Court: Tax Authority's Rejection of Inheritance Tax Payment via Deficit-Ridden Company Shares 'Lawful'

A court has ruled that it was lawful for tax authorities to reject an application to pay inheritance taxes using unlisted shares of a chronically deficit-ridden company.

The 4th Administrative Division of the Seoul Administrative Court (Presiding Judge Kim Young-min) recently ruled against the plaintiff in a lawsuit filed by an individual identified as A against the head of the Seocho Tax Office, seeking to cancel the rejection of the in-kind payment permit.

In 2023, A inherited 4,850 shares of Company B, along with real estate located on Teheran-ro in Gangnam-gu, Seoul.

During this process, A applied to pay 8.58895 billion won in inheritance taxes through an in-kind payment (paying taxes with assets other than cash) consisting of real estate and 1,797 unlisted shares of Company B, which were valued at around 4.67 million won per share.

While the Seocho Tax Office approved the payment via real estate, it rejected the application for Company B's unlisted shares worth approximately 8.4 billion won, citing that the company had posted consecutive deficits over the past two years.

The authority judged that the shares fell under "property inappropriate for management and disposal."

A filed the lawsuit arguing that even if Company B was in a deficit, its high asset value meant the shares could not be considered difficult to manage and dispose of, and that the disposition was void because the tax authorities had exceeded the statutory processing deadline.

However, the court sided with the tax authorities, concluding that Company B's unlisted shares were indeed property unsuitable for management and disposal.

The court pointed out that Company B had continuously recorded operating losses, such as about 200 million won in 2019 and about 140 million won in 2020, stating that "the generation of deficits is not temporary but rather a structural problem."

It also cited the negative evaluation by the Korea Asset Management Corporation, which reviewed Company B and predicted that its net asset value would continue to decline due to the entrenchment of its deficit structure.

Furthermore, the court noted that Company B's shareholder composition consists of family members, including A and their siblings, making it difficult to dispose of the shares even if the government were to acquire the minority stake.

Regarding A's claim that the tax authorities exceeded the processing deadline, the court judged that the notice of extension for the processing period was properly delivered to A, as it was sent by registered mail and was not returned.

The enforcement decree of the current Inheritance Tax and Gift Tax Act specifies "securities issued by a company that has incurred a deficit within two years prior to the date of the application for in-kind payment" as subjects for which in-kind payment can be refused.

(File Photo: Yonhap News)
※ Please note: This article was translated by AI and may contain errors.