As a rule, legal fees for inheritance disputes are not recognised as extraordinary expenses for tax purposes.
In its judgement of 25 July 2018, the 3rd Senate of the Nuremberg tax court dealt with the question of whether expenses for legal fees due to an inheritance dispute can be deducted as an extraordinary burden when calculating income tax.
The plaintiffs were two married couples jointly assessed for income tax who had incurred legal fees totalling around € 31,000 in connection with an inheritance dispute. They applied for their 2011 and 2012 income tax assessments to be amended so that the legal fees were recognised as extraordinary expenses and the income tax was reduced accordingly.
The plaintiffs based their application on the fact that the legal fees from the legal dispute arose from a division of the estate. The disputed estate included business premises and storage areas of the family business run by the plaintiff's son, which had to be maintained for the continued existence of the company. The plaintiff herself was employed by the company, but also had other income. If she had lost the case, the properties of the community of heirs would have been foreclosed, which would have deprived the company's employees of their livelihood.
The defendant tax office requested that the action be dismissed. The Nuremberg tax court dismissed the action.
The court has clarified that a reduction in income tax is generally possible in accordance with Section 33 EStG if the taxpayer inevitably incurs expenses for an extraordinary burden.
For the subsequent clarification of the disputed question of whether legal fees due to inheritance disputes are an inevitable expense for an extraordinary burden, the Senate has followed the case law of the BFH:
Accordingly, the costs of civil proceedings are only deemed to be unavoidable expenses if the taxpayer would run the risk of losing their livelihood or no longer being able to satisfy their vital needs within the usual framework if they did not enter into the legal dispute.
However, the taxpayer does not run the risk of losing his livelihood or no longer being able to meet his essential needs within the usual framework if sufficient other non-contested income is available to cover his living expenses and he has been able to ensure that no legal fees are incurred as a result of the estate settlement by waiving the inheritance, applying for estate administration or applying for estate insolvency proceedings.
The court applied these principles to the case at hand.
It is not sufficient that the employees of the company are at risk of losing their jobs due to the impending insolvency of the family business. What matters is the threat to the taxpayer's livelihood itself.
The plaintiffs themselves had sufficient income in addition to the disputed estate to satisfy their essential needs and could have prevented the legal fees from being incurred by disclaiming the inheritance. Their livelihood was also not jeopardised by any liabilities of the estate, as the plaintiffs would have had the option of filing for insolvency in addition to waiving the inheritance.
To summarise, it should be noted that although it is possible to take legal fees in inheritance disputes into account for tax purposes, this is only permitted within the very narrow limit that the taxpayer must run the risk of losing his livelihood even without the inheritance.
Philip Thomsen, trainee lawyer