This article explains the Supreme Court judgment of April 19, 2022.It addresses that case’s facts and reasoning. Application to another inheritance requires checking the laws and circulars applicable at that time and the individual circumstances.

What Was the Case?

What value should inherited real estate have for inheritance tax? This case concerned whether the tax office could use a real estate appraiser’s valuation where it substantially exceeded the value calculated under the National Tax Agency’s Basic Circular on Property Valuation, referred to here as the “Valuation Circular,” following the judgment.

The Supreme Court upheld appraisal-based taxation under the case’s circumstances and dismissed the heirs’ appeal. Crucially, it did not rely solely on the large valuation gap; it expressly said that a large gap alone was insufficient.

What Was Disputed?

On January 30, 2009, the deceased borrowed ¥630 million from a trust bank and bought the first property that day for ¥837 million. In December that year, the deceased borrowed ¥47 million from one co-heir and ¥378 million from the trust bank and bought a second property for ¥550 million. After the deceased died in June 2012, one heir acquired the properties under the will.

The heirs reported Circular values of ¥200,041,474 for the first property and ¥133,664,767 for the second. The total taxable value was ¥28,261,000, resulting in zero inheritance tax after the basic exemption.

The NTA Commissioner directed valuation by another reasonable method under paragraph 6 of the Circular, which permits Commissioner-directed valuation where the ordinary method is markedly inappropriate. Using appraisals of ¥754 million and ¥519 million respectively, the tax office reassessed total taxable value at ¥888,749,000 and total inheritance tax at ¥240,498,600, and imposed underreporting penalties.

The heirs sought revocation. Two issues arose: whether taxation above Circular values violated Article 22 of the Inheritance Tax Act and whether it violated the equality principle requiring similar treatment of taxpayers. Article 22 was the only statutory provision referenced in this case.

What Did the Court Say?

Where circumstances make uniform valuation under the Basic Circular on Property Valuation contrary to substantive fairness in tax burdens, valuing inherited property above its Circular value does not violate equality as a general principle of tax law.

In other words, applying the same Circular calculation to everyone can itself undermine fairness. Only where such circumstances exist does a higher valuation avoid violating equality. Conversely, singling out a taxpayer for a higher valuation without such circumstances is unlawful. The judgment states that general rule first.

How Does Article 22’s “Fair Value” Relate to the Circular?

Article 22 requires property acquired by inheritance, etc. to be valued at fair value upon acquisition. The Court interpreted fair value as objective exchange value. The law thus requires actual value, not the Circular formula itself.

The Court described the Circular as an instruction from a superior administrative body to subordinate bodies on performing their duties, finding no basis for direct legal force against the public. It drew this conclusion:

The value included in the inheritance tax base does not violate Article 22 so long as it does not exceed fair value as objective exchange value at acquisition, regardless of whether it exceeds the value calculated under the Circular.

The appraisals here were accepted as objective exchange values. Their exceeding Circular values therefore did not itself violate Article 22. The role of statutory wording in determining the outcome is shared with The Case Disputing “Domicile” for Gift Tax.

Why Can Departing from the Circular Still Be Unlawful?

Does compliance with Article 22 mean the tax office may always substitute an appraisal? The Court said no. Equality requires persons in similar circumstances to be treated similarly in applying tax law.

The Circular establishes general valuation methods, and uniform administrative use of them is publicly known. Applying a different measure to one person therefore raises equality concerns. The Court held that singling out a taxpayer for a value above the Circular value is unlawful absent a reasonable justification, even if that value does not exceed objective exchange value.

Circular valuation is therefore the rule and a higher valuation the exception. The exception is permitted only where uniform Circular valuation would undermine substantive fairness in tax burdens.

What Circumstances Justified the Exception Here?

The Court acknowledged the substantial gap between Circular and appraisal values but expressly said that this alone did not establish the required circumstances.

It identified the following circumstances, (1) and (2).

Valuing inherited real estate above its Circular value does not violate equality as a general tax-law principle under the circumstances stated in the judgment, including (1) and (2) below.

(1) The deceased bought the properties with borrowed funds. Without those purchases and borrowings, total taxable value would have exceeded ¥600 million; because of them, Circular valuation reduced it to ¥28,261,000 and the basic exemption reduced total inheritance tax to zero.

The deceased and appellants knowingly planned and implemented the purchases and borrowings expecting them to reduce or eliminate the appellants’ inheritance tax on the deceased’s anticipated near-term death; they therefore acted with tax reduction among their purposes.

The first factor was the magnitude of the reduction: a taxable value above ¥600 million became ¥28,261,000 and tax became zero. The second was that the parties knowingly planned and implemented the transactions expecting that result. Together, the Court found, uniform Circular valuation would create an intolerable imbalance with taxpayers who did not or could not undertake similar purchases and borrowings, contrary to substantive fairness.

The Court also recognized that the transactions were part of succession planning for the deceased and the company the deceased managed. It nevertheless reached the same conclusion. Its focus on how a regime is used, rather than merely transaction form, is illuminated by comparison with The Case Concerning Abuse of the Foreign Tax Credit.

Points that require care in practice

• A large gap between Circular value and fair value alone is insufficient. The judgment expressly rejects that proposition.
• The Court relied on both the magnitude of tax reduction and the parties’ intent. Its conclusion cannot be transplanted elsewhere using only one factor.
• The judgment found no basis for the Circular’s direct legal force against the public. Filing in accordance with it alone does not guarantee the outcome.
• The Court also held that a higher valuation is unlawful without reasonable justification. The tax authority must establish the relevant circumstances.
• Article 22 was the only statutory provision referenced. The decision was not based on a specific anti-avoidance rule.
• The ruling rests on the particular facts found. It does not say that debt-financed real estate acquisitions are generally problematic.
• Inheritance tax and property valuation also feature in annual tax reforms. Recent developments are outlined in The FY2026 Tax Reform Outline our article.

Sources

• Courts: Case Details 2020 (Gyo-Hi) No. 283
• Full Judgment (PDF)Courts