Case on the Gift Tax on Matrimonial Property Distribution

[9-2 KCCR 454, 96Hun-Ba14, October 30, 1997]

A. Background of the Case

In this case, the Constitutional Court ruled that the provision of the former Inheritance Tax Act that imposed a gift tax on property received from divorce was unconstitutional.

Article 29-2 Section 1 Item 1 of the former Inheritance Tax Act (prior to revision by Act No. 4805 on December 22, 1994) imposes a gift tax on a person who has acquired property due to another person's donation and has a domestic address at the time of the donation. It also provides that a divorcee, who acquires properties exceeding a certain amount from the other spouse through property distribution pursuant to Article 839-2 or Article 843 of the Civil Act, is deemed to have acquired them from another person's donation and is therefore liable for a gift tax.

The petitioner divorced her husband by mutual consent, transferred her title to some realties to the husband while applying for transfer of title to other real properties to herself on the ground of marital property distribution. The tax office director levied a gift tax on the transferred property. The petitioner sought the nullification of the administrative action and requested constitutional review of Article 29-2 Section 1 Item 1 of the Inheritance Tax Act which formed the basis of that action. When the presiding court denied the motion, the complainant filed a constitutional complaint.

B. Summary of the Decision

After examining the nature of property distribution in a divorce proceeding, the Court struck down the part of Article 29-2 Section 1 Item 1 of the former Tax Act that levies a gift tax on such transfer from the other spouse, for the following reasons.

Property distribution upon divorce is by nature a settlement of accounts on the properties communally owned by the husband and wife. The property distributed to a spouse has already belonged to that spouse before such distribution. Transfer of title in this case is nothing more than the partition of a communally owned property or realization of that spouse's potential interest in the property.

Such transfer is in no way equivalent to donation, in which one acquires new property without compensation. Rather, it takes on the nature of the discharge of one's duty of support for his or her former spouse. The Civil Act already exempts from taxation spouse-to-spouse transfer of medical costs, living expenses or educational costs that are considered to be common necessities. There is no basis for imposing a gift tax on property distribution upon divorce.

Even from a policy perspective, although property distribution upon divorce can be deemed a taxable transfer on some policy grounds if it is used for tax evasion, it is inconceivable for a regular couple to contemplate a divorce for such purpose. Furthermore, any property distribution in a divorce proceeding is different in essence from a gift, allowing no reason, policy-wise, to treat it as one. Therefore, the above provision violates the principle of substantial statutory taxation.

From the perspective of fairness in taxation, divorce and the death of a spouse differ in their property relations and personal relations and therefore, property transfer in the former situation must be treated differently from the latter. Thus, the above provision which imposes a gift tax on property distribution upon divorce violates the principle of equal taxation.

Justice Lee Young-Mo dissented, as follows.

The legislature set the per-person deduction very high for properties obtained through a divorce proceeding and thereby levies on a sector of the people that have exorbitant amounts of properties to be distributed. Therefore, the provision can be interpreted as allowing tax-free property distribution below the level set by the deduction and also allowing exemption from taxation for the part of property that exceeds that level when the acquiring spouse can demonstrate his or her contribution to its formation as a special circumstance. Therefore, the provision is within the broad scope of legislative discretion.

C. Significance of the Decision and Aftermath of the Case

Property distribution upon divorce had been previously advocated for as a theory of legislation. Later it was legislated as Article 839-2 of the Civil Act, especially to protect divorced women, when the Act was amended on January 13,1990, by Act No.4199. The Court’s decision was highly welcomed by women’s groups in Korea.

Nevertheless, it was criticized that the content of Article 31 Section 2 of the Inheritance Tax and Gift Tax Act wholly amended by Act No. 5193 on December 30, 1996, remained almost the same as Article 29-2 Section 1 Item 1 of the former act.

On December 28, 1998, the National Assembly settled the problem by repealing

Article 31 Section 2 of the Inheritance Tax and Gift Tax Act in the amendment by Act No. 5582