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Katsuhiko Sakai

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Additional notes for reason of disposition regarding tax administrations

Katsuhiko Sakai
Professor, Faculty of Commerce, Chuo University
Areas of Specialization: Tax Law and Tax Accounting

Foreword – Introduction of an example

In recent years, relating to tax administration procedures, the problem of additional notes for reason of disposition has especially gained attention.

Here, I will introduce the case that was reported in the morning edition of the Asahi Shimbun on April 19, 2015.

Three bereaved family members including company president inherited about 800 million yen of assets, in the form of land and stocks, etc., from their father who passed away in 2011. On the other hand, the father was a “general partner” bearing liability of the limited partnership company, and because that company had liabilities of 1.4 billion yen, it was thought that inheritance tax would not be incurred, so, excluding some assets, the remaining assets were declared to the tax office. In response to this, the National Tax Agency decided that the father had become a general partner with the aim of evading the inheritance tax, thinking it would be unlikely that the Agency would be demanded to pay on the 1.4 billion yen of liabilities. This decision led the Agency in 2013 to point out 800 million yen as undeclared income and impose a 250 million yen additional tax. After that, the bereaved family members, on the grounds that the liability existed and there was no reason for the additional notes of taxation disposition, made a formal objection to the National Tax Tribunal requesting the revocation of the taxation disposition. The Tax Agency insisted “the reason for taxation is enough if the amount and applicable laws are presented,” however the National Tax Tribunal found the “reason for the taxation to be unclear, and an illegal disposition that doesn’t meet the conditions of the law,” and revoked the taxation. The National Tax Tribune hasn’t made a decision on whether there actually was any liability.

1 Administrative disposition reason

Now, when administrative agencies use their authority to correct the content of final returns conducted by taxpayers, it has been believed as in the past that they must show legal basis for reason of the disposition and make it clear in writing (hereinafter “additional notes for reason”) However, as there are possibilities that administration tasks might occur in large quantity, excluding the administration disposition cases for “specific taxpayers”, it has been stipulated that additional notes for reason of administrative disposition are not necessary (to be more exact, there are additional notes for reason behind disposition on an application for approval for a reduction of the amount of estimated tax prepayment (Article 113, Paragraph (3) of Income Tax Law), and dismissal of the application for delayed payment (Article 39, Paragraph (4) of Inheritance Tax Law)). The specific taxpayers here, on top of proclaiming to have made a declaration in accordance with the appropriate books and documents relating to business, have received approval from the tax office superintendent, indicating they are so-called blue return taxpayers (former Income Tax Law Article 155). That is to say, regarding administrative disposition of taxpayers other than blue return taxpayers, administrative agencies could make the administrative disposition without additional notes for reason before.

This point, in the Administrative Procedure Act of 1993, additional notes for reason of disposition were made compulsory for administrative agencies (Articles 8 and 14), however, in the Act on General Rules for National Taxes, the law concerning national taxes, for the procedures related to execution of tax service of national taxes, a large number of regulations that applied to the Administrative Procedure Act were omitted, so regulations on additional notes for reason of disposition that were set under the same law were not applied to the Act on General Rules for National Taxes (the Act on General Rules for National Taxes Article 74, Paragraph (2), Item (ⅰ) omitted the application of Chapter 2 (Articles 5-11) and Chapter 3 (Articles 12-31) of the Administrative Procedure Act).

2 Aim of additional notes for reason

By the way, it is understood that additional notes for administrative disposition reason are in place to (1) inhibit arbitrary disposition by administrative agencies, and (2) appeal unacceptable rulings.

For example, the Osaka High Court explained its January 18, 2013 ruling (Hanrei Jiho No.2203, p.25) in the following manner.

“Article 130, Paragraph 2 of the Corporation Tax Law states that when correcting with regard to corporation tax pertaining to the blue return form, the reason for correction shall be additionally entered in a written notice of correction. This can be interpreted as the meaning of guaranteeing a careful and rational decision by correction agency and preventing arbitrariness, in addition to disclosing the reason for reassessment to both other party and giving an opportunity of petitioning for redress.

Also, additional notes for reason of correction shall not simply be an indicating of correction reason to the taxpayer, but because it includes the aim of guaranteeing fair correction, even in cases where the taxpayer can infer the reason for correction, regardless of whether the taxpayer can infer that correction reason or not, the extent of the reason that should be added shall not be mitigated. (December 27, 1963 Supreme Court ruling, Minshu 172-12-1871). (Underlined part is the writer’s own words.)”

In cases where there are objections to dispositions made by administrative agencies, you can appeal to the nation to have the disposition annulled, but in those cases, if you cannot provide an outline for petitioning of redress and clear reason, you cannot petition for redress. In other words, in order to petition for redress, you specifically need to know the complaint point of the disposition handed down by the administrative agencies. That is the meaning of (2) opportunity of petitioning for redress.

3 December 2011 tax reform

So, the aim of these two additional notes for reason is not only meant for blue return taxpayers. Opinions have been discussed that all taxpayers should be the subject of additional notes for reason of disposition. In the tax reform of December 2011, based on these opinions, the Act on General Rules for National Taxes stipulated that all taxpayers need to be the subject of additional notes for reason of administrative disposition.

In regards to these additional notes for reason of disposition, we can probably say that it was demanded to provide detailed notes concerning the judgment process in administrative agencies on why that kind of administrative disposition occurred. Accordingly, by only simply indicating the undeclared amount and the grounds, even in both aspects of (1) and (2) shown above, it can be thought that additional notes for reason are not satisfactory. In that sense, I believe that the judgment (decision) of the National Tax Tribunal in the case introduced at the start was appropriate.

Conclusion

With the tax reform of December, 2011, additional notes for reason became mandatory regarding all administrative dispositions and, concerning this point, administrative agencies are enhancing training at training institutions. I also help with that training at governmental training institutions, but when touching upon this kind of case, on top of having a thorough understanding of the purpose of the law, I must guarantee total compliance in the scene, and I am continuing to work hard for that and seeing it in a fresh light.

Katsuhiko Sakai
Professor, Faculty of Commerce, Chuo University
Areas of Specialization: Tax Law and Tax Accounting
Katsuhiko Sakai was born in Tokyo. He completed the doctoral program at the Graduate School of Law, Chuo University in2006. He is a Doctor of Law (Chuo University).
He started current position in 2014 after working as a professor at the Faculty of Law, Kokushikan University. His current research topics include the intertwining of tax laws and private laws and tax avoidance.
Major publications include Follow Up – Tax Laws (published in 2010), Step Up – Tax Laws, Study of Issue of Income Tax Law, Brush Up – Tax Laws (they were published in 2011), Close Up –Tax and Administrative Laws (published in 2012), Close Up – Tax Requisition Facts 3rd Edition (published in 2014), Start Up – Tax Laws 3rd Edition (published in 2015) (books listed above published by Zaikeishohosha), Administrative Case Litigation Law and Tax Disputes (published in 2010), and Corporate Tax Law as Seen From Court Case Examples (published in 2012) (both published by Okura Zaimu Kyokai), and many more.