Just as Japan's government faces a looming battle over its badly stretched budget, the Supreme Court has added to the revenue-raising challenge by ordering a record Y200bn ($2.4bn) individual tax refund.
The ruling marks a stunning victory for Toshiki Takei, eldest son of the founder of failed consumer finance company Takefuji, who had battled authorities for years over the decision to impose gift and penalty taxes on a 1999 transfer from his father of around Y160bn in shares in the family business.
A district court in 2007 backed Mr Takei's argument he was resident in Hong Kong at the time of the transfer and thus not liable for gift tax, a ruling overturned by a high court but that is now reinstated.
Takefuji filed for court protection last year after it was overwhelmed by claims from borrowers that said it overcharged them for their loans.
Mr Takei is to receive a respectable return on the money originally taken from him by the state, with state broadcaster NHK saying the Y200bn refund included Y40bn in interest generated at a legally mandated annual rate of more than 4 per cent.
While less than the double-digit rates Takefuji charged its customers, a 4 per cent return is higher than that offered by banks or government bonds in deflation-dogged Japan.
Japanese media said the refund – which is equivalent to roughly twice the total gift tax the government might expect to gather in an ordinary year – was the largest ever paid to an individual taxpayer.
The government argued that Mr Takei had taken up temporary residence in Hong Kong in part to avoid paying tax on the transfer of shares.
However, the Supreme Court said Mr Takei had spent most of his time in the Chinese city over a period of years and that it was illegal under the then law to treat him as a resident of Japan.
In a supplementary opinion on the ruling, justice Masahiko Sudo said tax rules could not be interpreted too freely. While the court's ruling might cause “some discomfort from the perspective of ordinary legal sense”, Mr Sudo wrote, “it is unavoidable”.
The record refund comes at an unfortunate time for government bean-counters, who are struggling to secure revenues for the fiscal year that starts in April.
Opposition parties are seeking to use their control of the Diet's upper house to block passage of legislation related to the budget, potentially threatening the government's ability to issue enough bonds to finance a yawning fiscal deficit.
While Japan expects to raise Y40,927bn in tax in fiscal 2011, taxation is set to account for a smaller share of government revenues than new bond issuance for the third year in a row.