Federal Fiscal Court ruling: Income tax election rights and applying them in the tax assessment notice

Elections in tax law  

Numerous clusters of cases concerning particular issues have formed around elections in income taxation. For example, case law considers the allowance under section 16(4) of the Income Tax Act to be fully exhausted even when it is applied without the taxpayer having first applied for it but then not challenging an incorrect assessment (Federal Fiscal Court judgement of 21 Jul 2009, file ref. X R 2/09, Federal Tax Gazette II 2009, p. 963; Cologne Fiscal Court judgement of 20 Mar 2024, file ref. 9 K 926/22).

But it is not only under substantive law that issues arise regarding elections under income tax law. From a procedural law perspective, the question particularly arises when the election must be made by and whether making it “late” gives rise to further legal consequences. For example, applying for a “favourability test” (“Günstigerprüfung”; section 32d(6); “election for assessment at the progressive rate”) may be considered an “indefinite election”, which is only limited by the expiry of the statute of limitations on assessment and the assessment becoming final (Federal Tax Court judgement of 9 Aug 2016, file ref. VIII R 27/14, Federal Tax Gazette II 2017, p. 821, para. 19). But this does not allow any other conclusions to be drawn – such as an obligation to file a tax return and a resulting suspension of the statute of limitations in accordance with section 170(2) sentence 1 no. 1 of the Fiscal Code for the assessment period (Federal Fiscal Court judgement of 14 May 2025, file ref. VI R 17/23).

In addition, the question arises as to whether elections that have been made can be changed. Making applications or elections, which in principle are not subject to any time limit, may be changed as long as the corresponding tax assessment notice has not become final both formally and substantively (Federal Tax Court judgement of 9 Dec 2015, file ref. X R 56/13, Federal Tax Gazette II 2016, p. 967). Alongside the time dimension, with regard to the formal finality of the amended assessment, subsequently making applications or elections is also limited in terms of amount by the scope of amendment allowed by section 351(1) of the Fiscal Code (Federal Fiscal Court judgement of 27 Oct 2015, file ref. X R 44/13, Federal Tax Gazette II 2016, p. 278).

Similar issues arise when deducting special expenses (“Sonderausgaben”) under section 10a of the Income Tax Act (“Riester pension scheme”). The deduction, which initially reduces tax liability in the assessment period in which it is claimed, is also considered by case law with regard to its “burdensome consequences, which are unwanted by the taxpayer” (Federal Tax Court judgement of 19 Jan 2022, file ref. X R 32/20). In particular, the tax incentive provided during the contribution phase is followed by full taxation (section 22 no. 5) during the pay-out phase. 

If the taxpayer waives the right to claim a special expense deduction despite meeting the substantive legal requirements for it and if retirement savings assets are misused as defined by section 93(1) sentence 1 of the Income Tax Act, he or she can prevent the tax deduction from being repaid that would otherwise be required (Federal Tax Court judgement of 19 Jan 2022, file ref. X R 32/20).

Ways to change elections regarding the special expenses deduction under section 10a of the Income Tax Act 

The Federal Fiscal Court has now again assessed the election of special expense deduction under section 10a, as described above, with regard to the possibilities for retroactive claims (file ref. X R 28/24). On its view, for periods up to 30 Jun 2020 neither the taxpayer’s consent to data transfer – addressed to the provider (which was required only for periods up to 2018) – nor data transfer from the provider to the central authority is sufficient to actively make the election for special expense deduction.

Furthermore, if the election under section 10a is not made, there is no possibility to amend this under sections 172 and following of the Fiscal Code. Section 175b in particular, as amended for the year at issue of 2019, cannot be invoked to justify an amendment. According to this provision (section 175b(1)), a tax assessment is to be revoked or amended to the extent that data transmitted by the entity subject to the reporting obligation to the tax authorities as defined by section 93c was not taken into account or not correctly taken into account in the tax assessment. This was actually the case – the data transmitted regarding the claimants’ retirement plan contributions was not taken into account in his 2019 income tax assessment. 

But at the time the original 2019 income tax assessment was issued, the tax office was not allowed to take into account this data on pension contributions transmitted by the provider at all, because the claimant had not yet elected for a special expense deduction. Section 175b, the scope of which was extensively clarified by the Federal Fiscal Court judgement of 20 Feb 2024, file ref. IX R 20/23, was therefore not relevant to the facts of the case, nor were sections 129 and 173.

In addition, the judgement contains interesting commentary on the obligations of the tax authorities under section 89(1) sentence 1. According to this provision, they are supposed to encourage the filing of returns, the submitting of applications and the amending of returns or applications if they were obviously only not submitted or submitted incorrectly by mistake or ignorance. The Federal Fiscal Court considered that the explanations provided in the 2019 income tax assessment at issue were very extensive and not presented in a reader-friendly manner. However, the reference to the issues surrounding section 10a of the Income Tax Act can already be seen after only a few lines. Furthermore, the Federal Fiscal Court did not consider it obligatory to send a separate letter to the taxpayer about this.