated at depreciation rates higher than 2 or 2.5 percent. The FA had obviously based its estimate of a remaining useful life of 25 years on a total useful life of one hundred years. The FA had not argued that the estimate was incorrect and was not otherwise recognizable. In this factual and legal situation, the shorter economic useful life asserted by the taxpayer was irrelevant.
5
With the appeal allowed by the tax court, the FA complains of a violation of substantive and formal law(§ 7 para. 4 sentence 2 EStG in conjunction with § 11c para. 1 EStDV; §§ 76, 81 para. 1, 96 FGO). Contrary to § 7 para . 4 sentence 2 EStG in conjunction with § 11c para. 1 sentence 1 EStDV, the Fiscal Court failed to determine the actual useful life of the buildings - if necessary by consulting experts - and wrongly adopted the previous estimation method of the FÄ, which had served to simplify administration but had never become the norm.
6
The FA requested that the contested judgment be set aside and the case be referred back to the tax court for a different hearing and decision.
7
The taxpayer requests that the appeal be dismissed.
Reasons for the decision
8
The appeal is well-founded. It leads to the previous decision being set aside and the case being referred back to the lower court.
9
According to § 7 para. 4 sentence 1 EStG in the new version of 1965, the depreciation for a building completed before January 1, 1925 is to be assessed at 2.5% per annum. According to Section 7 (4) sentence 2 EStG, this regulation does not apply if the actual useful life of the building is less than 40 years. According to Section 11c (1) sentence 1 EStDV, the useful life of a building is the period during which the building can be expected to be used for its intended purpose. The useful life of buildings acquired by the taxpayer after June 20, 1948 -- in Berlin after April 1, 1949 -- begins at the time of acquisition(§ 11c para. 1 sentence 2 no. 3 and para. 2 EStDV). This definition of the term and the beginning of the useful life represents a correct interpretation of the law, as it is in line with the wording and meaning of the provision of § 7 para. 4 EStG. If the total useful life of buildings constructed before January 1, 1925 were taken as the basis, the provision of § 7 para. 4 sentence 2 EStG, which provides for a useful life of only 40 years, would be impracticable (see Herrmann-Heuer, § 7 EStG note 24 a). The explanatory memorandum to the law also expressly emphasizes that the useful life is to be related to the respective owner (Bundestagsdrucksache IV/2008 p. 10 on the right). If reference is made to the acquisition after June 21, 1948 or April 1, 1949, this corresponds to the significance of the currency conversion for the economic and tax situation.
10
The statutory provision of § 7 para. 4 sentence 1 EStG determines a uniform depreciation rate for all buildings depending on the time of construction before or after 1 January 1925. This "statutory typification of depreciation" (Görbing, BB 1964, 677) applies both to cases in which depreciation was previously carried out at lower depreciation rates and if the previous annual depreciation amount exceeded 2 or 2.5 per cent. Contrary to the opinion of the lower court, it is irrelevant if, as a result, a total useful life of more than 100 years is achieved. Neither § 7 para. 4 EStG nor § 11c EStDV indicate that a total useful life of the building of 100 years should form the mandatory upper limit of the depreciation period. This is because, according to the new regulation, it is no longer the total useful life of the building that is important, but the total useful life in the hands of the respective taxpayer. This will often lead to depreciation over a longer period than 50 years, as it can generally be assumed that a building will change hands at least once in the course of 50 years (Görbing, loc. cit.). If the building is sold several times during this period, its total useful life may exceed 100 years.
11
The explanatory memorandum to the law does not state otherwise. The Federal Government initially stated there (Bundestag printed paper IV/2008 p. 5) that the technical useful life of residential buildings would normally be around 100 years, but that due to the rapid change in living habits it could not be disregarded that residential buildings would have to be demolished or fundamentally converted a considerable time before the end of their useful life. A useful life of 50 years was nevertheless extremely short, but could be justified because of the simpler handling of the depreciation rate of 2% and to compensate for the fact that no declining balance depreciation was permitted. With regard to the provision of § 7 para. 4 sentence 1 EStG, it is merely stated that it is to be expected with certainty that the depreciation rates of 2 or 2.5 percent will mean an improvement in the deduction possibilities for the vast majority of buildings. On the other hand, § 7 para. 4 sentence 2 EStG ensures that for buildings for which a higher deduction rate than 2 or 2.5 percent has already been applied, this higher depreciation rate can also be claimed in the future. There would therefore be no deterioration in the deduction possibilities in any case (Bundestag printed paper IV/2008, p. 8 and 10 re Sp.). However, the Federal Government assumed that the shorter actual useful life would be substantiated.
12
In the opinion of the Senate, the assumption of a shorter actual useful life also presupposes that the question is examined as far as possible within the framework of the official and judicial duty to clarify the facts(§ 204 AO, § 76 FGO), as the BFH already stated in the previous legal situation in the judgment VI 225/61 U of 31 August 1962 (BFH 75, 746, BStBl III 1962, 538). Pursuant to § 7 para. 4 sentence 2 EStG, the actual useful life of the building concerned in the dispute is to be determined (cf. § 11c para. 1 sentence 1 EStDV), whereas under the law applicable until December 31, 1964(§ 7 para. 1 sentence 2 EStG), depreciation was to be calculated according to the normal useful life of the building, i.e. it could be estimated on the basis of administrative experience with buildings of the same or similar age, location and the like. Since the useful life of the building depends not only on its technical characteristics but also on its economic usability, an economic useful life that differs from the technical useful life must also be taken into account. Of course, sufficient tangible evidence is required to assume that the economic wear and tear of the building is less than the technical useful life (see decisions of the Reichsfinanzhof VI A 270/32 of July 19, 1932, RStBl 1932, 1022; VI A 91/35 of December 12, 1935, RStBl 1936, 414; decision of the BFH IV 114/56 U of June 27, 1957, BFH 65, 175, BStBl III 1957, 301). In most cases, an estimate will be unavoidable even after the new statutory regulation, because at least uncertain future events must also be assessed. Consequently, it is not possible to demand certainty about the shorter useful life, but only the greatest possible probability. When this is the case in detail is a question of factual assessment. The Senate does not agree with the "strict requirements" for proof set out in Section 42 (3) EStR.
13
For the sake of uniformity of taxation alone, an examination of the actual useful life is required for all buildings for which a higher depreciation rate than 2 or 2.5% is claimed. If this review has already taken place before the new regulation comes into force, there are generally no objections to the continuation of the previous depreciation amounts. The same applies if the FA, in good faith, as in the case of a binding commitment (see BFH decision VI 269/60 S of August 4, 1961, BFH 73, 813, BStBl III 1961, 562), is to adhere to the previous treatment of the case. If, on the other hand, the previous depreciation was only calculated according to the empirical principle of a hundred-year total useful life of the building, the general typifying regulation of § 7 para. 4 sentence 1 EStG applies, in accordance with the principle that the FA and the taxpayer are generally not bound by the factual treatment in the taxation of previous years (see BFH decisions VI 215/61 U of October 26, 1962, BFH 76, 239, BStBl III 1963, 86, and I R 111/66 of November 30, 1966, BFH 87, 345, BStBl III 1967, 154). This is the situation here. In accordance with the taxpayer's request, the FA assumed a total useful life of 100 years and a remaining useful life of 20 years in the 1964 assessment period without further examination of the actual circumstances. This treatment of the case does not constitute a binding permanent regulation, nor does it satisfy the requirements of § 7 para. 4 sentence 2 EStG. This is because the FA calculated the depreciation solely on the basis of the useful life generally assumed for buildings of this type and age in the B-M district and did not, as required, address the circumstances of the buildings to be assessed here in detail. The FA was therefore not only entitled but also obliged to review the previous depreciation assessment and to amend it, unless the requirements of § 7 para. 4 sentence 2 EStG were met.
14
Accordingly, the previous decision cannot be upheld. The Senate is not in a position to decide for itself because it is still to be determined what the actual useful life of the building is likely to be. If a remaining useful life of less than 40 years cannot be determined with sufficient probability, the depreciation rate remains at 2.5%. The matter therefore had to be referred back to the tax court for a new hearing and decision.