Co-heir Means Codebtor in Taxation – Even if Unaware
The Federal Tax Court had to decide on August 29, 2017 (re VIII R 32/15) on a dispute among heirs of a large estate where everyone played a different role when it came to avoiding / creating tax liabilities.
Joint Heirs Receiving an Estate not Knowing the Contents
The beneficiaries of an estate not only receive all claims and liabilities per civil law but also inherit the tax status of the bequeather. Some heirs might be interested in what is in the estate while others do not care. Some heirs were in close relationship to the testator and others were more distant. Some heirs assume that because they have no knowledge of what has happened, they will not be responsible, while the informed beneficiary will think “I didn’t do it; I’m innocent.”
Facts of the Case
The plaintiff was co-heir with her sister S of their late mother in 2000. Their mother had capital income abroad in the years 1993 – 1999 which was not declared. Due to dementia, their mother was not capable anymore to submit valid tax returns. The returns were then prepared by S. S has positive knowledge that her mother declared too little capital income from that point at the latest. The tax office held the plaintiff jointly liable next to her sister S and demanded payment of the tax as well interest.
Co-heir means Codebtor
The Federal Fiscal court first of all clarified that all heirs of an estate are entitled to the whole estate (§1922 I BGB). Pursuant to §1967 BGB, the estate includes any and all debts of bequeather and further specified by §45 II 1 AO, the estate also includes tax liabilities in as much as joint debtors are liable based on civil law. This means all heirs are liable as joint debtors (§§1967, 2058 BGB i.c.w. §45 II 1 AO). All heirs are liable for the whole amount and the tax office may implement in its fair discretion whom they want to collect from. A specific knowledge of any debts or tax evasion is not required.
In as far as the bequeather was not able to legally submit a return due to her dementia (§104 no. 2 BGB i.c.w. §79 AO), the tax return is invalid. However, this does not effect the legally matured tax. When an heir finds out that a tax was assessed too low, be it before or after having received the estate, this person is obliged to correct an invalid return (§153 I 2 AO).
Since the sister S knew of the incorrect and invalid tax return even before her mother died, she intentionally committed tax evasion by omission on purpose (§370 I no. 2 AO). After inheriting her mother’s estate, the plaintiff also knew of the incorrect tax filing and was therefore obliged to file a corrected return and intentionally failed to correct the return. The duty to correct is not eliminated by the fact that their mother could not submit a valid return because of her dementia.
Practical Results of Tax Evasion
The tax evasion of S lead to the extended period of ten years of assessing taxes (§169 II 3 AO) – this is true for the plaintiff as well. It is irrelevant whether the plaintiff committed the evasion herself or not. It is only important that a tax was evaded. The evasion comes from failure to pay the tax itself, and does not arise from any intention or omission. Due to the extended period for assessment, it is irrelevant whether a liable person believes the assessment is time-barred and only later learns that a third person had evaded jointly owed taxes.
An heir receives an estate as is and is liable for the bequeather’s taxes owed. All heirs are jointly liable for the tax evasion – regardless of whether that person committed the tax evasion or not. If you notice that the deceased person has incorrectly filed a return, then you are obligated to correct it – as though the responsibility for the return were yours.