[1] Whether the appraisal value of unlisted stocks falls under the market price under Article 60 (2) of the former Inheritance Tax and Gift Tax Act (negative in principle)

[2] In a case where the issue is whether the appraisal value of a certified public appraisal corporation’s unlisted stocks can be deemed as the market price in determining whether the transfer of unlisted stocks between persons with a special relationship constitutes a market price lower than the market price, the case affirming the judgment below that the appraisal value cannot be deemed as the market price under Article 60(2) of the former Inheritance Tax and Gift Tax Act

[1] Article 49(1)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 17828, Dec. 30, 2002; hereinafter “Enforcement Decree of the Inheritance Tax and Gift Tax Act”) explicitly excludes the appraisal value of non-listed stocks from the value recognized as the market price pursuant to the latter part of Article 60(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 20, 2003; hereinafter “Inheritance Tax Act”). The purpose of the appraisal method for non-listed stocks is to unify the appraisal method in order to prevent the occurrence of a violation of the principle of fair taxation by calculating various appraisal values according to different appraisal methods. Considering that the market price under the former part of Article 60(2) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act is difficult to derive from the market price of non-listed stocks, the appraisal value of non-listed stocks cannot be deemed as the market price under Article 60(2)2) of the former Inheritance Tax Act, barring special circumstances.

[2] In a case where the issue is whether the appraisal value of the appraisal corporation’s non-listed stocks can be deemed as the market price in determining whether the transfer of non-listed stocks between a person with a special relationship constitutes a market price lower than the market price, the case affirming the judgment below that the appraisal value of the appraisal corporation’s non-listed stocks cannot be deemed as the market price under the above provision, as long as the appraisal value of the reliable appraisal institution is recognized as the market price, while the appraisal value of the non-listed stocks is clearly excluded from the appraisal value of the non-listed stocks, and the above appraisal value cannot be deemed as an objective and specific exchange price of the non-listed stocks, on the grounds that it is difficult to calculate the market price of the non-listed stocks, and the calculation of the market price according to the supplementary assessment method under the former Enforcement Decree of the Inheritance Tax and Gift Tax Act is lawful.

[1] Article 60(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 20, 2003); Article 49(1)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 17828 of Dec. 30, 2002) / [2] Article 101 of the former Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006); Articles 98 and 167 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18173 of Dec. 30, 2003); Articles 35, 60(2) and 63(1)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 20, 203); Article 28(1)4(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 201681 of Dec. 27, 20. 20.

Plaintiff 1 and one other (Attorneys Jeong Byung-chul et al., Counsel for the plaintiff-appellant)

Head of Yongsan District Tax Office and one other

Seoul High Court Decision 2007Nu20210 decided December 26, 2007

All appeals are dismissed. The costs of appeal are assessed against the plaintiffs.

The grounds of appeal are examined.

1. As to the grounds of appeal Nos. 1 through 4

Article 60(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 20, 2003; hereinafter “Gift”) provides that “The market price shall be the value which is generally deemed to be established when a free transaction is made between many and unspecified persons, and shall include the amount which is recognized as the market price under the conditions as prescribed by the Presidential Decree, such as the expropriation, public sale and appraisal price.” Article 49(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by the Presidential Decree No. 17828, Dec. 30, 2002; hereinafter “Enforcement Decree of the Inheritance Tax and Gift Tax Act”) upon delegation, provides that “the average value of appraisal values appraised by two or more reliable appraisal agencies with respect to the relevant property is recognized as the market price. However, in cases where it is difficult to compute the market price of the relevant property under Article 63(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, such as unlisted stocks, the market price is determined by Article 60(3).

As such, Article 49(1)2 of the Enforcement Decree of the Inheritance and Gift Tax Act explicitly excludes the appraisal value of non-listed stocks from the value recognized as the market price pursuant to the latter part of Article 60(2) of the Inheritance and Gift Tax Act. The purport of the appraisal method for non-listed stocks is to unify the supplementary assessment method prescribed by the Enforcement Decree of the Inheritance and Gift Tax Act in order to prevent the result that would go against the principle of fair taxation by calculating various appraisal values depending on the different appraisal method for non-listed stocks. In the case of non-listed stocks, the appraisal value for non-listed stocks cannot be deemed as the market price under Article 60(2) of the Inheritance and Gift Tax Act, unless there are special circumstances.

After compiling the adopted evidence and recognizing the facts as indicated in its holding, the lower court determined that Article 49(1)2 of the Enforcement Decree of the Inheritance and Gift Tax Act recognized the appraisal value of the reliable appraisal institution as the market price, but the global appraisal corporation’s appraisal value of the instant unlisted stocks held by the Plaintiffs cannot be deemed as the market price under the above provision, as long as the appraisal value of the instant unlisted stocks is explicitly excluded from the market price of the unlisted stocks, and that the above appraisal value cannot be deemed as the objective and specific exchange price of the instant unlisted stocks. As such, the lower court deemed that it is difficult to calculate the market price of the instant unlisted stocks, and determined that the instant disposition that calculated the value

Furthermore, the court below rejected all the claim that the plaintiffs' assertion, namely, the face value publicly announced in the process of the competitive bidding against the non-listed stocks of this case, the transaction value between plaintiffs 2 and the non-party, etc. regarding the non-listed stocks of this case, and the average stock price of the listed stocks similar to the non-listed stocks of this case, etc. of this case can be seen as the market price of the non-listed stocks of this case. The court below rejected all the above claim on the ground that since there was an attempt to sell the non-listed stocks of this case by competitive bidding method but there was no bidder, the face value publicly announced in the process cannot be seen as the market price of the non-listed stocks of this case, and the average stock price of

In light of the above legal principles, relevant statutes, and records, the judgment of the court below is just and acceptable. Contrary to the allegations in the grounds of appeal, there were no errors in the misapprehension of legal principles as to the application of the market price of unlisted stocks under the Inheritance and Gift Tax Act and the supplementary evaluation methods thereof.

2. As to the fifth ground for appeal

The lower court, based on the employment evidence, found that the Seoul Regional Tax Office’s tax investigation conducted a tax investigation on the Dongdong Housing Co., Ltd. and Mine Construction Co., Ltd. (hereinafter collectively referred to as “Dongdong Housing, etc.”), each of the issuing companies of the instant unlisted stocks, and that the amount of income for the business year related to the assessment of the instant unlisted stocks was partially omitted, and found that the Defendants reflected the assessment of the value of the instant unlisted stocks and the instant disposition on the basis that the instant transaction constituted low price transfer, and accordingly, rejected the Plaintiffs’ assertion that the instant disposition was not reflected in the circumstances newly occurring after the instant transaction.

According to the facts acknowledged by the court below, in assessing the value of the unlisted stocks in this case, the defendants found and corrected the fact that the amount of income, such as the same mineral housing, which should be reflected in the evaluation, was insufficiently counted in the evaluation, and did not reflect the circumstances newly occurred after the transaction in this case. Therefore, the judgment below to the same purport is just, and there is no error of law such as misunderstanding of the legal principles as to the base period for avoidance

3. Regarding ground of appeal No. 6

Under the tax law, penalty taxes are administrative sanctions imposed in accordance with the law in order to facilitate the exercise of the right to impose taxes and the realization of tax claims where a taxpayer violates a tax return and tax liability as prescribed by the law without justifiable grounds, unless there are justifiable grounds that do not cause the taxpayer to neglect his/her obligations (see Supreme Court Decisions 9Du3515 delivered on August 20, 199; 99Du7876 delivered on January 30, 2001, etc.).

The lower court acknowledged the facts as indicated in its reasoning based on employment evidence, and determined that, in light of the following: (a) Plaintiff 2’s transfer of the instant unlisted stocks to Plaintiff 1, who is his/her punishment, at a price much less than the appraised value based on the supplementary evaluation method prescribed by the Enforcement Decree of the Inheritance and Gift Tax Act, the amount of capital gains tax reported and paid falls short of the legitimate tax amount; and (b) the Plaintiffs were in a position to know the internal circumstances of the Dong-dong Housing, etc., the issuing company of the instant unlisted stocks; and (c) there is no justifiable reason that Plaintiff 2 failed to properly perform his/her duty to report and pay capital gains tax on the instant unlisted stocks; and (d) it cannot be said that Plaintiff 1 did not know that there was a duty to report and pay gift tax on the instant unlisted stocks due to the transfer of low-price

In light of the above legal principles, relevant regulations and records, we affirm the judgment of the court below. Contrary to the allegations in the grounds of appeal, we do not err by misapprehending the legal principles as to the grounds for exemption of additional

4. 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.

Justices Kim Ji-hyung (Presiding Justice)