Process: 614/2014-T

Date: February 9, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

This arbitral case (Process 614/2014-T) concerns the application of the IRS capital gains reinvestment exemption when property is acquired through divorce proceedings and subsequently sold. The taxpayer acquired property valued at €91,954.55 through a 2012 divorce partition deed, assuming the full mortgage burden of equal value. After selling this property, he reinvested the proceeds in a new primary residence purchased for €230,000 (€200,000 mortgage plus €30,000 cash) with his new spouse in 2010. The Tax Authority partially granted the taxpayer's administrative appeal, recognizing the reinvestment but issuing an additional assessment of €31,703.79. The Authority applied a 50/50 division principle, arguing that both the taxpayer and his new spouse should split the acquisition costs and reinvestment values proportionally, following DSIRS guidance. The taxpayer contested this approach, arguing that Article 1732(a) of the Civil Code should apply - he acquired half the original property through partition, generating capital gains exclusively attributable to him. He further argued the Tax Authority failed to properly apply Articles 10 and 43 of the IRS Code, which define capital gains as the difference between transmission value and acquisition value net of charges. The taxpayer maintained that the €30,000 cash payment constituted his separate property under Article 1723(c) of the Civil Code, not joint property with his new spouse. The core legal question involves whether capital gains from property acquired in divorce partition should be treated as individual or jointly attributed when reinvested during a subsequent marriage, and what documentation suffices to prove the source of reinvestment funds.

Full Decision

ARBITRAL DECISION

I – THE PETITION

M..., taxpayer no. ..., resident at Street ..., no. ... – ... – ...-... ..., notified on 27/06/2014 of the order issued by delegation of the Chief of Finance, by the Deputy Chief of Finance acting as substitute of the Finance Service of ..., which partially granted the administrative appeal presented and registered with no. ...2013..., which proceeded in the normal course, hereby requests Arbitration Proceedings pursuant to the provisions of item a) of section 1 of article 10 of Decree-Law no. 10/2011.

The Claimant formulates his petition in the following terms and with the following grounds:

The aforementioned administrative appeal was filed against the Personal Income Tax assessment no. ..., dated 06/08/2013, with the collection notice in the amount of € 3,064.55, concerning Personal Income Tax for the year 2010.

The ground of the appeal is based on the fact that the reinvestment of the capital gain in the acquisition of own property, which occurred in the year 2010, was not duly considered, and the manifestation of intention therefor was declared in the competent Form 3 declaration, attached to the case file at page 74.

The Finance Services of ..., in analyzing the administrative appeal, issued a decision of partial grant thereof, given that they considered the requirements indicated in the administrative appeal to be satisfied.

And those Services so decided, given that they also considered that the documents presented by the Claimant do not constitute sufficient supporting documents to sustain the values recorded in Form 3 Declaration, relating to the Personal Income Tax for 2009, they decided to proceed with their correction, resulting in an additional Personal Income Tax assessment in the amount of € 31,703.79.

The additional assessment resulted from the fact that the documents attached by the Claimant showed a difference between the amount of the acquisition value of the own residence and the amount of the mortgage credit contracted, both by the Claimant and by his spouse, given that the Services considered that such values would be divisible by both, in compliance with the doctrinal note of the DSIRS (Personal Income Tax Service), attached to the case file at page 101.

When, according to the Claimant, the Services should, to the contrary, have observed the provisions of article 1732, item a) of the Civil Code, given that the claimant, by deed of partition as a consequence of divorce, acquired half of the real property in question, which generated the capital gain.

And the Claimant clarifies that the said real property was acquired in 2001 for the amount of € 112,229.53 and in the deed of partition, executed on 12.12.2012, the amount of € 91,954.55 was assigned.

And that, in view of what was stated in the same deed of partition, the Claimant was left with the obligation to bear the burden of the mortgage loan, of equal value, which weighed on the said real property.

That is, the Claimant clarifies that he acquired by deed of partition of community assets of the spouses, as a consequence of divorce, the real property which was the family home of the spouses during the marriage, for € 91,954.55 and that he bore the burden of the mortgage loan that hung on the same real property, in equal amount.

And the Claimant considers that, thus being, such real property only generates capital gains for the Claimant, provided that the sale value of the same is verified.

And he further states that he does not agree with the understanding of the Services, when taking as reference the other acquisition values and assuming that they were supported by successive spouses, in each moment, in the proportion of one half and when operating, to reduce the value of reinvestment, the provisions of section 2 of article 43 of the Personal Income Tax Code.

Now, the Claimant considers that the Finance Service would always have to observe the provisions of sections 1, 4 and 5 of article 10 of the Personal Income Tax Code, read in conjunction with section 1 of article 43, which he transcribes.

And, in view of the normative provisions cited, the Claimant considers that "only the difference between the value of the onerous transmission of the real property – generating the capital gain – and the value of acquisition of the same, net of charges, is what can be considered, according to the law, as a capital gain".

And he emphasizes that the Finance Service of ... "omits the value of the capital gain generated and declared by the Claimant, as well as the value of the onerous transmission of this real property, which makes create a value, whether capital gain or capital loss, as provided for in the terms of article 10 of the Personal Income Tax Code".

That is, says the Claimant that the Finance Service "makes a consideration of the presumption that the Claimant is not the owner of the totality of the real property generating the capital gain, always taking, as the starting point, the acquisition values whether of the real property that generates the fact, whether of the real property for which such fact (capital gain) would have to be reinvested, always considering that the reinvested value is supported by the two acquirers of the real property which is today the permanent own residence of the claimant and his current spouse".

And that, thus, the Finance Service "concludes, by pure abstraction, by a reinvestment value that arises only by dividing by two all the values involved and not as it should, in obedience to the provisions of section 4 of article 10 of the Personal Income Tax Code, to the gain obtained by the onerous transmission of a property deducted that the charges that weighed on it – which is manifestly unlawful".

And the Claimant further states that the Finance Service so proceeded "without taking into account that, having the same recorded in Form 3 Declaration, relating to the Personal Income Tax of 2009, he intended to reinvest the capital gain that was verified in the onerous transmission of the real property that he acquired by partition of community assets of the spouses, as a consequence of the divorce that then occurred".

And that under the provisions of section 5 of article 10 of the Personal Income Tax Code, the gain obtained from the onerous transmission of the real property acquired in the public deed of partitions, as a consequence of divorce, was excluded from taxation.

And that, as a consequence, not verifying the provisions of section 1 of article 43 of the Personal Income Tax Code, given that it was invested in the acquisition of another real property which today constitutes his family home.

And he further adds that the Tax Authority would have to consider the origin of the amount paid in cash in the amount of the acquisition of this real property, that is, whether it was separate property of the claimant or not.

And the Claimant further states that "provided that the claimant has succeeded in two marriages with different spouses, at the time of the onerous transmission of the real property generating the capital gain and at the time of acquisition of the real property which constitutes the current family home, it was necessary to ascertain, or not, the provisions of item c) of article 1723 of the Civil Code…"

"…In order, legitimately, to be able to reach the conclusion, which was reached in the decision of the Finance Service of ..., that the amount of € 30,000.00, was supported by both acquirers of the real property which today constitutes the family home of both…"

"…Which arises from the difference between the mortgage loan of € 200,000.00 (two hundred thousand euros) and the purchase price of € 230,000.00 (two hundred and thirty thousand euros)…"

"…Or only supported by one of them, as was the case, with recourse to own means, under the provisions of item c) of article 1723 of the Civil Code".

And this because, notwithstanding, both being married, at the time of acquisition of the real property, the fact is that the cost or part of the cost of acquisition of such real property, was paid with recourse to separate property of one of the spouses, as provided for in section 2 of article 43 of the Personal Income Tax Code.

And the Claimant says that, thus being, he dismisses the presumption that such property is the ownership of both in the proportion of one half.

And that was the second error of the Finance Service of ..., given that, having the claimant himself already manifested the intention to reinvest in the acquisition of another real property the gain obtained from the onerous transmission of the real property that he acquired in totality with the deed of partitions executed on 12 February 2008, in obedience to the provisions of section 2 of article 43 of the Personal Income Tax Code, he already dismisses, by himself, the presumption made by the Finance Service of ....

Therefore, it should have, which it did not, followed the teaching set forth in the Judgment of the Supreme Court of Justice, REGIME OF COMMUNITY OF ACQUESTS, SEPARATE PROPERTY OF SPOUSE, DECLARATION OF THE ORIGIN OF MONEY Art. 1681 AND FOLLOWING AND 1723 ITEM C) OF THE CIVIL CODE OF 13/07/2010, at http://www.dgsi.pt/jstj.nsf/954f0ce6ad9dd8b980256b5f003fa814/91d1a7d88e141fbd80257797004d0844?OpenDocument

And the Claimant concludes that "thus being, the gain obtained by the, here, claimant, being separate property and having been reinvested in the acquisition of another real property which constitutes, today, and at the same time of its acquisition, the family home…"

"…Is such capital gain excluded from taxation by force of the joint provisions of section 5 of article 10 of the Personal Income Tax Code, "given that its amount is understood to be considered, in the terms and effects of section 2 of article 43 of the Personal Income Tax Code".

Therefore, says the Claimant, that this is the reason why the decision issued by the Finance Service, in granting partial relief to the administrative appeal and as a consequence correcting the assessment no. ... of 13/06/2013, is unlawful and as such null, and should therefore be revoked.

Therefore CONCLUDES THAT:

It does not consider the effective value of the capital gain verified by the acquisition of the totality of the real property in the deed of partition of community assets of the spouses, as a consequence of divorce, taking into account the discipline imposed by article 46 of the Personal Income Tax Code;

Rather, it makes the presumption of the value of the capital gain, taking as reference only the acquisition value of the same and dividing such value by 2 which is manifestly unlawful;

Not being therefore the value of reinvestment that arises as a result of mathematical operations, made by the Finance Service, but rather what results in accordance with the terms and effects of article 10 of the Personal Income Tax Code;

Given the reinvestment of such gain in the acquisition of another real property which constitutes the family home, it is under the terms of section 5 of article 10 of the Personal Income Tax Code excluded from taxation;

Adding, still that because of the acquisition of the real property, for which the claimant had manifested the intention to reinvest the gain obtained from the transmission of the real property that he had previously acquired, was made in the course of the current marriage;

The Finance Service commits the second unlawfulness, given that it presumes that the amount paid with respect to the difference between the value of the mortgage loan (two hundred thousand euros), which was intended to pay part of the sale price, and the effective value thereof which was € 230,000.00 (two hundred and thirty thousand euros), was invested by both spouses;

Without taking into account that such amount in cash paid by the claimant constitutes the capital gain generated by the onerous transmission of the real property that he had acquired by force of the Deed of Partition of Community Assets of the Spouses;

Being separate property of the claimant it is not divisible between him and his current spouse;

Therefore, the value of the reinvestment is what results from the gain obtained by the onerous transmission of a real property that was in the full ownership of the claimant and was entirely applied to the acquisition of the real property that he acquired with his spouse, as stated in the Deed;

Comprehending this value that was reinvested the provisions in the terms of section 2 of article 43 of the Personal Income Tax Code, it will be the same that must be considered;

As such, in the terms of the law it is not taxable;

Which results in the unlawfulness of the decision of correction of the assessment of Personal Income Tax registered with no. ....

Therefore requests that the decision of the Finance Service of ... be revoked.

II – THE RESPONSE OF THE RESPONDENT

The Tax and Customs Authority (AT), came in accordance with the provisions of article 17 of the Legal Regime of Tax Arbitration (RJAT), to present its RESPONSE, in the following terms and grounds that are summarized:

They begin by clarifying that the request for the constitution of an Arbitral Tribunal is filed against the decision of partial grant of the administrative appeal of the Personal Income Tax assessment no. ..., issued by the Deputy Chief of the Local Finance Service of ..., acting as substitute.

The AT does not recognize merit to the Claimant, who on the date of 20-07-2001 was married under the regime of community of acquests with A…

While married they jointly acquired the real property generating capital gains, for the amount of € 112,229.53.

Subsequently, following the divorce (finalized on 20/10/2008), on 12/12/2012 a deed of partition was executed, and the real property in question was awarded to the Claimant and spouse, for the amount of € 91,954.55, he assuming the burden, of equal value, relating to the bank loan.

And the AT emphasizes that although the Claimant declared the acquisition of the real property in question at different times (that is in 2001 and 2008), the acquisition values are contrary to the documentary support presented.

And it further clarifies that it is known that under the provisions of article 46 of the Personal Income Tax Code (CIRS), what is relevant for the purposes of determining the acquisition value is the amount that was used for the purposes of real estate transfer tax (or SISA) assessment.

And it further states that the AT, contrary to what the Claimant Author says, applied the said article 46 of the Personal Income Tax Code, as it could not but do so, as the Respondent emphasizes.

And it further states that if there is no real estate transfer tax (or SISA), the amount that served as its basis is considered.

Thus, says the Respondent, that "from the application of that provision results that half of the value of the real property acquired by the couple on 20-07-2001, would be € 56,114.72 (€ 112,229.53/2), given that the acquisition value was higher than the patrimonial value (§ 2 of article 19 of the Code of the Municipal Tax on the Onerous Transfer of Immovable Property2).

And as results from the deed of partition that occurred on 12-12-2008, the author acquired the other half of the real property for the amount of € 45,977.28 (€ 91,954.55/2).

And it further notes that the transmission by partition, although it was exempted from the real estate transfer tax, by force of article 19 of the Real Estate Transfer Tax Code, was subject under the provisions of item c) of section 5 of article 2 of that code.

The AT further clarifies that, "however, with the transmission by partition, the real property generating the capital gain had its first evaluation, for purposes of Real Estate Tax, with a patrimonial value being assigned of € 108,860.00".

The AT transcribes, for this purpose, article 31-A, section 1 of the Personal Income Tax Code: "In case of onerous transmission of real rights over real property, whenever the value of the contract is less than the definitive value that will serve as the basis for the assessment of the municipal tax on the onerous transfers of real property, or that would serve in the case of no such assessment, this is the value to be considered for purposes of determining taxable income".

And, says the AT, in that exact measure, the real property is considered acquired for € 54,430.00 (€108,860.00/2).

And it further states that, "as per the print extracted from Form 11 (at page 72 of the PA), the real property (urban article … of the parish of …, municipality of Lisbon) was disposed of on 25-08-2009 for the amount of € 300,000.00".

And it emphasizes that "consulted the history of the patrimonial values (page 96 PA) it is noted that the consideration value is higher, so under the terms of item f) of section 1 and section 2 of the article of the Personal Income Tax Code, it was this value considered by the AT".

And that "according to the bank statement (at page 70 of the PA), at the time of the realization of the capital gain, the amount of € 89,870.09 was amortized to the capital outstanding of the loan contracted for acquisition of the real property generating the same".

And the AT further clarifies that "with respect to the reinvestment of the capital gain realized and according to the deed at pages 3 to 17, the author and his spouse, A…, acquired, on 20-10-2010, a real property identified in the urban property register under the article … of the parish and municipality of …, for the amount of € 230,000.00".

And for this purpose they contracted a loan in the amount of € 200,000.00.

And that according to the provisions of item f), section 1 and section 2 of article 44 of the Personal Income Tax Code, the realization value is considered the greater of the values, that of the respective consideration or the value that was considered for purposes of the real estate transfer tax.

And the AT concludes that "thus, with respect to the value to be reinvested for purposes of the tax exclusion enshrined in section 5 of article 10 of the Personal Income Tax Code, the realization value or the definitive patrimonial value that was used for purposes of the real estate transfer tax assessment, if higher, is considered as such".

And the AT clarifies that "as for the reinvested value, where there is recourse to housing credit for the new real property, it will be the difference between the definitive patrimonial value, when higher than the effective acquisition value, and the value of the bank loan contracted for this purpose".

And the AT exemplifies as follows, for the concrete case: "€ 15,000.00 (€ 230,000.00 - € 200,000.00)/2.

Thus, says the AT that "in this circumstance, for there to be no taxation of that patrimonial increase the author should have reinvested the amount of € 210,129.10 (€ 300,000.00 - € 89,870.89). Which did not happen" – concludes.

Whence, according to the AT, "we are, thus, before a reinvestment of 7.14% (€ 15,000.00 / € 210,129.91), which had to be necessarily considered under the terms of item a) of section 5 of article 10 of the Personal Income Tax Code".

For this reason, the AT understood that "the conditions were met to address the matter appealed, considering a reinvestment of capital gain in the amount of € 15,000.00".

It further states that "however, given that the documentation presented by the Author did not support and does not support the values declared in Form 3 of Personal Income Tax/2009 relating to the values of the initial acquisition (€ 124,699.43 + € 124,699.42), these had to be corrected to € 56,114.76 and € 54,430.00, as mentioned above".

The AT emphasizes that according to the Author "it was only he who supported the acquisition of the real property, with recourse to separate property, by having come to have own monetary means, before marriage with the acquirer of the real property which is today the family home of both".

And the Author, on the basis of that argument, invokes the Judgment of the STJ, issued within the scope of Case no. 1047/06-9TVPTR.S1, of 13/10/2010.

But the AT clarifies that article 1723 of the Civil Code, under the heading "property substituted in place of separate property" says the following:

"Property retains the quality of separate property:

a) Property substituted in place of separate property of one of the spouses, by means of direct exchange;

b) The price of separate property alienated;

c) Property acquired or improvements made with money or values of one of the spouses, provided that the origin of the money or values is duly mentioned in the acquisition document, with the intervention of both spouses".

Says the AT that it naturally follows that the Author did not carefully read that judgment, so the conclusions that the judgment itself stated are:

"I-When only the interests of the spouses themselves are at stake, the lack of the declaration referred to in the foreseen item c) of art. 1723 of the CC can be replaced by any means of proof that demonstrates that the payment was made only with money or values of one of them, or with separate property of one of them.

II-Article 1723, c) of the Civil Code, in determining that property acquired with money or values of one of the spouses retains the quality of separate property provided that the origin of the money or values is duly mentioned in the acquisition document, or in an equivalent document requires the intervention of both spouses – (bold and underlined by the Respondent)".

And the AT specifies the meaning of the Judgment emphasizing that this "concerns only facts when only (sic)[1] the interests of the spouses themselves are at stake and not when there are conflicts between the interests of the spouses and third parties, in this case there is a conflict between the author and the AT and not a conflict between the author and his spouse. That is, there are not third parties' interests at stake but solely and simply those of the spouses".

And it further states the AT that "the very judgment refers to a series of doctrine, see all Antunes Varela (Family Law – 1st Vol., 4th ed. – Petrony Bookstore., p. 458) who considers «that property acquired with money or values of one of the spouses are only considered as separate property when the origin of the money or values is referred to in the very acquisition document or in an equivalent document, with the intervention of both spouses. Only in these terms does acquisition with separate property offer sufficient proof, in the eyes of the laws (art. 1723 CC)» ".

And further adding the Judgment, very clearly that Pires de Lima and Antunes Varela, CC annotated, 2nd ed. P. 426 state that "this is the solution that best corresponds to the interest of security in legal relations and that most effectively safeguards the legitimate interests of third parties against surprises of an uncontrollable manner. The lack of mention of the origin of the money or values with which the acquisition is made constitutes a presumption juris et de jure that these means are common, not only for the purpose of qualification of the property acquired, but also for the adjustment of relations between common property and the separate property of each spouse".

And still referring the Judgment, with extreme relevance to the question at hand, to Pereira Coelho (Course on Family Law, Vol. 1, 2nd ed., p. 519) who states the following: "Simply, being an idea of protection of third parties that justifies the limitation established, understands that such limitation should only be accepted where the interest of third parties requires it".

And refers also to Castro Mendes (Family Law, Vol. I, 2nd ed., p. 519) "the requirement of proof provided for in article 1723, item c) only aims to safeguard the interests of third parties".

In view of the above, the AT says that "there is no doubt that the legal capacity in which the AT finds itself in the relationship with the author and his spouse is in the capacity of third party and, in that capacity of third party, has his position safeguarded by the presumption juris et de jure and the requirement of proof provided for in article 1723, item c) of the CC".

And concludes stating that "thus, the author, when acquiring the real property together with his spouse, should have mentioned the origin of the money and required that this fact be mentioned in the deed of purchase of the same, not having done so, as is apparent from pages 3 to 10 of the PA (Title of purchase and sale and loan with mortgage and guarantee), does not have wherewith to prove that the money had the origin that he claims it had".

And, cautiously, says the AT that "even if this were not the case, which is not even admitted by mere academic hypothesis, it would still be said that the author has not presented any proof, at any time in the procedure or now, within the scope of this process, where the origin of the money in question be referred to, which would lead us to change the position previously taken".

And finally states that the act under discussion does not suffer from any unlawfulness, so the request for arbitral pronouncement should be considered without merit, with the AT being absolved and, consequently, the decision of the AT on the author's appeal should be maintained with all legal consequences.

III – SANATION

  1.  The Singular Arbitral Tribunal was regularly constituted in the CAAD, on 09-10-2014, to examine and decide the subject matter of this proceeding, as appears from the respective Minutes.

  2.  The parties enjoy legal personality and capacity and are legitimate.

  3.  The petition is legitimate, the Tribunal is competent as to the subject matter and was filed on 07-08-2014 and accepted by the Tribunal.

  4.  No preliminary or prejudicial issues were raised by the parties.

IV – THE ESSENTIAL FACTS

From the elements of the present case file the following facts can be established:

  1.  The Claimant M..., taxpayer no. ..., entered into marriage on 27.02.1997, under the regime of community of acquests, with A…, taxpayer no. …, see page 61 of the PA.

  2.  In the capacity of married persons they jointly acquired, by Notarial Deed of 27.07.2001, the urban real property registered in the property register of the parish … under the article …, for € 112,229.53, see art. 10 of the P.I., with the proceeds of a loan from Bank B… of € 109,375.54, for own permanent residence.

  3.  On 20.10.2008 the divorce between both was decreed, by mutual consent, see Minutes of Conference of 20.10.2008, and the Agreement as to the fate of the family home was also homologated.

  4.  That Agreement contained the following:

a. The family home constituted by the real property registered in the urban property register under the article …, of the parish …, which constituted community property of the couple, is awarded to the husband.

b. During the pendency of the divorce both remain responsible, in the proportion of one half, for payment of the monthly installments inherent to the loan contracted by both for acquisition of the permanent own residence with Bank B…, SA.

c. After the divorce is decreed the installments and expenses of the preceding number remain exclusively the responsibility of the Claimant.

  1.  In accordance with the List of property of the couple in divorce, there appears, among others, item no. 5 relating to the urban real property registered in the property register under the article … of the parish …, municipality of Lisbon, to which they assign the value of € 250,000.00.

  2.  From the same List of property there further appears item no. 7, relating to a debt of the couple to Bank B…, SA, the amount relating to the outstanding capital balance of the loan contracted by both for acquisition of the permanent own residence with no. …, in the amount of € 92,560.01.

  3.  On 12.12.2008 the Deed of Partition of the community property of the couple was executed, the Claimant spouse M… awarding half of the said real property to the ex-spouse A… for € 45,977.20 (€ 91,954.55/2) and assuming the burden of payment of the total debt to B… which still weighed on the real property, in the amount of € 91,954.55.

  4.  The AT proceeded to the appraisal of the real property, as it was the first transmission after the entry into force of the Patrimony Reform approved by Decree-Law no. 287/2003, of 12 November, to which a Tax Patrimonial Value (VPT) of € 108,860.00 was assigned.

  5.  On 25.08.2009 the said real property, registered in the urban property register of the parish …, under the article 1249, was disposed of by the Claimant M…, for € 300,000.00, higher, therefore, than the VPT.

  6. It happens that, after the sale, on 26.08.2009 the remaining debt to Bank B… that weighed on the said real property was paid, in the amount as of that date of € 89,870.09, see Bank Statement, at page 70 of the PA.

  7. On 07.05.2010 the Claimant M... presented Form 3 declaration of Personal Income Tax for the year 2009, in the capacity of divorced, declaring in Annex G the following elements:

a. Disposal of article … in 2009.08, for € 300,000.00;

b. Acquisition value:

                                              i.      In 2001.07 – for € 124,699.42 (sic)[2];

                                            ii.      In 2008-12 – for € 124,699.42 (sic)[3]

c. Intended to reinvest € 206,489.79 (that is: € 300,000.00 - € 93,510.21[4] ).

  1. Given the elements of the declaration and others available to the Services, the AT proceeded to issue the Personal Income Tax assessment no. …, dated 06.08.2013, in the amount of € 3,064.55.

  2. The Claimant timely presented Administrative Appeal under article 68 of the Tax Procedure Code, on the ground that the said assessment did not consider the reinvestment in the amount of € 15,000.00.

  3. The Appeal was considered timely by the AT and partially granted by Order of 23.06.2014, from the Chief of Finance of ..., consisting, however, of the information support provided by the Services on 23.06.2014, that some values contained in the Form 3 declaration and Annex G, for the year 2009, above mentioned, are shown to be contrary to the documentary support.

  4. The Services ground their action on the fact that "for there to be no taxation of capital gains there would have to be reinvested the amount of € 210,129.91 (€ 300,000.00 - €89,870.09)".

  5. And that with respect to reinvestment in the new residence, that value of € 210,129.91 could not be considered, taking into account that the acquisition of the new residence for € 230,000.00 was made with the proceeds of a bank loan of the amount of € 200,000.00, remaining, therefore, the possibility of reinvestment of only the amount of € 30,000.00, if everything was done only by the Claimant M….

  6. However, as this did not occur, because the acquisition of the new real property for permanent own residence was made by the Claimant M...and C…, in common and equal parts, the possible reinvestment value could only be € 15,000.00, that is, (€ 230,000.00 - € 200,000.00)/2.

  7. And that, in these terms, "we are before a reinvestment of 7.14% (€ 15,000.00/€ 210,129.91), which will be considered under the terms of item a) of section 5 of art. 10 of the Personal Income Tax Code".

  8. This Order of partial grant was communicated to the Claimant M... by Office no. …, of 23.06.2014, from the Finance Service of ..., see page 109 of the PA, also giving him notice that "with respect to the said order he may file hierarchical appeal within 30 days, under the terms of section 2 of article 66 read in conjunction with article 76, or present judicial impugnation within 15 days under the terms of section 2 of art. 102, all of the Code of Tax Procedure and Process, or request for constitution of Arbitral Tribunal, within 90 days, under the terms of item a) of section 1 of art. 10 of Decree-Law no. 10/2011"

  9. Thus, it is stated by the Services of the AT that the value of half of the acquisition of the real property in question in July 2001 is not € 124,699.43, as is mentioned, as well as the acquisition of the other half, by partition on divorce, in December 2012, also is not € 124,699.42, but, respectively, of € 56,114.76 (1/2 of the acquisition value of € 112,229.53) and € 54,430.00 (1/2 of the value of the VPT of € 108,860.00, resulting from the appraisal, as it is higher than the acquisition value by partition on divorce, in the amount of € 091,954.22)

  10. It should be noted that on 20.10.2010, the Claimant M..., already married to C…, taxpayer no. …, had acquired for permanent own residence the urban real property registered in the property register under the article of the parish and municipality of ... under the article …, for € 230,000.00, with the proceeds of a loan of € 200,000.00.

  11. On 31.05.2011 the spouses Claimants M...and C... presented Form 3 declaration of Personal Income Tax for the year 2010, not having submitted any Annex G, relating to the disposal of the previous real property registered in the property register of the … under the article …, nor to the reinvestment made, as they should and as had declared, alone, in his declaration of 07.05.2010.

  12. Subsequently, dated 29.08.2013, the Claimants came to present a new Form 3 declaration, relating to the same year 2010, of substitution, to which they attached Annex G, appearing therein in Q. 5, field 509, that they proceeded to reinvest € 15,000.00 in the acquisition of the new permanent own residence made on 20.10.201 for € 230,000.00, with recourse to credit of € 200,000.00.

  13. It should be noted, finally, that on 07-08-2014 the then Claimant and now Petitioner M..., presented an arbitral petition against the partial grant of the Administrative Appeal timely filed, "for the reason that there was not properly considered the reinvestment of capital gain in acquisition of own residence which occurred in the year 2010 and whose manifestation of reinvestment intention[5] was declared in the competent Form 3 declaration, attached to the case file at page 74.

  14. It should be noted that in Form 3 declaration relating to the year 2009, the Claimant mentioned, as already was referred, in Q. 4 and 5 of Annex G, the following elements:

a. Box 4:

                                              i.      Field 401 - the realization value of € 150,000.00, in August 2009, (1/2 of € 300,000.00);

                                            ii.      Field 402 - the realization value of € 150,000.00, in August 2009, (1/2 of € 300,000.00);

b. Box 5:

                                              i.      In Field 505 – relating to the amount outstanding of the loan as of the date of disposal of the property (art. 1249-U of the parish of …) - the amount of € 93,510.21;

                                            ii.      In Field 506 – relating to the realization value which it intends to reinvest (without recourse to credit) – the amount of € 206,489.79.
  1. It should be noted, finally, that at the time of the Meeting of Article 18 of the RJAT, the Representative of the Claimant requested that three documents be attached to the case file, namely:

a. Declaration of real estate transfer tax obligation Term no. …/…/2001, signed by the Claimant M...and by A… for purposes of payment of the then transfer tax owed for the purchase, at the price of 22.500.000$00 (€ 112,229.53), of the urban real property registered in the property register of the parish of … under the article …, with the taxable value of 1.068.151$00 (5,327.91), from which resulted the payment of tax in the amount of 1.004.100$,00 (€ 5,008.43), declaration presented to the Finance Service Lisboa-14 on 20-07.2001.

b. A certificate of debt no. …/2006, relating to the Claimant M...and the additional real estate transfer tax, assessed under the terms of article 115 of the Code of the Municipal Tax on the Onerous Transfer of Immovable Property and of the Tax on Successions and Donations, in the total amount of € 22,002.23, for not having made payment of the tax within the legal term that ended on 10.11.2006.

c. Office no. …, of 14.10.2006, from the Finance Service Lisboa-11, to notify the Claimant M...that he should proceed to pay the additional real estate transfer tax assessment relating to the tax paid on 20.07.2001, by the real estate transfer tax obligation term no. …/…, according to the supporting statement of which is attached a photocopy, but which was not attached to the case file.

  1. From the documents attached, which were submitted to the AT for review, the Respondent did not agree with the attachment of the said documents, nor recognized any relationship with the documents contained in the case file, in particular as regards the certificate of debt relating to the additional real estate transfer tax assessment, nor did the Claimant present any explanation regarding the same documents.

  2. The Tribunal also did not draw any relevant conclusion from them, except that the additional real estate transfer tax can only refer to the acquisition of a different real property from that which is the subject of this case, given that it is stated in the debt certificate that the legal term for payment of the real estate transfer tax ended on 10.11.2006, which, therefore, the Tribunal also did not deem its content as relevant proof.

IV – FACTS NOT PROVEN

Of all the essential facts mentioned above and given as established, for being contained in the case file, there are situations that are not proven.

Thus,

  1.  That with respect to the acquisition of the urban real property registered in the property register of the urban parish of … under the article …, it was not proven, by any means, that it was acquired with property or money of the Claimant, so that, under article 1723, c) of the CC it could be considered with separate property of the acquirer.

  2.  On the contrary, as per the Deed of acquisition and loan with mortgage, it appears to have been acquired together with the ex-spouse A…, on 20.07.2001, a presumption that was not destroyed, nor appears in the said documents, so that the Jurisprudence cited by him contained in the Judgment of the STA no. 1047/06 could be applied.

  3.  That the value of the two halves of the urban real property disposed of, registered in the property register under the article …, whose values appear in Fields 401 and 402 of Q. 4 of Annex G to the Form 3 declaration of Personal Income Tax filed on 27-05-2010 by the Claimant M..., in the capacity of divorced, in the amount of € 124,699.43, given as acquired in July 2001 (joint acquisition with the ex-spouse A…) and € 124,699.42 as acquired in December 2008 (by award of the ½ of the ex-spouse in the partition under the divorce), are not shown to be correct.

  4.  In fact, having the said real property intended for the own permanent residence of the then couple M...and A..., been acquired jointly by both, on 20.07.2001, for the global value of € 112,229.53 (and not € 124,699.43), should be contained in the said Annex the value of € 56,114.77 and € 56,114.76, respectively[6].

  5.  And it was also not proven, for purposes of application of article 1723 of the CC that the new residence, located in the parish of …, was acquired solely with own means of the Claimant, by absence of the document that reveals it or by lack of express mention in the respective Deed of acquisition.

  6.  In what date the Claimant and his current spouse C... inhabited the urban real property registered in the property register of the parish of… under the article …, acquired on 20-10.2010, for € 230,000.00, with the proceeds of a loan of € 200,000.00, for purposes of the provisions of item a) of section 6 of art. 10 of the Personal Income Tax Code.

V – QUESTIONS OF LAW TO BE DECIDED

  1.  What is at issue in the present case is to determine what is the value of the reinvestment of the realization value of the urban real property registered in the property register under the article … of the parish …, - which initially constituted the permanent own residence of the couple subsequently divorced M...and A..., and which came to belong exclusively to the Claimant M..., by partition under the divorce, - in the acquisition of the urban real property registered in the property register of the parish of … under the article …, for € 230,000.00, with the proceeds of a bank loan of € 200,000.00.

  2.  And this aspect is relevant, as will be seen, to determine what the non-reinvested value is for determination of the portion of capital gains resulting from the disposal of the said article … for purposes of its taxation, in the exact proportion of the non-reinvestment, in accordance with and for the purposes of the provisions of sections 5 and 7 of article 10 of the Personal Income Tax Code, among others.

  3.  For this purpose, it is important to know the applicable law, so that the appropriate conclusions may be drawn.

  4.  Thus, we will invoke the following norms applicable to the case under analysis in the case file, almost all within the scope of the Personal Income Tax Code, in effect at the time of the facts:

First and foremost, the provisions of article 10 of the Personal Income Tax Code:

"Article 10 - Capital Gains

1 - Capital gains are gains obtained that, not being considered business and professional income, capital income or real property income, result from:

a) Onerous transmission of real rights over real property ….

2 - ….

3 - Gains are considered obtained at the moment of the practice of the acts provided for in section 1, ….

4 - The gain subject to Personal Income Tax is constituted:

a) By the difference between the realization value and the acquisition value, net of the portion qualified as capital income, where applicable, in the cases provided for in items a), b) and c) of section 1;

5 - Excluded from taxation are gains from the onerous transmission of real property intended for the own permanent residence of the taxpayer or of his family unit, under the following conditions:

a) If, within 36 months from the date of realization, the realization value, deducted from the amortization of any loan contracted for acquisition of the real property, is reinvested in the acquisition of the ownership of another real property…exclusively with the same purpose located in Portuguese territory….;

b) …

c) For purposes of the provisions of item a), the taxpayer shall manifest the intention to proceed with the reinvestment, even if partial, mentioning, in the statement of income relating to the year of disposal, the value that intends to reinvest;

6 - There shall be no benefit referred to in the preceding section when:

a) In the case of reinvestment in the acquisition of another real property, the acquirer does not apply it to his residence or that of his family unit until six months after the end of the term within which the reinvestment should be made"

7 – In the case of partial reinvestment of the realization value and verified the conditions established in the preceding section, the benefit referred to in section 5 shall respect only the proportional portion of gains corresponding to the reinvested value.

  1.  On the other hand, it is also important to cite the following provisions of the Personal Income Tax Code that are also applicable to the case in the file:

"Article 31-A – Definitive value considered for purposes of assessment of municipal tax on the onerous transfer of real property

1 - In case of onerous transmission of real rights over real property, whenever the value contained in the contract is lower than the definitive value that will serve as the basis for the assessment, this is the value to be considered for purposes of determining taxable income.

2 - For execution of the provisions of the preceding section, if at the date on which the definitive value becomes known there has elapsed the term for delivery of the income statement referred to in article 57, the taxpayer must proceed with delivery of the substitute statement during the month of January of the following year.

3 - The provisions of section 1 do not prejudice the consideration of a value higher than that referred to when the General Tax Administration demonstrates that this is the effective value.

4 - For purposes of the provisions of section 3 of article 3, of sections 2 and 6 of article 28, and of sections 2 and 6 of article 31, the value referred to in section 1 should be considered, without prejudice to the provisions of the following sections.

5 - The provisions of sections 1 and 4 are not applicable if proof is made that the realization value is lower than that provided for therein.

6 - The proof referred to in the preceding section must be carried out in accordance with the procedure provided for in article 139 of the Corporate Income Tax Code, with the necessary adaptations".

  1.  And further the following provisions of the same Personal Income Tax Code:

"Article 43 - Capital Gains

1 – The value of income qualified as capital gains is the corresponding balance calculated between the capital gains and capital losses realized in the same year, determined in accordance with the following articles:

2 – The balance referred to in the preceding section, relating to transmissions made by residents provided for in items a)… of article 10, positive or negative, is only considered in 50% of its value.

…...

" Article 44 - Realization value

  1 – For determination of gains subject to Personal Income Tax, the realization value is considered:

a) ….

….

f) In the remaining cases, the value of the respective consideration

2 – In the cases of items a), b) and f) of the preceding section, dealing with real rights over real property, shall prevail, when higher, the values at which the properties have been considered for purposes of assessment of the municipal tax on the onerous transfer of real property or, if there is no such assessment, those that should be, in case it were owed.

3 - …

4 - …"

" Article 46 - Acquisition value on a onerous basis of real property

1 – In the case of item a) of section 1 of article 10, if the real property was acquired on a onerous basis, the acquisition value considered is that which served for purposes of assessment of the municipal tax on onerous transactions of real property (IMT).

2 – If there is no assessment of municipal tax on onerous transactions of real property, the value that would serve as its basis is considered, determined in accordance with the proper rules of that tax.

3 …

4 …

5 …"

  1.  It is also important to cite art. 139 of the Corporate Income Tax Code

"Art. 139 - Proof of the effective price in the transmission of real property

1 – The provisions of section 2 of article 64 are not applicable if the taxpayer proves that the price actually charged in transmissions of real rights over real property was lower than the tax patrimonial value that served as the basis for the assessment of the municipal tax on the onerous transfer of real property.

2 - …

3 – The proof referred to in section 1 must be carried out in its own procedure by means of a request addressed to the competent director of finance and presented in January of the year following the one in which the transmissions occurred, if the tax patrimonial value is already definitely fixed, or within 30 days following the date on which the appraisal became definitive, in the other cases.

4 - ….

….

7 - …"

  1.    Finally, it should be noted what is provided for in article 59 of the Code of Tax Procedure and Process – CPPT, also applicable in the analysis of the situation of the case file.

"Article 59 - Beginning of the procedure

1 – The assessment procedure is instituted with the declarations of taxpayers or, in the absence or defect thereof, on the basis of all elements which it has or comes to obtain the competent entity.

2 – The determination of the taxable matter shall be done on the basis of taxpayers' declarations, provided that they present these according to the terms provided in the law and provide the tax administration with the elements essential to verify its tax situation.

3 – In case of error of fact or law in the declarations of taxpayers, these can be substituted:

a) Whichever the situation of the declaration to be substituted, if the legal term for its delivery still runs;

b) Without prejudice to the counter-ordination liability that may be applicable in the case, when from this declaration results higher tax or lower refund than previously calculated, in the following terms:

I) In the 30 days following the end of the legal term. Whichever the situation of the declaration to be substituted;

II) Until the end of the legal term for administrative appeal or judicial impugnation of the assessment act, for the correction of errors or omissions attributable to taxpayers from which results tax of an amount lower than that assessed on the basis of the declaration presented;

III) …

4 - …

5 - …

6 – The presentation of substitute declarations cannot result in the extension of the terms for administrative appeal, judicial impugnation or revision of the tax act, which would be applicable if they had not been presented.

7 - …"

  1.    Given the legislation transcribed, applicable to the situation of the case file, we proceed to objectively review the Arbitral Petition.

  2.  The Claimant M..., taxpayer no. …, contests in his arbitral petition, that he does not agree with the decision of partial grant of the administrative appeal, from which resulted the Personal Income Tax assessment no. …, dated 06.08.2013, and, therefore also does not agree with this assessment, on the ground that the reinvestment of capital gain in the acquisition of own residence was not duly considered, and whose manifestation of intention was declared in the competent Form 3 declaration, attached to the case file, at page 74.

  3.  Now, this manifestation of reinvestment is only that itself, a manifestation of intention, in the terms required by item c) of section 5 of art. 10, before transcribed.

  4. Hence that beyond this manifestation of intention, it is also essential that, under the terms of the provisions of item a) of the same section 5, the realization value, deducted from the amortization of the eventual loan, is reinvested in the acquisition of the ownership of another real property exclusively with the same purpose.

  5. It is verified, in fact, that the Claimant manifested in his Form 3 declaration for the year 2009, the year of disposal of the real property in question, registered in the urban property register of the parish …, and presented on 27-05-2010, the intention to reinvest € 206,489.79, which together with the amount outstanding declared in the same of € 93,510.21, makes the total of € 300,000.00, which was the value of the disposal.

  6. It should be noted that, in accordance with articles 4 and 5 of the P.I., "given that it was also considered that the values recorded in the Form 3 Declaration, relating to the Personal Income Tax for 2009, have no documentation that supports them, it was decided to proceed with their correction, resulting in an additional assessment, in correction, in the amount of € 31,703.79".

  7. Now, this declaration indeed contained elements that did not correspond to the documentary truth, regarding the acquisition value of the alienated residence, whose value contained in Q. 4 of Annex G, Fields 401 and 402 was, respectively, of € 124,699.43 and € 124,699.42, when it should have been € 56,114.76 relating to each half of the real property acquired in July 2001 and December 2008.

  8. It should also be noted that for purposes of determining the gain from capital gains the value of the second half acquired by partition in the divorce proceeding that should be considered is not half of the acquisition value of the totality of the real property of € 91,954.55, that is € 45,977.28, but the value of € 54,430.00, corresponding to half of the patrimonial value resulting from the appraisal value made in the amount of € 108,860.00, under the terms of the provisions of sections 1 and 2 of article 48 of the Personal Income Tax Code.

  9. It happens that, when presented Form 3 declaration of Personal Income Tax relating to the year 2010, on 31-05-2010, the Claimant did not present jointly the Annex G, to declare what the realization value (understand) that in fact he reinvested in the new residence, with the same purpose, which in that same year 2010 he acquired.

  10. Only on 29.08.2013 is a substitute declaration presented relating to the same year 2010, in which Annex G is included and where is declared in the respective Q. 5, Field 509, the value of € 15,000.00, reinvested in 2010 in the new residence, see page 82 of the PA.

  11. It is, therefore, the Claimant himself who declares the reinvestment of € 15,000.00 in the acquisition of the new residence.

  12. The Services did not, however, proceed with the assessment of this substitute declaration, for having been presented outside the legal term provided for in item II of item b) of section 3 of section 6 of article 59 of the CPPT, that is, they cannot use substitute declarations if they were presented beyond the legal term for administrative appeal or judicial impugnation, if from them result lower tax than previously assessed on the basis of the previous declaration.

  13. Hence the Services, and correctly, proceeded with the presentation of a correction document, see pages 113 and 118 of the PA, given the faculty conferred in sections 1 and 2 of art. 59 of the CPPT, where they mentioned the following elements, on the basis of which they founded the respective assessment:

Taxpayer A – Claimant M...– taxpayer no. …

a. Box 4 – Field 401 – Realization of ½ in 8-2009 – € 150,000.00

b. Box 4 – Field 402 – Realization of ½ in 8-2009 – € 150,000.00

And in the same Fields, still the information relating to the acquisition value:

c. Box 4 – Field 401 – Acquisition of ½ in 7-2001 – € 56,114.76

d. Box 4 – Field 402 – Realization of ½ in 12-2008 – € 54,430.00

And still in the second part of this Box 4, that it is the urban real property of the parish no. … – with the article …

And, finally, in Box 5, the value of reinvestment is mentioned, in the following terms:

Field 505 – Amount outstanding of the loan as of the date of disposal - € 89,870.09

Field 506 – Realization value that intends to reinvest - € 15,000.00

Field 508 – Reinvested value in the year of the declaration (2010) after the date of disposal - € 15,000.00.

  1. From the foregoing, it is found that the assessment made on the basis of these elements contained in the Correction Document of the Services, is correctly made, not differing from the values contained in the Substitute Form 3 Declaration of Personal Income Tax presented on 29.08.2013 by the Claimants, above already mentioned, regarding the reinvestment value.

  2. In fact, the value of the required reinvestment in order for there to be a total exclusion of taxation of the gain resulting from the disposal of article 1249, under the terms of section 5 of article 10 of the Personal Income Tax Code, would have to be the value of € 210,129.91 (€ 300,000.00 - € 89,870.09), that is, the realization value (sale), deducted from the amount outstanding and amortized on the date of acquisition of the new real property for permanent own residence.

  3. This conclusion, in addition to the legal basis contained in the cited article 10, section 5, is that which also results from the Jurisprudence of the STA, in accordance with, among others, Judgment no. 01241/09, of 24-03-2010 and 0950/12, of 16-01.2013.

  4. However, as the Claimant M...and his current spouse C... had recourse to a loan of € 200,000.00 for acquisition of the new residence already before identified, for € 230,000.00, the maximum value of reinvestment that could be legally considered would be that of (½ of 230,000.00 – ½ 200,000.00), that is € 15,000.00.

  5. That is, the reinvestment made of € 15,000.00 represents, in relation to what should have been made of € 210,129.91, a percentage of 7.14%.

  6. And, as a consequence, there shall be taxation of 7.14% of the value of the fiscal capital gain calculated as a result of the disposal of the urban real property registered in the property register of the parish of the … under the article …, under the terms of section 7 of article 10 of the Personal Income Tax Code.

  7. And it was not proven

VI – DECISION

Under the terms provided herein this Singular Arbitral Tribunal decides the following:

a) To consider as legally correct the decision of partial grant of the Administrative Appeal no. ...2013…, for being duly founded.

b) To judge the petition for declaration of unlawfulness of the Personal Income Tax assessment no. …, dated 23.08.06, with the collection notice in the amount of € 3,064.55, without merit.

c) To condemn the Claimants to payment of the costs of the proceeding, in the amount of € 1,836.00.

VII – VALUE OF THE PROCEEDING

The value of the additional Personal Income Tax assessment, in correction, in the amount of € 31,703.79.

VIII – COSTS

The value of the arbitration fee is € 1,836.00, by force of Table I of the Regulations for Costs of Tax Arbitration Proceedings, under the terms of articles 12, section 2, and 22, section 4, both of the RJAT, and article 4, section 4, of the said Regulations.

Notify.

Lisbon, 9 February 2015

The Singular Arbitrator,

(José Rodrigo de Castro)

[1] Court's Note

[2] Court's notation, given that having the real property been acquired for € 112,229.53, the half acquired by M...in 2001.07, would be € 56,114.77 (€ 112,229.53/2).

[3] Idem

[4] When the value of the remaining debt already paid on 26.08.2009 was € 89,870.09)

[5] Italics by the Court.

[6] The Court emphasizes that at the date of presentation of this Form 3 declaration and Annex G for the year 2009, on 27.05.2010, the appraisal which assigned the patrimonial value of € 108,860.00 to the real property in question had not yet been carried out.

Frequently Asked Questions

Automatically Created

How is the reinvestment exemption for capital gains applied when a property is acquired through a divorce partition agreement?
When property is acquired through a divorce partition agreement, the reinvestment exemption for capital gains applies based on the individual spouse's acquisition through the partition deed. Article 10(5) of the IRS Code excludes from taxation capital gains reinvested in acquiring another primary residence. The key issue is determining ownership attribution: if one spouse acquires the property through partition (even if only acquiring the other spouse's half) and assumes the full mortgage burden, they may argue the entire capital gain generated upon subsequent sale is individually attributable. However, Tax Authorities may apply proportional division principles if the property is later sold and proceeds reinvested during a new marriage, particularly when both new spouses appear as co-purchasers of the replacement property. The taxpayer must demonstrate through partition deed documentation that they are the sole owner of the capital gain-generating property and that reinvestment funds derive from this individual source.
Can the full mortgage value be attributed to one spouse for IRS capital gains reinvestment purposes after divorce?
Attribution of the full mortgage value to one spouse for IRS capital gains reinvestment purposes after divorce depends on the partition agreement terms and subsequent property ownership. If the divorce partition deed explicitly assigns the property to one spouse who assumes the entire mortgage debt burden (as occurred in this case with a €91,954.55 valuation and matching mortgage obligation), that spouse can argue they bear the full acquisition cost for capital gains calculation purposes. However, complications arise when the taxpayer remarries and purchases a new property with the new spouse. Tax Authorities may apply Article 43(2) of the IRS Code, considering that acquisition costs and reinvestment values should be proportionally divided between co-purchasers. The taxpayer can counter this by invoking Article 1723(c) of the Civil Code, arguing that funds used for reinvestment constitute separate property acquired before the new marriage or derived from individual capital gains. Supporting documentation proving the source and ownership of funds is essential to sustain full mortgage attribution to one spouse.
What happens when the Tax Authority only partially grants a gracious complaint on IRS housing reinvestment?
When the Tax Authority partially grants a gracious complaint on IRS housing reinvestment, it means they accept some arguments while rejecting others, resulting in a modified assessment rather than full relief. In this case, partial grant occurred because the Authority acknowledged the taxpayer's right to the reinvestment exemption principle but recalculated the exempt amount based on their interpretation of ownership attribution and supporting documentation. The Authority concluded that documents submitted did not sufficiently support the values declared in the Model 3 tax return, leading them to apply proportional division between spouses. This resulted in an additional assessment of €31,703.79 instead of the original €3,064.55. Partial grant decisions create a hybrid outcome where the taxpayer achieves some relief but faces additional tax liability based on the Authority's corrections. The taxpayer can challenge partial grants through arbitral proceedings under Decree-Law 10/2011, arguing the Authority misapplied legal provisions or misinterpreted documentation, as occurred here regarding Articles 10 and 43 of the IRS Code and Article 1732(a) of the Civil Code.
How does Article 1732(a) of the Portuguese Civil Code affect the calculation of capital gains on property acquired in divorce proceedings?
Article 1732(a) of the Portuguese Civil Code governs property partition in divorce and significantly affects capital gains calculations. This provision establishes how community property is divided between divorcing spouses. When applied to IRS capital gains, it determines the acquisition cost basis for property obtained through partition. In this case, the taxpayer acquired his ex-spouse's half-share of property originally purchased for €112,229.53 in 2001, with the partition deed valuing his acquisition at €91,954.55 in 2012. The taxpayer argues that Article 1732(a) means he became the sole owner of the entire property through partition, making any subsequent capital gain from selling that property entirely attributable to him individually. This contrasts with the Tax Authority's position that would trace back to original joint ownership and apply proportional calculations. The proper application of Article 1732(a) is crucial because it determines whether the acquisition through partition creates a new, individual ownership basis for capital gains purposes or whether the original joint purchase character persists. The taxpayer's position is that partition creates a fresh acquisition event with individual attribution, while the Authority appears to maintain historical joint ownership characteristics for proportional calculations.
What documentation is required to support reinvestment values declared in the IRS Model 3 tax return?
Documentation required to support reinvestment values declared in the IRS Model 3 tax return includes: (1) the public deed or promissory purchase agreement proving acquisition of the new primary residence, showing purchase price and date; (2) mortgage loan agreements showing amounts borrowed and loan terms; (3) payment receipts demonstrating cash payments made beyond mortgage financing; (4) for property acquired through divorce partition: the partition deed showing acquisition value and date, plus documentation of mortgage obligations assumed; (5) the deed or agreement for the sold property showing sale price and date; (6) declarations proving the property served as permanent primary residence; (7) for married taxpayers claiming separate property: documentation establishing funds derive from separate property under Article 1723(c) of the Civil Code, such as proof of pre-marital assets, inheritance, or gifts with exclusion clauses. In this case, the Tax Authority found the submitted documents insufficient because they could not conclusively determine that the €30,000 cash payment (difference between €230,000 purchase price and €200,000 mortgage) constituted the taxpayer's separate property versus joint property with his new spouse. The Authority required clear tracing of fund sources to attribute reinvestment values individually versus proportionally between spouses. Bank statements, asset declarations from before the new marriage, and explicit documentation linking sale proceeds to reinvestment funds strengthen claims for individual attribution.