Recourse action vis-à-vis spouse

Recourse action – by virtue of suretyship or owing to joint and several liability having been assumed by a spouse in respect of a debt having been contracted by the other spouse – aimed against the spouse who carries on a business venture is treated as work where the income tax regime is concerned. A case brought before the Supreme Court revolved around the scope of the recourse action and the question as to whether it had been permissible to charge the write-down thereof to the (operating) result.

The case in question involved an IOU to the bank stipulating that the spouses had assumed joint and several liability for the bank loan in question, with the wife having mortgaged the dwelling she owned so as to provide the bank with security. The husband launched a business venture, which after several loss-making years he discontinued. As the debt to the bank had not yet been repaid, the bank went on to foreclose. The mortgage loan was redeemed using part of the proceeds of the sale under foreclosure of the mortgaged property. Part of what was left over was used to repay the husband’s business debts. The discussion centred around the question as to whether the payment made by the wife in this context did or did not qualify as a loss from other operations, with the Leeuwarden Court of Appeal concluding that the wife had gained recourse action vis-à-vis her husband in the amount of half the sum she had paid, the write-down of which recourse action should be charged to her results from activities.

The State Secretary appealed the above ruling, claiming that the Court of Appeal had ignored the Inspector of Taxes’ contention to the effect that the acceptance of joint and several liability was not in accordance with the arm’s length principle. The Advocate General in his closing statement argued that the distinction between suretyship and joint and several liability was not germane to the issue at hand, as the wife would in either scenario have gained recourse action vis-à-vis her husband for the full amount. The Court of Appeal had erroneously decided that there was recourse action for half the amount only, as the debt had only concerned the husband. Owing to the Court of Appeal having failed to tackle the Inspector of Taxes’ allegation of inconsistency with the arm’s length principle, the matter had to be referred back to said Court. In so far as the joint and several liability does indeed involve inconsistency with the arm’s length principle, the write-down of the recourse action may not be charged against the results from activities; in so far as it does not, the entire amount paid back to the bank may be charged to the results.