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59UNCONSTITUTIONALITY OF THE LEGISLATION ON TAX DEDUCTIONS WITH REGARD TO SUBDIVISION OF LAND LOTS
DOI: http://dx.doi.org/10.14420/en.2014.2.5
Anatoli Samochkin, Chairman of the Board of LLC BaltAgroKorm, e-mail: a.samochkin@gmail.com.
Abstract. The article examines the legislation that regulates tax deductions
in the field of operations with real estate. Legal conditions for granting tax deductions are framed by combination of tax legislation (Subparagraph 1, Para 1 of Article 220 of the Tax Code of the Russian Federation, hereinafter referred to as the RF Tax Code) and land legislation (Article 11.4 of the Land Code of the Russian Federation, hereinafter referred to as the RF Land Code), as well as by regulations on registering operations with real estate (Para 5, Article 12 of the Federal Law No 122-FZ). As a whole, the said regulations do not establish a uniformed approach concerning subdivision and settling the commencement date of the term of limitation for exercising the right to receive tax deductions. The author considers collision of the two juridical dates: the date of origin of land ownership and the date of issuing the land lot certificate in case of the land subdivision on the initiative of the owner. It resulted from ambiguities inherent in the legislation. Due to the stated collision there emerge contradictory legal practices with ensuing infringement of civil rights. On the basis of the presented research, the author offers to declare Subparagraph 1, Para 1 of Article 220 of the RF Tax Code unconstitutional. Keywords: Tax Code, Land Code, registration of deeds, tax deductions,
subdivision, legislation ambiguity, proprietary rights, registration of rights to real estate, Constitutional Court, Ministry of Finance of the Russian Federation, practice of law enforcement.
The legal problem consists in an ambiguity in the legislation that establishes tax deductions in case of selling the land lot, which had been subdivided by its owner. Besides, the owner had his lot in possession for more than three years, and divided the lot during this period. It is not certain, which date is to be determined as the date when the three year period starts: shall it be the date of acquisition the main lot or the date of receiving the title documents that warrant the property rights to the subdivided (newly formed) land lots.
Para 4 of Article 11.4 of the RF Land Code specifies that in case of subdivision the owner acquires proprietary rights to all the lots formed as a result of subdivision. The given regulation does not provide for settling the definite and valid date when
there arise proprietary rights to the lots formed by subdivision; consequently, there are no grounds for uniform understanding and application of related norms of civil and tax law. For example, Subparagraph 1, Para 1 of Article 220 of the RF Tax Code specifies tax deductions for taxpayers on the income, received from sale of the land lot, which taxpayer has had in his possession for more than three years. However, Article 11.4 of the RF Land Code in combination with Articles 218, 219 and 223 of the Civil Code of the Russian Federation (hereinafter referred to as the RF Civil Code) does not allow to fix unambiguously the moment when proprietary rights arise, that is when the three year period starts. Thus the mode of settling the date of proprietary rights presents an ambiguous limitation here.
The stated ambiguity of the Tax Code causes violation of the constitutional rights specified by Articles 18, 19, 35, 57 of the RF Constitution. The law ambiguity makes itself evident in the fact that in their legal practices different agencies apply the norm prescribed by Subparagraph 1, Para 1 of Article 220 of the RF Tax Code in different ways.
Legal views and legal practices of the Russian Ministry of Finance are not certain; it is proved by the fact that there have been published several explanations on how to apply Subparagraph 1, Para 1 of Article 220 of the RF Tax Code, which interfere with each other.
The Ministry of Finance of the Russian Federation published the Letter dated 5 May, 2011 No 03-04-05/5-331 (fl) «About absence of grounds for paying the individual income tax by the physical person, who had owned 1/2 of the flat since 1993 and inherited the second half of the flat in 2007 after his wife's death, in case the given flat is sold in 2010».
The Letter was published as a reply to the following situation. Since 1993 the flat belonged to two owners. In connection with his wife's death in November 2007, the taxpayer came into inheritance with the 1/2 of the flat that had been his wife's share of the given flat. In 2010 the flat was sold.
The Ministry of Finance interprets the situation as follows: according to Para
1 of Article 244 of the RF Civil Code the property owned by two or several persons belongs to them on a common property basis. According to Article 235 of the RF Civil Code, changes in the composition of owners, including changes due to alienation of estate to one of the owners of common property, do not entail disposition of rights for the given property for the latter. Herewith, under Article 131 of the RF Civil Code changes in the composition of property owners are subject to state registration of deeds.
The legal position of the Russian Ministry of Finance is that the moment of origin of the proprietary rights shall be determined by the time of receiving the original state registration of proprietary rights to the given flat, but not the time of receiving a repeated ownership certificate for the same property. Hence, the bare fact that there is issued a different certificate (with a different date, number, for an object with a different flat area comparing with the first certificate issued for an object that is part of a whole) shall not be considered as grounds for commencing new proprietary rights, and the date of origin of proprietary rights shall be the date
of issuance of the original ownership certificate.
However, in the Letter dated 10 February, 2012 No 03-04-05/7-153 the Russian Ministry of Finance formulates a different legal position. The letter was published to give an assessment of the legal situation, when a taxpayer inherited a land lot in 2006, but registered his proprietary rights to it in 2007. In 2011 he divided the land lot, and he was planning to sell one of the newly formed lots.
In this case the position of the Russian Ministry of Finance is that the taxpayer had owned the said lot for less than three years. This interpretation is based on Article 11.4 of the RF Land Code, which states that subdivision results in forming several land lots, while the original land lot ceases to exist. At the same time the owner obtains proprietary rights for all the land lots that are formed by the subdivision.
On the ground of Article 219 of the RF Civil Code, the Ministry of Finance of the Russian Federation points out that proprietary rights for buildings, constructions and other objects of newly created estate property that are subject to state registration of deeds, arise from the date of such registration.
The legal position of the RF Ministry of Finance is also based on Para 9 of Article 12 of the Federal Law dated 21.07.1997 «About state registration of rights to estate property and operations with it», according to which in case of the division, apportionment of participatory share in specie and other legal operations with property, registration entity records are made in new sections of the Uniform State Register of Proprietary Rights and new dossiers of title documents are formed with new cadastral numbers.
In summary, the RF Ministry of Finance points out that since subdivision results in creating new property objects with new cadastral numbers, while the original land lot as an object of a right ceases to exist, the ownership period concerning land lots after such subdivision is considered to start on the date the lot is registered in the Uniform State Register of Right to Estate Property and Operations with it. Thus, the ownership period shall start on the date of issue of new ownership certificates.
Comparison of these two Letters of the federal agency of the executive branch demonstrates that this norm in regard to settling the commencement date of proprietary rights allows for ambiguous interpretations in law enforcement practices. When the subject matter is a flat, the date of original acquisition of right is considered to be the date for calculation of limitations, while date of issue of a repeated certificate has no legal effect. At the same time, in case with a land lot acquisitive prescription is determined by the date of issue of new ownership certificates. Hence, the Ministry of Finance of Russia has no clear idea about the date of origin of proprietary rights to estate property, and correspondingly, about the beginning date of the time period of acquisitive prescription.
It is unacceptable to apply Article 219 of the RF Civil Code in the situation under consideration, since the subject matter of the said Article is buildings, constructions and other newly created objects. They can be erected or constructed; earlier the object has not existed in nature.
Subdivision of land lots, as well as dividing other real estate objects, does not involve creating new objects. The original land lot and new land lots have always been just land; there is no creation per se. Creation also means that previously there has been no object, and, correspondingly, nobody has had proprietary rights to it. This is an investitive juridical fact - the object is created for the first time.
When we deal with subdivision, the original lot existed as an object of the physical world and was owned by somebody. That is why, when studying the question about the origin of proprietary rights, we should analyse if there occurred transfer of ownership from one person to another. This is precisely what the legislation states on this matter in Para 2, Article 218 of the RF Civil Code: title to assets can be bought from the owner by another person by virtue of the contract of sale, exchange, donation or another transaction with the purpose of assignment of assets. Legal effect depends on if it is transfer of ownership (Article 218 of the RF Civil Code) or creation of the right for the first time (Article 219 of the RF Civil Code).
According to Article 223 of the RF Civil Code, in case parties conclude an agreement the acquirer can exercise proprietary rights to the object from the date of registration, if the other is not stipulated by law. Thus, registration is important in cases of transfer of ownership to the acquirer, i.e. when the owner is changed.
Legal views of the Supreme Court of the Russian Federation are formulated in the Court Order dated 11 May, 2011 No 67-B11-2 of the Panel of Judges on administrative cases issued upon application of O.I. Tuboltsev about unenforceability and revocation of a decision of a tax body.
Having analysed the provisions of the RF Civil Code that regulate rights of owners, grounds for disposition of proprietary rights, Articles 2, 12 of the Federal Law No 122-FZ, norms on the property-related tax deduction specified by the RF Tax Code, the said collegiate Panel of Judges came to the conclusion that the alterations that the applicant made in his non-residential premises by dividing them into several premises with subsequent registering them as separate accounting entities cannot be taken as grounds for stating that the applicant had possessed the property, which was alienated in 2007 under the purchase and sale contract for less three years.
The position of the said collegiate organ of the Supreme Court of the Russian Federation is based on Para 1, Article 131 and Article 235 of the RF Civil Code, according to which proprietary rights and other proprietary interests concerning real estate, creation, restriction or termination of such rights, as well as transfer of title, are subject to state registration in the Uniform State Register.
The procedures that specify the state registration of rights to estate property and operations with it are stipulated by the Federal Law dated 21 July, 1997 No 122-FZ «About the state registration of rights to estate property and operations with it». According to provisions of Para 1, Article 2 of the Law No. 122-FZ, the state registration is a juridical act made to confirm that the state acknowledges and validates the origin, abridgment (encumbrance on property), transfer or disposition of rights to estate property according to the Civil Code of the Russian
LAW AND MODERN STATES
Federation.
By implication of the sited norm, such validation must comply with requirements of the RF Civil Code, contain no misrepresentations of the legal status of the property in regard to the given object, be based exclusively on presented documents, validate the proprietary right and its object-matter.
The owner has the right of possession, exploitation and disposal of his property in regard to which he has the right to accomplish any operations that are not contrary to law and other legal acts and do not infringe rights and protected by law interests of other persons, including the right to dispose of his property in other ways, which are not connected with its alienation or transfer in hand of other persons (Subparagraphs 1, 2 of Article 209 of the RF Civil Code).
Referring to Article 235 of the RF Civil Code, the Court points out that the legislation in force does not include as ground for termination of rights in regard to estate property cases when this property is divided into separate independent units and then registered in cadastral and technical registers.
According to Para 9, Article 12 of the Federal Law No 122-FZ, in case of division, apportionment of participatory share in specie and other legit operations with property, registration entity records are made in new sections of the Uniform State Register of Proprietary Rights and new dossiers of title documents are formed with new cadastral numbers.
These new sections of the Uniform State Register of Proprietary Rights and new dossiers of title documents contain reference to the sections and new dossiers, related to the real property objects, as a result of operations with which there were made entries into new sections of the Uniform State Register of Proprietary Rights and formed new dossiers of title documents.
Moreover, the Federal Law No 122-FZ does not oblige the owner of the estate property to register his proprietary right again, including his title to separate units of his property. Therefore, if the applicant registers his estate property objects that appeared as a result of dividing an originally unified object, it does not entail termination of proprietary rights to the disputed property, it being parts of property, proprietary rights for which had been registered in the due course of law.
Referring to Para 26, 27, 36, 67 of the Maintenance Rules for the Uniform State Register of Right to Estate Property and Operations with it that were adopted in execution of Para 5, Article 12 of the Federal Law No 122-FZ and ratified by the Government Regulation of the government of the Russian Federation dated 18 February, 1998 No 219, the Supreme Court of the Russian Federation came to the conclusion that in case of dividing the property object into several new objects, the related section of the said Register closes, since the original object ceases to exist as a cadastral records unit, but it does not affect the title to the property, which the applicant had owned in the form of parts of the unified property object.
Analysis of provisions of Para 67 of the said Rules in systemic combination with the forecited norms proves that such circumstances as alteration of the real property object does not entail termination or transfer of the original proprietary rights.
Thus, the fact that the applicant registered the real property objects, which came into being after division of unified premises, does not entail passage of title to the disputed property objects, being parts of the non-residential premises, proprietary rights to which had been registered in the due course of law.
Hence, the Supreme Court of the Russian Federation declares that issuing a new certificate per se without analysis of subjects and objects has no legal effect and cannot be unconditionally considered as grounds for calculating the limitation period in regard to proprietary rights. Unless there took place transfer of title from one person to another, or there was created a new property object, which exceeds the original one, then issuing a new certificate by itself is not the ground for determining the date of origin of the proprietary rights.
Ambiguity of the mentioned laws makes itself evident in the fact in the case examined above these laws were applied in a different way comparing with other cases from judicial practices of the same body, namely the Panel of Judges on administrative cases of the Supreme Court of the Russian Federation. The Court Order dated 19 October, 2011 presents the position of the RF Supreme Court Judge V.N. Pirozhkov, which is totally contradictory to the position of the Panel of Judges on administrative cases of the Supreme Court of the Russian Federation. It states that the proprietary rights are converted from proprietary rights to a unified object into proprietary rights to its parts.
However, the position of the said collegiate organ is based on the data recorded in the ownership certificates regarding parts of what used to be one object, i.e. the initial purchase and sale contract. Since the object still belongs to the same person, it can be declared that there has been no transfer of title. The Court Order of the collegiate Panel of Judges states: it is the property object as a unit of cadastral records that ceases to exist, but not the title to assets, when the applicant had owned the same assets in the form of parts of unified property.
Substantial controversy in the two Court Orders of the Supreme Court of the Russian Federation under examination (i.e., the Court Order of the Panel of Judges on administrative cases of the Supreme Court of the Russian Federation dated 11 May, 2011, and the Court Order of the Judge of the Supreme Court of the Russian Federation V.N. Pirozhkov dated 19 October, 2011 about refusal to transfer a supervisory plaint for consideration by the Panel of Judges on administrative cases of the Supreme Court of the Russian Federation) serves as an evidence of ambiguity inherent to Para 4, Article 11.4 of the RF Land Code, which creates conditions for violation of constitutional rights of citizens.
However, the position of the collegiate Panel of Judges appears to be more important and conclusive.
There are evidences of ambiguity in application of the mentioned law in practices of the Superior Commercial Court of the Russian Federation as well.
The Constitutional Court of the Russian Federation has had an extensive practice concerning constitutionality of Subparagraph 1, Para 1 of Article 220 of the RF Tax Code. Notwithstanding that the norm under examination has not undergone direct analysis with a view to assess its constitutionality, actual
constitutional practice clearly proves ambiguity of the given prescription of law.
The Decree of the Constitutional Court of the Russian Federation dated 28 March, 2000 No 5-n «With regard to the case about checking constitutionality of Subparagraph «k» of Para 1, Article 5 of the Russian Federation Law on Value-Added Tax in the context of the plaint filed by the closed joint-stock company «Confetti» and I.V. Savchenko» presents a legal regulation on the matter of clearness as applied to tax legislation.
Formal certainty of tax rules means they are precise enough to enable enforcement bodies to understand and apply them correctly. If the tax norm is loose, it can result in it being applied in an arbitrary and discriminatory way, which does not agree with the main principle of the constitutional state (Article 1, Part 1 of the Constitution of the Russian Federation). When state agencies and civil servants act towards taxpayers in such a way, it leads to violation of the principle of legal equality (Article 19 of the Constitution of Russia) and the ensuing requirement of equality in imposing taxes, which is specified in Para 1 of Article 3 of the RF Tax Code. That is why the tax, being specified by a faulty in terms of juridical methodology requirements norm, cannot be considered legally established in the sense of Article of the Constitution of Russia (Decrees of the Constitutional Court of the Russian Federation dated 8 October, 1997 and 11 November, 1997. The former Decree was issued in regard to the case that concerned checking constitutionality of the Law of St. Petersburg «On Rates of the Land Tax in St. Petersburg in 1995», the latter - of Article 11.1 of the Law of the Russian Federation «On the State Boundary of the Russian Federation»).
At the same time court practices must ensure constitutional interpretation of regulations subject to application.
There are more judicial acts of the Constitutional Court of the Russian Federation on the same matter: Decree of the Constitutional Court of the Russian Federation dated 17 June, 2010 No 904-0-0 «About refusal to take under advisement Alexei Andreevich Shilov's appeal against violation of his constitutional rights by provisions of Para 1 of Article 20 and Subparagraph 2, Para 1 of Article 220 of the Tax Code of the Russian Federation»; Decrees of the Constitutional Court of the Russian Federation dated 21 March, 1997, No 5-n of the Tax Code of the Russian Federation and dated 28 March, 2000, No 5-n; Court Order of the Constitutional Court of the Russian Federation dated 9 November, 2010 No 1433-0-0 «About refusal to take under advisement Mariya Yurievna Tolubaeva's appeal against violation of her constitutional rights by provisions of Subparagraph
1, Para 1 of Article 220 of the Tax Code of the Russian Federation»; Court Order of the Constitutional Court of the Russian Federation dated 26 May, 2011 No 6100-0 «About refusal to take under advisement Mikhail Yurievich Kolodin's appeal against violation of his constitutional rights by provisions of Para 6 of Article 19 of the Federal Law “About introduction of alterations in Part 1 and Part 2 of the Tax Code of the Russian Federation and several legislative acts of the Russian Federation»; Court Order of the Constitutional Court of the Russian Federation dated 2 November, 2006 No 444-0 with regard to the appeal of the Commissioner
for Human Rights in the Russian Federation against violation of constitutional rights of Irina Aleksandrovna Astakhova by provisions of Subparagraph 1, Para 1 of Article 220 of the Tax Code of the Russian Federation, and other acts.
The Constitutional Court of the Russian Federation formulated the law provision, according to which in implementing the general rules specified by Subparagraph 1, Para 1 of Article 220 of the Tax Code of the Russian Federation in the system of valid legal regulations, law enforcement bodies should take into account the constitutive circumstances specified by the RF Civil Code and the Family Code of the Russian Federation (hereinafter the RF Family Code), for example, with regard to determination of the ground and the time of originating proprietary rights to the taxpayer's corresponding property. The said rules concern application of property-related tax deduction in order to determine the taxation base (as related to determining the period, during which the property alienated by the taxpayer had been owned by him).
Thus, the constitutional court of the Russian Federation formulated a legal regulation, stipulating that the tax deduction must correlate with the circumstances that have a constitutive effect rather than with title documents; for example, it must depend on the reason and time of originating the proprietary right to the respective property of the taxpayer.
In its Judicial Decision dated 2 November, 2006 No 444-0, the Constitutional Court of the Russian Federation presented the legal position, according to which realization of the general legal norms specified by Subparagraph 1, Para 1 of Article 220 of the RF Tax Code in the system of legal regulations in force implies taking into account the constitutive circumstances enlisted in the RF Civil Code and the RF Family Code. The said legal norms concern general rules of applying the property-related tax deduction for determining the taxation base (with regard to the period of determination, during which the taxpayer had been having a title to the alienated property). Among other things, the rules should be applied, when determining the ground and the time of originating the proprietary right to the respective property. Non-application of the rules would cause appearing ungrounded differences in imposition of taxes regarding physical persons (for example, regarding spouses in case of terminating the mode of their joint ownership after death of one of the spouses), and thereby it would cause impingement of their rights and legitimate interests in tax legal relations. Such impingement would violate the principle of equality of all citizens before law (Article 19, Part 1, Constitution of the Russian Federation) and the ensuing rule of equal and equitable taxation.
In the Decree dated 25 April, 1995 No 3-n «About the case of checking constitutionality of Part 1 and 2 of Article 54 of the Housing Code of Laws of the Russian Soviet Federative Socialist Republic in the context of complaint of L.N. Sitalova» the legal position on the given violation of constitutional rights was formulated in the following manner: «A possibility of arbitrary application of the law is to be viewed as an infringement to the principle of equality of all citizens before law and court, which is declared by the Constitution of the Russian Federation (Article 19, Part 1)».
In the same Decree the Constitutional Court of Russia phrased its position regarding legitimacy of citizens' complaints by stating that «citizens have a right to appeal to the Constitutional Court of Russia only when they suppose that a certain ambiguity is present in deciding, if the law applicable to their rights conforms to the Constitution of Russia».
Thus, the Constitutional Court of Russia in its acts repeatedly expressed its position, according to which an ambiguity in applying a legal norm indicates the necessity to give a clearer definition of such a norm in order to prevent from emerging a possibility of infringement of civil rights and freedoms.
An ambiguity in the matter of conformity of the tax rule to the Constitution of the Russian Federation lies in the fact that it allows for casual, non-uniform interpretations by various legal entities. Unconstitutionality of the law under examination lies in the fact that it allows to apply norms at their sole discretion, by reference to nonlegal categories.
Ambiguity of laws lies in the fact that law enforcement bodies interpret, understand and apply them in different ways. So, courts of general jurisdiction, arbitration courts and bodies of executive power have contradictory court practices regarding appliance of the law under analysis.
Hence, it should be recognized that the norm specified by Subparagraph 1, Para 1 of Article 220 of the RF Tax Code does not conform to the Constitution of the Russian Federation, and its interpretations in law enforment practice infringe rights and freedoms of citizens. It is necessary to restore citizens to their rights.
References
1. The Constitution of the Russian Federation.
2. The Land Code of the Russian Federation.
3. The Tax Code of the Russian Federation.
4. The Federal Law dated 21.07.1997 «About state registration of rights to estate property and operations with it».
5. The Letter of the Ministry of Finance of the Russian Federation dated 5 May, 2011 No 03-04-05/5-331 (fl) «About absence of grounds for paying the individual income tax by the physical person, who had owned 1/2 of the flat since 1993 and inherited the second half of the flat in 2007 after his wife's death, in case the given flat is sold in 2010».
6. The Letter of the Ministry of Finance of the Russian Federation dated
10 February, 2012 No 03-04-05/7-153.
7. The Court Order of the Supreme Court of the Russian Federation dated
11 May, 2011 No 67-B11-2 of the Panel of Judges on administrative cases of the Supreme Court of the Russian Federation.
8. The Government Regulation of the government of the Russian Federation dated 18 February, 1998 No 219 «About ratification of the Maintenance Rules for the Uniform State Register of Right to Estate Property and Operations with it».
9. The Decree of the Constitutional Court of the Russian Federation dated
17 June, 2010 No 904-0-0 «About refusal to take under advisement Alexei Andreevich Shilov's appeal against violation of his constitutional rights by provisions of Para 1 of Article 20 and Subparagraph 2, Para 1 of Article 220 of the Tax Code of the Russian Federation».
10. The Decree of the Constitutional Court of the Russian Federation dated
25 April, 1995 No 3-n «About the case of checking constitutionality of Part
1 and 2 of Article 54 of the Housing Code of Laws of the Russian Soviet Federative Socialist Republic in the context of complaint of L.N. Sitalova».
11. The Decree of the Constitutional Court of the Russian Federation dated 21 March, 1997 No 5-n «With regard to the case of checking constitutionality of provisions of the second paragraph of Para 2 of Article 18 and Article 20 of the Law of the Russian Federation dated 27 December, 1991 «On fundamentals of the tax system in the Russian Federation».
12. The Court Order of the Constitutional Court of the Russian Federation dated 9 November, 2010 No 1433-0-0 «About refusal to take under advisement Mariya Yurievna Tolubaeva's appeal against violation of her constitutional rights by provisions of Subparagraph 1, Para 1 of Article 220 of the Tax Code of the Russian Federation».
13. The Court Order of the Constitutional Court of the Russian Federation dated
26 May, 2011 No 610-0-0 «About refusal to take under advisement Mikhail Yurievich Kolodin's appeal against violation of his constitutional rights by provisions of Para 6 of Article 19 of the Federal Law «About introduction of alterations in Part 1 and Part 2 of the Tax Code of the Russian Federation and several legislative acts of the Russian Federation».
14. The Court Order of the Constitutional Court of the Russian Federation dated
2 November, 2006 No 444-0 with regard to the appeal of the Commissioner for Human Rights in the Russian Federation against violation of constitutional rights of Irina Aleksandrovna Astakhova by provisions of Subparagraph 1, Para 1 of Article 220 of the Tax Code of the Russian Federation
