A court has ruled that tax authorities may refuse to accept unlisted shares as payment of inheritance tax when the company has posted losses for years, even if the shares are backed by valuable assets, because the stock would be difficult to manage or dispose of.
The Seoul Administrative Court's Fourth Administrative Division, presided over by Chief Judge Kim Young-min, ruled in August against a plaintiff identified as A, who had sued the head of the Seocho District Tax Office seeking to overturn the refusal, legal sources said on the 4th.
A is an heir of the deceased, identified as B, and in August 2023 filed an inheritance tax return covering B's estate, which included 4,850 shares in a company identified as C and real estate in Seoul's Gangnam district.
The dispute began when A asked the tax office to accept 1,797 shares in C and the real estate in lieu of 8.59 billion won of the inheritance tax owed. The shares were valued at about 4.65 million won each at the time.
The tax office approved payment in kind for the real estate but rejected the shares. It said the company had posted losses in the two years before the application, making the stock "property unsuitable for management or disposal" under the former enforcement decree of the Inheritance Tax and Gift Tax Act.
A filed an administrative suit after an objection and a petition to the Tax Tribunal were both dismissed. A argued the refusal was unlawful because the tax office issued it after the statutory deadline for deciding on payment-in-kind applications. A also said the shares could not be considered difficult to manage or dispose of, given the company's substantial asset holdings, even if it had been in the red for two years.
The court rejected both arguments. It first found no problem with the deadline, noting that the tax office had sent a notice of extension by registered mail to A's address. "Absent special circumstances such as the mail being returned, it is reasonable to conclude that it was delivered to A around that time," the court said.
The court also found the unlisted shares unsuitable for management or disposal. It cited an assessment by the Korea Asset Management Corporation, which reviewed the suitability of the proposed payment alongside the tax office and concluded that the company's net asset value was likely to keep declining, based on its financial condition and past earnings structure.
"The company posted continuous operating losses in fiscal 2019 and fiscal 2020," the court said. "The company's losses are not temporary but structural, which can serve as strong grounds for finding that the shares are unsuitable for management or disposal." The court also noted that all of the company's shares are held by A's siblings and other family members. "Even if the Republic of Korea were to acquire the shares through approval of payment in kind, this would amount to no more than a minority stake," the court said. "Considering the shareholder composition, the disposal of these shares, which constitute only a minority stake, cannot be deemed easy."
