Seoul court lets a tax office refuse 8.36 billion won of shares in a loss-making family firm as inheritance tax

At about 4.65 million won a share ^[4], the 1,797 shares on offer were worth roughly 8.36 billion won ^[14]. That is about 97% of the tax the heir wanted to settle in kind ^[15]. The valuation set the size of the estate's bill. Whether the state would accept the shares as payment was a separate test in the former enforcement decree of the Inheritance Tax and Gift Tax Act: was the property suitable for management or disposal ^[5].

The heir answered that test with the balance sheet. A company with substantial asset holdings, the heir argued, could not have shares that were hard to manage or dispose of, even after two years in the red ^[6]. The court looked at operating results instead. "The company posted continuous operating losses in fiscal 2019 and fiscal 2020," it said ^[9]. "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" ^[10]. It also relied on the Korea Asset Management Corporation (KAMCO), which reviewed the offer alongside the tax office. KAMCO concluded that the company's net asset value was likely to keep declining, given its financial condition and past earnings structure ^[8].

Ownership also counted against the shares. Every share in the company is held by the heir's siblings and other family members ^[11]. "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 ^[12]. "Considering the shareholder composition, the disposal of these shares, which constitute only a minority stake, cannot be deemed easy" ^[13]. The block on offer was about 37% of the estate's 4,850 shares ^[16], and the estate's whole holding was worth roughly 22.55 billion won at the same price ^[17]. The report does not give the company's total share count, so the size of the stake the state would have held is unknown.

The tax office accepted the Gangnam real estate from the same offer ^[5]. It declined to make the state a minority holder beside one family, in a company whose net assets KAMCO expected to shrink ^[8][11]. The heir's procedural challenge failed too. The office had sent a notice extending its decision deadline by registered mail, and the court said: "Absent special circumstances such as the mail being returned, it is reasonable to conclude that it was delivered to A around that time" ^[7].

The provision the court applied comes from the former version of the enforcement decree ^[5], so applications under the current text may be judged on different wording. This case also had both of the facts the court weighed against the heir: losses it called structural, and a minority block in a family firm ^[10][13]. A controlling stake, or a company with a single loss year, could be decided the other way. I think the ruling will hold for the common case, an heir with a minority slice of a family company that has lost money two years running. A tax office can check both the loss record and the shareholder register from what is already on file. If a later case accepts shares in an asset-rich, loss-making company as payment, the asset argument still works.