Capital gain from business assets: income tax instead of property gains tax, protection of legitimate expectations in case of erroneous assessment and double taxation in the Canton of Thurgau

Facts

In tax period 2014, the taxpayer and his wife operated an agricultural business as self-employed persons in the municipality of [V.] /TG. The business assets of the sole proprietorship included parcel No. xxx, which had been zoned as building land for a long time. In 2014 he split off a portion of 800 m2 from it (new number yyy, building zone W2).

In a property gains tax return dated 14 May 2014 submitted to the Tax Administration of the Canton of Thurgau (KSTV/TG), the taxpayer, who was not represented by a lawyer, notary or fiduciary, stated proceeds of CHF 300'000.--. He did not answer the question of whether the property sold was listed in the balance sheet (yes/no). The KSTV/TG then provisionally assumed private assets and recorded the gain under property gains tax (provisional taxable gain CHF 295'000.--, tax CHF 33'040.--).

On 12 June 2014 the taxpayer sold the portion to third parties for CHF 300'000.--. On 14 June 2016 the property gains tax assessment decision (unchanged at CHF 33'040.--) was issued, which became final and binding without challenge. On 16 March 2017 the assessment decision for income and wealth tax 2014 followed, in which a capital appreciation gain was added (direct federal tax CHF 294'014.--, cantonal and municipal taxes CHF 299'586.--). The objection to the municipality and the appeal to the Tax Appeals Commission led to reductions (most recently CHF 257'760.-- for direct federal tax, no change to the cantonal and municipal taxes).

The Administrative Court of the Canton of Thurgau dismissed the appeal in judgment GLA.2018.156 of 26 June 2019. It reasoned that since 2014 the dualistic system has applied in the Canton of Thurgau, that the privilege under Art. 18 para. 4 DFTA or § 20 para. 4 StA/TG lapses due to zone W2, and that the gain must be recorded as income from self-employment. Overtaxation was not threatened, as the KSTV/TG would credit the property gains tax against income tax. An incompletely disclosed set of facts did not form a basis for legitimate expectations.

By way of a public law appeal and subsidiary constitutional complaint, the taxpayers requested that the prior instance decision be set aside, alternatively that it be determined that the capital appreciation gain had been finally assessed and was exempt from income taxation, with remittal. They complained in particular of a violation of the principle of protection of legitimate expectations (Art. 9 Cst.) and of the prohibition of arbitrariness, and argued that the final assessment decision could not be revoked. The prior instance, the KSTV/TG and the Federal Tax Administration (FTA) requested dismissal.

Considerations

The Federal Supreme Court entered into the public law appeal (Art. 82 let. a, Art. 89 para. 1, Art. 100 para. 1 FSCA in conjunction with Art. 146 DFTA and Art. 73 DTHA). There is no room for a subsidiary constitutional complaint. It examined federal law ex officio with full cognition (Art. 106 para. 1, Art. 95 let. a FSCA), based its review on the facts established by the prior instance (Art. 105 para. 1 FSCA), which also applies to harmonised tax law.

For direct federal tax, in 2014 there was no longer any agricultural or forestry land, as the partial parcel was not subject to the land law protection under RLRA and did not form an appropriate surrounding area of an agricultural business. Art. 18 para. 4 DFTA was therefore excluded. On disposal from business assets, both the recaptured depreciation and the cyclical capital appreciation gain are to be recorded under income tax (BGE 138 II 32 E. 2.3.1). The appeal is unfounded in this respect and must be dismissed.

For cantonal and municipal taxes of the Canton of Thurgau, the dualistic system has applied since 1 January 2014 (Art. 8 para. 1 and Art. 12 para. 1 DTHA; § 126 StA/TG; § 20 paras. 1, 2 and 4 StA/TG). Property gains tax is only payable on private assets, while gains from business assets are subject to income tax. As the property belonged to business assets, the gain would have had to be recorded cantonally under income tax; property gains tax was not appropriate.

However, property gains tax was assessed, which became final and binding, and subsequently the same gain was subjected to income taxation. This led to double taxation at cantonal and municipal level. The prior instance did not see a case of protection of legitimate expectations, since the KSTV/TG had held out a credit. The Federal Supreme Court rejects this: in the mixed assessment procedure, the assessment authority has a comprehensive duty to investigate (Art. 46 para. 1 DTHA), which may only rely on established facts. Although the taxpayer did not fulfil his duty to cooperate (Art. 42 para. 1 DTHA) by leaving the decisive question open, he did not provide false or misleading information.

The assessment authority concluded from the mere failure to tick the box for private assets, although the taxpayer was…