Imposing Income Tax by Deeming a Transfer Is Unlawful

The court has ruled that imposing capital gains tax based solely on the tax authority's determination that a transfer has occurred?regardless of whether the parties themselves intended to transfer ownership?violates the principle of legality in taxation. On May 8, the Seoul High Court Administrative Division 9-3 (Presiding Judges: Kim Hyungbae, Kim Moosin, Kim Dongwan) ruled in favor of plaintiff A in a lawsuit (2024Nu46196) seeking to cancel the imposition of capital gains tax by the head of the Banpo Tax Office in Seoul. Since the Banpo Tax Office did not appeal the loss, the ruling became final as of May 31.

[Facts]

A is the child of B, who passed away in March 1995. Around 2004, A filed a lawsuit against C, B's eldest son, seeking restoration of inheritance rights and return of the statutory reserved portion, and won. The court at the time ordered C to transfer ownership registration for a portion of real estate in Jongno-gu, Seoul, to A and others, and to return the value of other properties for which restitution in kind was impossible.

Photo to aid understanding of the article. Pixabay.

C did not comply with the court's orders to A and the other statutory heirs. Another statutory heir, D, filed for a compulsory auction on real estate registered under C's name. Through this process, A received a distribution of approximately 440 million won, the principal amount confirmed by the civil judgment, from the sale proceeds.

The Banpo Tax Office determined that, when A and others claimed the return of their statutory share from C, some of the real estate subject to value restitution had already been sold to third parties, making restitution in kind impossible. The office considered that A acquired the corresponding share of these properties as of the commencement of inheritance and then transferred it in June 2014, when the distribution was made through compulsory auction. The office calculated the principal amount of approximately 440 million won that A received as the transfer price and imposed capital gains tax of about 150 million won on A.

Disputing this, A argued, "The amount in question was received as value restitution because restitution in kind was impossible, and therefore it cannot be considered subject to capital gains tax." A further claimed, "C had already transferred the relevant real estate, which was part of the inherited property, to third parties long before the court ruling; thus, only C should be considered liable for capital gains tax on the transfer of the properties subject to value restitution."

[First Instance Judgment]

The first instance court accepted A's argument. The court stated, "The Banpo Tax Office's imposition is based on the premise that the distribution of approximately 440 million won to A constitutes a 'transfer' under tax law, but there is nothing that can be regarded as a 'transfer.' A merely exercised the right to claim the return of the infringed statutory share against C, and the civil judgment determined that A would receive the rightful portion not in kind but as value restitution. Accordingly, A received the amount in question through the auction process."

[Appellate Judgment]

The appellate court also found the Banpo Tax Office's imposition unlawful and ruled it should be canceled. The appellate court considered the imposition to constitute double taxation. The court stated, "The timing of the transfer of the 440 million won in question should be considered as either May 1996 or March 2001, when C transferred the properties subject to value restitution to third parties, and the tax authorities would already have imposed capital gains tax on C for this. Therefore, the imposition is unlawful due to double taxation and is void." The court added, "There are no provisions in the Income Tax Act that deem a person to have transferred an asset simply because they acquired money as a result of an asset transfer and corresponding payment, regardless of whether the parties intended a transfer."

Han Suhyeon, Law Times Reporter

※This article is based on content supplied by Law Times.