Judgment of the Cologne Fiscal Court dated October 20, 2022, Ref. 6 K 1506/17

• The declining usufruct value when acquiring a co-ownership half can increase acquisition costs if it is directly economically related to the acquisition.

• A shortened depreciation period can be proven by an expert determination of the remaining economic useful life (e.g. according to SWRL/ImmoWertV); an ERAB report is not mandatory.

Facts of the case

The amount of depreciation for the office building rented by the plaintiff with apartments, storage buildings and halls in the Z ... in ... X.

The plaintiff was entitled to usufruct of the aforementioned property on the basis of a legacy from her deceased partner Y. According to the inheritance contract of ... 2005 (notary Q, deed no. 1.../2005) and the inheritance settlement agreement of ....2007 (notary P, deed no. 2.../2007), she had to bear the costs, charges and, in particular, the loan liabilities for the property. After the death of Mr. Y, his sons, Y1 and Y2, each owned half of the property. The usufruct was not entered in the land register in accordance with the wishes of all contracting parties.

With the purchase agreement dated ... 2013, the plaintiff acquired half of the property from Y1 for a purchase price of € ... and incidental acquisition costs of € ....

As part of her 2014 income tax return, the plaintiff claimed a depreciation allowance of € ... for the property as income from renting and leasing. She had calculated this by allocating the total acquisition costs for half of the property in the amount of ... € 75 % to the building, i.e. ... €, and distributing this amount over a useful life of 6 years in accordance with Section 7 (4) sentence 2 EStG. The plaintiff had determined the useful life by subtracting the age at the time of acquisition of 44 years from the typical useful life of the property of 50 years.

The defendant initially assessed the plaintiff's 2014 income tax with a notice of assessment dated 24.06.2016 subject to review in accordance with Section 164 (1) AO. In subsequent correspondence, it announced an amendment to the assessment, assuming a useful life of 50 years for the property. The plaintiff then applied for depreciation over 15 years for the property (FG file p. 183 et seq.), submitting a short calculation of the capitalized earnings value of the Chamber of Crafts of X dated 09.08.2010.

On 27.10.2016, the defendant amended the plaintiff's income tax assessment in accordance with Section 164 (2) AO and, in addition to various other undisputed changes, now took into account depreciation for the property in accordance with Section 7 (4) sentence 1 no. 2a EStG in the amount of ... €, namely ... € x 2 %.

The claimant lodged an appeal against this decision. In the objection proceedings, it submitted a brief expert opinion by T dated 21.12.2016 (FG file p. 15), according to which the property was in a poor condition and the remaining useful life for the residential and office building was 34 years and for the hall 4 years. On 12.12.2016, the defendant issued a partial notice of relief due to other points of dispute and rejected the objection as unfounded in an objection decision dated 02.05.2017.

The plaintiff then filed the present action, in which it further requested that the depreciation for wear and tear for the property be determined taking into account an actual useful life of less than 50 years. As justification, it submitted a supplementary statement by T (FG file p. 36), in which he explains the determination of the remaining useful life in his expert opinion, points out urgent renovation work in the order of magnitude of over ... € and recommended the demolition of the halls from a technical and economic point of view.

The court obtained an expert opinion from S from R on the question of the remaining useful life of the property in its entirety. In his expert opinion dated 14.07.2020, to which reference is made for details (court file p. 238 et seq.), he arrives at a weighted remaining useful life of 19 years for the property at the time of acquisition. The plaintiff considers this remaining useful life to be correctly determined.

For the first time in the legal proceedings, it is also requesting a higher assessment basis for depreciation. When the half of the property was acquired, the plaintiff's usufruct was extinguished. The monetary value of the usufruct was to be included in the assessment basis.

In the course of the legal proceedings, the question also arose as to whether the apportionment of the total purchase price made by the plaintiff in the ratio of 75 % building and 25 % land was appropriate against the background of the available expert opinions. In this respect, the parties involved agreed on an allocation in the ratio of 55% buildings to 45% land in order to avoid obtaining a further expert opinion.

The plaintiff requested

to amend the 2014 income tax assessment dated 12.12.2016 in the form of the objection decision dated 02.05.2017 to the effect that the deductions for wear and tear for the property Z ... in X in the amount of ... € are taken into account.

The defendant requested

dismiss the action.

In addition, it proposes that an appeal be allowed in the event that it is unsuccessful.

The defendant refers to its objection decision and maintains the consideration of the standardized depreciation period of 50 years. In addition, it states that in the case in dispute there are no tangible indications for the assumption of technical wear and tear of the property. The refurbishment measures proposed by the expert T were not urgent, as they have neither been carried out nor commissioned to date. The assumption of a shortened useful life for economic reasons is contradicted by the established value of the property of over ... € and the clearly positive return on the property according to the tax return.

The expert S commissioned by the court had calculated a plausible weighted economic remaining useful life of 19 years in accordance with Section 6 (6) ImmoWertV. The defendant's building expert also considered the calculations to be methodologically appropriate and correct. However, the calculation does not constitute evidence of a shortened useful life within the meaning of § 7 para. 4 sentence 2 EStG. The economic remaining useful life pursuant to § 6 para. 6 ImmoWertV and the useful life pursuant to § 7 para. 4 EStG differ in terms of their application and objective. The remaining useful life determined in accordance with Annex 4 of the Property Value Directive is merely a calculation parameter within the valuation procedure in accordance with the ImmoWertV. The relatively short remaining useful life determined results exclusively from the type of building, the age of the building and the fact that no modernization work had been carried out as at the valuation date. However, the mere fact that the building is an old building with outdated furnishings is not sufficient to deviate from the statutory standardization of the useful life. The expert opinion contains no indications that the buildings could no longer be used for their intended purpose after the expiry of the calculated remaining useful life. Rather, it is pointed out that the economic remaining useful life can be extended at will through appropriate modernization.

An increase in the depreciation assessment basis could not take place. It was not apparent that the expiry of half of the usufructuary right would lead to further acquisition costs. Like the redemption payment for a usufructuary right, the transaction was to be treated as a transaction at the asset level. Any other view would not take into account the fact that the creation of the usufructuary right and the subsequent acquisition of the property were two separate legal transactions that took place at different times.

Reasons for the decision

The contested decision is unlawful and therefore infringes the plaintiff's rights (§ 100 para. 1 FGO). The defendant has not included income from letting and leasing in accordance with § 21 EStG for the property in Z ... in ... X as part of the income-related expenses, the defendant took into account too low a deduction for wear and tear (AfA) in accordance with § 7 EStG.

In accordance with Section 7 (1) sentence 1 EStG, in the case of assets whose use or utilization by the taxpayer to generate income is expected to extend over a period of more than one year, the portion of the acquisition or production costs that is attributable to one year if these costs are distributed evenly over the total period of use or utilization (depreciation in equal annual amounts) is to be deducted for one year in each case. The deduction is based on the normal useful life of the asset (Section 7 (1) sentence 2 EStG). Deviating from this, the deduction for a building used to generate income is determined according to the fixed percentages of Section 7 (4) sentence 1 EStG. Namely, for a building that is not part of the business assets and was completed after December 31, 1924, an annual depreciation of 2% of the acquisition or production costs is to be deducted as a deduction for wear and tear. This regulation represents a legal standardization of the useful life within the meaning of § 7 para. 1 sentence 2 EStG.

In the case in dispute, the depreciation is set too low because, on the one hand, the basis for calculating the depreciation was determined incorrectly (see 1.) and, on the other hand, the property is to be depreciated over the actual useful life of 19 years instead of 50 years (see 2.).

• 1. in addition to the purchase price paid by the plaintiff including ancillary costs for the half of the property acquired from Mr. Y1 in the amount of ... €, the value of the usufruct in the amount of ... € must also be included in the assessment basis as acquisition costs.

• a. Pursuant to Section 255 (1) sentence 1 HGB, acquisition costs are the expenses incurred to acquire an asset and bring it to an operational condition, insofar as they can be individually allocated to the asset. This also includes incidental costs and subsequent acquisition costs (Section 255 (1) sentence 2 HGB). In the absence of a deviating definition in the German Corporation or Income Tax Act, this commercial law concept of acquisition costs is also to be used as the basis for the tax balance sheet assessment (BFH rulings from 03.08.2005 I R 36/04, BStBl II 2006, 369 with further references; from 20.04.2011 I R 2/10, BStBl II 2011, 761). However, the acquisition costs of an asset can only be those costs that can actually be allocated to its procurement from an economic point of view(BFH rulings of 03.07.1997 III R 114/95, BStBl II 1997, 811; of 17.10. 2001 I R 32/00, BStBl II 2002, 349). A mere causal or temporal connection with the acquisition is not sufficient for this. Rather, it depends on the purpose of the expenditure (final concept of acquisition costs, see BFH ruling of 13.10.1983 IV R 160/78, BStBl II 1984, 101 with further references). This purpose must be directed towards the intended function and characteristics of the acquired asset (for business assets: BFH ruling of 03.08.2005 I R 36/04, BStBl II 2006, 369).

In the case in dispute, the value of half of the usufruct is also to be recognized as acquisition costs, because the plaintiff gives up an asset with a monetary value - her half usufruct right - in order to acquire the unencumbered half of the property. When acquiring the half of the property, she consciously and purposefully accepted that her usufruct right would be partially extinguished at the time of acquisition in accordance with Section 1072 in conjunction with Section 1063 BGB. § Section 1063 of the BGB. The provision of Section 899 BGB, according to which a right to a third-party property does not expire if the entitled party acquires ownership of the property, does not apply to a mandatory right such as the usufructuary right in question (Picker in Staudinger, BGB, status 12/2021, Section 889 marginal number 4).

A different assessment is also not appropriate because the demise of the one-half usufructuary right occurs by operation of law. The acquisition costs of an asset include not only the consideration owed to the seller, but also other expenses that are directly economically related to the acquisition and - as in the case in dispute - are inevitably incurred as a result of the acquisition and lead to an increase in the value of the asset (see also: BFH rulings of 06.07.1989 IV R 27/87, BStBl II 1990, 126; of 20.04.2011 I R 2/10, BStBl II 2011, 761).

As a result, in the opinion of the recognizing Senate, the present case cannot be assessed differently than if the plaintiff had waived its usufructuary right in a first step against payment of a redemption sum by the property owner and, in a second step, had acquired the unencumbered property from the property owner against a purchase price increased by the redemption payment. In this case, the consideration increased by the redemption payment would have to be recognized in full as acquisition costs. Nothing else can apply in the case in dispute because, from an economic point of view, the case is identical, only with an abbreviated payment method.

The case law of the Federal Fiscal Court cited by the defendant against this assessment (BFH ruling of 09.08.1990 X R 140/88, BStBl II 1990, 1026) and the letter from the Federal Ministry of Finance (BMF letter of 30.09.2013 BStBl I 2013, 1184 Tz 64) are beside the point. The defendant fails to recognize that the references cited by him relate to payments made by the property owner to the usufructuary for the relinquishment of a usufructuary right and not to the transfer of the usufructuary right by the beneficiary for the purpose of acquiring the unencumbered half of the property. Furthermore, the assessment as a transaction at the private asset level does not argue against the assumption of acquisition costs anyway, as acquisition transactions are usually carried out at the asset level in the area of income from letting and leasing. Conclusions from this valuation regarding the existence of acquisition costs are not appropriate.

• b. The usufruct of the half of the property is to be valued at ... €.

The valuation of the usufruct is based on the provisions of Part One of the BewG. The capital value of lifelong usufruct is to be valued at a multiple of the annual value in accordance with Section 14 (1) BewG. In the case of benefits or services whose amount is uncertain or fluctuates, the annual value is to be based on the amount that is likely to be realized in the future on average over the years (section 15 (3) BewG). This valuation requires an estimate(BFH ruling of 05.06.1970 III R 82/67,BStBl II 1970, 594, BFH ruling of 06.05.2009 II B 14/09, juris). The income generated in recent years can serve as an indication of the amount likely to be generated in the future (BFH ruling of 28.05.2019 II R 4/16, BStBl II 2020, 326). The determination of the future average income on the basis of the average income of the three years preceding the valuation date is approved by the highest court rulings (see BFH ruling of 11.02.1972 III R 129/70, BStBl II 1972, 448, under II.4.b).

When determining the value of usufructuary rights to real estate, the income from letting and leasing is to be assumed first. In order to calculate the annual value of the usufruct, the expenses to be borne by the usufructuary must then be deducted. This also applies to debt interest paid by the usufructuary, as this reduces the annual value of the usufructuary right (BFH ruling of 28.05.2019 II R 4/16, BStBl II 2020, 326).

The Senate estimates the annual value of the usufruct in the case in dispute based on the average of the income earned by the plaintiff in previous years and taking into account the debt interest borne by the plaintiff in the amount of ... € (2010), ... € (2011), ... € (2012) and ... € (2013) to ... €. The annual value determined in this way is multiplied by the multiplier according to the annex to Section 14 (1) BewG for the plaintiff, who was ... years old at the time of acquisition of 13.296. This results in a value of € ... (1/2 of (... x 13.296)) for half of the usufructuary right, which has expired.

• c. In accordance with the agreement reached between the parties, 55% of the acquisition costs of the building, i.e. € ..., is to be allocated to the acquisition costs of the building in the amount of € ... (half usufructuary right ... € plus purchase price incl. ancillary costs ... €).

• 2 These acquisition costs are to be depreciated over 19 years, in deviation from the typical statutory useful life of 50 years.

In accordance with Section 7 (4) sentence 2 EStG, the depreciation corresponding to the actual useful life of a building can be applied instead of the depreciation in accordance with Section 7 (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. Whether the depreciation can be based on a shorter useful life than the standardized periods provided for by law (Section 7 (4) sentence 1 EStG) within the meaning of Section 7 (4) sentence 2 EStG depends on the circumstances of the individual case (BFH ruling of 04.03.2008 IX R 16/07, BFH/NV 2008, 1310 with further references).

It is up to the taxpayer to demonstrate a shorter actual useful life in the individual case - within the scope of the duties of cooperation incumbent upon him - and, if necessary, to prove it - within the scope of the burden of proof incumbent upon him (see BFH ruling of 11.08.1993 X R 82/90, BFH/NV 1994, 169). The assessment of the circumstances presented by the plaintiffs in this respect is then the responsibility of the tax court as the court of fact in the legal proceedings (established case law, see BFH ruling of 28.10.2008 IX R 16/08, BFH/NV 2009, 899, BFH decision of 22.04.2013 IX B 181/12, BFH/NV 2013, 1267; Hessisches FG, interim judgment of 14.05.2007 4 K 1716/04, EFG 2008, 202, confirmed by BFH judgment of 23.09.2008 I R 47/07, BStBl II 2009, 986).

In order to demonstrate the shortened actual useful life of a building used to generate income, the taxpayer may use any method of demonstration that appears suitable in the individual case to provide the necessary evidence; in this respect, it is necessary that the taxpayer's explanations provide information on the relevant determinants - e.g. technical wear and tear, economic depreciation, legal restrictions on use - which influence the useful life in the individual case, and on the basis of which the period in which the relevant building can probably be used in accordance with its intended purpose (Section 11c (1) EStDV) can be determined with sufficient certainty by means of an estimate.

The provision of § 7 para. 4 sentence 2 EStG grants the taxpayer the right to choose (Anzinger in Herrmann/Heuer/Raupach, § 7 EStG Rz 307; Blümich/Brandis, § 7 EStG Rz 524; Pfirrmann in Kirchhof, EStG, 19th ed, § 7 Rz 89; Bartone in Korn, § 7 EStG Rz 173), whether he is satisfied with the standardized depreciation rate in accordance with § 7 para. 4 sentence 1 EStG or claims and explains an actually shorter useful life. As part of the official investigation to be carried out by the tax office - in which all circumstances favorable to the parties involved must also be taken into account in accordance with Section 88 (1) sentence 2 AO - the taxpayer's estimate must be taken as a basis as long as it is based on considerations that a reasonably prudent taxpayer would normally make. Since the taxpayer's estimate does not require certainty about the shorter actual useful life, but at best the greatest possible probability, it is only to be rejected if it is clearly outside the reasonable estimation framework (see BFH ruling of 28.09.1971 VIII R 73/68, BStBl II 1972, 176; Cologne tax court of 23.01.2001 8 K 6294/95, EFG 2001, 675).Against this background, according to the case law of the Federal Fiscal Court (BFH ruling of 28.07.2021 IX R 25/19, BFH/NV 2022, 108), the submission of a building substance report, in particular the determination of the condition of real estate using the so-called ERAB method (method for determining the wear and tear stock of building materials), by the taxpayer is not a prerequisite for the recognition of a shortened actual useful life, even if such an expert opinion could possibly understand the technical "wear and tear" of a building in individual cases. This is because the ERAB method, which was only developed a few years ago and is used to record the condition of each relevant structural element of buildings and represent it by means of a quantitative value, only defines a value specific to the building material - the so-called wear and tear stock - with the help of quality and damage-related characteristics and associated characteristic values. This is primarily used to assess the quality of building elements for the development of individual maintenance strategies, taking into account existing ecological and economic framework conditions (see Schönfelder, Zustandsermittlung von Immobilien mittels Verfahren ERAB, 2012). Irrespective of the fact that the legislator could not have had the new ERAB procedure in mind when creating Section 7 para. 4 sentence 2 EStG, a building fabric appraisal of this type alone cannot credibly demonstrate that the taxpayer's property is in good condition in the context of the application of Section 7 para. 4 sentence 2 EStG; moreover, it is not apparent that the ERAB method can (also) provide information on the economic depreciation or any legal restrictions on use, which can also influence the required estimate of the useful life (likewise Blum/Weiss, Die steuerliche Betriebsprüfung 2020, 3, 6).

If the taxpayer or an expert commissioned by the taxpayer therefore chooses a different verification method for comprehensible reasons, this can be the basis for the estimate of a shortened actual useful life required in individual cases - if necessary, taking into account appropriate adjustments (see BFH decision of 19.01.2018 X B 60/17, BFH/NV 2018, 530) - insofar as conclusions can be drawn from the chosen method about the determinants to be determined. Since only the greatest possible probability of a shorter actual useful life can be required in the context of the estimate, a narrowing of the expert opinion methodology or a commitment to a specific determination procedure would exceed the requirements for the burden of proof (BFH ruling of 28.07.2021 IX R 25/19, BFH/NV 2022, 108).

On the basis of the court expert opinion of S, the Senate has come to the conclusion that, taking into account all technical and economic circumstances, the useful life at the time of acquisition of the half of the building in dispute was 19 years. The Senate follows the expert's explanations, who convincingly estimated a remaining useful life in his expert opinion based on the model he used in accordance with Annex 4 (Model for deriving the remaining economic useful life for residential buildings taking into account modernizations) of the Property Value Directive. The Senate does not consider the other expert opinions to be usable. According to the comprehensible findings of the court-appointed appraiser S, the brief appraisal by T submitted by the plaintiff does not examine and research all circumstances influencing the value in comparison to a full appraisal and also contains numerous errors listed in detail. In this respect, reference is made to the statements on page 31 et seq. of the expert opinion obtained by the court. In the opinion of the Senate, the brief calculation of the capitalized earnings value by the Chamber of Skilled Crafts of X dated 09.08.2010 cannot be used because it was not carried out at the time of acquisition.

The procedure used by the court expert to determine the remaining useful life to derive the economic remaining useful life for residential buildings, taking into account modernizations on the basis of Annex 4 of the SWRL, is not primarily aimed at determining the actual useful life within the meaning of Section 7 (4) sentence 2 EStG. As the Federal Fiscal Court has already ruled, the fact that the calculation method used by the expert is only based on a model economic remaining useful life is not of decisive importance for the method applied in the case in dispute. This is because it is not apparent that the appropriate estimation framework in accordance with Section 7 (4) sentence 2 EStG was left behind, as the required estimate is ultimately only about proving that the typical useful life to be assumed by law is incorrect in individual cases and that a shorter useful life is to be assumed with the greatest possible probability (BFH ruling of 28.07.2021 IX R 25/19, BFH/NV 2022, 108).

In this respect, the defendant's semantic objection that the term "economic remaining useful life" is not to be equated with the term "actual useful life" in Section 7 para. 4 sentence 2 EStG cannot be accepted either. As already stated by the Düsseldorf tax court (Düsseldorf tax court, judgment of July 12, 2019 - 3 K 3307/16 F, EFG 2019, 1673), it is true that the determination of the remaining useful life is only a necessary intermediate step in determining the value of the building in the context of determining the market value, but is the main purpose in the context of Section 7 (4) sentence 2 EStG. However, the Senate is not able to construe a difference between the (remaining) useful life within the meaning of Section 7 (4) sentence 2 EStG and the remaining useful life within the meaning of Section 6 (6) ImmoWertV (see also Cologne tax court, judgment of 30.6.2016 11 K 3657/14, juris). Rather, the concept of the (remaining) useful life, i.e. the remaining useful life, is not a fiction in both contexts, despite the need for an estimate - which may have to be determined differently. Rather, the question to be answered in both cases is how many years the building can still be expected to be used commercially in its existing condition. This is just as important for the question of the market value as it is for the question of the appropriate allocation of expenses. As Section 7 (4) sentence 2 EStG is not only based on the remaining technical useful life, but the taxpayer can also rely on a shorter economic useful life, it is not comprehensible to what extent there could be an economic useful life "from an income tax point of view" that differs from the economic useful life "from a market value point of view" and how this should be determined. Since Section 7 (4) sentence 2 EStG generally allows the taxpayer to provide evidence of a shorter useful life, the Senate is of the opinion that this evidence must in any case be provided using a method recognized by experts.

The defendant did not raise any objections to the detailed findings made by the expert within the framework of the model applied. On the contrary, the defendant, referring to his building expert, described the expert's calculations as methodologically appropriate and correct. It is also not obvious on what grounds the submitted expert opinion could be objected to and the estimation framework was left in the present case. Contrary to the defendant's opinion, the value of the property of approx. € and the clearly positive yield achieved with the property to date, as evidenced by the tax returns, do not indicate that the appraisal framework has been abandoned. This is because, on the one hand, every estimate is naturally subject to uncertainty. Secondly, the weighted remaining useful life of the property determined by the valuer has not yet expired. Finally, contrary to the defendant's opinion, it is by no means a prerequisite for the consideration of a useful life of less than 50 years that the technical wear and tear of individual components is proven.

• 3 Accordingly, the depreciation is calculated as follows:

The calculation of the income tax to be determined taking into account a depreciation of ... € is imposed on the defendant in accordance with Section 100 (2) sentence 2 FGO.

The decision on costs is based on Section 136 (1) FGO.

Reasons for the admission of the appeal pursuant to Section 115 (2) FGO are neither apparent nor presented.

The decision on provisional enforceability is based on §§ 151 Para. 3, 155 FGO in conjunction with §§ Sections 708 No. 10, 711 of the Code of Civil Procedure.

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