Federal Fiscal Court ruling: Deduction entitlements under section 10f of the Income Tax Act cannot be inherited

Consequences of the taxpayer’s death in income tax law 

The death of a taxpayer has several consequences in income tax law: It does not alter the income tax assessment period, which under section 25(1) of the Income Tax Act always corresponds to the calendar year, while personal tax liability under section 1(1) ceases on death (Federal Fiscal Court judgement of 16 Feb 2011, file ref. X R 46/09, Federal Tax Gazette II 2011, p. 685, para. 13). Under sentences 1 and 2 of section 2(7), the assessment period continues without change, and income tax is in principle due on its end (section 38 of the Fiscal Code, section 36(1) of the Income Tax Act; Federal Fiscal Court judgement of 4 Jul 2012, file ref. II R 15/11, para. 20). 

The year is not “split up”: all income that the deceased earned in the year of death up to and including the date of death is included in a single annual assessment. The same applies to deductions when determining the deceased’s final taxable income. For example, special expenses that are to be allocated by time under section 11(2) can only be taken into account in the deceased tax assessment to the extent incurred up to the time of death (Federal Fiscal Court judgement of 16 Feb 2011, file ref. X R 46/09, Federal Tax Gazette II 2011, p. 685, para. 13). Furthermore, “large donations” can only be carried forward or carried back on behalf of the deceased, but not of the heir (Federal Fiscal Court judgement of 21 Oct 2008, file ref. X R 44/05).

The legislature has also regulated the effects of universal succession on the assets of a natural person in several scattered provisions. Since this process does not involve consideration, it is not an acquisition, meaning that characteristics of economic assets can be transferred. For example, under sentence four of section 17(1), the liability under section 17 regarding capital gains for shares in corporations and similar assets (section 17(1) sentence one) passes to the successor. The associated acquisition costs (section 17(2a)) are also treated in this way (section 17(2) sentence 5). 

In other cases, the legislature has limited its regulations on this issue to cases of individual succession which do not include inheritance (section 23(1) sentence three; section 20(4) sentence six). With regard to the specific issue of the depreciation base in private assets, the legislature has established a provision in section 11d(1) of the Income Tax Implementation Act under which the depreciation base and the depreciation rate are transferred, but the legal successor’s entitlement to deduct depreciation is made a basic prerequisite for a deduction of this kind (Federal Fiscal Court judgement of 7 Feb 2012, file ref. IX R 27/10, para. 11).

Further consequences of the taxpayer’s death

As the universal successor, the heir “assumes, in a comprehensive sense—both in substantive and procedural terms—the tax status of the deceased” (Federal Fiscal Court judgement of 13 Jan 2010, file ref. V R 24/07, Federal Tax Gazette II 2011, p. 241, para. 23 with further references). Consequently, when the taxpayer dies, a procedural situation comes about under section 45 of the Fiscal Code in which the claims and liabilities arising from the deceased’s tax liability (section 37(1)) pass to the heirs as the universal successors (section 45(1) sentence one). Whether universal succession in turn exists as defined by section 45(1) should be basically assessed under civil law (Fiscal Code Application Decree on section 45, under 1.). In addition, questions arise regarding section 122 and how tax administration acts are to be addressed (Fiscal Code Application Decree on section 122, under 2.12 and 2.13, including numerous examples), as well as regarding the obligation of the universal successors to file tax returns (section 149) (Federal Fiscal Court judgement of 13 Jan 2010, file ref. V R 24/07, Federal Tax Gazette II 2011, p. 241, para. 27).

Furthermore, consequences also naturally arise for inheritance tax, some of which are linked to income tax issues, particularly relating to the deduction of estate liabilities under section 10(5) of the Inheritance Tax Act [Erbschaftsteuergesetz–ErbStG]. Income tax liabilities arising from assessment periods that ended before the deceased’s death are deductible as estate liabilities under section 10(5) no. 1 regardless of whether they had already been assessed at the time of the deceased’s death; in the case of tax evasion, however, they are deductible only to the extent that they have actually been assessed (Guidance on the Inheritance Tax Act [ErbStR] 10.8(2)). 

Income tax liabilities from the assessment period in which the deceased’s date of death falls originate with the deceased and are also deductible under the conditions set forth in 10.8(2) of the Guidance on the Inheritance Tax Act 10.8(2) (10.8(3)). Therefore, deductible estate liabilities as defined by section 10(5) no. 1 include not only tax liabilities that had already legally arisen at the time of inheritance, but also tax liabilities that the deceased, as a taxpayer, incurred by bringing about taxable events and that arise when the year of death expires (since the change in established case law in Federal Fiscal Court judgement of 4 Jul 2012, file ref. II R 15/11). The assessment of the tax is not a prerequisite for it to arise; rather, under section 85 sentence 1 of the Fiscal Code it presupposes that it has arisen (e.g., Federal Fiscal Court judgement of 11 Jul 2019, file ref. II R 36/16, para. 16).

The Grand Chamber of the Federal Fiscal Court had basically ruled against losses under section 10d of the Income Tax Act being carried over in income tax law – an heir cannot claim a loss deduction under section 10d in his or her own income tax assessment that was not utilised by the deceased (Federal Fiscal Court judgement of 17 Dec 2007, file ref. GrS 2/04, Federal Tax Gazette II 2008, p. 608). In its judgement of 25 Mar 2026 (file ref. X R 23/24), the tenth chamber of the Federal Fiscal Court has now extended this ruling to include deductions under section 10f of the Income Tax Act: if a taxpayer who had incurred expenses for the maintenance of a listed historic building it used for personal residential purposes in accordance with section 10f(1) or (2) of the Income Tax Act dies before the end of the ten-year deduction period, the right to claim the deduction does not pass to the heirs.

Additional tax consequences from the taxpayer’s death

The landmark ruling by the Grand Senate in 2008 (Federal Fiscal Court judgement of 17 Dec 2007, file ref. GrS 2/04, Federal Tax Gazette II 2008, p. 608; Guidance on the Income Tax Act 10d(9)) extended the applicable case law to cover additional loss carryforwards in the subsequent period of time – any remaining negative income of the deceased’s from third countries as defined by section 2a(1) is not transferred to the heir by way of succession (Federal Fiscal Court judgement of 23 Oct 2019, file ref. I R 23/17, Federal Tax Gazette II 2021, p. 138). This judgement therefore also affects the special loss schedules of the Income Tax Act; the tax authorities consider that sections 20(6) and 22 no. 3 sentence 4 are among the provisions relevant here (Guidance on the Income Tax Act 10d(9) sentence 9).

Furthermore, trade tax loss carryforwards as defined by section 10a of the Trade Tax Act [Gewerbesteuergesetz–GewStG] are also in jeopardy because the detrimental “change of business owner” (Federal Fiscal Court judgement of 12 Nov 2020, file ref. IV R 29/18, Federal Tax Gazette II 2021, p. 722) is triggered regardless of whether “it is based on a transfer for or without consideration, on universal succession (e.g. inheritance) or on particular succession (e.g. anticipated inheritance)” (Explanatory Notes to the Trade Tax Act [Gewerbesteuer-Hinweise–GewStH] 10a.3(1), “Change of Business Owner”).

The assessment of taxpayers also becomes an issue upon the taxpayer’s death. Under sentence 1 of 26(1) of the Income Tax Act, joint assessment requires resident income tax liability as defined by section 1(1) or (2) or section 1a, as well as that the spouses are not permanently separated. These conditions must have been met at the beginning of the assessment period or occur during the assessment period. In this way the conditions are still met in the year of death. In the following year, although the surviving spouse can no longer apply for a joint assessment of income tax, he or she has the option of “widow’s splitting,” which still allows him or her to use the splitting tax rate for that assessment period (section 32a(6) first sentence no. 1 of the Income Tax Act).