▲ The Supreme Court
The Supreme Court has ruled that when levying inheritance tax on small non-residential real estate, such as "little buildings" (small commercial buildings), the value determined through a post-appraisal commissioned by the National Tax Service (NTS) can be recognized as the market value.
On Wednesday (June 17), according to legal circles, the Supreme Court's Second Division (led by Justice Kwon Young-jun) recently finalized a lower court's ruling partially in favor of the plaintiff in an appeal filed by an individual, referred to as A, against the head of the Mapo Tax Office to cancel an inheritance tax assessment.
A inherited land in Seodaemun-gu, Seoul, following the death of their mother in April 2019.
In October of that year, A calculated the value of the land at approximately 7.4 billion won based on the officially assessed individual land price and reported and paid about 2.7 billion won in inheritance tax.
Under the Inheritance and Gift Tax Act, the value of property is in principle based on the market value at the time the inheritance begins. However, in cases where it is difficult to determine the market value, such as with "little buildings," the property can be evaluated based on officially assessed individual land prices.
However, this method has limitations as it may not properly reflect the actual value.
Following criticism that appropriate taxes were not being levied on "little buildings," which are a representative means of wealth transfer, the enforcement decree of the Inheritance and Gift Tax Act was amended in February 2019, establishing a legal basis for conducting appraisals when imposing inheritance and gift taxes on such properties.
In June 2020, the tax authority commissioned two appraisal firms to evaluate the property, and A also commissioned two other appraisal firms to do the same.
The appraised values determined by the four firms ranged from 11 billion to 12.1 billion won, which was significantly higher than the reported value.
The tax authority deemed the average of the four appraised values, approximately 11.5 billion won, as the market value and imposed an additional 2.2 billion won in inheritance tax.
In response, A filed a lawsuit, arguing that it was unfair for the tax authority to arbitrarily commission a post-appraisal of the land to increase the inheritance tax.
A claimed that such an action undermines the legal stability of taxpayers and goes against tax equity.
However, the Supreme Court ruled, "It is permissible for the tax authority to conduct an appraisal during the investigation process to determine the inheritance tax and then make an assessment based on that appraised value."
Although the court canceled 100 million won out of the 2.2 billion won, citing issues with the appraisal firms' method of calculating the appraised value, it essentially ruled in favor of the tax authority.
The court explained that even if a taxpayer has reported and paid inheritance or gift taxes according to supplementary evaluation methods, it is consistent with the principle of no taxation without law and tax equity for the tax authority to determine the value by verifying the objective exchange value in accordance with the enforcement decree of the Inheritance and Gift Tax Act.
Regarding criticisms raised by some over the NTS's arbitrary and selective appraisal standards, the Supreme Court also stated, "As it is practically impossible to conduct appraisals on all real estate, [selective appraisal] is somewhat inevitable and, from the perspective of tax administration efficiency, is actually necessary."
However, the Supreme Court also emphasized that the provisions of the enforcement decree must be strictly interpreted to minimize the room for arbitrary intervention by the tax authority.
This is to consider the legal stability of taxpayers.
Under the enforcement decree, for an appraised value to be considered the market value, it must meet the requirement of "no special circumstances of price fluctuation." The Supreme Court ruled that this requirement applies beyond the price determination base date up to the date the appraisal report is prepared.
It also explained that whether special circumstances exist must be comprehensively determined by considering changes in regulations and the local environment, the time gap between the evaluation base date and the date the appraisal report is prepared, as well as the risk of the appraiser's subjectivity intervening.
Furthermore, the court ruled that appraisals by the court are also permitted in principle.
However, it stated that the presiding judge must carefully examine whether the tax authority's request for appraisal causes unexpected disadvantages to the taxpayer.
In the second trial of this case, the court calculated the legitimate tax amount by estimating the market value of the land at approximately 11.3 billion won based on the appraisal results of a court-appointed appraiser, and canceled the excess amount as unlawful.
The Supreme Court also found no error in this judgment and dismissed the appeal.
※ Please note: This article was translated by AI and may contain errors.