When taxes threaten the minimum subsistence level

But this may also mean overreaching the target and in some constellations even incurring more taxes than income, as shown by the case decided by the Cologne Fiscal Court in its ruling of April 26, 2023 (Case No. 5 K 1403/21).

An entrepreneur had a total amount of income from various types of income of around EUR 520,000 in 2002. Simultaneously, there were loss carryforwards as well as losses from option transactions and other private sales transactions of around EUR 400,000. However, due to the loss offset restrictions in § 22 and § 23 EStG, there was no offset against the positive income from the other types of income. The income tax for 2002 was therefore higher than the real income - with the consequence that the subsistence level was also no longer met. The Cologne Regional Court therefore ruled in favor of the taxpayer that a partial waiver of income tax is justified on objective grounds of equity. According to the court, income tax may ultimately only be levied at such a level that the "real income" minus income tax leaves the minimum subsistence level.

Despite the constitutionality of the restriction on the offsetting of losses in § 22 of the Income Tax Act, which may be assumed in principle, the assessment of a tax is factually inequitable if, although it outwardly complies with the law, as a result of a legal overhang it runs against the legislator's intentions in the specific case to such an extent that the levying of the tax appears to be inequitable. Such is the case if it can be assumed that the legislator would have decided the question to be decided in an equitable manner - had it regulated it - in the sense of the intended equitable measure. Decisions of the Bundesverfassungsgericht (BVerfG - Federal Constitutional Court) and the Bundesfinanzhof (BFH - Federal Fiscal Court) result in a constitutional obligation to grant equitable relief if the application of the law, which in itself is not objectionable, leads to an "unintentional overhang" in individual cases. This can be assumed, in particular, in the case of an income tax liability created by the interaction of various regulations, which, however, is in reality not based on any increase in performance. For this would violate the prohibition of excessiveness that applies to all tax law and the principle of taxation according to ability to pay, which dominates income tax law in particular.

An impact of fundamental rights in an individual case must also be examined within the framework of objective equity, contrary to the view of the tax authorities. Pursuant to the case law of the BVerfG, ensuring fairness in individual cases requires a decision on equity in atypical cases in order to take into account the "effectiveness of fundamental rights". For this reason, the state must leave taxpayers as much tax-free income as they need to support themselves (subsistence level); the subsistence level is constitutionally the lower limit for income tax.

However, in the opinion of the Tax Court, other considerations do not result from the special tax treatment of highly speculative transactions, the risks of which the taxpayer has deliberately entered into himself. This is because the limitation on loss deduction introduced in light of this must also take a back seat to the legal positions granted under constitutional law. From the violation of fundamental rights, which occurred in the dispute due to the violation of the subjective net principle, the Tax Court concludes a discretionary reduction to zero. Consequently, in the case in dispute, the tax office is obliged to issue the administrative act sought and, for reasons of objective equity, to make a different tax assessment of income tax for the year 2002.