The Supreme Court has ruled that a value derived from a retroactive appraisal can be recognized only when there are no special circumstances involving price fluctuations, when calculating inheritance and gift taxes on small non-residential properties such as so-called "small buildings."
According to the legal community Wednesday, the Supreme Court's Second Division (presiding Justice Kwon Young-joon) recently upheld a lower court ruling in favor of the plaintiffs in a final appeal, in which the children of couple A filed a lawsuit against the head of the Yangcheon Tax Office and others seeking to cancel a gift tax assessment.
The plaintiffs received land and buildings in the Seongnam area of Gyeonggi Province from their parents in July 2019. In October that year, they calculated the value of the real estate at 3.95 billion won and reported and paid gift tax. However, the tax authorities commissioned appraisals from two appraisal firms in April the following year, and imposed additional gift tax based on the average of the appraised values from the two firms, 6.19 billion won, which they regarded as the market price. The plaintiffs filed the lawsuit, arguing that the tax authorities directly commissioning appraisal institutions to generate appraised values constituted an abuse of the tax investigation authority, and that an appraised value generated nine months after the gift date failed to reflect appropriate value and therefore could not be recognized as the market price.
Under the enforcement decree of the Inheritance Tax and Gift Tax Act, revised in February 2019, tax authorities may conduct retroactive appraisals when imposing inheritance and gift taxes on small buildings.
The courts of first and second instance sided with the plaintiffs. They found that the appraised value was difficult to regard as the market price of the real estate, given that there had been a considerable degree of price fluctuation between the gift date and the base date for calculating the appraised value.
The Supreme Court maintained the lower court's judgment. While stating that retroactive appraisal is permitted under the enforcement decree of the Inheritance Tax and Gift Tax Act, it held that the qualifying clause requiring "no special circumstances involving price fluctuations" must be interpreted strictly. The court ruled that the tax authorities must prove that there were no special circumstances involving price fluctuations from the gift date until the appraisal was conducted, and that an appraised value for which this cannot be proven cannot be recognized as the market price.
