(2021) When can legal expenses be deducted?

The tax authorities have always been very stingy when it comes to recognising civil litigation costs: such costs were rarely considered "necessary" and were therefore mostly rejected as extraordinary expenses. Only in exceptional cases were such costs recognised, namely when the legal dispute affected an existentially important area or the core area of human life.

(1) In May 2011, the Federal Fiscal Court abandoned this narrow view and significantly expanded the possibilities for tax deductibility: civil litigation costs should always be considered necessary for legal reasons, regardless of the subject of the proceedings, and thus recognised as extraordinary expenses if the legal action or defence has a sufficient chance of success and does not appear frivolous. "Success must be at least as likely as failure" (BFH ruling of 12.05.2011, BStBl. 2011 II p. 1015).

(2) In June 2015, the Federal Fiscal Court abandoned its generous case law for the years before 2013 and no longer adheres to its taxpayer-friendly ruling of 12.05.2011. The rule now is: civil litigation costs are generally only considered necessary if the event underlying the litigation is also necessary for the taxpayer. This is generally not the case with civil litigation, so the litigation costs cannot be deducted as extraordinary expenses (BFH ruling of 18.06.2015, VI R 17/14).

(3) Since 2013, the legislator has overturned the BFH's citizen-friendly ruling and stipulated by law that litigation costs can only be deducted as extraordinary expenses in exceptional cases under section 33 EStG - taking into account a reasonable burden - "if the taxpayer is at risk of losing their livelihood and being unable to meet their basic needs in the usual manner" (section 33 (2) sentence 4 EStG).

The Rhineland-Palatinate Finance Court recently ruled that costs incurred in legal disputes related to the construction of a home are not tax-deductible as extraordinary expenses (ruling of 07.05.2020, 3 K 2036/19).

Tip: The Münster Finance Court recently ruled that legal costs incurred to obtain post-marital maintenance are deductible as income-related expenses if the maintenance recipient declares the maintenance payments as other income in accordance with section 22 no. 1a EStG (FG Münster of 03.12.2019, 1 K 494/18 E).

The case: The claimant and her now ex-husband separated in 2012. They were involved in family court proceedings concerning the divorce, pension rights adjustment, and post-marital maintenance. In 2014, the marriage was dissolved by a court order, and the claimant's former husband was ordered to make monthly maintenance payments. The woman appealed against the court's decision for higher monthly payments.

In 2015, a court settlement was reached regarding the maintenance amount. In her 2015 income tax return, the claimant declared other income in the amount of the maintenance payments received and claimed the legal costs (court and legal fees) as tax-reducing. The tax office refused to take them into account.

According to the judges, the legal costs should be considered as income-related expenses for the maintenance recipient because she taxed the maintenance payments from her ex-husband under section 22 no. 1a EStG. The woman incurred the legal costs to receive (higher) future income in the form of maintenance payments. The maintenance payments are to be treated as taxable income under section 22 no. 1a EStG because the ex-husband, as the payer, had the option to deduct his maintenance payments as special expenses under section 10 (1a) EStG, known as real splitting. The maintenance payments are thus fully equated with other income. This means that a deduction for income-related expenses must also be fully possible.