Courts Not Allowed To Make Hypothetical Rulings

A court cannot contemplate hypothetical situations; it must deal only with facts.  A taxpayer presented an itemized income tax return for 2004. The tax authorities determined that there was an unjustified reduction in the tax base in the amount of losses the taxpayer received during the previous tax period.  The losses arose from the 2004 submission of an income tax return for the year 2002: the taxpayer changed the data on his tax return, in particular, the portion on extraordinary income and expenses, which he did based on a decision by the Chamber of Commerce’s Arbitration Court in Zurich.  The tax inspectors declared that the taxpayer reduced his tax base for extraordinary expenses by the amount of losses he accrued and could have included compensation for losses, lost profits, and interest on debts into his extraordinary income on his 2004 tax return.

The court determined that his 2004 income tax was calculated and paid according to a tax base that was unjustifiably reduced by his losses from previous years; however, this occurred at a time when there was an absence of a legal basis on the issue. Given the circumstances, the court declared that it does not have the right to make a hypothetical ruling on the taxpayer’s obligations, including those on undeclared expenses (Resolution #N A33-15146/05 by the Eastern Siberian Region’s Federal Arbitration Court from 10-07-2009.)