Case on the Land Excess-Profits Tax Act

[6-2 KCCR 64, 92Hun-Ba49 et al., July 29, 1994]

A. Background of the Case

Since 1989, a vicious cycle of land price increases and land speculation worsened the wealth gap, which prompted the legislation of the Land Excess-Profits Tax Act. In this case, the Court found the entire Act to be nonconforming to the Constitution.

Article 8 Section 1 of the Land Excess-Profits Tax Act (amended by Act No. 4563, June 11, 1993) identifies lands annexed to unlicensed buildings (Item 4 Sub-Item (c)), rental properties (Item 13), etc. as the objects of taxation; Section 10 describes the method of calculating the tax. Article 11 prescribes the standard for deducing a tax basis from unrealized gains and for assigning the standard market land prices needed for such assessment. Article 12 stipulates a 50% uniform rate for the land excess-profits tax.

When the tax office director imposed land excess-profits tax according to the Land Excess-Profits Tax Act, the complainants filed for judicial review of administrative action at the Seoul High Court, demanding nullification of the tax. They also requested constitutional review of Articles 8, 11 and 12 of the Act on the grounds that those provisions violated the Constitution. When this was rejected by the Seoul High Court, they filed a constitutional complaint.

B. Summary of the Decision

The Court found the Land Excess-Profits Tax Act to be nonconforming to the Constitution (hereinafter referred to as the “First Decision”).

According to the standard of determining a tax basis in Article 11 of the Act, standard public land prices have so great a consequence on the existence and the scope of people's tax obligations that their determination is not adequate for blanket delegation to lower laws. They should be outlined at least generally in the statutory provisions. Article 11 Section 2 completely entrusts presidential decrees with the determination of standard public land prices, thereby violating the principle of statutory taxation and the rule against blanket delegation. However, lest the rash invalidation of the provisions cause a major confusion in

tax administration, it would be appropriate to demand an immediate amendment instead of declaring the provision unconstitutional.

Furthermore, for the method of land assessment prescribed in the above regulation, there is a structural lack of preparedness, such as the narrow choice of standard tracts of land, and lower-level administrative employees having to assess the land prices for each tract of land. This may lead to taxation on the principal, not the profits thereof, and may violate the property right of the people. This calls for an amendment of the rules related to the determination of standard public land prices and an improvement on the administration thereof.

Also, in the case of the long-term ownership of land, there are no provisions that take price fluctuations over the entire period of ownership into account. As a result, when a piece of land undergoes the repeated cycle of appreciation and depreciation over a long period of time, the owner may be taxed for short-term appreciation when there is no increase in comparison to the price when the taxation period commenced. The land excess-profits tax thus calculated may engulf the principal, contravening its nature as income tax and thus violating Article 23 of the Constitution.

When applied to unrealized gains that are by nature difficult to be measured objectively, the uniform rate of 50% is so high that it may constitute tax on artificial gains and again engulf the principal. This violates the constitutional right to property, and undermines substantive equality among taxpayers with different income levels.

Article 8 of the Land Excess-Profits Tax Act, which defines the scope of “unused lands” subject to taxation, decides whether to impose land excess-profits tax solely depending on whether a building stands on the land, regardless of whether such land is within the ownership limit prescribed by the Ceilings on the Ownership of Housing Sites Act. Thus, the aforementioned provision is misaligned with the Ceilings on the Ownership of Housing Sites Act.

Further, the Land Excess-Profits Tax Act includes in principle all rental lands under the taxable “unused lands” and yet exempts such lands “designated by Presidential Decree” without specifying any criteria or scope. Accordingly, the existence of a tax obligation is determined by an administrative authority, which is in conflict with the constitutional rule of delegation and the principle of statutory taxation provided in Article 59 of the Constitution.

Meanwhile, the land excess-profits tax is by nature a prepayment of the transfer profit tax, since the former is a kind of income tax like the latter and they completely overlap with parts of the objects of taxation. Yet, the failure to allow the deduction of the entire amount of the excess land value tax from the

transfer profit tax violates the principle of taxation on real worth, a component of the constitutional principle of statutory taxation.

As seen above, the Land Excess-Profits Tax Act must be amended since some parts violate the Constitution while others do not conform to the Constitution. However, the provisions deemed unconstitutional include Article 11 Section 2 on land prices and Article 12 on tax rates, which are the basic elements of the entire system. Striking down any one of them will incapacitate the entire statute. We have no choice but to strike down the Act in its entirety pursuant to the proviso of Article 45 of the Constitutional Court Act.

Nevertheless, the above statute is intricately related in content and structure to other tax laws like the Restitution of Development Gains Act. Its immediate invalidation would therefore create confusion and a vacuum in law. The Court hereby delivers a decision of nonconformity to the Constitution, suspending its application until the legislature amends or abolishes the Act in line with the grounds for unconstitutionality mentioned above, but temporarily retaining its formal existence.

C. Aftermath of the Case

Some acclaimed the Court for examining the problem not from a policy perspective but from a constitutional standard of equal taxation (Kim Sung-Soo,Was the Court’s Decision of Nonconformity Mistaken?). Yet some criticized that the Court focused on protecting the property rights of the privileged class while neglecting substantive equality and the balanced growth of the entire public (Seo Won-Woo,Recognizing Land as Public Property).

Following the decision, the National Assembly amended the Land Excess-Profits Tax Act through Act No. 4807 on December 22, 1994.

Article 8 of the Act was revised to exclude from land excess-profits taxation rental lands with improvements upon them up to the permissible limit of annexation. The new provision expanded the scope of exclusion for unused lands owned by those who do not own houses from 60 or 80pyeong(3.3 m2) per household per lot to 200pyeong, to align it with the limit set up by the Ceilings on the Ownership of Housing Sites Act.

Article 11 was revised to specify that the publicly noticed land values determined under the Public Notice of Values and Appraisal of Lands, etc. Act will be used as the standard public land price for each tract of land. It was also revised so that, if the price of land which was subject to land excess-profits tax in the preceding fiscal period falls, the amount of depreciation will be deducted

from the tax base for the subsequent fiscal period, in order to prevent erosion of the principal.

Article 12 was revised to apply 30% to a tax basis equal to or less than 10 million won and 50% to a tax basis exceeding 10 million won.

However, Article 2 of the Addenda of the revised Act stipulated, "This statute shall apply to land excess-profits accumulated after it becomes effective," thereby failing to provide the grounds for applying the revised law in this case. After the decision, the Court, on July 27, 1995, in 93Hun-Ba1 et al. partly dismissed and partly upheld provisions of the former Land Excess-Profits Tax Act. The First Decision had found the entire Land Excess-Profits Tax Act to be nonconforming to the Constitution, and the Act was thus entirely revoked. In response to the claim that the First Decision had found the entire Land Excess-Profits Tax Act to be nonconforming to the Constitution and the Act was thus entirely revoked and could not be applied to this case, the Court declared that the reason the First Decision had to declare the Act unconstitutional or nonconforming to the Constitution was because certain provisions that formed the basis of the Act were unconstitutional; if they lost effect, this would render the entire Land Excess-Profits Tax Act unenforceable.

As the decision had not declared that all the provisions of the former Land Excess-Profits Tax Act, or the systemper se, was unconstitutional, the claims against the former provisions of the Act, revised after the nonconformity decision and not applicable in this case, were dismissed, while other provisions were recognized as eligible for a review on merits. For these provisions, the Court held that Sub-Items (b) and (c) of Article 8 Section 1 Item 4, the phrase "…… after acquisition" of Article 8 Section 3, Article 8 Section 5, and Article 22 of the former Act do not violate the Constitution (hereinafter referred to as the “Second Decision”). The grounds for this decision were that taxation was necessary in certain cases to prevent the hasty construction of temporary makeshift buildings on unused land for the purpose of tax evasion; it was reasonable to distinguish between cases where land was acquired after being restricted in usage by law, and cases where the acquisition preceded the restriction; and that the “payment in kind” or “request for sale” systems for taxation on excess land was intended for taxpayer convenience, not intended to impose any duty. Further, the Court held that in this original case or parallel cases that would be retroactively subject to the nonconformity decision, the statutes amended by the legislature after the aforementioned decision should apply.

On the Court’s First Decision, the Supreme Court held that until the former Act is declared unconstitutional, it is objectively unclear whether the Act is

unconstitutional or not. Therefore, since any defect in the former Act becomes a reason for merely cancelling the administrative action, the land excess-profits tax imposed under the former Act does not automatically become void (96Nu1689). Cases were settled by the former Land Excess-Profits Tax Act before the Second Decision.

However, after the Second Decision by the Court, the revised Act was applied on the original case, etc. in line with the Court’s decision that the revised Act would apply retroactively.

The Land Excess-Profits Tax Act was revoked by Act No. 5586 on December 28, 1998, as its original purpose of controlling real estate speculation was now being fulfilled by supplementary measures such as the real-name registration system, and as land prices were also becoming stabilized.