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Israeli District Court Rules Taxpayers and Tax Authority Must Adhere to Assessment Agreements
An Israeli district court has ruled that both taxpayers and the Israel Tax Authority must comply with terms in assessment agreements, even if they later seek to change their positions. The decision came in a case involving a couple who signed agreements limiting allocation of rental income but later claimed a larger tax exemption on a joint return.
JE
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An Israeli district court ruled that taxpayers cannot unilaterally change positions after signing assessment agreements with the Israel Tax Authority, and that the authority is similarly bound by such agreements. The ruling came in Weiss vs Large Enterprises Assessing Officer. The taxpayers were a husband and wife.
The wife owned eight commercial properties received by gift or inheritance, while the husband owned two residential apartments. The couple also held shares in a company that owned five additional properties. All properties were rented out.
The husband qualified as 100% disabled under Section 9(5) of the Income Tax Ordinance. This provision allows a larger exemption for active income, up to NIS 684,000, and a smaller exemption for passive income, up to NIS 81,960. The couple sought to apply the husband's full exemption against the wife's rental income by classifying it as active.
The Israel Tax Authority objected to this classification. It persuaded the couple to sign assessment agreements for the years 1995-2001 and 2011-2014. Those agreements stipulated that only 15% of the wife's rental income would be allocated to the husband as active rental income in those years and in subsequent years.
Six months after signing the second agreement, the couple filed a joint tax return for 2015 claiming the active-income exemption for 100% of the wife's rental income. The authority rejected this approach. The court determined that the rental income qualified as active business income.
It cited the number of properties involved, the required management efforts, and the specialized knowledge of the real-estate market. The court also found that joint tax returns are permitted under tax law and that the husband's disability exemption could in principle be applied against the wife's rental income in such a return.
