[Jeon Daegyu's 7 Trials and 8 Failures] Acquisition Tax Issues When Inheritance Occurs After Rehabilitation Commencement

Mr. A, who ran a small pub, could not overcome the economic recession and filed for personal rehabilitation proceedings with the court on February 4, 2018. The personal rehabilitation proceedings commenced on March 4, just one month later. Mr. A drafted a repayment plan to pay off his debts over three years, and the court approved the repayment plan on May 3, 2018. Thereafter, Mr. A completed all repayments according to the plan and finally received a discharge decision on June 4, 2021.

Preparing for a fresh start, Mr. A received a notice from the Mayor of Mapo District Office on June 7, 2021, demanding payment of acquisition tax amounting to 24 million KRW. The story is as follows. Mr. A’s father passed away on September 10, 2019, after the approval of the repayment plan, and Mr. A inherited an apartment located in Mapo District that his father owned. Although payment of acquisition tax due to inheritance was natural, Mr. A was taken aback by the unexpected tax notice. Moreover, since a significant amount of security rights corresponding to his father’s debts were established on this apartment, Mr. A is considering limited acceptance (accepting inheritance of the father’s debts only up to the value of the inherited property, thereby also paying acquisition tax accordingly). Mr. A wonders whether he must pay acquisition tax despite the court’s discharge decision.

Taxes for which the tax obligation arose before the commencement decision of the personal rehabilitation proceedings are treated as priority personal rehabilitation claims in the proceedings. Priority personal rehabilitation claims must be fully repaid during the personal rehabilitation process. If Mr. A’s father had died before the commencement decision of the personal rehabilitation proceedings, the acquisition tax Mr. A had to bear would have been reflected in the repayment plan as a priority personal rehabilitation claim and fully repaid (which would reduce the repayment amounts to other creditors), and thus there would have been no further tax burden due to the discharge decision. However, since Mr. A’s father died after the approval of the repayment plan, the acquisition tax could not be reflected in the repayment plan.

Modification of the repayment plan refers to changing the terms set in the repayment plan after its approval but before the completion of repayments. Since Mr. A incurred a tax (acquisition tax) burden due to his father’s death after the approval of the repayment plan, he could consider modifying the repayment plan. However, Mr. A cannot resolve the acquisition tax issue through this. Modification of the repayment plan is only possible before the repayments under the plan are completed. Mr. A’s repayments under the plan have already been completed, and furthermore, a discharge decision has been made, so the repayment plan cannot be modified.

A discharge decision does not exempt Mr. A from acquisition tax. Only personal rehabilitation claims are subject to discharge in personal rehabilitation proceedings. The acquisition tax Mr. A must pay arose after the commencement decision of the personal rehabilitation proceedings, so it is not a personal rehabilitation claim. It is either a personal rehabilitation estate claim or a claim that is neither a personal rehabilitation claim nor a personal rehabilitation estate claim. Regardless of the type of claim, Mr. A’s acquisition tax, which is not a personal rehabilitation claim, is not subject to discharge. Ultimately, Mr. A must pay the full acquisition tax resulting from his father’s death.

Although taxes must be collected as they are the source of finance for the state or local governments, Mr. A faces an unexpected situation as in the above case, which may extinguish his hopes for a new start. At least, Mr. A’s recovery to normal daily life will be somewhat delayed. Considering that the personal rehabilitation process aims for rapid social reintegration through debt adjustment, legislative measures regarding taxes incurred after the commencement of personal rehabilitation proceedings seem necessary.

Jeon Dae-gyu, Chief Judge, Seoul Rehabilitation Court