Whether the voluntary auction of real estate for exercising a mortgage constitutes “transfer of assets,” which are subject to capital gains tax under Articles 4(1)3 and 88(1) of the Income Tax Act (affirmative), and whether the owner of real estate should be deemed the person to whom the capital gains tax belongs even if the heir who has made a qualified acceptance (affirmative)

The voluntary auction of real estate for the execution of a mortgage is an act to realize the content of a security right and constitutes “transfer of assets,” which is subject to capital gains tax under Articles 4(1)3 and 88(1) of the Income Tax Act. In this case, the proceeds from sale, which is capital gains, is reverted to the owner of the real estate. Even if the owner of the real estate succeeds to the rights and obligations of the inheritee comprehensively from the time of commencement of inheritance, it is no different from the inheritor who granted simple approval. Therefore, it is also the same as the person to whom capital gains accrue.

Articles 4(1)3 and 88(1) of the Income Tax Act

Plaintiff 1 and one other (Law Firm, Attorneys Lee Dong-hoon et al., Counsel for the plaintiff-appellant)

Head of Seocho Tax Office

Seoul High Court Decision 2009Nu31641 decided June 4, 2010

All appeals are dismissed. The costs of appeal are assessed against the plaintiffs.

The grounds of appeal are examined.

The voluntary auction of real estate for the execution of a mortgage is an act to realize the contents of a security right and constitutes “transfer of assets,” which is subject to capital gains tax under Articles 4(1)3 and 88(1) of the Income Tax Act. In this case, the proceeds from sale, which is capital gains, is reverted to the owner of the real estate. Even if the owner of the real estate succeeds to the rights and obligations of the inheritee comprehensively from the time of commencement of inheritance, it is no different from those of the heir who granted simple approval. Therefore, it is also the same as the owner of the real estate.

The court below, citing the reasoning of the judgment of the court of first instance, acknowledged the facts as stated in its holding, and determined that the disposition of this case, which imposed capital gains tax on the sale of each real estate of this case by voluntary auction, cannot be deemed unlawful since it violated the substance over form principle, inasmuch as the transferor of each real estate of this case sold in the above voluntary auction procedure was the plaintiff, etc., and the sales price was delivered to the inheritance obligee, and the plaintiff et al. obtained the economic effect of extinction of inheritance obligation due to inheritance obligation due to inheritance, since the sales price was delivered to the inheritance obligee and the inheritance obligation was repaid to the inheritance obligee, and thus, it cannot be deemed that the disposition of this case, which imposed capital gains tax on the plaintiffs as to the sale of each real estate of this case by the above voluntary auction, was unlawful.

In light of the above legal principles and records, the above determination by the court below is just and acceptable. Contrary to the allegations in the grounds of appeal, there were no errors of misapprehending the legal principles as to the principle of substantial taxation or the effect of qualified acceptance

In addition, this case’s capital gains tax obligation is not an inheritance obligation, but a qualified acceptance system does not limit the existence of an obligation, but merely limits the scope of liability. Thus, the Plaintiffs’ qualified acceptance does not limit the scope of the property acquired by inheritance. Therefore, the transfer income tax obligation of this case is an obligation to be borne in the process of disposing of inherited property for the repayment of inherited property, and it constitutes an expense for inheritance stipulated in Article 998-2 of the Civil Act, and there is room to view that it is only a liability within the limit of inherited property with respect to a tax obligation corresponding to inherited expenses under the purport of the qualified acceptance system for the protection of an inheritor. However, it cannot be deemed that the disposition imposing capital gains tax is unlawful by the qualified acceptance of the Plaintiffs as to this case’s obligation itself is limited to the scope of the property acquired by inheritance or exceeding the limit of the above property. The allegation in the grounds of appeal to the contrary purport is rejected.

Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Shin (Presiding Justice)