Transfer Price for Private Transactions of Unlisted Stocks ⚖️ A Note on Decoding Tax Practice 📚️ Practical Judgments Based on Tax Law, Precedents, and Circulars

――The price for income tax and the price for gift tax perform different jobs with the same face

“Professor, when buying and selling unlisted stocks between individuals, what should the transaction price be?”
Mika asked, facing a thick stock valuation statement.
The professor took a sip of coffee and replied.
“To that question, I must first ask back, ‘Which tax are you talking about?’”
“Even though it is a question about price, does the answer differ depending on the tax?”
“Yes. In the world of unlisted stocks, even for the same stock, the face seen by income tax and the face seen by gift tax are different.”
The usual company president popped his head in.
“Professor, saying that stocks have faces is quite a scary story.”
The professor said quietly.
“In tax practice, the more a face appears to be one, the more a valuation circular is hidden behind it.”
This time, I will organize the transfer price for buying and selling unlisted stocks between individuals.
The problem seems simple at first glance.
Should it be sold at the inheritance tax valuation?
Should it be sold at the price calculated according to Income Tax Basic Circular 59-6?
Or is the amount agreed upon by the parties sufficient?
However, it is dangerous to settle this problem with only one price.
In private transactions of unlisted stocks, it is necessary to consider the seller's income tax, the buyer's gift tax, and the treatment of capital losses separately.
In other words, even if there is only one amount written in the sales contract, it is checked from multiple angles for tax purposes.
“Professor, in other words, even if there is only one contract, the tax office has two, no, three eyes, right?”
“That is correct.”
“The eye of income tax, the eye of gift tax, and the eye that looks at capital losses.”
“You are quite sharp.”
“The tax office is a three-eyed monster, then.”
“It is not a monster, but it is watching very closely.”

1 What are unlisted stocks?

Unlisted stocks are stocks that do not have a price traded daily in the market like listed stocks.
Typical examples are stocks of family-owned companies, small and medium-sized enterprises, family-run companies, and unlisted companies.
If it were a listed stock, you could generally know the fair market value by looking at the stock price on the stock exchange.
However, unlisted stocks do not have such an easy-to-understand market price.
They are not traded in the market every day.
The number of people who want to buy is limited.
They often have transfer restrictions.
They can be tied to the company's control.
The meaning changes depending on whether the stock is held by a minority shareholder or a controlling shareholder.
The appearance of value changes depending on whether it is a stock that only receives dividends or a stock that can move the company.
Mika said.
“In other words, unlisted stocks are ‘products without price tags,’ right?”
The professor nods.
“Yes. Moreover, the meaning of the number changes depending on who looks at that price tag.”
The president crossed his arms.
“My company's stock doesn't have a price tag either.”
“Yes.”
“Then, can I set any price I like?”
The professor answered immediately.
“As a sales contract, you can decide the price if the parties agree. However, it does not necessarily mean that the price will pass through tax-free as it is.”
“The price is free. But the tax office's gaze is also free.”
“That is quite accurate.”
The sales price under civil law and company law is not necessarily the same as the fair market value for tax purposes.
The sales price agreed upon between the parties is the consideration under the contract.
However, in taxation, it is sometimes confirmed whether the consideration is too low, too high, or to whom the economic benefit has shifted.
In particular, in transfers between relatives, between family shareholders, between a representative and minority shareholders, and to successors, the sales price is likely to become a tax issue.

2 Seller's income tax――In principle, calculate based on the actual sales price

Mika said while flipping through the materials.
“First, it's the seller's income tax. When an individual sells unlisted stocks to another individual, what is the revenue amount for capital gains?”
The professor replied.
“In principle, it is the transfer consideration determined in the actual sales contract.”
“In other words, the sales price itself.”
“Yes. That is the concept of Article 36 of the Income Tax Act.”
When an individual transfers assets to another individual, in the calculation of capital gains, the amount to be received from the transfer of those assets, that is, the transfer consideration determined in the sales contract, is taken as the revenue amount.
Therefore, even when unlisted stocks are bought and sold between individuals, the revenue amount for the seller's capital gains is, in principle, the sales price determined by the parties.
What is important here is Article 59, Paragraph 1 of the Income Tax Act.
Article 59, Paragraph 1 of the Income Tax Act has a provision that deems a transfer to have occurred at fair market value in certain cases.
However, this provision is applied to gifts to corporations or transfers to corporations at a significantly low price.
For normal transfers from an individual to an individual, fair market value transfer taxation is not imposed on the seller under Article 59, Paragraph 1 of the Income Tax Act.
The president said.
“Professor, in other words, when I sell unlisted stocks to an acquaintance as an individual, I, as the seller, basically calculate capital gains based on the contracted amount, right?”
“Yes. For the seller's income tax, we start by thinking about that.”
“Then, even if I sell it cheaper than the fair market value, will the seller not be taxed at fair market value?”
“For private transactions, the deemed transfer at fair market value under Article 59, Paragraph 1 of the Income Tax Act does not apply.”
“Oh, then that's a relief.”
The professor shook his head.
“President, when you say ‘that's a relief’ in tax law, the next article usually comes out.”
“It came out, didn't it? The ambush of tax law.”
“This time, it is Article 59, Paragraph 2 of the Income Tax Act and Article 7 of the Inheritance Tax Act.”

3 Points to note for the seller――If it is less than half of the fair market value, capital losses may disappear

What the seller should be careful about is Article 59, Paragraph 2 of the Income Tax Act.
Even in a transfer between individuals, if the transfer consideration is less than half of the fair market value and a capital loss arises from that transfer, that loss is deemed not to have occurred.
Mika said.
“In other words, even if you sell it much cheaper than the fair market value and create a capital loss, there are cases where that loss cannot be used for tax purposes, right?”
“That is correct.”
“Article 59, Paragraph 1 of the Income Tax Act does not directly apply to private transactions. However, the denial of loss in Paragraph 2 of Article 59 requires caution.”
“Yes. It is important not to confuse these.”
The seller's transfer revenue is in principle the contract amount, but if you sell for less than half of the fair market value and a loss occurs, that loss may be denied.
The ‘fair market value’ in this case is the fair market value in the application of Article 59 of the Income Tax Act.
For unlisted stocks, it will be considered based on the price calculated according to Income Tax Basic Circular 59-6.
What comes up here is Income Tax Basic Circular 59-6.
This circular stipulates how to think about the ‘price at that time’ when stocks, etc., are gifted, etc.
For unlisted stocks, we use the example of the valuation of unlisted stocks in the Basic Circular on Property Valuation.
However, it is not a simple story of using the inheritance tax valuation as it is.
It is necessary to read it in a way that fits the capital gains taxation of income tax.
The president said.
“Professor, isn't it just bringing the inheritance tax valuation as it is?”
“That is the troublesome part.”
“The tax law is looking like it's not straightforward again.”
“Yes. On the income tax side, the position of the individual who transferred, the voting rights ratio, and whether they are a central family shareholder become issues.”
“You look at the person selling.”
“That's right. In capital gains taxation of income tax, there is a background idea of liquidating the capital gain of an asset at the opportunity when it leaves the owner's control.”
The price in Income Tax Basic Circular 59-6 is not a price that always replaces the revenue amount of the seller in private transactions.
This is a price that becomes an issue mainly in the context of Article 59 of the Income Tax Act, that is, fair market value transfer taxation or judgment of less than half.
If you get this wrong, it leads to the misunderstanding that ‘you must sell at the 59-6 price even in private transactions.’”

4 Buyer's gift tax――If you buy too cheaply, gift tax will come to the buyer

Mika said.
“Then, if the seller's side is in principle the contract amount, what happens to the buyer's side?”
The professor replied.
“Here, Article 7 of the Inheritance Tax Act appears.”
“The deemed gift when receiving property from an individual at a significantly low price, right?”
“That is correct.”
When an individual receives property from another individual at a significantly low price, the economic benefit equivalent to the difference between the fair market value of that property and the acquisition consideration may be deemed to have been acquired by gift.
This is Article 7 of the Inheritance Tax Act.
The ‘fair market value’ that becomes an issue in this case is the fair market value of the Inheritance Tax Act.
Therefore, for unlisted stocks, in principle, it will be judged using the inheritance tax valuation based on the Basic Circular on Property Valuation.
Mika said.
“In other words, on the buyer's side, you look at the inheritance tax valuation, right?”
“Yes.”
“For the seller's income tax, the contract amount becomes the revenue amount.”
“Yes.”
“For the buyer's gift tax, the difference from the inheritance tax valuation becomes an issue.”
“That is the core of this time.”
In private transactions, it is necessary to check not only the seller's income tax but also the buyer's gift tax risk.
The president said.
“Professor, it is quite complicated that what the seller and the buyer look at is different.”
The professor replied.
“Unlisted stocks are a labyrinth of valuation.”
“So, for one stock certificate, income tax and gift tax bring different maps.”
“And both maps are written in small print.”
What I want to be careful about here is the judgment of ‘significantly low price.’
In Article 59, Paragraph 2 of the Income Tax Act, the standard of less than half of the fair market value appears.
However, in Article 7 of the Inheritance Tax Act for gift tax, it is not judged simply by whether it is less than half.
It is judged based on the difference between the fair market value and the consideration, the relationship between the parties, the circumstances of the transaction, the rationality of the price determination, and the economic benefit obtained by the buyer.
It is dangerous to bring the income tax's half standard directly into the gift tax's Article 7 of the Inheritance Tax Act.
The president said.
“Then, you cannot say that if it is more than half of the inheritance tax valuation, gift tax is absolutely safe, right?”
“Yes. That is something to be careful about.”
“I want an easy-to-understand safe line.”
“In tax law, the shortcut that looks easy to understand can sometimes become a cliff later.”

5 Then, which price should the sales price be based on?

Then, when buying and selling unlisted stocks between individuals, should the sales price be based on the inheritance tax valuation or the price of Income Tax Basic Circular 59-6?
The answer is that it is necessary to think about it separately for each tax item.
In the calculation of capital gains for the seller's income tax, in principle, the actual sales price is the revenue amount.
Therefore, it does not mean that you must sell at the price of Income Tax Basic Circular 59-6 to determine the seller's revenue amount.
However, if the transfer price is less than half of the fair market value of Article 59 of the Income Tax Act and a capital loss occurs, there is a possibility that that loss will be considered not to have occurred.
In this judgment, the price of Income Tax Basic Circular 59-6 becomes an issue.
On the other hand, for the buyer's gift tax, Article 7 of the Inheritance Tax Act becomes an issue.
If it is recognized that it was received at a significantly low price, there is a possibility that gift tax will be imposed on the difference between the inheritance tax valuation and the acquisition consideration.
Therefore, as a practical way of thinking to avoid tax problems in private transactions, selling at or above the inheritance tax valuation is an important guideline in principle.
In practice, buying and selling at a price above the inheritance tax valuation and at an amount reasonably agreed upon by the parties is a basic response to suppress tax risk.
Mika said.
“In other words, in practice of deciding the sales price, you are conscious of the inheritance tax valuation or higher to avoid the buyer's deemed gift risk, right?”
The professor nods.
“Yes. Especially in private transactions, the buyer's gift tax risk is high.”
“However, it is on the premise that the valuation calculation itself is correct, right?”
“Of course. Even if it is above the inheritance tax valuation, if the calculation of that valuation is wrong, the foundation is tilted.”
The president said.
“Professor, is it absolutely safe if it is above the inheritance tax valuation?”
The professor thought for a moment and said.
“The word ‘absolute’ is more dangerous than a luxury car in tax practice.”
“I see. Safe driving is necessary.”
“Yes. It is necessary to confirm the contents of the valuation company, the position of the shareholder, family relationships, transfer restrictions, the voting rights ratio immediately before, and special circumstances.”
The idea of being above the inheritance tax valuation is an important guideline, but it does not mean that valuation methods and individual circumstances can be ignored.
The company has land with large unrealized gains.
There is a large asset movement immediately before.
Company control shifts due to the sale.
The rationality of price determination in sales between relatives and family members is weak.
In such cases, more careful consideration is necessary.

6 Precedent No. 1――How to read Income Tax Basic Circular 59-6

Here, as an important judicial precedent, there is the Supreme Court judgment of March 24, 2020.
This is a case where the transfer of unlisted stocks from an individual to a corporation became an issue, and strictly speaking, it is not a private transaction itself.
However, it is very important in thinking about how to read Income Tax Basic Circular 59-6.
In the case, unlisted stocks were transferred at 75 yen per share.
The taxpayer side thought that it was not a transfer at a significantly low price based on the price by the dividend discount method.
On the other hand, the tax authority evaluated the fair market value of Article 59, Paragraph 1 of the Income Tax Act higher and made a tax disposition as a low-price transfer to a corporation.
The point of contention is from whose position to judge whether it corresponds to a minority shareholder in the valuation of unlisted stocks.
Do you look at it from the transferee's position?
Do you look at it from the transferor's position?
The Supreme Court, regarding capital gains taxation, grasped that the capital gain of an asset is liquidated and taxed at the opportunity when that asset leaves the owner's control.
Therefore, it judged that a valuation method according to the degree of the transferor's control over the company should be used, not the transferee's control over the company.
The Supreme Court judgment of March 24, 2020, is an important precedent showing that in the valuation of Income Tax Basic Circular 59-6, the control power of the transferor side should be emphasized, not the transferee.
Mika said.
“In other words, in capital gains taxation of income tax, there are scenes where ‘who sells’ becomes more important than ‘who buys,’ right?”
The professor replied.
“Yes.”
“Even if you borrow the valuation circular of inheritance tax or gift tax, you need to read it according to the purpose of income tax.”
“That is correct.”
The president said.
“Do you need to even re-read it when borrowing a circular?”
“Yes.”
“It's like borrowing someone else's suit and fixing it to fit your own body.”
“That is a good analogy. If you wear it without fixing it, the sleeves will be too long for tax purposes.”
What can be understood from this Supreme Court judgment is that the price of Income Tax Basic Circular 59-6 is not something that simply copies the inheritance tax valuation.
It is necessary to evaluate by looking at the circumstances of the transferor side in accordance with the purpose of capital gains taxation of income tax.
It is not a scene to decide the normal transfer revenue itself of private transactions, but it is an important judicial precedent in the scene of thinking about the fair market value related to Article 59 of the Income Tax Act.

7 Precedent No. 2――Even in private transactions, gift tax may be imposed on the buyer

Next, as an important judicial precedent in practice close to private transactions, there is the Tokyo District Court judgment of January 31, 2007.
In this case, the representative director of an unlisted company bought the company's stocks from multiple individual shareholders.
However, the tax authority, considering that the consideration was significantly low, deemed that the buyer acquired it by gift for the difference between the fair market value and the consideration according to Article 7 of the Inheritance Tax Act, and made a decision of gift tax.
In court, it was disputed whether it corresponds to the ‘significantly low price consideration’ of Article 7 of the Inheritance Tax Act, and how to evaluate the fair market value under the Inheritance Tax Act of unlisted stocks.
As a conclusion, the taxpayer side lost the case, and the disposition was maintained.
The Tokyo District Court judgment of January 31, 2007, is an important case showing that even if there is a sales contract between individuals, gift tax can be imposed on the buyer if the consideration is significantly low.
Mika said.
“In other words, even if it is a sales price agreed upon between individuals, if it is too cheap, gift tax may be imposed on the buyer, right?”
The professor nods.
“Yes. Especially when the buyer is in a position close to a representative or a controlling shareholder, it is easy to have a structure where economic benefits are obtained by collecting stocks.”
“Even if the seller is convinced and sells, gift tax becomes an issue for tax purposes.”
“Yes. The seller's conviction and the fair market value for tax purposes are different stories.”
The president said.
“Professor, is it no good even if the seller says ‘this price is fine’?”
The professor replied.
“Even if it is valid as a contract, it is different for tax purposes.”
“Even though the people themselves are convinced.”
“The tax office looks at economic benefits rather than conviction.”
“That is quite strict.”
This judicial precedent is important in thinking about the buyer's gift tax risk in private transactions of unlisted stocks.
In particular, when consolidating stocks from minority shareholders to representatives, successors, controlling shareholders, and relative shareholders, if you collect them at a cheap price, the problem of Article 7 of the Inheritance Tax Act may arise.
There is a sales contract.
The price is paid.
The parties are in agreement.
Even so, if it is far from the fair market value for tax purposes, the difference may be considered a deemed gift.
In the buying and selling of unlisted stocks, ‘it is okay because there is a contract’ is not enough. Materials that can explain even the rationality of the price are necessary.

8 Precedent No. 3――‘Significantly low price’ is not uniform

Regarding the ‘significantly low price’ of Article 7 of the Inheritance Tax Act, it is not decided only by a uniform mechanical standard.
There are judicial precedents where the buying and selling of unlisted stocks were judged not to correspond to the ‘significantly low price consideration’ of Article 7 of the Inheritance Tax Act.
There is also a judicial precedent where, in a sale of land between relatives, it was judged not to correspond to a significantly low price because it was a consideration based on the inheritance tax valuation.
However, it is dangerous to apply the land judicial precedent to unlisted stocks as it is.
For land and stocks, the valuation mechanism, transaction circumstances, presence or absence of control, and the nature of the economic benefit obtained by the buyer are different.
Mika said.
“In other words, it is not ‘inheritance tax valuation is absolutely safe,’ but ‘while using the inheritance tax valuation as an important guideline, look at individual circumstances,’ right?”
The professor replied.
“Yes. Especially unlisted stocks are assets whose value easily changes depending on the buyer's position.”
“One share held by a minority shareholder and one share collected by a controlling shareholder have different meanings.”
“That is correct.”
The president said.
“Even for the same one share, the weight is different depending on the person.”
“For tax purposes, there are such things.”
“Stocks are heavier than paper.”
“Especially in family-owned companies, voting rights are heavy.”
In the judgment of Article 7 of the Inheritance Tax Act, not only the difference between the fair market value and the consideration, but also the relationship between the parties, the circumstances of the sale, the rationality of price determination, and the economic benefit obtained by the buyer become issues.
Therefore, in practice, it is also important to leave the history of price determination, not just price calculation.
Why was that amount decided?
Which valuation method was used?
From whose position was it evaluated?
Are there valuation materials from a tax accountant or expert?
What kind of negotiations were there between shareholders?
How are the board of directors, general meeting of shareholders, and transfer approval procedures?
These records can have great significance later.

9 In practice, divide into three questions

This point of contention becomes easier to organize if divided into the following three questions.
First, what is the revenue amount of the seller's capital gains?
This is, in principle, the transfer consideration of the sales contract.
As long as it is a private transaction, it is not deemed to have been transferred at fair market value under Article 59, Paragraph 1 of the Income Tax Act.
Second, if a capital loss occurs for the seller, is that loss recognized?
Here, whether the transfer price is less than half of the fair market value of Article 59 of the Income Tax Act becomes an issue.
In this judgment, the price of Income Tax Basic Circular 59-6 becomes important.
Third, is gift tax imposed on the buyer?
Here, whether it was received at a significantly low price according to Article 7 of the Inheritance Tax Act becomes an issue.
The fair market value in this case is considered based on the inheritance tax valuation in principle.
In private transactions of unlisted stocks, it is important to check the seller's revenue amount, the seller's loss denial, and the buyer's deemed gift separately.
Mika said.
“In other words, it looks like one question of ‘how much should the sales price be,’ but actually there are three tax checks, right?”
The professor replied.
“That is correct.”
“Seller's revenue amount.”
“Yes.”
“Seller's loss denial.”
“Yes.”
“Buyer's deemed gift.”
“Those are the three.”
The president said.
“Professor, it's like the tax office is looking from three directions.”
The professor said.
“In the buying and selling of unlisted stocks, they are looking not only from three directions, but also from behind the shareholder register.”
“That's scary.”
“There is no need to be afraid. You just need to organize it.”

10 Documents to Retain for Price Determination

When buying and selling unlisted stocks between individuals, document preparation is crucial in practice.
First, prepare a stock valuation statement.
Confirm the application of the valuation company's size classification, family shareholder determination, presence of central family shareholders, voting rights ratio, comparable industry ratio method, net asset value method, and dividend discount method.
Next, confirm the relationship between the seller and the buyer.
Are they relatives?
Are they related parties?
Are they officers?
Are they successors?
Are they controlling shareholders?
Are they minority shareholders?
How does the voting rights ratio change before and after the transaction?
This confirmation is necessary.
Furthermore, retain the reasons for determining the transaction price.
Was it based on the inheritance tax valuation?
Did you obtain an expert valuation?
Is there a history of negotiations?
Is it a purchase from a minority shareholder?
Does it involve the transfer of corporate control?
What was the approval procedure for restricted stocks?
In the sale and purchase of unlisted stocks, it is important to keep the contract, valuation statement, organization of shareholder relationships, and the reasons for price determination as a set.
Mika said.
"So, for unlisted stock transactions, a contract alone is not enough, is it?"
The professor replied.
"Yes. The contract is not the goal, but the entrance."
"Valuation materials, shareholder relationships, voting rights, and negotiation history are also necessary."
"That is correct."
The president said.
"Professor, even though it's a stock transaction, it's almost like a company health checkup."
"In fact, it is just like that. Stock valuation is a task like checking a company's weight, blood pressure, and muscle mass."
"Then, will our company be diagnosed as metabolic?"
"Companies with heavy net assets are evaluated as heavy in a different sense."

11 Practical Conclusion

Finally, I will summarize the points of this discussion from a practical perspective.
When buying and selling unlisted stocks between individuals, the revenue amount for the seller's capital gains is, in principle, the transaction price agreed upon by the parties.
The deemed transfer at market value under Article 59, Paragraph 1 of the Income Tax Act does not directly apply to transactions between individuals.
However, if a transfer is made at less than half of the market value and a capital loss occurs, that loss may be deemed not to have occurred.
In this determination, the value under Income Tax Basic Circular 59-6 becomes an issue.
On the other hand, for the buyer, attention must be paid to the deemed gift under Article 7 of the Inheritance Tax Act.
If it is recognized that unlisted stocks were acquired at a significantly low price, there is a possibility that gift tax will be imposed on the difference between the inheritance tax valuation and the acquisition price.
The basic practical policy is to buy and sell at a price equal to or higher than the inheritance tax valuation and at an amount reasonably agreed upon by the parties.
However, being at or above the inheritance tax valuation does not always mean it is absolutely safe.
The valuation calculation must be correct.
The shareholder classification of the seller and buyer must be correctly determined.
There must be rationality in the price determination.
The relationship between the parties and the transfer of economic benefits must be explainable.
These are important.
Mika said.
"Professor, today's conclusion is to look not at 'which price,' but at 'what price is being determined for which tax item,' right?"
The professor nodded.
"That is correct."
The president said.
"In other words, income tax has an income tax ruler, and gift tax has a gift tax ruler."
"Yes."
"And with unlisted stocks, if you use the wrong ruler, you will immediately measure it incorrectly."
"That is exactly the point of practice."
In private transactions of unlisted stocks, it is most important to first separate the tax items and then confirm from whose perspective the valuation is being made.
The sale and purchase of unlisted stocks is not just a question of 'at what price to sell.'
Who is selling?
Who is buying?
How does the control relationship change before and after the transaction?
Will the seller have a capital gain or a capital loss?
Will economic benefits transfer to the buyer?
How does that price compare to the inheritance tax valuation?
Is this a situation where the market value determination of Income Tax Basic Circular 59-6 becomes an issue?
These need to be confirmed in order.
The professor said at the end.
"In the sale and purchase of unlisted stocks, before deciding on the price, first separate the tax items."
Mika nodded.
"Even for the same stock, income tax and gift tax see different scenery, don't they?"
The president crossed his arms.
"Professor, from today, before looking at the stock price, I will look at whose tax it is."
The professor laughed.
"That is the first step to not getting lost in the sale and purchase of unlisted stocks."
Stocks without a trading market do not have an easy-to-understand sign called a market price.
That is precisely why it is necessary to carefully determine the price using valuation circulars, income tax basic circulars, Article 7 of the Inheritance Tax Act, and judicial precedents as clues.
The price of a stock is written only once in the contract.
However, in tax practice, income tax and gift tax view that single price from different angles.
Preparing a price and documents that can withstand that scrutiny is the most realistic safety measure in private transactions of unlisted stocks.