Taxpayers End up Losing Case Concerning Property Valuation Based on Roadside Land Values


On April 19, the Japanese Supreme Court ruled in a case that the valuation of property according to roadside land price was "grossly inadequate" with regard to the inheritance tax assessment on the real estate involved. Generally, when calculating inheritance taxes, real estate is evaluated based on roadside land prices. However, this case attracted a great deal of attention because of its rejection of the roadside land price method for tax assessment. In what cases is the method deemed to be grossly inadequate?

Case Summary

In this case, the appellants, who were joint heirs, filed an inheritance tax return for the inherited real estate (properties A and B) based on the land tax assessment derived from the roadside land value, as stipulated in the National Tax Agency’s Basic Instructions on Evaluation of Assets.  However, the director of the Sapporo Minami Tax Office stated that it was "grossly inadequate to value the property in accordance with the provisions of the said Instructions," and the taxpayers received a disposition of correction on the grounds that the property should be valued based on the appraisal value in accordance with Paragraph 6 of the said Instructions.

The appellants then sought to have the corrective disposition rescinded. Both the Tokyo District Court and the Tokyo High Court recognized the application of Paragraph 6 of the Instructions, and upheld the appraised value of the government's side. Therefore, the tax filers appealed to the Supreme Court.

*Basic Instructions on Evaluation of Assets, Paragraph 6:
Properties with values that are deemed grossly inadequate when being calculated in accordance with the provisions of these Instructions shall be revalued in accordance with instructions from the Commissioner of the National Tax Agency.

In this case, the decedent purchased Real Estate Property A and Real Estate Property B with bank loans in the period immediately prior to the start of inheritance, and it is thought that this was planned and executed on a dare in the hope that this would reduce the burden of inheritance taxes on the decedent's inheritance, which was expected to occur in the near future. The purchase of the A & B properties, which totaled just under 1.4 billion yen for the two buildings, and the bank borrowing, resulted in the total assessed value of the properties based on roadside land prices being approximately 333.7 million yen, less than a quarter of the purchase price, and the amount of inheritance tax declared was 0 yen due to the application of debt deductions and other deductions.

RE Property A RE Property B
Purchase price 837 million yen 550 million yen
Sale price Not sold. 515 million yen
Roadside land price valuation 240 million yen 133.66 million yen
Appraised value 754 million yen 519 million yen

Important Points

In this decision, the Supreme Court considered the actions of the decedent and the appellants, such as the purchases of the properties and the bank loans with the intention of saving taxes, and approved the adoption of the appraised value based on the application of Paragraph 6 of the Instructions. According to this decision, it appears that it is not enough that the appraised value deviates from the roadside land value, but it is also necessary to focus on the tax-saving intentions and actions of the decedents and other parties involved, in order for Paragraph 6 of the Instructions to be applied.

It was also confirmed that it is common to value real estate at roadside land value, and that it is against the principle of equality to disallow valuations at roadside land value only in specific cases.  However, it was also indicated that it would be unfair to allow tax avoidance, and that this case does not violate the principle of equality.

It was hoped that the ruling would provide clear criteria for the application of Paragraph 6 of the Instructions, but unfortunately, there was no mention of any specific criteria. If a clear standard were to be established, tax reductions up to the point where the standard is met would be allowed. In the end, it remains unclear how much is safe and how much is not, and overall it must be said that this case was a victory for the National Tax Agency.

Special Provisions for Small Assets Other than Those for Tax-Saving Purposes Will Continue to Apply.


Since tax saving and tax avoidance activities using small depreciable assets such as drones and scaffolding used at construction sites, etc., have been rampant, in order to contain tax saving schemes using these assets, the 2022 tax reform excludes "assets used for lending" from the assets eligible for the system, etc., for inclusion in deductible expenses of the acquisition costs of small depreciable assets. However, it seems that the same system can be applied depending on the purpose of the asset(s).

Details of Revision

In response to the prevalence of tax-saving schemes in which companies acquire large quantities of small-value assets (drones, construction scaffolding, LEDs, etc.) that they do not use in their own businesses, and then lease these acquired assets to other companies in order to reduce their profits, the 2022 tax reform revised the scope of assets eligible for three systems, including the system for deducting the acquisition costs of small-value depreciable assets as taxable expenses.

  • A system that allows for the inclusion in deductible expenses of the acquisition costs of depreciable assets with small acquisition costs (a system that allows immediate depreciation for depreciable assets with an acquisition cost of less than 100,000 yen);
  • Lump-sum depreciation system (a system that allows depreciation of depreciable assets with an acquisition cost of less than 200,000 yen, in 1/3 increments);
  • Special provisions for inclusion in deductible expenses of the acquisition costs of small depreciable assets for small and medium-sized enterprises (a system that allows immediate depreciation of depreciable assets with an acquisition cost of less than 300,000 yen).

Specifically, it appears that loans made in the ordinary course of business activities will fall under the category of "loans made as a main business”, and will continue to be eligible for each of the three systems listed above. Only loans made for the purpose of tax reduction, tax avoidance, etc., would be exempted from the three systems listed.

In addition, for example, a case where a parent company purchases assets and lends them to a subsidiary for reasons such as the subsidiary lacking funds is also considered a "loan made as a main business" and is thus eligible for the respective systems.

Avoiding the Appearance that the Purpose is to Save Taxes, Avoid Taxes, etc.

As stated above, loans that are not made for the purpose of tax reduction, tax avoidance, etc., and are made in the ordinary course of business activities, fall under the category of "loans made as a main business”.

Therefore, in order to use each of the systems listed above, it is necessary to avoid the misunderstanding that the purpose is to save taxes, avoid taxes, etc.

It would be a waste if a loan made in the course of normal business activities is considered to be for the purpose of tax reduction/tax avoidance, and ends up being deemed ineligible for the program.

When lending assets to other companies using each of the prior-listed systems, etc., be sure to document matters such as why it was necessary to conduct such a transaction.

Clarification on Handling of Subsidies Received after the Acquisition of Fixed Assets


The outbreak of new coronavirus infections has increased the focus on subsidies and grants. Even if your company has received a subsidy, you will not be able to benefit much from it if you are immediately subject to corporate tax on the full amount of the subsidy. Some subsidies allow for compressed bookkeeping, so this should be considered.

Business Restructuring Subsidies Eligible for Compressed Bookkeeping

Basically, corporate tax is imposed on subsidies and grants received by corporations from the national and local governments. Just because they are subsidies or grants does not mean that they are exempt from taxation.

Also, the timing for recording income from subsidies and grants is the "fiscal year in which the right to receive the revenue is determined" - specifically, the "fiscal year that includes the date of the subsidy/grant payment decision”.

In the case of business restructuring subsidies, although the nature of the subsidy is to cover expenses, the deposit of the subsidy amount equivalent to the necessary expenses is not made on the date of the decision to provide the subsidy. The secretariat will confirm the appropriateness of the payment upon submission of receipts for capital investment and other expenses in the subsidy project performance report, and the payment and settlement will be made after the subsidy amount is finalized.

Therefore, in the event of a discrepancy in fiscal periods between the date of the payment decision and the date of the finalization of the subsidy/grant amount, the timing for recording revenue from the business restructuring subsidy will be the fiscal year which includes the date of the finalization of the subsidy amount.

Please note that if expenses are paid in fiscal year X and the subsidy/grant amount is finalized in fiscal year X+1, the entire subsidy amount will be recorded as the revenue in fiscal year X+1 and constitute taxable income for corporate income tax purposes.

What is Compressed Bookkeeping?

Compressed bookkeeping is a system for deferring taxation of the revenue from grants to future years.

In principle, the entire amount of a subsidy is subject to corporate taxation as miscellaneous income on the date of the payment determination. However, by using compressed bookkeeping/the accelerated depreciation method, your company can avoid corporate taxation "in the fiscal year in which the subsidy is received”. In the long run, the amount of tax payable will be the same, but you can avoid a situation where your company is subject to corporate tax on the entire amount of the subsidy immediately after receiving it.

However, in principle, the compressed bookkeeping can only be utilized for acquisitions, etc., of fixed assets. Please be aware that if your company has received a subsidy but has not acquired any fixed assets, you may not be able to apply such bookkeeping.

Even If There Is a Gap between Fiscal Periods, Compressed Bookkeeping Can Be Applied

When subsidies are received and fixed assets are acquired during a fiscal year, compressed bookkeeping can be applied in the fiscal year in which it is determined that the subsidies will not be required to be refunded.

It has been clarified in the law that if the subject fixed assets were acquired in the fiscal year prior to the fiscal year in which the subsidy payment decision date belongs, the fixed assets are also subject to compressed bookkeeping. The same treatment had been permitted in the past, but this amendment clarifies the matter.

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