Good news: With its ruling of 08 August 2013 – 11 K 3540/12, the Düsseldorf Tax Court recognises the costs of conciliation proceedings as extraordinary expenses for income tax purposes. Background: According to recent BFH case law, civil litigation costs may be regarded as unavoidable and therefore qualify as extraordinary expenses, regardless of the subject matter of the proceedings. Relying on this recent case law, the claimant deducted attorney's fees and expert witness costs incurred in connection with conciliation proceedings before the Mining Damage Conciliation Body in North Rhine-Westphalia in his income tax return. He owns a two-family house in a former mining area and had asserted damages claims against the mining company, ultimately reaching a settlement before the conciliation body. However, the tax office classified these expenses as costs of private living and did not recognise them as extraordinary expenses. The judges of the Düsseldorf Tax Court took a different view: conciliation proceedings are to be regarded as a "preliminary stage" to civil litigation, and the related costs are therefore unavoidable. To the taxpayer's satisfaction, they allowed the deduction of the conciliation costs as extraordinary expenses. However, an appeal to the BFH was admitted, so it remains to be seen how the BFH will decide.
Frequently asked questions
Frequently asked questions
Are the costs of arbitration proceedings deductible as extraordinary expenses?
According to the ruling of the FG Düsseldorf dated 08.08.2013 (11 K 3540/12), costs of arbitration proceedings can be deducted as extraordinary expenses within the meaning of § 33 EStG. The court considered the arbitration procedure to be a preliminary stage to civil litigation and therefore deemed the expenses unavoidable. However, an appeal to the BFH was permitted, so a final ruling by the highest court is still pending.
Which specific expenses were at issue in the case before the FG Düsseldorf?
The dispute concerned attorney's fees and expert witness costs incurred in connection with a conciliation proceeding before the Schlichtungsstelle Bergschaden NRW (Mining Damage Conciliation Board NRW). As the owner of a two-family house located in a former mining area, the plaintiff had asserted damage claims against the mining company and reached a settlement in the conciliation proceeding.
Why are civil litigation costs considered unavoidable under recent BFH case law?
The BFH has revised its case law to the effect that civil litigation costs may, in principle, qualify as unavoidable within the meaning of § 33 EStG, regardless of the subject matter of the proceedings. The reasoning is that the taxpayer can generally only enforce their rights through the courts. The FG Düsseldorf has extended this reasoning to the preceding conciliation proceedings as well.
How had the tax office originally treated the costs of the conciliation proceedings?
The tax office classified the attorney and expert fees as non-deductible costs of private living and denied their recognition as extraordinary expenses (außergewöhnliche Belastung). Only the Düsseldorf Tax Court rejected this view and allowed the deduction.
Is the ruling by the Fiscal Court of Düsseldorf on mediation proceedings final?
No, the Fiscal Court of Düsseldorf has admitted an appeal on points of law to the BFH. Until a decision by the highest court is reached, the tax recognition of mediation costs as extraordinary expenses (außergewöhnliche Belastung) is not conclusively settled. Taxpayers should therefore keep relevant cases open and, where appropriate, file an objection.