Wording of the judgment
Facts of the case
1
The plaintiff and appellant (plaintiff) is a pharmacist and receives income from commercial operations. Together with his wife, he acquired, on the basis of a notarial agreement dated May 13, 1972, with effect from July 1, 1972, one half each of the developed property ...
2
Prior to this, on June 1, 1972, the spouses had concluded the following contract:
3
The wife transfers to her husband her half share in the house ... for the purpose of developing and setting up a pharmacy. She receives a monthly rent of DM 600 for this. The rent is to be paid monthly. Should the tenant fall into arrears with his payments, interest of 8% shall be charged. The lessee is responsible for all running costs relating to the property share - in particular interest payments for borrowed funds ...
4
In 1972 and 1973, the plaintiff carried out considerable conversion, extension and modernization work on the entire building in his own name and for his own account. In particular, the ground floor of the property, which had previously been used exclusively as a residential building, was converted into a pharmacy.
5
During a tax audit carried out at the plaintiff's premises in 1978 for the years 1973 to 1976, the auditor considered the plaintiff to be the beneficial owner of the share of the ground floor belonging to his wife, capitalized the entire construction costs for the construction of the pharmacy in the amount of DM 342,605.40 (excluding input tax) at the plaintiff's premises and, in this respect, took uniform depreciation of 2.5% per year with the rest of the building in accordance with § 7 para. 4 no. 2 of the Income Tax Act ( EStG ).
6
During a further external audit in 1983, the auditor took the view that the plaintiff was not to be regarded as the beneficial owner of the wife's co-ownership share and that the production costs attributable to this were not to be regarded as those of the building, but of an independent tangible asset, the right to use the building. In accordance with Section 7 (1) EStG, he continued to take into account depreciation at a rate of 2.5% per year in line with the normal useful life of the building of 40 years.
7
The plaintiff unsuccessfully appealed against this with an objection and a lawsuit, which were directed at a depreciation rate of 5% per year. The plaintiff justified his request by arguing that the expected useful life was only 20 years because he would give up his business on reaching the age of 65, i.e. in 1992.
8
The tax court took the view that the facts presented by the plaintiff were not suitable to justify a higher depreciation rate because, according to the principles of arm's length comparison, it had not been established that a depreciable right of use had been created in the person of the plaintiff at all. The contract of June 1, 1972 was unclear and incomplete. According to its text, it was conceivable that the lease payment of DM 600 per month was solely for the use of the pharmacy built on his wife's share of the property. However, it was clear from the couple's joint income tax return that the payment also related to the use of the apartments in the rest of the building. There was no other explanation for the fact that for 1981 the plaintiff declared only the rental income from the contract of June 1, 1972 (DM 7,200), whereas the plaintiff declared all income from the rental of the apartments as income from renting and leasing the property and obviously also took into account all income-related expenses from this type of income. As a result, it was already questionable what the plaintiff had actually leased and what he was allowed to use, but above all how long the use allegedly granted to the plaintiff was to last. Finally, the contract did not contain any provisions regarding the legal consequences of Section 951 of the German Civil Code (BGB). A third party would not invest sums of well over DM 100,000 in a property that did not belong to him without ensuring the type, scope and duration of use and without regulating his claims at the end of use.
9
In his appeal, the plaintiff alleges a violation of substantive law. He is also of the opinion that a 20-year useful life and consequently a depreciation rate of 5% should be applied.
Reasons for the decision
10
The appeal is unfounded. As a result, the tax court rightly refused to amend the contested income tax assessments, taking into account the higher depreciation rate sought.
11
1.
The plaintiff could only claim the claimed higher depreciation rate if the use of the pharmacy, insofar as it is attributable to his wife's share of the property, were based on a right of use whose normal useful life (§ 4 para. 4 in conjunction with § 7 para. 1 sentences 1 and 2 EStG) would be lower than the 40-year useful life to be assessed for the building in accordance with § 4 para. 4 in conjunction with § 7 para. 4 sentence 1 no. 2 EStG.
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2.
According to the case law of the Federal Fiscal Court (BFH), construction measures on third-party land lead to capitalization in the amount of the production costs as a tangible asset in the context of profit realization and to corresponding depreciation if they are carried out in the exercise of a right of use. This is justified, although it is based on an intangible asset (see BFH ruling of August 10, 1984 III R 98/83, BFHE 142, 90, BStBl II 1984, 805), by the fact that in this respect claims under the law of obligations pursuant to § 951 i.V.m. § 812 BGB (cf. inter alia BFH rulings of July 13, 1977 I R 217/75, BFHE 123, 32, BStBl II 1978, 6; of October 31, 1978 VIII R 182/75, BStBl II 1978, 6; of October 31, 1978 VIII R 182/75, BStBl II 1978, 6; of October 31, 1978 VIII R 182/75, BStBl II 1978, 6; of October 31, 1978 VIII R 182/75, BStBl II 1978, 6; of October 1978 VIII R 182/75, BFHE 127, 163, BStBl II 1979, 399, and VIII R 146/75, BFHE 127, 501, BStBl II 1979, 507; of 22. January 22, 1980 VIII R 74/77, BFHE 129, 485, BStBl II 1980, 244; of September 20, 1989 X R 140/87, BFHE 129, 485, BStBl II 1980, 244. September 20, 1989 X R 140/87, BFHE 158, 361, 367, BStBl II 1990, 368 under 5.; of March 15, 1990 IV R 30/88, BFHE 160, 244, 246, BStBl II 1990, 623 under 2.).
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3.
Whether the plaintiff in the case in dispute has obtained a legal position that can be assessed as such a right of use appears doubtful: The findings made by the tax court on the contract of June 1, 1972 and its assessment under tax law, which were not challenged with procedural objections, do not - as the tax court assumed - stand in the way of the success of the action from the point of view of arm's length comparison, because the business motivation for the construction measures is beyond question. However, the ambiguities of the contract highlighted by the lower court, which in fact would not have been concluded between unrelated third parties, could argue that the assumption of the costs attributable to the wife's co-ownership share constitutes a gift and therefore does not meet the requirements for the acquisition of an asset eligible for capitalization and depreciation (cf. recognizing Senate in BFHE 158, 361, 367, BStBl II 1990, 368 with further references). However, this does not require any further discussion here due to the prohibition of discrimination.
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4.
Even if one were to assume a right of use that could be capitalized and depreciated despite the deficiencies mentioned above (under 3.), this would not change the previous result because there is no indication that a normal useful life of less than 40 years would have to be applied for such a right in accordance with § 4 para. 4 in conjunction with § 7 para. 1 sentence 2 EStG.
15
According to the previously cited case law, depreciation is based on the normal useful life of the asset, unless the duration of the usage relationship is shorter (BFH in BFHE 127, 501, BStBl II 1979, 507). The assessment of a shorter depreciation period requires a specific justification based on the objective circumstances. The tax debtor is responsible for this because it involves an estimate (Schmidt/Drenseck, Kommentar zum Einkommensteuergesetz, 12th ed. 1993, § 7 note 5b with further references) and factors from his sphere of influence and knowledge (cf. see BFH rulings of February 15, 1989 X R 16/86, BFHE 156, 38, BStBl II 1989, 462, and of May 3, 1991 V R 36/90, BFH/NV 1992, 221, 222, in each case with further references), special obligations to cooperate. The plaintiff did not comply with these obligations, although there was reason to substantiate objective circumstances for the alleged shorter period of use at the latest since he became aware of the objection decision; for it must have been clear to him from this point in time that his mere declaration of intent to end his commercial activity on reaching the age of 65 was not sufficient to justify his request. Life experience does not automatically suggest that a self-employed person will cease his activity on reaching the age of 65. Moreover, even if this had happened in the specific case in the meantime, this would not necessarily have led to a termination of use.