Challenging Property Tax: Japanese Supreme Court Allows New Arguments in Court After Review Committee Stage

Date of Judgment: July 16, 2019
Case Name: Claim for Revocation of Fixed Assets Valuation Review Committee Decision Dismissing Request (平成30年(行ヒ)第139号)
Court: Supreme Court of Japan, Third Petty Bench

In a significant ruling on July 16, 2019, the Supreme Court of Japan clarified an important procedural aspect of challenging fixed assets tax valuations. The Court held that a taxpayer, in a lawsuit seeking the cancellation of a decision made by a Fixed Assets Valuation Review Committee, is permitted to raise new arguments or grounds for the illegality of the property valuation, even if those specific grounds were not presented during the initial administrative review process before the Committee. This decision enhances a taxpayer's ability to fully contest disputed valuations in court.

The Property Valuation Dispute: From Committee to Court

The appellant, X, was the owner of a nine-story office building with a basement in Tokyo, constructed in 1989 ("the subject building"). For the fiscal year 2012, the Governor of Tokyo determined the value of this building for fixed assets tax purposes to be ¥688,028,700. This value was then registered in the official fixed assets tax ledger ("the subject registered price").

In Japan, challenging a registered price for fixed assets tax involves a mandatory two-step process:

1. Request for Review (審査の申出 - shinsa no mōshide): A taxpayer dissatisfied with a registered price must first file a "request for review" with the relevant local Fixed Assets Valuation Review Committee (固定資産評価審査委員会 - Kotei Shisan Hyōka Shinsa Iinkai) within a specified period (Local Tax Act, Article 432, paragraph 1).
2. Lawsuit to Cancel Committee's Decision (裁決主義 - saiketsu shugi): If the taxpayer is still dissatisfied with the Review Committee's decision on their request, they can then file a lawsuit in court. Importantly, this lawsuit is not directly against the original valuation by the mayor/governor, but rather seeks the cancellation of the Review Committee's decision (Local Tax Act, Article 434, paragraph 2). This procedural framework is known as "decision-centric litigation" (saiketsu shugi), meaning the court reviews the legality of the administrative body's final decision in the appeal process.

On April 4, 2012, X filed a request for review with the Tokyo Fixed Assets Valuation Review Committee ("the subject Committee") concerning the subject registered price. In this initial request, X's primary argument was that there was an error in the application of the "age-related depreciation adjustment rate" (経年減点補正率 - keinen genten hosei ritsu) used in calculating the building's value. Notably, at this stage, X did not raise any contention that there were errors in the calculation of the building's fundamental "reconstruction cost points" (再建築費評点数 - saikenchiku-hi hyōtensū) stemming from allegedly incorrect quantities of reinforcing steel and concrete assumed for the main structure of the building.

On February 24, 2015, the subject Committee issued a decision rejecting X's request ("the subject decision"). X then filed a lawsuit against Y (the Tokyo Metropolitan Government) in the Tokyo District Court, seeking the cancellation of the subject decision to the extent the valuation exceeded ¥587,115,400. X initially focused its court arguments on issues like the allegedly discriminatory application of depreciation rates, claiming that its composite structure building was treated unfavorably without rational justification. The Tokyo District Court, on March 17, 2017, rejected X's claims.

X appealed this decision to the Tokyo High Court. During the High Court proceedings, X sought to add a new argument to its case: that the calculation of the subject building's reconstruction cost points was flawed due to errors in the assumed quantities of reinforcing steel and concrete used for its main structural components. Based on this new argument, X also amended its claim, now seeking cancellation of the Committee's decision to the extent the valuation exceeded ¥547,278,800 (a lower figure reflecting the impact of this alleged new error).

The Tokyo High Court, in its judgment on December 14, 2017, refused to consider X's new argument concerning the steel and concrete quantities. The High Court held that a taxpayer, in a lawsuit to cancel a Review Committee's decision, is generally not permitted to raise grounds for illegality that were not asserted during the initial review process before the Committee itself. It reasoned that allowing new grounds at the court stage, which had not been subjected to the Committee's prior review, would contravene the spirit of the prior administrative review requirement (Local Tax Act, Article 434, paragraph 2) and the general principles of administrative litigation (Administrative Case Litigation Act, Article 8, paragraph 1 proviso, which can limit the introduction of issues not raised in a mandatory prior administrative appeal, absent justifiable reasons under Article 8, paragraph 2, item 3). Consequently, the High Court dismissed the part of X's claim related to the new argument as inadmissible for failing to meet the prior administrative review requirement. It also rejected X's original arguments and dismissed the remainder of the claim. X then appealed this High Court ruling to the Supreme Court.

The Legal Question: Can New Arguments Be Raised in Court?

The central legal question before the Supreme Court was whether a taxpayer challenging a Fixed Assets Valuation Review Committee's decision in court is restricted to only those specific arguments and grounds for illegality that were presented during the initial administrative review stage before the Committee. Or, does the court have the jurisdiction to consider new supporting arguments regarding the illegality of the Committee's final price determination, even if those arguments were not articulated at the administrative level?

The Supreme Court's Ruling: New Arguments Permitted in Court

The Supreme Court overturned the Tokyo High Court's decision and remanded the case for further proceedings, holding that the High Court had erred in refusing to consider X's new argument. The Supreme Court ruled that taxpayers are permitted to raise new grounds in court to support their claim that the Committee's valuation decision is illegal.

The Supreme Court's reasoning was as follows:

1. Broad Scope of the Review Committee's Examination: The Court clarified that the scope of a Fixed Assets Valuation Review Committee's examination, when a taxpayer requests a review of a registered price, is not limited to the specific points raised by the taxpayer. Instead, the Committee's review should extend to "all matters necessary for judging the appropriateness of the registered price". The Committee has the authority to investigate matters on its own initiative (shokken shugi - 職権主義) and can gather necessary materials to do so (citing Local Tax Act, Article 433, paragraphs 3 and 11, and relevant provisions of the Administrative Appeal Act which are applied mutatis mutandis). This means the Committee is expected to conduct a comprehensive review of the valuation's correctness.
2. Subject Matter of the Lawsuit: In a subsequent lawsuit seeking cancellation of the Review Committee's decision, the fundamental issue before the court is the "appropriateness of the Committee's determination of the price".
3. New Arguments as "Means of Attack or Defense": Specific factual or legal arguments put forth by the taxpayer to demonstrate the illegality of the Committee's price determination are merely "means of attack or defense" (攻撃防御方法 - kōgeki bōgyo hōhō) concerning this central issue (the legality of the determined price).
4. No Violation of Procedural Rules by Raising New Arguments: Given the above, the Supreme Court concluded that a taxpayer (the review applicant) asserting specific grounds of illegality in court that were not explicitly raised during the review before the Committee does not violate the spirit or purpose of Local Tax Act Article 434, paragraph 2 (which establishes decision-centric litigation) or other related procedural rules governing administrative appeals. The subject matter of the dispute—the legality of the price determination affirmed by the Committee—remains the same.
5. Permissibility of Amending the Claim in Court: The Court also found that X's amendment of the monetary amount sought for cancellation in the High Court (which was a consequence of introducing the new argument about steel and concrete quantities) was merely a change in the upper limit of the successful judgment X was seeking should the court find in its favor. There were no circumstances rendering such an amendment impermissible.

Therefore, the Supreme Court held that the High Court erred in law by dismissing the part of X's claim based on the new argument as inadmissible and by failing to consider this new argument when assessing the legality of the Review Committee's decision. This failure to consider a potentially valid ground for challenging the valuation constituted an error of law that necessitated a more thorough trial.

Analysis and Implications

This 2019 Supreme Court decision significantly clarifies the procedural rights of taxpayers in fixed assets tax disputes in Japan:

• Enhanced Taxpayer Rights in Court: The ruling strengthens a taxpayer's ability to fully litigate a disputed fixed assets tax valuation. It allows for the development and introduction of all relevant arguments and evidence at the court stage, even if those specific points were not perfectly articulated or even raised during the initial administrative review before the Fixed Assets Valuation Review Committee. This is particularly important because taxpayers often lack access to detailed information or specialized expertise when they first file their review request with the Committee.
• Nature of Review Committee Proceedings Affirmed: The Supreme Court's decision implicitly confirms that the review process before a Fixed Assets Valuation Review Committee is not intended to be a strictly adversarial, quasi-judicial trial that would definitively finalize all factual and legal arguments between the taxpayer and the assessing authority. The Committee's power to investigate matters ex officio (on its own initiative) supports the idea that its review is broader than just the taxpayer's initial contentions.
• Distinction from "Substantial Evidence Rule" Contexts: Legal commentary points out that the procedural framework for fixed assets tax appeals differs from certain other specialized administrative review systems (such as some patent appeal processes under older laws) where a "substantial evidence rule" (jisshitsuteki shōko hōsoku) might apply. Under such a rule, a court's review might be limited, and new evidence or arguments might be restricted if the administrative tribunal is deemed quasi-judicial and its factual findings, if supported by substantial evidence, are given deference. The Supreme Court's ruling in this case implicitly confirms that such a restrictive rule does not apply to lawsuits challenging decisions of Fixed Assets Valuation Review Committees, as these Committees are not structured as specialized quasi-judicial bodies with such binding fact-finding powers, and the Local Tax Act contains no provision establishing a substantial evidence rule for their decisions.
• Focus Remains on the Legality of the Committee's "Price" Determination: The decision reaffirms that the ultimate issue in these lawsuits is the legality and correctness of the final price for the property as determined (or upheld) by the Fixed Assets Valuation Review Committee. Any relevant argument or evidence that bears upon the lawfulness of that price determination can, therefore, be considered by the court.

Conclusion

The Supreme Court's 2019 judgment in this case represents a significant development in the procedural aspects of fixed assets tax litigation in Japan. It ensures that taxpayers are not unduly constrained in court by the arguments they may have raised, or failed to raise, during the initial administrative review phase before the Fixed Assets Valuation Review Committee. By allowing new grounds supporting a claim of illegal valuation to be introduced in the judicial proceedings, the decision promotes a more thorough and comprehensive examination of the legality of property tax assessments, thereby enhancing the avenues for taxpayers to seek fair and accurate valuations. This ruling underscores the principle that while prior administrative review is a mandatory step, it should not serve to unduly limit the scope of judicial scrutiny when a taxpayer continues to challenge the outcome.