Private asset management versus commercial trading

Case 1: From donated private assets to commercial real estate trading

1. basic facts

In 2016, the siblings Leano and Gianna each received a 3/5 share of the unbuilt plot no. 69 in the canton of SG (total plot size 1,^760m2) from their mother as part of an advance receipt. They acquired the remaining 2/5 of the plot under a contract dated March 2022 for CHF 1.55 million. ^300m2 of the plot was separated off. They had this part entered in the land register as new plot no. 70 (co-owned by the two siblings).

Parcel no. 69 belonged to her mother's private property.

Leano is a lecturer in cantonal constitutional law at the HSG, Gianna works as a doctor at the Cantonal Hospital SG.

After the separation, Leano and Gianna established condominium ownership on the remaining plot no. 69 and had an apartment building with 15 condominiums built on it. In 2022, they sold six condominiums or a quota of 341/1000. They generated proceeds of CHF 4,210,952. The siblings declared a property gain (in private assets). The remaining nine condominiums are rented to permanent tenants and serve as long-term capital investments. Happy sheep graze on the parceled out and unbuilt ^300m2.

After the sale of the six condominiums, the responsible tax commissioner of the tax office of the Canton of St. Gallen stated that the two siblings did not qualify as real estate traders.

In connection with the sale of the six condominiums, the tax office of the Canton of St. Gallen classifies the siblings as commercial real estate traders, determines a taxable net profit of CHF 533,000 each (see below for details) and wants to record this with the dBSt as well as the cantonal and municipal taxes.

Calculation of net profit:

Total construction costs CHF 5'673'008

Purchase of building land (2/5) CHF 1,550,000

Building land inheritance (3/5) CHF 2,325,000

./. parceled out (^300m2) CHF - 660'508

Total construction costs CHF 8'887'500

Total sales (341/1000) CHF 4,210,952

Share of construction costs (341/1000) CHF -3,030,638

Total profit CHF 1'180'314

Profit per shareholder CHF 590,157

./. pers. AHV contributions (10.6%) CHF - 62'557

Net profit per shareholder CHF 527,600

Questions

1. Formalities: What can be asserted with an appeal in public law matters before the Federal Supreme Court? What jurisdiction does the Federal Supreme Court have with regard to the facts of the case?
2. The siblings would like you to comment on the opinion of the SG tax office regarding the sale of the six condominiums.
3. If the six condominiums sold are classified as business assets, the question arises as to how the remaining nine condominiums rented out and plot no. 70 (^300m2) are to be classified.
4. Provided that the remaining nine condominiums also qualify as business assets, the siblings would like to contribute them to the newly founded Las Perlas AG as a tax-neutral contribution in kind as soon as possible. How do you assess this plan?

Facts variant

In 2012, Leano and Gianna (neither of whom had any connection to the real estate sector) acquired a property with two buildings by means of an advance inheritance. In 2016 and 2017, they had maintenance work carried out on the existing buildings. However, this proved to be a bad investment given the age of the buildings (built in 1920). On the recommendation of real estate experts, they had the existing buildings demolished in 2021 and 2022 and a new development built. This comprised an apartment building with six apartments. From December 2022 to February 2023, Leano and Gianna sold four apartments. Leano and Gianna each took over one of the other two apartments.

Question on the factual variant

• Are the requirements for commercial property trading fulfilled due to the sale of the four flats?

Case 2: Co-ownership share: sale and time of realization

1. facts of the case

A is the managing director of C. AG, where his spouse B is also employed. C. AG is active in real estate management. In September 2010, A, together with five other buyers - including D. AG, which operates in the real estate sector - acquired a co-ownership share of 15% in the overbuilt plot no. 6 in the municipality of U at a public auction. A financed the acquisition of the co-ownership exclusively with his own funds.

In July 2011, A and Z. GmbH concluded a contract for the simple partnership G.. Its aim was to realize a hotel and residential complex on plot no. 6 together with the other co-owners. In the following years, the simple partnership G. paid fees of over CHF 650,000 to the architectural firm F. AG for the implementation of the real estate project on plot no. 6.

In December 2019, the municipality granted the ordinary partnership a building permit for the "demolition of the existing building and the construction of a residential and hotel complex" on plot no. 6.

In June 2020, A transferred half of his co-ownership share (7.5%) in plot no. 6 to Z. GmbH and gave the other half (7.5%) to his wife B.

Spouses A and B have always declared the co-ownership share in plot no. 6 as private assets since the acquisition. This was accepted by the tax authorities of the canton of VS.

By public purchase agreement dated October 10, 2022, the simple partnership G. (consisting of spouse B, among others) sold parcel no. 6 to Y. AG for the purchase price of CHF 20 million, whereby one of the contractual clauses had the following wording:

"If the amended building permit is not obtained by 30.4.2023 or one of the official permits required for the construction project is canceled, the present purchase will lapse without compensation on either side."

On December 12, 2022, the municipality granted approval for the adaptation of the construction project approved in December 2019.

In December 2023, spouses A and B submitted their tax return for 2022. In the comments on the tax return, they claimed that the profit from the sale of the co-ownership share in plot no. 6 should be subject to real estate gains tax.

In the 2022 assessment ruling, the tax authorities of the Canton of VS did not include any income from self-employment from the sale of plot no. 6. The assessment ruling became legally binding without being contested.

In the 2023 assessment decision, the tax authorities of the canton of VS recorded income from self-employment from the sale of the co-ownership share in plot no. 6.

Spouses A and B were unsuccessful in both their appeal to the tax authorities and their appeal to the administrative court.

In an appeal in public law matters before the Federal Supreme Court, spouses A and B argue that the sold co-ownership share in plot no. 6 was part of their private assets and not business assets. Even if the co-ownership share had been business assets, the profit from its sale would have been taxable as income from self-employment in the 2022 tax period.

Questions

1. How will the Federal Supreme Court rule with regard to the sale of spouse B's co-ownership share (7.5%) in plot no. 6? Self-employment or private capital gain?
2. How will the Federal Supreme Court decide with regard to the time of realization?

Case 3: Commercial art dealer? Part 1

1. facts of the case

Ms. Sanddorn is a partner with unlimited liability in Galerie Blumenbild, a limited partnership in the canton of Bern, for which she is 100% active. Every year from 2020 to 2023, Ms. Sanddorn removed works of art from her art collection declared as private and consigned them to Galerie Blumenbild for sale at auctions. In 2020, for example, the consignment comprised 42 works of art, all but four of which were sold at auction. The sales amounted to CHF 734,700 in 2020, CHF 87,150 in 2021, CHF 309,350 in 2022 and CHF 218,600 in 2023.

Questions

1. Which tax aspects do you recognize?
2. What additional information would you request?
3. How would you argue?

Case 4: Commercial art dealer? Part 2

1. facts of the case

See above, case 3.

Question

• Do you recognize other tax aspects?

Case 5: Part-time investment trading as a self-employed activity

1. facts of the case

From 2007 to 2009, Piercarlo Falcone held investments in companies with mining rights in Guinea-Bissau (West Africa). Bauxite, an ore used in the production of aluminum, is mined in this country.

Falcone was Chairman of the Board of Directors of C.C. Ltd, which carried out geological surveys in Guinea-Bissau. He was employed 100% by H.C.

May 22, 2009: Foundation of F.C. AG (share capital: CHF 500,000). Falcone was significantly involved in this foundation - also as a shareholder.

May 28, 2009: The government of Guinea-Bissau granted various exploration and mining licenses. These were transferred to F.C. AG via C.C. Ltd.

June 30, 2009: Capital increase of F.C. AG (new share capital: CHF 1,000,000). Falcone was also significantly involved in this.

2009: Shareholder loan from Falcone to F.C. AG.

January 13, 2010: Falcone and another shareholder of F.C. AG concluded a trust agreement with L. AG as trustors. This was intended to transfer all shares in F.C. AG to L. AG on a fiduciary basis in order to simplify negotiations with prospective buyers. The aim of the trustors was to sell the entire block of shares "en bloc" to a buyer who was "potent enough" to build up the infrastructure and organization required for the wind-down.

February 11, 2010: Agreement on a staggered sale to M.M. Corporation until December 31, 2015. Various contract adjustments were subsequently made. Falcone achieved proceeds of CHF 4,320,000 in 2011.

In his 2011 tax return, Falcone declared income from his employment at H.C. AG of around CHF 86,000 and income from securities of CHF 887.

The assessment authority assessed taxable income of CHF 97,600 and qualified investment income of CHF 1,595,900 (indirect partial liquidation) for the 2011 tax period. The assessment authority set the taxable assets at CHF 2,100,000.

Falcone lodged an objection to this. This was rejected. The assessment authority carried out a reformatio in peius and increased the taxable income to CHF 2,512,621 and set the taxable assets at CHF 2,414,064. These amounts were slightly amended by the special administrative court. The appeal against this to the Administrative Court was rejected.

Falcone appealed against the decision of the Administrative Court to the Federal Supreme Court in matters of public law. 

Questions

1. Can the assessment authority carry out a reformatio in peius in objection proceedings?
2. How will the Federal Supreme Court rule with regard to the sale of F.C. AG shares by Falcone?

Case 6: Privileged liquidation gains taxation - private withdrawal

1. basic facts

The married couple A.A. (born 1961) and B.A. (hereinafter: Mr. and Mrs. A.) are resident for tax purposes in Erlen/TG. The husband ran an agricultural business there as a self-employed (secondary) occupation. In 2020 and 2021, he sold the current business assets and some of the agricultural land from his business assets. This led to the realization of hidden reserves in the amount of CHF 70,000 in the 2020 tax period .

After 2021, he retained ownership of parcels no. 97, no. 98 and no. 99, which comprised (1) the self-occupied farmhouse, (2) the outbuildings and (3) the surrounding area of 80 acres.

With a purchase agreement dated August 2, 2022, A.A. - with the support of a broker called in in December 2021 - also sold these three properties, which resulted in total proceeds of CHF 1,330,000. The couple then moved from the farmhouse to their single-family home, also located in Erlen, which they had purchased in 2012, subsequently rented out to third parties and renovated in November 2021. In the 2021 annual financial statements, A.A. recognized the three properties at market value. In the 2021 tax return, he claimed a private withdrawal in relation to the three properties as at November 1, 2021.

In the 2022 tax return, Mr. and Mrs. A. then no longer declared any business assets.

As part of the assessment procedure for the 2020 tax period, Mr. and Mrs. A. claimed that the definitive cessation of their self-employment took place on 1 November 2021, which is why 2020 should be taken into account as the second-last financial year for the taxation of the liquidation profit from the cessation of self-employment.

The tax authorities of the Canton of Thurgau, on the other hand, took the view that the liquidation was only completed with the sale of the three properties in the 2022 tax period. 

Mr. and Mrs. A. claim to have transferred the three parcels of land to private assets in November 2021. They refer to the derecognition (at market value) and the treatment in the tax returns. They claim that they no longer declared any business assets in the 2022 tax period, which is why 2020 should be considered the second-last financial year within the meaning of Art. 37b DBG.

Questions

It must therefore be examined whether the conditions for privileged liquidation within the meaning of Art. 37b DBG or Art. 11 para. 5 StHG are met.

Specifically, the following questions arise:

What are the requirements for a private withdrawal?

1. Is the sale of the three properties on August 2, 2022 to be regarded as the last act of liquidation of A.A.'s self-employed (secondary) gainful activity or did it already cease in the 2021 tax period?
2. What are the tax consequences for Mr. and Mrs. A. from the assessment of the latter question?

2nd variant of the facts

In its ruling of August 5, 2021 (2C_390/2020), the Federal Supreme Court considered that, in case of doubt, the asset should be assumed to remain part of the business assets. The decisive factor is not the short holding period as such, but the fact that all the evidence points to a pre-existing intention to sell the asset immediately after derecognition. The intention to transfer (subjective element) was therefore not proven, which ruled out the possibility of assuming a private withdrawal despite the undisputed booking (objective element). Consequently, there was no privileged liquidation within the meaning of Art. 37b DBG or Art. 11 para. 5 StHG. The appeal of Mr. and Mrs. A. was therefore dismissed.

Subsequently, Mr. and Mrs. A. submitted an application to the Federal Supreme Court for a revision of the aforementioned ruling. They request that a liquidation within the meaning of Art. 37b DBG and Art. 11 para. 5 StHG be assumed for the purposes of the revision. In their application, Mr. and Mrs. A. mainly describe their business and family environment.

They expressly base their request for revision on Art. 123 para. 2 lit. a BGG. According to this provision, the revision of a Federal Supreme Court judgment can be requested if the requesting party subsequently learns of significant facts or discovers decisive evidence that it was unable to provide in the earlier proceedings, excluding facts and evidence that only arose after the decision.

In casu, Mr. and Mrs. A. repeat in their request for revision factual circumstances that were already known to the Federal Supreme Court - and the lower courts.

Question on the factual variant

• How is the appeal to be decided?

Case 7: Privileged liquidation profit taxation - profit from the revaluation of fixed assets

1. facts of the case

The two taxpayers Andri and Franco, both older than 55, jointly operated a KollG. They each held half of the shares in this company. The KollG was converted into an AG with retroactive effect from 1.1.2014.

In 2013, i.e. before its conversion into an AG, KollG revalued certain assets in the amount of CHF 175,000. This resulted in a profit for KollG for this financial year.

In the 2013 tax period, Andri and Franco applied for separate taxation of the liquidation profit of CHF 87,500 each as a result of giving up self-employment in the course of the conversion of KollG into an AG.

The assessment authority rejected this. The objection lodged against this was upheld.

As the appeal lodged by the FTA against this was rejected by the cantonal court, the FTA appealed to the Federal Supreme Court. It requested that the profit from the accounting revaluation for the 2013 tax period be included in the taxpayer's income from self-employment.

Question

• Is the profit from the accounting revaluation of fixed assets, which was carried out in the financial year before the conversion of KollG into an AG, subject to privileged taxation in accordance with Art. 37b DBG?