▲ The Supreme Court of Korea
The Supreme Court has reaffirmed the legal principle that while appraised values obtained through post-valuation can be recognized as the market value when calculating inheritance and gift taxes for small non-residential properties, such as so-called "small buildings," this is only permissible if there are no special circumstances involving price fluctuations.
According to the legal community, the Second Division of the Supreme Court (Justice Kwon Young-jun presiding) recently upheld a lower court ruling in favor of the plaintiffs in an appeal filed by the children of a couple, identified as A, against the head of the Yangcheon District Tax Office, seeking to cancel the imposition of gift tax.
In July 2019, the plaintiffs received land and buildings in Seongnam, Gyeonggi Province, as a gift from their parents. In October of that year, they calculated the value of the real estate at 3.95 billion won and filed and paid the gift tax accordingly.
However, in April 2020, the tax authorities commissioned appraisals from two appraisal firms and imposed additional gift tax, treating the average of the two appraised values—6.19 billion won—as the market value.
In response, the plaintiffs filed a lawsuit, arguing that the tax authorities' act of commissioning an appraisal to generate a value constituted an abuse of tax investigation authority. They further claimed that the appraised value, generated nine months after the date of the gift, could not be recognized as market value because it failed to reflect the appropriate value at the time.
According to the Enforcement Decree of the Inheritance and Gift Tax Act, which was amended in February 2019, tax authorities are permitted to conduct post-appraisals when imposing inheritance and gift taxes on small buildings.
While the Supreme Court acknowledged that retroactive appraisals are permitted under the Enforcement Decree, it ruled that the proviso clause stating there must be "no special circumstances involving price fluctuations" must be interpreted strictly.
The court held that the burden of proving that there were no special circumstances causing price fluctuations between the date of the gift and the time of the appraisal lies with the tax authorities, and that any appraised value for which this cannot be proven cannot be recognized as the market value.
The first and second trials of this case determined that the appraised value did not meet the requirements, considering factors such as the rise in individual officially assessed land prices and the duration between the date of the gift and the price calculation reference date.
The Supreme Court further ruled that it is necessary to examine whether there were any special circumstances involving price fluctuations throughout the entire period, not only from the date of the gift to the price calculation reference date but also up to the date the appraisal report was written.
However, the Supreme Court concluded that the lower court's decision was correct in determining that the appraised value could not be recognized as the market value, as the price fluctuation requirements were already not met during certain periods.
(Photo: Yonhap News TV, Yonhap News)
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