Seeking to Pay Inheritance Tax with Shares of a Loss-Making Company... Court Rules "Rejection of Payment in Kind Is Legal"

Heir: "High Asset Value Despite Losses"


Court: "Structural Losses... Difficult to Sell Shares"

An heir who attempted to pay inheritance tax using unlisted shares filed a lawsuit against the tax authorities for rejecting payment in kind, citing the company’s ongoing losses—but ultimately lost the case. The court determined that the company had accumulated losses and that it would be difficult for the state to dispose of the shares even if it received them.

According to the legal community on October 4, the Administrative Division 4 of the Seoul Administrative Court (Presiding Judge Kim Youngmin) ruled against the plaintiff in a lawsuit filed by heir A against the head of the Seocho Tax Office to cancel the rejection of the payment in kind. Payment in kind is a system that allows taxes to be paid with assets such as shares or real estate instead of cash.

Previously, in February 2023, Mr. A inherited 4,850 shares of a real estate leasing company and real estate in Gangnam-gu, Seoul. In August of the same year, Mr. A applied to pay about 8,588,950,000 won of the inheritance tax with 1,797 of the inherited shares and real estate. The shares submitted for payment in kind were valued at approximately 8,368,950,000 won, and the real estate at 220,000,000 won.

The tax authorities approved payment in kind for the real estate but rejected the application for the shares because the issuing company had operated at a loss for two years prior to the application. At that time, the Enforcement Decree of the Inheritance and Gift Tax Act specified that shares in a company that had recorded losses within the previous two years were subject to rejection for payment in kind.

However, the Enforcement Decree allowed exceptions if both the tax office and the Korea Asset Management Corporation jointly investigated and found the application appropriate. In this case, though, the company’s shares were also deemed inappropriate during the investigation. The Korea Asset Management Corporation determined that the losses had become entrenched, so the company’s net asset value was expected to continue declining. Mr. A filed a lawsuit challenging the rejection of payment in kind.

In court, Mr. A argued the company’s asset value, insisting that even though there were losses, the high value of the assets was a valid reason not to reject the payment in kind. He further pointed out that the shares were appraised at a high value for the taxation, but the examination for payment in kind only focused on deficits. He also argued that reducing excessive executive compensation would resolve the losses.

However, the court found that the incurred losses were “not temporary but structural.” In fact, the company had recorded an operating loss of approximately 207,300,000 won in the 2019 fiscal year and about 139,430,000 won in the 2020 fiscal year, in addition to the losses during the two years before the payment in kind application. The court stated, “Given the continuing losses and the entrenched deficit structure, the net asset value is likely to keep declining,” and added, “Simply expressing an intention to reduce executive compensation is not sufficient to guarantee actual improvement.”

The court also did not recognize the high appraised value of the shares as grounds for allowing payment in kind, explaining that the value of the assets and their suitability to be received, managed, or disposed of by the state for tax payment are separate matters. The court further explained, “Since all shares of the company are held by family members, the stake the state would acquire would be minor and thus difficult to sell.”

This content was produced with the assistance of AI translation services.