2. The costs of appeal shall be borne by the Plaintiff.

A. The Plaintiff, a corporation for the purpose of the construction business, acquired shares 2,850,191 shares of the non-party 1 corporation (hereinafter “the former merger”) in KRW 19,748,517,60, and was in possession of the shares of the non-party 1 corporation (hereinafter “the former merger”). On December 31, 1998, the Plaintiff returned the shares of the merger district to the non-party 2 corporation as the non-party 1 was merged into the non-party 2 corporation (hereinafter “the merger”), and on behalf of returning the shares of the non-party 2 corporation to the non-party 301,293 shares of the non-party 2 corporation [=2,850,191 shares x 0571 shares x 0571 shares of the non-party 1 corporation), and “the new shares of the instant merger” were issued to the non-party 2 corporation at the time of the merger (hereinafter “the Korea Stock Exchange”) and the total new shares of the instant merger”).

B. In filing a return of corporate tax reverting to the business year 1998, the Plaintiff: (a) transferred the merged principal of this case and deemed to have acquired the new stocks of this case; (b) calculated the market price of the new stocks of this case as 1,801,732,140 won (i.e., 5,980 won x 301,293) as the transfer price of the merged principal of this case; (c) calculated the difference in the disposal price of the merged principal of this case as 17,946,785,460 won (transfer price 1,801,732,732, 140 won - acquisition price 19,748,517,600 won; hereinafter “the issue of the difference in value”) as the special loss of assets; and (d) calculated the amount of tax related to each of the paid interest under Article 28(2)1 of the former Corporate Tax Act (amended by Act No. 6293, Dec. 29, 2000) as the market price of this case.

C. However, on October 15, 2002, the Defendant issued each of the instant taxation dispositions imposing corporate tax of KRW 10,90,824,890 on the Plaintiff for the business year 1998, on the ground that the difference in the issue of this case calculated by the Plaintiff as a special loss is not a taxation transaction, but merely an appraised loss of securities (i.e., inclusion of the difference in the amount of corporate tax in gross income) and the corporate tax of the business year 1998, on the basis of the acquisition value of the corporate tax of the business year 1999, such as calculating the interest paid on the loan related to the possession of assets unrelated to the business, and adding the interest paid on the loan related to the possession of assets irrelevant to the business to the deductible expenses, and imposed corporate tax of KRW 1,310,824,890 for the business year 199 and corporate tax of KRW 1,80 for the business year 198 (the corrected corporate tax related to the merger exceeds the amount of corporate tax imposition disposition of KRW 1,718,890,79.

[Ground of Recognition] Facts without dispute, Gap evidence Nos. 1 through 7, Eul evidence Nos. 1 and 2 (including each number), the purport of the whole pleadings

2. Whether the taxation disposition is legitimate

A. Summary of the plaintiff's assertion

(1) The legal nature of the instant replacement of shares constitutes a transfer of assets, which are transaction subject to taxation under the Corporate Tax Act by means of share swap, and thus, the key difference in the issue of the instant case should be included as a special loss of investment assets in the deductible expenses of 1998 business year, and the interest paid on borrowings related to the holding of assets irrelevant to business for 1999 should be calculated based on the market price of new shares

(2) Even if the replacement of the instant shares is not subject to taxation, under the former Corporate Tax Act (wholly amended by Act No. 5581, Dec. 28, 1998; hereinafter “Act”), the “principle of priority in corporate accounting standards” is applied (Article 17(3) of the Act); and the current corporate accounting standards, upon the merger, require the merged corporation’s shareholders to account as a transaction subject to the recognition of profit and loss if they acquire new shares in lieu of returning the merged shares through the merger, so it is legitimate to include the difference in the issue of this case in deductible expenses for the business year 198.

(3) Finally, even if the difference in the issue of this case cannot be included in the deductible expenses for the business year 1998, the Plaintiff included the issue difference in this case in the deductible expenses for the business year 1998 due to the conflict in the interpretation of the tax law as to the period of attribution of profit and loss due to the merger of this case. As such, the portion of the penalty tax exemption among the tax disposition of this case should be revoked.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

(1) Whether the replacement of the instant shares constitutes a transaction subject to taxation

(A) Article 9(2) and (3) of the Act define the concept of gross income or deductible expenses as "profit or deductible expenses arising from transactions", and Article 17(1) of the Act provides that "the business year to which gross income and deductible expenses accrue shall be the business year to which the date on which the gross income and deductible expenses are determined belongs." Thus, in order to appropriate profits and losses from a transaction, such profits and losses shall be realized in the business year concerned, and the assets evaluation marginal profit or deductible expenses shall not be included in the gross income or deductible expenses in principle as unrealistic profits and losses (Article 15(1)5 and Article 16 subparag. 6 of the Act).

Therefore, in case where a corporation, a stockholder of a merged corporation, receives the new stocks on behalf of the merged owner as a result of a merger, the difference between the value of the merged owner and the merged owner is realized, and the replacement of the merged owner and the merged new stocks through the merger does not mean that the corporation concerned disposes of the merged owner and acquires the new stocks at its own will, but the merged owner, the assets held by the corporation, as a result of the merger between the merged corporation and the merged corporation, is replaced by the merged new stocks, and the corporation concerned does not change the ownership of assets in the form of stocks before and after the merger. Therefore, the difference between the value of the new stocks on the merger with the merged owner cannot be deemed as having been realized, and the above difference is merely the evaluation marginal profit or evaluation marginal profit of the assets not yet realized.

Therefore, the Plaintiff’s assertion that the difference between the principal owner of the merger and the value of the new shares of the merger should be included in the deductible expenses as a special loss of the invested asset on the premise that the replacement of the shares of this case due to the merger is naturally a taxation opportunity.

(B) As to this, the Plaintiff asserts that if the value of the new stocks of the merger exceeds the value of the merger principal, it shall be deemed that the excess amount is realized by the relevant corporation in the logical balance with the deemed dividend system (Article 19 subparag. 5 of the Act), and that if the value of the new stocks of the merger exceeds the value of the merger principal, it shall be deemed that the loss is realized.

On the other hand, the constructive dividend system does not leak out of the surplus funds which are corporate management performance and reverts to stockholders or investors in the form of legal reserves, earned surplus reserves, and other voluntary reserves, and it is an economic profit similar to the actual cash dividend, and thus, it is an economic profit similar to the actual cash dividend. Therefore, the portion exceeding the value of the new stocks newly issued through a merger is the gross income subject to taxation of the former Enforcement Decree of the Corporate Tax Act (see Supreme Court Decision 92Nu16126, Jun. 11, 1993). However, according to Article 45-3(2)1 of the former Enforcement Decree of the Corporate Tax Act, the difference between the value of the new stocks issued through a merger and the acquisition value of the former acquisition value of the new stocks issued through a merger, which is the economic effect of the corporate management performance, shall be calculated on the basis that the former Enforcement Decree of the Corporate Tax Act (wholly amended by Presidential Decree No. 15970, Dec. 31, 1998; hereinafter “Enforcement Decree”).

If the fictitious dividend system is based on the premise that the difference between the principal owner of the merger and the value of the new stocks of the merger is directly realized as profit and loss, there is no reason to limit the scope of profit to be realized to the difference between the market value of the new stocks of the merger and the acquisition value of the acquisition value of the merger principal rather than the difference between the acquisition value of the new stocks of the merger principal and the acquisition value of the merger principal (in case of the fictitious dividend through the merger of corporations, in principle, the new stocks that acquired the net assets of the merged corporation and the merged corporation delivered in compensation for it should be issued on the premise that the net asset value of the extinguished corporation increases in the net asset value of the extinguished corporation at the request of the company's capital adequacy, so the value of the new stocks of the merger to be delivered to the shareholders of the extinguished corporation is expressed the net asset value, and because it is a face value, the value of the new stocks of the merger

Therefore, the constructive dividend system is not a system based on the recognition of profits and losses for the difference between the value of the new stocks of the merged owner and the merged owner, but an exception provision for the principle of not recognizing profits and losses. On the other premise, the plaintiff's assertion that if the acquisition value of the merged shares exceeds the market price of the new stocks of the merged owner, the difference should be recognized as real loss is without merit.

(C) Article 37(1)3 of the Enforcement Decree of the Act provides that the acquisition value of assets, such as the new stocks through a merger, shall be calculated as “normal value” at the time of acquisition, and the above “normal value” refers to the market price. Thus, the Plaintiff asserts to the effect that, at the time of acquisition of new stocks through a merger, profit and loss on the difference between the owner of the merger and the value of the new stocks through a merger, should be recognized as realized. However, inasmuch as the replacement of the merger principal and the new stocks through a merger is merely a substitution of assets and is not deemed as a transaction subject to taxation in principle, the above “normal value” should be deemed as acquisition value of the merger principal rather than the market value of the new

(D) In addition, the Plaintiff asserts that the replacement of shares by a merger constitutes a transfer of shares, which are subject to securities transaction tax, under the Securities Transaction Tax Act and the Restriction of Special Taxation Act, and thus, the instant stock replacement also constitutes a transfer of shares, which is a taxation instrument. However, as seen above, whether the replacement of shares by a merger is a taxation instrument or not is determined by whether the profit or loss was realized through the transaction. Since the replacement of shares by a merger is recognized as a transfer of shares subject to securities transaction tax, it does not change the realization of profit or loss

(2) Whether the fair and reasonable corporate accounting standards apply and the existence of corporate accounting practices exist

(A) As to whether the Plaintiff’s settlement of accounts is fair and reasonable corporate accounting standards, the law does not recognize as a profit or loss realized as a matter of principle, and as to the fact that the law does not explicitly stipulate that the difference between the acquisition value of the merger principal and the market value of the new stocks after the merger is calculated as deductible expenses, unless there is a provision stipulating that it is realized in addition to the case of fictitious dividend as to the substitution of the new stocks after the merger, which is an asset owned by the corporate shareholder of the merged corporation, as a result of the merger, the Plaintiff’s settlement of accounts in the instant case where the difference between the

(B) Furthermore, as to the existence of corporate accounting practices such as the Plaintiff’s accounting performance in this case, it is not sufficient to recognize the difference solely based on the results of the fact-finding conducted by the President of the Korean Institute of Certified Public Accountants of the first instance, and the President of the Korean Institute of Certified Public Accountants of the first instance. Rather, according to the evidence No. 5, the Commissioner of the National Tax Service, based on the established rules of January 5, 1995, "if the value of the stocks received by the merged corporation from the merged corporation falls short of the amount required for acquiring the stocks of the merged corporation, the difference between the value of the stocks received by the merged corporation falls short of the amount required for acquiring the stocks of the merged corporation shall be included in deductible expenses in calculating the income amount of the business year which includes the date of disposal, such as the sale of the stocks in this case, even if the value of the new stocks already acquired the acquisition value of the merged corporation

(3) Whether there exists a justifiable reason for an exemption from additional duties

Under the Corporate Tax Act, additional tax is a kind of administrative sanction imposed when a taxpayer corporation is liable to return a faithful tax base and to pay a tax amount in order to secure the propriety of taxation, and is negligent in fulfilling its obligations. Such a sanction is not imposed where there is a justifiable reason to believe that it is not unreasonable for a taxpayer to be unaware of his/her obligations due to a conflict of opinion due to a significance in the interpretation of the tax law beyond the simple scope of the land or the scope of the misunderstanding, etc., and there is a circumstance where it is unreasonable for the taxpayer to reasonably present the obligation, or where it is unreasonable to expect the relevant party to perform the obligation, etc. (see Supreme Court Decision 2002Du666, Aug. 23, 2002, etc.).

As seen above, the difference between the owner of the merger and the owner of the merger in the event that the new shares of the merger are replaced by the new shares of the merger due to the merger under the law is interpreted as not being included in the profit and loss for the pertinent business year in principle, considering that the difference between the value of the new shares of the merger before the Plaintiff’s return of the corporate tax of this case is deemed not to be included in the profit and loss for the pertinent business year; even if the value of the new shares of the merger had already been acquired before the Plaintiff’s return of the corporate tax of this case, it was interpreted that the difference was not included in the pertinent business year; and it is not recognized that there was an accounting practice such as the accounting of this case, the Plaintiff’s accounting of this case is merely the land or mistake of the law, and it cannot be deemed that there was a conflict of opinion

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and the judgment of the court of first instance is just, and the plaintiff's appeal is dismissed as it is without merit. It is so decided as per Disposition.

[Attachment]

Judges Kim Jong-sik (Presiding Judge)