Case at issue
The plaintiffs are heirs of the testator who died in 2016. At the time of death, he owned a leased agricultural and forestry (LuF) business. Following the testator's death, the heirs declared the cessation of the LuF business as of the date of death within the prescribed deadline pursuant to § 16 Abs. 3b S. 3 EStG. In doing so, a cessation gain within the meaning of § 16 Abs. 3 EStG in conjunction with § 14 S. 2 EStG was realised for income tax purposes. The heirs deducted the income taxes attributable to the cessation gain (income tax, solidarity surcharge and church tax) as an estate liability in their inheritance tax returns (§ 10 Abs. 5 Nr. 1 ErbStG). This deduction was rejected as void by both the competent tax office and the subsequent fiscal court.
No deduction as estate liabilities
In its judgment (judgment of 10 May 2023, II R 3/21), the BFH concurs with the competent tax office and the fiscal court's decision. As justification, the court explains that while it is generally possible to take tax liabilities into account in the inheritance tax return in a manner that reduces the enrichment, the decisive factor is that the testator must have independently realised the tax-relevant facts. In the present dispute, however, the heirs only retroactively applied for the cessation of the LuF business as of the date of death. The tax-relevant event – in this case a cessation of business – was therefore not effected by the testator, but by the heirs. Accordingly, the income taxes attributable to the cessation gain cannot be deducted as estate liabilities within the meaning of § 10 Abs. 5 Nr. 1 ErbStG.
Note: Deduction of income taxes as an estate liability
It should, however, be noted that future income taxes as well as income taxes not yet paid on the testator's income may indeed be deducted by the heirs as estate liabilities. Examples include income tax prepayments or also additional income tax payments arising from rental and lease income earned during the testator's lifetime, etc. The reason is that the income taxes payable in the cases mentioned have their origin in tax-relevant events realised by the testator.
Frequently asked questions
Frequently asked questions
Are income taxes from a retroactive business closure by heirs deductible as estate liabilities?
No. According to the BFH ruling of 10 May 2023 (II R 3/21), income taxes on a closure gain arising from a business closure declared by the heirs under § 16 Abs. 3b S. 3 EStG cannot be deducted as estate liabilities under § 10 Abs. 5 Nr. 1 ErbStG. The decisive factor is that the tax-triggering event was not realised by the decedent, but by the heirs themselves.
What is the requirement for deducting tax liabilities as estate liabilities under Section 10 (5) No. 1 ErbStG?
Tax liabilities are only deductible to reduce the enrichment if the decedent personally fulfilled the tax-triggering event. If the tax-triggering actions are taken only by the heirs, the necessary connection to the decedent is missing, and a deduction is not permitted.
Which income taxes can heirs still deduct as estate liabilities?
Income taxes remain deductible if they originate from tax-relevant circumstances of the decedent. Examples include outstanding income tax prepayments or back payments, for instance arising from rental and lease income earned by the decedent during their lifetime.
What are the tax consequences if heirs declare the cessation of a leased agricultural and forestry business?
If the heirs declare the cessation of business retroactively to the date of death pursuant to § 16 Abs. 3b S. 3 EStG, a taxable cessation gain arises under § 16 Abs. 3 EStG in conjunction with § 14 S. 2 EStG. The resulting income tax, solidarity surcharge, and church tax are borne by the heirs but do not reduce the enrichment subject to inheritance tax.
Why is the business cessation under § 16 Abs. 3b EStG not deemed an act of the decedent?
Even though the cessation declaration has retroactive tax effect to the date of death, it is based on a decision made by the heirs after the inheritance occurred. The decedent did not cease the business but merely leased it out, so the tax-triggering act is attributable to the heirs.