Key statements of the judgment
- Scale of depreciation: The decisive factor is the actual useful life in accordance with Section 7 (4) sentence 2 EStG in conjunction with Section 11c (1) EStDV. § Section 11c (1) EStDV, i.e. the period during which the building can be expected to be used for its intended purpose.
- Shorter economic than technical useful life: If the economic useful life is shorter than the technical useful life, it can be recognized if there is no other economically viable use.
- Uniform asset disintegrates: In the case of a functionally linked overall system (package distribution system), the uniform usage and functional relationship ceases to exist after the economic consumption of essential sub-buildings (distribution halls after the end of the lease).
- Consequence for depreciation: From this point in time, the overall system must be divided into several assets; uniform depreciation over an amortized total useful life is legally incorrect.
- Outcome of the proceedings: The judgment of the lower court, which was based on a uniform 25-year useful life, was set aside; the case was referred back for a new assessment of the facts (separate consideration of the parts and their useful lives).
Wording of the judgment
Facts of the case
I. The plaintiffs and appellants (plaintiffs) are married couples jointly assessed for income tax. In 1993, the plaintiff leased to company A for DM 76,050 per month - still to be constructed - halls for the operation of a parcel distribution system. The lease was to begin in the fall of 1993 and end 15 years after the move-in date (October 1993). The tenant terminated the contract on September 30, 2008.
The property, which was built as a lightweight construction (construction costs DM 3,041,000), consists of a delivery hall (950 sqm), two distribution halls (2,710 sqm), office and social rooms (350 sqm), which are structurally connected to each other, and driving, parking and maneuvering areas (9,645 sqm).
The loans taken out to finance the construction costs are to be repaid in 2011.
The defendant and appellant (the tax office --FA--) initially assumed a 15-year useful life in accordance with the declaration. The income tax assessment notices and the notice on the determination of the remaining loss deduction were issued subject to review. In a later review, the FA deviated from its opinion and issued amended income tax assessments for the years 1992 to 1994 on December 6, 2000, as well as an amended assessment of losses as of December 31, 1994, in which it assumed a useful life of 40 years.
In the appeal proceedings, a construction expert stated, among other things, that it was not possible to conclusively assess whether a useful life of 15 years or 25 years was appropriate.
After further consultations with the building expert and the building expert of the Higher Finance Authority, the latter considered a 25-year economic life to be the most likely. The FA accepted this and amended the 1992 and 1993 income tax assessment notices and the loss assessment notice as at December 31, 1994 accordingly in the objection decision dated December 18, 2002. Otherwise, the objections were rejected as unfounded. In support of its decision, the FA referred to the fact that the property could continue to be used for other purposes even after the expiry of the rental agreement.
The plaintiffs based their action against the amended assessments on the fact that the property could not be put to any further economically viable use after the expiry of the 15-year lease agreement with tenant A and had to be demolished.
At the time of the appraisal (January 2006), the expert appointed by the tax court estimated the remaining technical useful life of the entire facility at 22 years and its remaining economic useful life at 15 years, based on a new utilization concept without including the distribution halls, which were economically worn out after the expiry of the lease agreement with the tenant. Based on an individual assessment of the buildings making up the overall complex, the expert formed a uniform useful life for the entire complex, whereby he took into account the demolition of the distribution halls after cessation of use as a reduction item in the economic remaining useful life of the entire commercial property.
The tax court dismissed the claim. The tax authorities had rightly assumed a depreciation period of 25 years for the buildings, which were closely related in terms of use and function.
With their appeal on points of law, the plaintiffs allege a violation of substantive law (§ 7 para. 4 sentence 2, para. 1 sentence 2 of the Income Tax Act --EStG--, § 11c para. 1 sentence 1 of the Income Tax Implementation Ordinance --EStDV--).
The plaintiffs apply, mutatis mutandis, to set aside the judgment of the tax court and the opposition decision of December 18, 2002 and to amend the contested income tax assessments for 1992 and 1993 and the determination of the loss deduction as of December 31, 1994 of December 6, 2000 to the effect that the depreciation for wear and tear (AfA) for the parcel distribution system set up by the plaintiff is recognized in accordance with a period of 15 years.
The FA requested that the appeal be rejected.
Reasons
II. The appeal is well-founded and leads to the reversal of the previous decision and to the referral of the case back to the tax court for a different hearing and decision (§ 126 para. 3 sentence 1 no. 2 of the German Fiscal Court Code --FGO--). In assessing the economic useful life of the parcel distribution system at issue, the tax court erred in law in applying § 11c (1) EStDV.
1. pursuant to § 7 para. 4 sentence 2 EStG, the depreciation corresponding to the actual useful life of a building can be applied instead of the depreciation pursuant to § 7 para. 4 sentence 1 EStG. The useful life within the meaning of Section 7 (4) sentence 2 EStG is, in accordance with Section 11c (1) EStDV, the period during which a building can be expected to be used for its intended purpose. The useful life to be estimated is determined by technical wear and tear, economic depreciation and legal circumstances that may limit the useful life of an asset. The technical useful life, i.e. the period in which the asset is subject to technical wear and tear, is the starting point. If the economic useful life is shorter than the technical useful life, the taxpayer can invoke this (established case law, e.g. judgments of the Federal Fiscal Court --BFH-- of November 19, 1997 X R 78/94, BFHE 184, 522, BStBl II 1998, 59; of September 18, 2003 X R 54/01, BFH/NV 2004, 474, with further references).
A shorter useful life based on economic wear and tear can only be used as a basis for depreciation if the asset is objectively economically consumed before the end of the technical useful life. Economic consumption can only be assumed if the possibility of an economically viable (alternative) use or utilization has definitively ceased (BFH ruling in BFHE 184, 522, BStBl II 1998, 59, under II. 4.; see also ruling of 15 February 1989 X R 97/87, BFHE 156, 423, BStBl II 1989, 604).
Whether this is the case depends on the circumstances of the individual case. The assessment required for this is the responsibility of the tax court as the court of fact (e.g. BFH judgment of October 31, 1978 VIII R 146/75, BFHE 127, 501, BStBl II 1979, 507, under 2.).
2. the previous decision does not comply with these standards.
In agreement with the plaintiffs, the tax court assessed the entire facility in dispute as a uniform asset, but, in accordance with the expert opinion obtained, assumed a uniform total useful life even after economic consumption of the distribution halls (expiry of the lease of 15 years) as an essential part of this asset. In doing so, the tax court did not take into account the fact that the uniform usage and functional context of the parts of the building originally forming the overall facility ceased to exist with the economic consumption of the distribution halls, i.e. that the latter were divided into several assets. The tax court incorrectly bases a uniform depreciation on the total production costs of the entire facility.
3. the contested judgment must therefore be set aside on legal grounds. The procedural objections raised are therefore irrelevant.
The matter is not ready for decision. In the second instance, the tax court will have to take into account the fact that, according to the expert opinion obtained, it can no longer be assumed that the original overall system continues to exist as a uniform asset upon expiry of the lease agreement of 15 years due to the economic consumption of the distribution halls.