Gift, etc. of other profits under Article 42 of the Inheritance Tax and Gift Tax Act

The costs of appeal are assessed against the Defendants.

1. Regarding ground of appeal No. 1

Article 42 (1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007; hereinafter referred to as the "Act") provides that "in addition to donations under Articles 33 through 41, 41-3 through 41-5, 44 and 45, where profits that fall under any of the following subparagraphs and are above the standard prescribed by Presidential Decree are acquired, such profits shall be deemed as the value of property donated to the person who has acquired such profits." In addition to donations under Articles 33 through 41, 41-3 through 41-5, 44 and 45, subparagraph 3 of Article 42 provides that "the profits that have been acquired by the increase or decrease of the capital of a corporation, such as conversion, acquisition, exchange, etc. of stocks by convertible bonds, etc. under Article 40 (1), or profits acquired by the change

On the grounds indicated in its reasoning, the lower court determined that: (a) the Plaintiff’s father, DaD and Kim E-E, etc. (hereinafter “MaD, etc.”) donated OOOE, etc. (hereinafter “the instant stock donation”) to FF, Inc. (hereinafter “FF”), only constitutes a donation of stocks; and (b) it does not constitute “business acquisition by transfer or organizational change, etc.” as stipulated in the latter part of Article 42(1)3 of the Act.

Examining the reasoning of the judgment below in light of the above provisions, we affirm the judgment of the court below. Contrary to the allegations in the grounds of appeal, there were no errors by misapprehending the legal principles as to the interpretation of the above provision or failing

2. As to the grounds of appeal Nos. 2 and 3

A. Article 2(1) of the Act provides that gift tax shall be imposed on donated property by another person’s donation. Article 2(3) of the Act provides that “The term “donation” refers to a transfer (including a transfer at a remarkably low price) of tangible and intangible property, which can calculate economic values, directly or indirectly, to another person (including a transfer at a remarkably low price) or an increase in the value of another person’s property by contribution. However, in order to ensure taxpayers’ predictability and to ensure stability in tax law relations, the provision on the calculation of donated property (hereinafter “value calculation provision”) regulates a specific type of transaction and act, which limits only certain transaction and act to be subject to gift tax, and the scope of taxation can be deemed to set a limit on the scope and limit of gift tax by prescribing that the transaction and act excluded from the subject or scope of gift tax can be subject to gift tax even if such transaction and act constitute the concept of gift under Article 2(3) of the Act.

However, Article 41(1) of the Act and Article 31(6) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 22042, Feb. 18, 2010) provide for the calculation of the value of donated property in cases where the profits earned by stockholders, etc. are at least KRW 100 million as taxable subject to gift tax in cases where a corporation having deficits (hereinafter referred to as "contributed corporation") and a person having a special relationship with stockholders, etc. of a corporation under temporary or permanent closure of business, etc. provide for the calculation of the value of donated property in cases where the profits earned by such stockholders, etc. are at least KRW 100 million. The above provision aims to impose gift tax on an irregular donation that causes profits to stockholders, etc. of a specific corporation without any corporate tax due to the donation of property in deficit (see Supreme Court Decision 2008Du6813, Apr. 14, 2011).

This is clear that the legislative intent of intending to exclude profits acquired by shareholders, etc. from gift tax assessment is based on transactions with corporations that bear corporate tax on assets increase and decrease profits, etc. while running a business normally, and such legislative intent is not changed due to the introduction of the complete comprehensive taxation system on donations as stipulated in Article 2(3) of the Act. Therefore, it should be deemed that the limitation is set to prevent shareholders, etc. from imposing gift tax on the profits from transactions with corporations that do not have losses or profits from transactions with corporations that do not have losses other than temporary or permanent corporations.

Therefore, barring special circumstances, such as where a separate provision on the said benefit is subject to gift tax, gift tax may not be imposed on shareholders, etc. based on Article 2(3) of the Act (see, e.g., Supreme Court Decision 2013Du13266, Oct. 15, 2015).

B. According to the reasoning of the judgment below, ① DaD et al. donated the instant shares to F on December 29, 2007, and FF reported and paid KRW OOOO of the corporate tax for the business year 2007 by including OOO of the asset receipt profit from the instant shares donation in its gross income; ② at the time, Plaintiff ChoA was holding OO of the FF’s issued stocks, Plaintiff ChoB, and Plaintiff ChoB owned OOOO of the FF’s issued stocks; ③ the Defendants deemed that the Plaintiffs donated the benefits equivalent to the increased value of the shares in possession, and thus, the Defendants imposed gift tax on the Plaintiffs from May 20 to May 25, 201, by applying Articles 2(3) and 42(1)3 of the Act.

C. Examining these facts in light of the aforementioned provisions and legal principles, even if ChoD et al. indirectly donated the instant shares to F to F, thereby indirectly increasing the value of the shares owned by the Plaintiffs, who are shareholders of FF, the instant shares donation constitutes a case where the instant shares were donated to a corporation with no deficit, and the FF was liable for corporate tax on the profits accruing therefrom, and thus, gift tax cannot be imposed on the profits accrued to the Plaintiffs pursuant to Article 2(3) of the Act, etc. In addition, the instant shares donation does not constitute “business acquisition limit or corporate restructuring, etc.” under Articles 2(3) and 42(1)3 of the Act. Ultimately, each of the instant dispositions imposing gift tax on the Plaintiffs by applying Articles 2(3) and 42(1)3 of the Act is unlawful as it goes beyond the limit of imposing gift tax.

D. Therefore, although part of the judgment of the court below is insufficient, the judgment below is just and acceptable. Contrary to the allegations in the grounds of appeal, the court below did not err by misapprehending the legal principles on the interpretation and application of Articles 2(3), 41(1) and 42(1)3 of the Act, the principle of no taxation without law, or by failing to exhaust all necessary deliberations, which affected the conclusion of the judgment.

3. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.