Deductibility of contributions from a family foundation as commercially justified expenses

Facts

The [X.] family foundation was established in 1922 and has the purpose of providing contributions to the family descendants for their livelihood, bearing the costs of equipment, education and vocational training of minor beneficiaries in whole or in part, and securing and facilitating the economic advancement of the beneficiaries in case of need. In 1998, the foundation paid out CHF 70,500.-- to each of the four family branches. The tax administration of the canton of Glarus notified the foundation of the final assessment for direct federal tax 1998 and set the taxable profit at CHF 1,479,500.--. The foundation lodged an objection, which was rejected. The Administrative Court of the canton of Glarus partially upheld the foundation's appeal and set the taxable profit at CHF 1,197,563.--.

The tax administration of the canton of Glarus requests the Federal Court to overturn the judgment of the Administrative Court and set the taxable income of the [X.] family foundation at CHF 1,479,500.--. The Federal Tax Administration supports this request.

Considerations

The Federal Court must examine whether the contributions from the family foundation to the beneficiaries are deductible as commercially justified expenses. The lower court affirmed this, as the payments to the beneficiaries were made in fulfillment of a legal obligation imposed on the foundation and served the purpose of the family foundation.

However, the Federal Court holds the view that the contributions from the foundation to the beneficiaries only do not belong to the taxable profit if they are still within the permissible purpose of the foundation. If, contrary to the statutory ideal purpose restriction, unconditional economic benefits are nevertheless paid out to the beneficiaries for their general livelihood, these cannot be recognized as commercially justified expenses.

The…