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The 1996 Tax Act drastically restricted the possibilities for deducting the cost of a room in one's private residence used for business or professional purposes (see article no. 23 sec. 4.2.1). No deduction at all is allowed unless more than half of all activity is conducted from the home office or if there is no other place of work available for the particular activity. If one of these tests is met, the deduction is still limited to DM 2,400 per year unless the home office is the "centre of the [taxpayer's] entire business and professional activities" (new sec. 4 (5) no. 6b EStG and revised sec. 9 (5) EStG).

1. Constitutional issues

The Federal Tax Court first upheld the constitutionality of the new statute in its decision of 27 September 1996 (BStBl II 1997, 68). This by no means put an end to litigation concerning the new statute, however. In its most recent decision (21 November 1997 - DB 1998, 450), the Federal Tax Court addressed new constitutional issues concerning the legislative process by which the new statute was enacted. It held that the statute was not unconstitutional on procedural grounds just because it was added to a comprehensive tax package by a conference committee of the German Parliament and Federal Council instead of being independently initiated by one of these two bodies.

The court also reaffirmed its earlier holding concerning the substantive constitutionality of the statute. With respect to taxpayers who already had offices in their homes at the time the statute was enacted, the court held that the statute had no retroactive effect. The court said that citizens were not entitled to rely on the continued effect of provisions of the tax law from which they benefit; the mere expectation that the tax law presently in effect would continue unchanged enjoyed no constitutional protection. With respect to the legislative approach in general, the court reaffirmed earlier holdings that the legislature had wide latitude in dealing with expenditure closely related to private living expenses, especially when it is not possible to verify whether the expenditure serves private or income-earning purposes.

2. Statutory interpretation

The recent high court decision also raises an issue of statutory interpretation. The case concerned a teacher who was entitled to the limited deduction of DM 2,400 per year because no other place of work was available for certain types of necessary work, such as lesson preparation. The Federal Tax Court affirmed the lower court's denial of an unlimited deduction, stating that a home office was not the centre of a teacher's teaching activity.

However, the high court also upheld the lower court as concerned deduction of a bookcase in the home office over and above the DM 2,400 limit. The statute by its terms applied to the office and its "appointments" (Ausstattung), a term which, the court noted, could include both furnishings and equipment. However, the court interpreted the DM 2,400 limit as relating only to the cost of the office (e.g. apportioned rent or depreciation, heating costs) plus the cost of furnishings (draperies, rugs, etc.), but not to equipment (Arbeitsmittel) such as bookcases or desks. These, the court said, are deductible without limit subject only to the general condition that they be used for professional as opposed to private purposes.

The court thereby invalidated the contrary position taken by the tax authorities in their recent directive on offices in the home (22 Jan. 1998 - DB 1998, 340), sec. 20 of which would have included desks, bookcases, and all furniture (but not "typical work equipment") in the DM 2,400 limit.

3. Recent lower court decision

A recent lower court decision involved interpretation of two further aspects of the statute. One of these was decided in the taxpayer's favour, the other went against him. The tax court regarded both issues as straightforward and denied the taxpayer the right to appeal the decision. The taxpayer has, however, petitioned the Federal Tax Court to hear the appeal.

The case involved an individual with two distinct occupations, one as an office worker and the other as an employee of the local "wage tax assistance association" (Lohnsteuerhilfeverein). Wage tax assistance associations are non-profit associations the purpose of which is to provide tax assistance to their members. Essentially, this means income tax return preparation in return for payment of modest annual membership dues. The taxpayer in question worked essentially as a tax return preparer from an office in his home, where he also met with the persons whose tax returns he prepared.

The court held that the taxpayer was entitled to the limited deduction of DM 2,400 per year with respect to his office, but not to an unlimited deduction. The grant of a limited deduction followed from the fact that the office in the home was the only place of work available with respect to the tax return preparation activities, it being obviously impermissible for him to use his office at his other unrelated job for such purposes. The limited deduction was allowable even though the use of the home office did not account for more than 50 % of the taxpayer's total business and professional activity because the requirements for the limited deduction are alternative, not cumulative. This has in the meantime become the official position of the tax authorities themselves (directive of 22 Jan. 1998, sec. 4, 5).

The court denied an unlimited deduction because the use of the home office was not the "centre of the [taxpayer's] entire business and professional activities". While the home office was unquestionably the centre of the tax return preparation work, his job as an office worker was centred elsewhere.

The grounds of the taxpayer's appeal are not clear from the decision. It seems likely, however, that the taxpayer will raise constitutional arguments against the requirement that an office in the home be the centre of all remunerative activity in order qualify for an unlimited deduction.

Disclaimer and Copyright

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