Federal Supreme Court rules in favour of the taxpayer on grounds of rules of evidence and upholds a connoisseur's price

23. April 2018

Federal Supreme Court upholds lower cantonal administrative court ruling (12 March 2018, 2C_181/2018).

Dr. Marcel R. Jung successfully represented a taxpayer in a federal income tax proceeding against the Federal Tax Administration in a case where two investors transferred a jointly held property to privately held real estate companies within 10 months after acquisition. Ten days after the transfer, the companies sold the property to a high net worth individual with a profit margin of 82.5%.

The taxpayers held jointly a property situated in the canton Zug. Both transferred their share into a privately held company at cost. The property was purchased by the taxpayers from a third party ten months before. In a first proceeding, Dr Marcel R. Jung successfully represented both taxpayers in a real estate capital gains tax proceeding against the real estate capital gains tax commission of the respective community (5 April 2016, 2C_156/2015). The Federal Supreme Court overturned the ruling of the lower cantonal administrative court and held that both taxpayers held the property as business asset rather than private assets on grounds of arbitrarily establishment of facts. As a consequence, the gain, if any, realised from the transfer of the property to the privately held companies was not subject to real estate capital gains tax at speculation tax rates.

After the first Federal Supreme Court ruling, the Federal Tax Administration started a second proceeding against one of the two taxpayers (the other one was already finally assessed) and invoked that the fair market value of the property at time of transfer to the privately held company did not correspond to its historical cost, but to the sales price paid by the third party. Such capital gain would have been subject to federal and cantonal/communal income taxes and social security contributions in the hands of the taxpayer instead of the privately held company. However, this capital gain was already taxed in the hands of the companies subject to federal and cantonal/communal income taxes.

The Federal Tax Administration invoked that the taxpayer was not able to demonstrate for what reason the property experienced an increase in value of 82.5 within ten days.

The Federal Supreme Court points out that the fisc bears the burden of proof for those facts of charging provisions that trigger the tax liability while the taxpayer has a duty to cooperate. Further, the court noted that the lower court evaluated the evidence of the transfer price and the sales price as valid as both were agreed with third parties. The court holds that the position of the Federal Tax Administration is a mere hypothesis for which the fisc was not able to give reasons. The court also noted that the purchaser of the property was a high net worth individual who obviously wanted to invest as a connoisseur. In such a case, the sales price would qualify as connoisseur's price. In the end, the court upheld the argument of the taxpayer according to which the sales price was a windfall profit in the hands of the privately held companies rather than in the hands of the taxpayers.

The court did not scrutinise the transfer of the property to the privately companies as the lower court already examined the judicial domestic anti-avoidance rule (Steuerumgehung) thoroughly. This doctrine, if applied, would have fiscally attributed the capital gain to the taxpayers based on fictitious facts. The German tax scholar Enno Becker was the creator of this doctrine that was introduced by the Swiss Federal Supreme Court in Swiss tax law on 1 December 1933 (BGE 59 I 272). At that time, however, the limitation of construction of a charging provision was the meaning of the word rather than the provision's ratio. By means of an overshooting substance over form approach, fictitious facts are assumed in order to trigger the charging provision. Because of the modern method of teleological construction (that extends the provision's ratio beyond the meaning of its word: praeter verba legis), there is no (more) need for the errorneous German attribution rule, but it is still alive and plays the leading role in Swiss tax case-law. In contrast, the abuse of rights doctrine (Rechtsmissbrauchsverbot) that still plays a minor role in Swiss tax case-law (that limits the application of a rule of law: contra verba legis) refuses or does not refuse the application of a rule of law based on real facts.