Process: 139/2018-T

Date: November 20, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 139/2018-T) addresses a crucial IRS capital gains dispute concerning the proper acquisition value for inherited property. The claimant inherited a 12.5% share of urban property in Lisbon upon his father's death in August 2011, when the property's tax patrimonial value (VPT) was €5,856.38 under the old Real Property Tax Code. He sold the property in November 2011 for €220,000.00. Subsequently, in 2012, the Tax Administration revalued the property under the IMI Code, establishing a new VPT of €99,550.00. The tax authority calculated capital gains using the original €5,856.38 value, resulting in an IRS assessment of €9,397.34. The claimant argued that the updated €99,550.00 value should apply for capital gains calculations. The central legal question was whether the acquisition value for capital gains purposes should be the VPT registered at the date of inheritance (death) or the subsequently updated IMI valuation. This case highlights the temporal aspect of property valuations in Portuguese tax law and their impact on capital gains calculations for inherited real estate. The dispute also involved a procedural clarification regarding the correct assessment number and an adjustment account. The defendant Tax Administration contended that only the value existing at the moment the tax obligation arose (date of death) could be considered, as the updated valuation did not exist when the property was sold. The decision has significant implications for taxpayers inheriting property subject to subsequent IMI revaluations and their IRS obligations.

Full Decision

ARBITRAL DECISION

REPORT:

A..., taxpayer no. ... with tax domicile at Rua ..., no. ..., ... – ... Aveiro, hereinafter referred to as the Claimant, filed a request for the constitution of an arbitral tribunal in tax matters and a request for arbitral determination, pursuant to the provisions of numbers 1 and 2 of article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter abbreviated as LRAT), petitioning for the annulment of the dismissal of the request for revision of the Personal Income Tax assessment relating to the 2011 tax year, in the amount of €9,397.34, with the consequent reimbursement to the Claimant of the amount unduly paid and of the corresponding indemnity interest.

To substantiate its request, it alleges, in summary:

  • the calculation of the capital gain determined in the context of Personal Income Tax is affected by illegality;

  • the real property in question was acquired by the Claimant upon the death of his father, which occurred in August 2011, which property, on the date of death, had a tax patrimonial value of €5,856.38, determined on the basis of the Real Property Tax Code and the Agricultural Industry Tax Code and the Municipal Tax Code;

  • the real property was disposed of for the amount of €220,000.00, and on 31/12/2012 was valued under the Municipal Real Estate Tax (IMI) Code at a tax patrimonial value of €99,550.00;

  • the disputed assessment considered as the acquisition value of the disposed real property the amount of €5,856.38 and not the amount of €99,550.00;

  • this value could not serve for the calculation of capital gains, as it was not determined in accordance with the IMI Code.

The Claimant submitted 7 documents and did not call any witnesses.

In the request for arbitral determination, the Claimant chose not to appoint an arbitrator. Therefore, pursuant to the provisions of article 6, no. 1 of the LRAT, the undersigned was appointed by the Ethics Council of the Centre for Administrative Arbitration, and the appointment was accepted as legally provided for.

The arbitral tribunal was constituted on 5 June 2018.

Notified as provided in article 17 of the LRAT, the Defendant filed a reply, alleging in summary:

  • As a preliminary matter, the Personal Income Tax assessment relating to the year 2011, in the amount of €9,397.34, is assessment no. 2012... and not assessment no. 2012...;

  • the procedure for the valuation of the real property acquired by the Claimant began on 17/01/2012 and ended on 22/03/2012, with the entry in the property register of the updated tax patrimonial value of €99,550.00;

  • the tax patrimonial value to be considered for purposes of Stamp Tax assessment is the value entered in the property register on the date the tax obligation arose, which coincides with the date of death, in this case €5,856.38;

  • the Tax Administration could not consider for the purpose of calculating capital gains a value that had not yet been determined on the date when the Claimant disposed of the real property;

Concluding, therefore, for the dismissal of the arbitral claim filed.

Notwithstanding this, the Defendant further submits that, should the tribunal find that the determination of the capital gain should take into consideration, as the acquisition value, the amount of €99,550.00, then it should order the partial annulment of the assessment and its reformulation based on that value and not, as the Claimant requests, order the total annulment of the assessment.

The Defendant submitted a copy of the administrative file and did not call any witnesses.

By order of 14/09/2018, the Claimant was notified to submit to the file a copy of the disputed assessment and proof of its payment. The Claimant then submitted to the file a copy of Personal Income Tax assessment no. 2012..., in the amount of €7,434.50 and proof of its payment.

Subsequently, the Claimant clarified that there had been two Personal Income Tax assessments relating to the 2011 tax year: one in the amount of €7,434.50 and another, later, in the amount of €9,397.34, disputed herein.

Given the positions assumed by the parties and the absence of any need for additional production of evidence, the hearing referred to in article 18 of the LRAT was dispensed with, as well as the presentation of further submissions.

II. CASE MANAGEMENT:

The Arbitral Tribunal was properly constituted and is materially competent.

There are no nullities that invalidate the proceedings.

The parties have legal personality and capacity and are legitimate, with no defects in representation.

There are no other nullities, exceptions or preliminary issues that preclude examination of the merits and which the tribunal must address of its own motion.

III. PRELIMINARY ISSUE:

In the reply filed, the Defendant raised, as a preliminary matter, the issue that the Personal Income Tax assessment relating to the year 2011, in the amount of €9,397.34, is assessment no. 2012... and not assessment no. 2012..., as incorrectly invoked by the Claimant.

Having examined the documents submitted to the file, it is verified that the disputed assessment is indeed assessment no. 2012..., the only assessment with the amount of €9,397.34.

Assessment no. 2012..., to which the Claimant refers, concerns the adjustment account that was made.

In fact, regarding the 2011 tax year, two Personal Income Tax assessments were made: one with number 2012..., in the amount of €7,434.50 and another with no. 2012..., in the amount of €9,397.34.

Given that the Claimant had already paid the first assessment issued, in the amount of €7,434.50, he would only need to pay, with respect to the second assessment, the difference between the amount of €9,397.34 and the amount already paid, that is, the amount of €1,962.84, corresponding to the adjustment account statement no. 2012....

The indication, by the Claimant, of assessment no. 2012... as being the disputed assessment was merely a simple clerical error, as revealed in the context of the statement itself, and the same must be considered corrected.

IV. ISSUE TO BE DECIDED:

Given the positions assumed by the parties, it is easily apparent that the only issue to be decided by this Tribunal is whether, for the purpose of calculating the capital gain, the acquisition value should be that which appears in the property register on the date of death or the tax patrimonial value resulting from the valuation carried out by the Tax Administration.

V. FACTUAL MATTER:

Proven Facts

With relevance to the decision to be rendered in the present proceedings, the following facts are established as proven:

  1. The Claimant acquired, by the death of his father, 12.5% of the autonomous fraction designated by the letter "F" of the urban real property located at Avenida ..., nos. ... and ..., parish of ..., municipality of Lisbon, registered in the urban property register under article ...;

  2. On the date of death, the tax patrimonial value registered in the property register of the said fraction was €5,856.38, determined on the basis of the Real Property Tax Code and the Agricultural Industry Tax Code and the Municipal Tax Code;

  3. By public deed executed on 09/11/2011, the fraction referred to in paragraph 1) above was sold at the price of €220,000.00;

  4. The Claimant filed a Personal Income Tax return relating to the 2011 tax year, in which he declared the sale made, indicating as the acquisition value of the real property the amount of €5,856.38;

  5. The real property referred to in paragraph 1) above was subject to valuation by the Tax Administration in 2012, and came to have a tax patrimonial value of €99,550.00;

  6. The Claimant was notified of Personal Income Tax assessment no. 2012..., relating to the 2011 tax year, in the amount of €9,397.34;

  7. The Claimant paid the amount of €9,397.34, relating to Personal Income Tax for 2011;

  8. The Claimant's sister, who also acquired, by the death of their father, 12.5% of the real property referred to in paragraph 1) above, was also assessed for tax calculated on the basis of, as the acquisition value of the real property, the amount of €5,856.38;

  9. That assessment was annulled by the Tax Administration, as it understood that the acquisition value to be considered would have to be the amount of €99,550.00;

  10. The Claimant filed, on 29/05/2013, a request for revision of the tax act, which was dismissed by order notified to the Claimant by letter dated 20/02/2018;

  11. The request for constitution of the arbitral tribunal in tax matters and for arbitral determination was filed on 22/03/2018.

Facts Not Proven

No facts of interest to the proceedings remained unproven.

Reasoning on Factual Matter

The conviction regarding the facts held as proven was formed on the basis of documentary evidence submitted by the parties, indicated for each point, the veracity of which was not disputed, as well as the matters alleged and not contested.

VI. ON THE LAW:

Given that the factual matter is established, it is now necessary, by reference thereto, to determine the applicable law.

The issue to be decided in the present proceedings concerns the interpretation of the norms contained in no. 1 of article 45 of the Personal Income Tax Code and article 13 of the Stamp Tax Code, which provide as follows:

Article 45 of the Personal Income Tax Code:

"1 – For the determination of gains subject to Personal Income Tax, the acquisition value is considered, in the case of assets or rights acquired as a gift:

a) The value that was considered for purposes of stamp tax assessment;

b) The value that would serve as the basis for stamp tax assessment, if it were due."

For its part, article 13, no. 1 of the Stamp Tax Code clarifies that:

"The value of real property is the tax patrimonial value entered in the property register in accordance with the Municipal Real Estate Tax Code on the date of transmission, or that determined by valuation in the cases of properties omitted or registered without tax patrimonial value." (emphasis added).

To this end, the Claimant submits that, in the case of an acquisition as a gift, the acquisition value to be considered must be the tax patrimonial value entered in the property register in accordance with the Municipal Real Estate Tax Code on the date of transmission, as expressly results from article 13, no. 1 of the Stamp Tax Code.

Therefore, the Tax Administration could not consider, as the acquisition value for the purpose of calculating the capital gain, the amount of €5,856.38, which was not determined in accordance with the Municipal Real Estate Tax Code, as required by article 13, no. 1 of the Stamp Tax Code, but in accordance with the Real Property Tax Code and the Agricultural Industry Tax Code and the Municipal Tax Code.

Thus, according to its argument, the disputed assessment is affected by illegality, due to violation of articles 45, no. 1, subparagraph b) of the Personal Income Tax Code and 13, no. 1 of the Stamp Tax Code.

For its part, the Defendant contends that the value to be considered as the acquisition value is the value entered in the property register on the date the tax obligation arose, which, pursuant to the provisions of article 2031 of the Civil Code, coincides with the date of death.

This value, in this case, is the amount of €5,856.38 and not the amount of €99,550.00, which was only determined after the date of death, specifically in 2012.

It concludes, therefore, that no illegality can be attributed to the disputed assessment.

Given the positions of the parties, let us now examine what, in accordance with the rules of legal interpretation recognized, should be the proper interpretation of articles 45, no. 1 of the Personal Income Tax Code and article 13 of the Stamp Tax Code, transcribed above.

From a reading of the cited articles, it does not appear that there are any doubts regarding which value should be considered as the acquisition value of the real property for the purpose of calculating the capital gain.

And this value can only be, in our view, the value that has been determined in accordance with the Municipal Real Estate Tax Code and no other, in particular the value determined in accordance with the former Real Property Tax Code and Agricultural Industry Tax Code and Municipal Tax Code.

Indeed, assuming, as is necessary, that the legislator expressed itself adequately, one cannot argue that when the legislator, in article 13, no. 1 of the Stamp Tax Code, determines that "the value of real property is the tax patrimonial value entered in the property register in accordance with the Municipal Real Estate Tax Code on the date of transmission," it actually intended to refer to any tax patrimonial value entered in the property register, regardless of whether it was determined in accordance with the Municipal Real Estate Tax Code or the Real Property Tax Code and Agricultural Industry Tax Code and Municipal Tax Code.

If this had in fact been the legislator's intention, it certainly would not have been concerned with making express reference to valuation in accordance with the Municipal Real Estate Tax Code, being satisfied with the provision that the value of real property is the tax patrimonial value entered in the property register on the date of transmission.

Thus, if the legislator expressly inserted the phrase "in accordance with the Municipal Real Estate Tax Code" in the cited article 13, no. 1 of the Stamp Tax Code, it is because it intended that this be the value to be considered and no other.

And article 45, no. 1 of the Personal Income Tax Code, by expressly referring to the value considered for purposes of stamp tax assessment or that would serve as the basis for its assessment, if it were due, leaves no room for doubt that, for the determination of gains subject to Personal Income Tax, the acquisition value is considered, in the case of acquisitions as a gift, to be the tax patrimonial value entered in the property register on the date of transmission, calculated in accordance with the Municipal Real Estate Tax Code.

In this case, since the tax patrimonial value entered in the property register on the date of death (€5,856.38) was not determined in accordance with the Municipal Real Estate Tax Code, it cannot be considered by the Tax Administration as the acquisition value for the purpose of calculating capital gains.

Instead, for the purpose of calculating capital gains, the Tax Administration can only consider the acquisition value that has been determined in accordance with the Municipal Real Estate Tax Code, namely the amount of €99,550.00.

That said, it is certainly true that, as the Tax Administration submits, when the Claimant submitted the Personal Income Tax return form 3 for the 2011 tax year, he indicated as the acquisition value the amount of €5,856.38.

However, this does not produce the effect sought by the Tax Administration. In fact, if on the date of death the real property had not yet been valued in accordance with the Municipal Real Estate Tax Code, the Claimant obviously could not have indicated any other value as the acquisition value of the real property.

On the contrary, what was required of the Tax Administration was that, upon receipt of this return, it should ascertain whether the value indicated as the acquisition value had been determined on the basis of the Municipal Real Estate Tax Code and, if it had not been so determined, it should proceed with the valuation and only assess the return filed after this valuation.

In light of the foregoing, and there being no basis for calculating the capital gains on the basis of the amount of €5,856.38 as the acquisition value, the disputed assessment, to the extent that it concerns the calculation of capital gains, is affected by illegality.

The Tax Administration reached the same understanding with respect to the assessment made to the Claimant's sister for the same taxable event.

In fact, following the arbitral claim filed by the Claimant's sister, the Tax Administration annulled the Personal Income Tax assessment relating to the 2011 tax year, precisely on the grounds that it considered that the value to be considered as the acquisition value of the real property for the purpose of calculating capital gains could not be the tax patrimonial value entered in the property register on the date of death, but rather the value subsequently determined through the valuation of the real property in accordance with the Municipal Real Estate Tax Code.

Now, if the Tax Administration understood, with respect to the same taxable event, that there was no basis for the disputed assessment, it seems evident that, if only for a matter of uniformity of treatment, essential to the protection of legal certainty and confidence, the same solution should be applied to an exactly similar situation, as is the case in the present proceedings.

The Law, as the practical application of norms, would be ill-served if the same situation were to receive different treatments, when it is certain that the Defendant has already ruled in favour of the taxpayer in the same position, granting them the right.

Any other solution would violate the principles of tax justice and equality.

In light of the foregoing, it is evident that there is no legal basis for the dismissal of the request for official revision relating to Personal Income Tax assessment no. 2012... and, consequently, for the disputed assessment, to the extent that it considers as the acquisition value for the calculation of the capital gain the tax patrimonial value of €5,856.38.

Since the Claimant only disputes the assessment to the extent that it concerns the tax calculated on the basis of the acquisition value of the real property of €5,856.38 and not the remaining portion of the assessment, only the disputed portion can be annulled.

Lastly,

The Claimant petitions for the Defendant to be condemned to pay indemnity interest.

As to indemnity interest, number 1 of article 43 of the General Tax Law provides:

"Indemnity interest is due when it is determined, in a gracious claim or judicial challenge, that there was error attributable to the services from which resulted payment of the tax debt in an amount exceeding that legally due."

In the case of the present proceedings, it is verified that, through error attributable to the services, the Claimant was forced to pay a tax in an amount exceeding that due.

Thus, indemnity interest is due, to be paid by the Defendant to the Claimant, calculated on the amount of excess tax paid by the Claimant, corresponding to the difference between the tax due, calculated on the basis of the acquisition value of the real property of €99,550.00 and the tax assessed, calculated on the basis of the acquisition value of the real property of €5,856.38.

Since the Defendant could and should have remedied the illegality at least when examining the revision request presented by the Claimant, an examination that, pursuant to the provisions of article 57, no. 4 of the General Tax Law, should have taken place within 4 months after its presentation by the Claimant (29/05/2013), the indemnity interest should be calculated, at the legal rates, from 30/09/2013 until effective and complete reimbursement by the Defendant.

The claim is thus partially upheld, and, consequently, the act of dismissal of the request for revision of the Personal Income Tax assessment relating to the 2011 tax year should be annulled, as well as the disputed assessment, to the extent that it concerns the tax calculated on the basis of, as the acquisition value of the real property, the amount of €5,856.38, and the Defendant should be condemned to reimburse the Claimant for the excess tax paid, plus the respective indemnity interest.

VII. OPERATIVE PART

In light of the foregoing, the claim being partially upheld, the following is decided:

a) to annul the act of dismissal of the request for revision of the Personal Income Tax assessment relating to the 2011 tax year;

b) to partially annul the disputed assessment, to the extent that it concerns the tax calculated on the basis of, as the acquisition value of the real property, the amount of €5,856.38;

c) to condemn the Defendant to reimburse the Claimant for the amount paid in excess, corresponding to the difference between the tax due, calculated on the basis of the acquisition value of the real property of €99,550.00 and the tax assessed, calculated on the basis of the acquisition value of the real property of €5,856.38;

d) to condemn the Defendant to pay the Claimant the corresponding indemnity interest, calculated on the amount of excess tax paid by the Claimant, at the legal rates, from 30/09/2013 until effective and complete reimbursement by the Defendant.

The value of the case is fixed at €9,397.34, pursuant to subparagraph a) of no. 1 of article 97-A of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of no. 1 of article 29 of the LRAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The value of the arbitration fee is fixed at €918.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, as well as no. 2 of article 12 and no. 4 of article 22, both of the LRAT, and no. 4 of article 4 of the said Regulation, to be paid in the proportion of 79% by the Claimant and 21% by the Defendant.

Register and notify.

Lisbon, 20 November 2018

The Arbitrator,

Alberto Amorim Pereira

Text prepared by computer, pursuant to no. 5 of article 131 of the Code of Civil Procedure, applicable by referral of subparagraph e) of no. 1 of Decree-Law no. 10/2011, of 20/01.

Frequently Asked Questions

Automatically Created

How is the acquisition value of inherited property determined for IRS capital gains tax purposes in Portugal?
For IRS capital gains purposes in Portugal, the acquisition value of inherited property is determined by the tax patrimonial value (VPT) registered in the property matrix at the date of death. According to Portuguese tax law, when property is acquired through inheritance, the acquisition value corresponds to the VPT that existed on the date the inheritance occurred, not any subsequent valuation. This value serves as the basis for calculating capital gains when the inherited property is later sold.
Can the updated property tax value (VPT) under the IMI Code be used to calculate capital gains if it was determined after the property was sold?
No, an updated property tax value under the IMI Code cannot be retroactively applied to calculate capital gains if the valuation was completed after the property sale. The Tax Administration's position is that the relevant VPT is that which existed on the date the tax obligation arose (the inheritance date), not a value determined through a subsequent administrative revaluation procedure. The temporal sequence is critical: the acquisition value must be established at the moment of inheritance, and a later IMI reassessment cannot change the historical acquisition cost for capital gains purposes.
What is the relevant property tax value for calculating capital gains on inherited real estate – the value at the date of death or the later IMI reassessment value?
The relevant property tax value for calculating capital gains on inherited real estate is the VPT registered at the date of death (inheritance), not a later IMI reassessment value. Even if the Tax Administration conducts a revaluation after the inheritance that significantly increases the property's VPT, this updated value cannot be retroactively applied to establish the acquisition cost. The legal principle is that the tax patrimonial value must exist in the property register at the moment the inheritance occurs to be considered the acquisition value for subsequent capital gains calculations.
How does the CAAD arbitral tribunal handle disputes over IRS capital gains calculations involving inherited properties?
The CAAD arbitral tribunal handles IRS capital gains disputes involving inherited properties by examining the legal framework governing property valuations and their temporal application. The tribunal analyzes whether the Tax Administration correctly applied the relevant VPT according to the applicable tax codes (Real Property Tax Code, IMI Code) and the timing of valuation procedures. The tribunal considers arguments from both parties regarding which property value should apply, examines the administrative file, and determines whether assessments comply with legal requirements. The tribunal has authority to order partial or total annulment of incorrect assessments and mandate recalculations.
Are taxpayers entitled to a refund and compensatory interest if the tax authority incorrectly calculates capital gains on the sale of inherited property?
Yes, taxpayers are entitled to a refund and compensatory interest (juros indemnizatórios) if the Tax Administration incorrectly calculates capital gains on inherited property sales. When an arbitral tribunal or court determines that an IRS assessment was based on an incorrect calculation methodology, the tribunal can order reimbursement of amounts unduly paid plus compensatory interest. However, the specific outcome depends on the tribunal's substantive decision regarding which property valuation method was legally correct. The right to compensatory interest arises when the taxpayer has paid more tax than legally due because of an administrative error in applying tax law.