Skip to main content



Supreme Court Ruling on Double Taxation

Toshiaki Kouno
Senior Associate

August 25, 2010 (Wednesday)

Supreme Court Ruling on Double Taxation

“In this world nothing can be said to be certain, except death and taxes.” These are the words of Benjamin Franklin, the famous politician and physicist who helped found the United States.

Death and taxes, from which we are bound to never escape, are intertwined. The inheritance tax, often a point of concern when relatives or family members pass away, is a typical example. Income tax and gift tax, however, can also factor in the equation regarding inheritance and business succession, in some cases leading to thorny tax situations.

The Supreme Court added a new twist on July 6, 2010. Noting a double taxation of inheritance tax and income tax when life insurance claims are received through pension payment, the Supreme Court ruled to stop levying income tax.

A simple explanation of the content of the ruling and confirmed facts is as follows. A wife’s husband died, creating a life insurance claim of 23 million yen. The wife decided to receive this amount in annual installments of 2.3 million yen over 10 years. Inheritance tax at a base of 13.8 million yen (23 million x 60% = 13.8 million) was levied at this time. In addition, a 10-year income tax was also levied on the tax base after necessary expenses (amount equivalent to paid insurance premiums) were deducted from the 2.3 million yen annual pension payments. The Supreme Court ruled that the 13.8 million yen inheritance tax base was a double taxation of inheritance tax and income tax.

Is double taxation only in life insurance claims?

A decade ago it was said to be impossible to win an administrative lawsuit against the government. There are past examples, however, of rulings against traditional practices even concerning inheritance taxation.

When assets acquired from inheritance (real estate, golf course membership, and so forth) are transferred, the taxation base for income tax is the amount after acquisition costs (purchase price, registration fees at the time of purchase, and so forth) and transfer-related costs (commission paid to real estate agents, and so forth) are deducted from the transfer value of the assets (sales amount). Is it possible, then, to include the registration fees in the acquisition costs at the time of inheritance? Registration fees at the time of inheritance were not recognized as acquisition costs in the past, but about six years ago the Supreme Court ruled that such fees are included.

(Reference: National Tax Agency, “Regarding the Acquisition Costs of Transfer Income When Transferring Assets Acquired by Gift or Inheritance.”)

Unlike six years ago, the Supreme Court’s recent ruling made headlines because these life insurance contracts number in the millions at least, meaning many policyholders will be affected.

The impact of the ruling doesn’t stop there: the same problem is mirrored in real estate and unlisted stocks. For example, if an offspring inherits land valued at the time of inheritance at 15 million yen from the father (who originally purchased it for 10 million yen), and then sells the land for 50 million yen, how are the inheritance and income taxes levied?

Currently, in addition to an inheritance tax at a base of 15 million yen as valued at the time of inheritance, an income tax at a base of 40 million yen (after deducting 10 million yen from 50 million yen) would also be levied. If applying the Supreme Court’s recent ruling as is, the 15 million yen valuation at the time of inheritance should be deemed double taxation. (Regarding listed stocks, there are cases where the market value at the time of inheritance transfer is recognized as an acquisition cost. The valuation of the inheritance tax of listed stocks is oftentimes lower than the market value at the time of transfer—in these cases, a similar problem does not emerge.)

Impact of double taxation, and discussion on the tax system

Inheritance tax is thought of as a high tax, but as noted in the April 10, 2009 article, “Regarding Gift Tax Cuts” this understanding is incorrect. How taxation influences people's behavior should be the focus of discussion, not the amount of tax. Compared to cases where offspring inherit and continue businesses, in particular the sale of business assets such as unlisted stock to third-parties creates “double taxation.” This “double taxation” impedes the succession of business to capable third-parties, therefore potentially damaging the productivity of society as a whole.

Given this situation, the impact of the Supreme Court's ruling extends beyond the issue of life insurance. Regarding the business succession tax system, this ruling should be used as an opportunity to consider in an integrated fashion not only the inheritance and gift tax but other taxes such as income tax as well.

In addition, while there is a tendency to focus on tax rates in this discussion, the issue that has emerged from this ruling is the tax base. How to view this issue is an important topic moving forward.

Recent elections have left the ruling party as the minority in the Upper House, creating another “twisted Diet.” Many point to the discussion on consumption tax as one reason behind the Democratic Party of Japan's defeat. The direction of bipartisan discussion on the tax system, called for by the DPJ, is also unclear. The problem of the tax system, however, is not limited to consumption tax or the simple fluctuations of tax rates—we urgently hope for discussion that also includes the tax base.