＜Abstract＞

Comparative Study on the Preferential Tax Treatment Methods of In-kind Contribution of Capital in Korea and the U.S.
： Focusing on Analysis of Tax-Incidence effect and Problems by Methods

Cha, Myung Ki* & Kim, Su Sung

This paper analyzes and compares the method of preferential tax treatment of in-kind contribution of capital in Korea and the United States to identify and improve the problem, and it is meaningful that ,unlike the prior study, it clarified the advantages and disadvantages by quantifying the tax burden of each party by the taxation methods.

The main difference between the two systems is that Korea applies the taxation carried forward of the basic framework for in-kind contribution to sole proprietor when converting into corporate entities, and the advanced depreciation provision when corporations make in-kind investments to other corporations, whereas in the U.S., the capital gains arising from in-kind contribution, whether individual or corporate, are regarded as unrealized gains. This paper analyzes the tax burden effect of parties by applying example to each method.

Pre-researches argue that the taxation model of the U.S. tax law based on U.S.C. Article 351 should be adopted, carry-over basis which is the succession method of the book value, but this has a substantial problem of double taxation. By modifying the rule, the transfer method of carrying amount succession eliminates the problem of double deduction by allowing the transferor to recognize stock security in exchange for investment in-kind based on market value not a book value. Unlike the double deduction, The double taxation as unrealized gains from in kind contribution still exists on both sides of transferee and transferor. Therefore, critical problems such as complex accounting process may be occurred when a large number of assets with built-in losses and gains are invested in kind.

Unlike corporate investors, in case of individual’s in kind contribution, the Korea Tax Law has two problem in taxation carried forward. First, primary taxpayer is changed from sole proprietor into transferee corporation. Tax payer shift without reasonableness has nothing to do with the rationale of deferral taxation system. Discriminatory regulations by the characteristics of entity may be in violation of the tax justice. In addition, there is a controversy over the recognition of debt owed by the transferee corporation due to the taxpayer shift, and if it is recognized as a liability, it would be unnecessary preferential privilege for a particular party, thereby undermining the tax equity.

Under the current method, the advanced depreciation provision method under Article 47.2 of the Corporate Tax Act shows that this method does not cause problem on double taxation or double deduction of the carry-over basis method problems and in addition, that the capital gain is deferred when the investment is made, in accordance with the purpose of the deferral of tax method, without the shift of taxpayer which is the problem of taxation carried forward. Therefore, the advanced depreciation provision method may be the most suitable method to fulfill the purpose of preferential tax treatment.

It would be merely a temporary measure to prevent potential tax avoidance, abuse of the system or double benefits by adding or modifying supplementary whenever inherent issues are discovered. It is not guaranteed that a fundamental revision to address the problems of the current system will not cause derivational problem, but it is necessary to make efforts to revise it through continuous research.

▶ Key Words：contribution in kind, carry-over basis, tax shift, taxation carried forward, advanced depreciation provision, U.S.C. article 351

** Published on February 2020
** Full article available in Korean only