Cho High Court Decision 201Do0544 decided October 24, 2011

The appraised value per share before the capital increase at the time of a low price allocation shall be based on the day preceding the payment date of the stock price.

It is difficult to see that the non-party company had gone through the procedure of solicitation of subscription against many and unspecified persons under the former Enforcement Decree of the Securities and Exchange Act while allocating the new shares in this case, and in calculating the assessment value per share before the increase, it is reasonable to make it subject to the prior period on the basis of the day preceding the payment date of the stock price rather than the public notice date for the increase of capital.

2011Guhap307622 Revocation of Disposition of Gift Tax Imposition

X 22 others

Head of the tax office of distribution and 15 others

March 21, 2012

April 6, 2012

1. All of the plaintiffs' claims are dismissed.

2. The costs of lawsuit are assessed against the plaintiffs.

The imposition of each gift tax indicated in the gift tax column shall be revoked in the attached Form No. 1 that the Defendants made to the Plaintiffs on the date indicated in the disposition date column.

1. Details of the disposition;

A. On May 7, 2007, an Association-registered corporation (hereinafter referred to as "non-registered corporation") held a board of directors on 35 (32 persons, including the plaintiffs, changed to 32 persons through a resolution of the board of directors dated June 11, 2007 and June 19, 2007) of registered common shares 4,439,383 shares (the changed to 3,745,320 shares after the resolution of the board of directors on May 16, 2007) (the changed to 3,745,320 shares) were to be issued by a third party allocation method of 00 won per share (hereinafter referred to as "the allocation of new shares").

B. On June 27, 2007, the plaintiffs participated in the allocation of new shares of this case and accepted 3,439,454 shares as shown in the attached Form No. 3,454 shares, and paid a total of 00 won shares.

C. Around June 2010, the director of the Seoul Regional Tax Office conducted an investigation on the change of stocks against the non-party company. 32 persons participating in the allocation of the instant new stocks confirmed that the non-party company’s new stocks were allocated at a lower price (000 won per share after the contribution date (00 won per share as of June 26, 2007) - 00 won per share of the assessment price per share after the contribution date) and notified the Defendants of the taxation data.

D. From November 1, 201 to November 10, 2010, the Defendants imposed and notified the Plaintiffs on the basis of Article 39(1)1(a) and (c) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “Inheritance Tax and Gift Tax Act”) as stated in the attached Form No. 39(1)1(c) of the Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “instant disposition”).

E. The Plaintiffs filed an appeal with the Tax Tribunal on January 7, 201 against the instant disposition and the imposition of additional tax thereon. However, on June 24, 2011, the Tax Tribunal rendered a decision with respect to the Plaintiffs that “only cancellation of the imposition of additional tax and dismissal of the remaining claims” was dismissed.

[Reasons for Recognition] Facts without dispute, entry in Gap evidence Nos. 1, 2, 17 through 39 (including paper numbers), entry in Eul evidence Nos. 1 and 2 (including paper numbers), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

(1) In allocating the instant new shares, the Nonparty Company solicited 50 persons or more to make an offer pursuant to Article 2-4(1) of the former Enforcement Decree of the Securities and Exchange Act (amended by Presidential Decree No. 20551, Jan. 18, 2008; hereinafter the same). Therefore, the allocation of the instant new shares constitutes “distribution by the method of public offering of new shares, which is an exception to deemed donation due to capital increase by issuing new shares, pursuant to Article 39(1)1 (a) and (c) of the former Inheritance Tax and

(2) Even if it cannot be deemed that 50 or more persons have solicited to subscribe, the instant new stocks allocation constitutes deemed public offering under Article 2-4 (4) of the former Enforcement Decree of the Securities and Exchange Act. In the case of deemed public offering, insofar as the issuance of securities is deemed public offering under the former Securities and Exchange Act, it constitutes “distribution by means of public offering of securities” under Article 39 (1) 1 (a) and (c) of the former Inheritance Tax and Gift Tax Act.

(3) The appraisal value per share prior to the increase of capital shall be calculated on the basis of the public notice date, not on the payment date of the stock price.

(4) Even if the date of calculating the “value per share before the capital increase” is the date of payment of stock price, there was a national tax practice that has been taxed as of the date of public notice. Nevertheless, the Defendant calculated the “value per share before the capital increase” as of the date of payment of stock price is in violation of the principle of prohibition of retroactive taxation and Article 18(3) of the Framework Act on National Taxes.

(b) Related statutes;

It is as shown in the attached Table related statutes.

(c) Fact of recognition;

(1) Paid-in capital increase process

(A) On May 7, 2007, the non-party company passed a resolution of the board of directors on the allocation of new shares of this case and announced this on the website of the Financial Supervisory Service. The main contents are as follows.

(B) After several times, Nonparty Company modified and published the details of the instant allocation of new shares through a resolution of the board of directors, and the specific details are as follows.

(C) Change of the person subject to allocation of the instant new stocks is as shown in the list of persons subject to allocation of the new stocks.

(2) The solicitation process for an offer

(A) The largest shareholder of the non-party company, EA, ParkBB, and the Director General of the Management Headquarters had individually contacted persons in a relationship with them and selected persons to be assigned.

(B) There is a list of subscription advisers (Evidence A) stating 60 persons who have subscribed to the instant new shares as data related to the solicitation of subscription, and the details of allocation thereof. Accordingly, the employee MaD of the non-party company, who was a working-level employee at the time, testified that “A, etc., reported the list of subscription advisers and subsequently prepared the list of subscription advisers” in the court.

[Ground of recognition] Facts without dispute, entry of Gap evidence 2 through 16 (including additional numbers), witness MaD's testimony, the purport of the whole pleadings

D. Determination

(1) As to the first argument

(A) Article 39(1)1 (a) and (c) of the former Inheritance Tax and Gift Tax Act provides that where a corporation issues new stocks at a price lower than the market price of the new stocks to increase its capital, where a person who is not a shareholder of the relevant corporation obtains profits by directly obtaining such new stocks from the relevant corporation, gift tax shall be imposed by deeming the amount equivalent to the relevant gains as the value of donated stocks of the person who has acquired such profits: Provided, That where a stock-listed corporation or Association-registered corporation under the Securities and Exchange Act allocates new stocks by means of public offering of new stocks under Article 2(3) of the Securities and Exchange Act, the same shall not apply. Meanwhile, Article 2(3) of the former Securities and Exchange Act (amended by Act No. 8635, Aug. 3, 2007; hereinafter the same shall apply) provides that "public offering of new stocks is intended to invite new stocks to be issued under the conditions as prescribed by the Presidential Decree", Article 2-4(1) of the former Enforcement Decree of the Securities and Exchange Act provides that the person who has received new stocks or new stocks through solicitation.

Furthermore, in order to constitute “distribution by means of public offering of securities” under Article 2-4(5) of the former Enforcement Decree of the Securities and Exchange Act, which is an exception that does not include profits arising from the low-price issuance in the value of donated property, the procedures for soliciting an offer under Article 39(1)1(a) of the former Inheritance Tax and Gift Tax Act, namely, advertisements through newspapers, broadcasting, magazines, etc., distribution of printed matters, such as notice and publicity leaflets, holding of an investment presentation meeting, electronic communications, etc., should not be limited by means of electronic communications, etc., but the act of notifying that securities will be issued or sold, or providing guidance on the acquisition procedure, at least by means of an equivalent or similar method (see Supreme Court Decision 2003Do7554, Feb.

(B) In full view of the following circumstances acknowledged by the health team, the evidence and the purport of the entire pleadings as seen earlier, it is difficult to deem that the non-party company underwent the procedure of 'invitations to subscribe' under Article 2-4 (5) of the former Enforcement Decree of the Securities and Exchange Act against many and unspecified persons while allocating new shares of this case.

(1) A person who was selected as eligible for subscription to the minutes of the board of directors and the details of relevant public disclosure shall be only 41 persons (the plaintiff ChoE and OO venture capital stock company shall be a specially related person or expert who can easily know the financial situation or details of the business of the company outside the country and is determined by the Financial Supervisory Commission, and shall be excluded from the number of soliciting subscribers pursuant to Article 2-4 (3) 7 of the former Enforcement Decree of the Securities and Exchange

② Although 60 persons are indicated in the current status list of subscribers for subscription (Evidence A 2), it is difficult to believe the content of the current status list of subscribers for subscription as it is, in light of the following: (a) the fact that the number of subscribers for subscription is not submitted in the instant lawsuit; (b) the document itself is submitted in the process of the instant lawsuit; (c) the document itself is not written; and (d) the basic information for verifying the authenticity, such as the person who prepared the proposal; and (e) the possibility that only the person who made the solicitation for subscription was additionally compiled and submitted thereafter cannot be ruled out; and (b) MaD, the author of the current status list of subscribers for subscription, bears the testimony that “it is not directly solicited by the principal, but was prepared after receiving a report from thisA, etc.”

(3) In addition, although the plaintiffs submitted the confirmation of fact that they were not in the list of recommending persons to subscribe, they are all persons who are in a relationship with the non-party company or the plaintiffs, it is difficult to believe the confirmation of fact as they are.

④ Meanwhile, in light of the fact that 50 or more persons are invited to subscribe for securities under the former Securities and Exchange Act, the issuing company is subject to various restrictions under the former Securities and Exchange Act, such as submission of securities registration statement, etc., and the solicitation of subscription for securities offering under the former Securities and Exchange Act is required to use a prospectus, a preliminary prospectus, and a simple prospectus, and may be subject to sanctions, such as restrictions on the solicitation of securities (Articles 8, 12, 13(2), and 20 of the former Securities and Exchange Act). In short, the issuing company that offers securities pursuant to the former Securities and Exchange Act has to manage objective data to support that the issuing company that offers securities under the former Securities and Exchange Act has undergone the solicitation procedure for subscription under the former Securities and Exchange Act

(2) As to the second argument

(A) Inasmuch as the subject of tax law itself is a rapidly changing and diverse economic phenomenon, while performing various economic and policy objectives and social security objectives, the interpretation of tax law ought to be permitted to the extent that it does not seriously undermine the legal stability and predictability pursued by the principle of no taxation without law (see, e.g., Supreme Court Decision 2007Du4438, Feb. 15, 2008).

(B) According to Article 39(1)1(a) and (c) of the former Inheritance Tax and Gift Tax Act, where a corporation issues new shares at a price lower than the market price to increase its capital, a person who receives allocation shall gain profit equivalent to the difference between the market price and the value of the new shares; and where new shares are allocated by means of securities offering under the former Securities and Exchange Act, the amount equivalent to the benefit should be included in the value of the donated shares; and where new shares are allocated by means of discount, the imposition of gift tax shall be exempted in cases of public offering, even though there are persons who gain profit through discount,. This is to be determined again through fair competition trading process within Korea Stock Exchange or Association brokerage market even if the new shares are issued by a stock-listed corporation or Association-registered corporation under the former Securities and Exchange Act or Association-registered corporation under the relevant Acts and subordinate statutes such as the former Securities and Exchange Act. In addition, the difference between the new shares issued by the issuer to facilitate the financing of the stock-listed corporation or Association-registered corporation under the former Securities and Exchange Act should be deemed to be excluded from the issuance price of the new shares.

Therefore, it is reasonable to view that a limited interpretation accords with the purport of Article 39(1)1 (a) and (c) of the former Inheritance Tax and Gift Tax Act to refer only to a general public offering corresponding to “where the number of persons who are solicited to acquire securities newly issued is not less than 50” under Article 2-4(1) of the former Enforcement Decree of the Securities and Exchange Act, rather than to include profits arising from a low-price issuance in the value of donated securities, which are the exceptional grounds for not including the profits arising from such issuance in the value of donated securities.

(3) As to the third argument

Article 29(3)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that with respect to the calculation of the gains deemed to have been donated at a low price under Article 39(1)1 (a) and (c) of the former Inheritance Tax and Gift Tax Act, the calculation of the gains shall be made by multiplying the amount obtained by subtracting the subscription price per stock from the value (the total number of issued and outstanding shares x the number of issued and outstanding shares x the number of shares increased by the increase in the capital) ± (the number of shares increased by the increase in the capital x the number of new shares x the number of shares increased by the increase in the capital) ± (a) , by the number of forfeited shares or the number of new shares allocated by the increase in the capital). Article 29(4) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended on December 30, 202) provides that the calculation of

Since the language and purport of each provision, the purport of legislation, and the effect of the acquisition of shares due to the increase of capital has caused the payment of the shares to the subscribers, in calculating the "value per share before the increase of capital" in the formula under Article 29 (3) 1 (a) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act with respect to the method of calculating profits arising from the increase of capital by a third party, it is reasonable to make it the subject of the previous period on the basis of the date preceding the payment date of shares rather than the public notice of the increase of capital under Article 29 (4) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (see, e.g., Supreme Court Decision 2007Du

(4) As to the fourth argument

(A) The principle of retroactive taxation prohibition under Article 18(3) of the Framework Act on National Taxes applies only to cases where there are special circumstances in which the protection of taxpayer's trust is deemed to conform to the justice even if the principle of legality is sacrificeed, and the practice of national tax administration generally accepted by taxpayers under such provision refers to the extent that it is not unreasonable for a taxpayer to trust such practice, even if erroneous practices were accepted by a general taxpayer, who is not a specific taxpayer, as just and without objection. The mere fact that there was an expression of public opinion as to the standard of interpretation of tax law does not necessarily mean that such practices cannot be deemed to exist, and the burden of proof as to the existence of such interpretation or practice is the taxpayer (see, e.g., Supreme Court Decision 2005Du2858, Jun. 29, 2006).

(B) Article 29(3)1 through 3 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that "the value per share before the person gives rise to the increase in the capital shall be the average value of the final market value of the Korea Securities and Futures Exchange published by the day preceding the day when the person gives rise to the increase in the capital," and the Commissioner of the National Tax Service, on June 28, 2004, sent a reply that "the date of the increase in the capital is reasonable to regard the date when the fact is published." However, since Article 29(4) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act of December 30, 202 explicitly stated that the calculation of profits under the provision of Article 29(3) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act shall be based on the payment date of the stock price, it is difficult to deem that the national tax administrative practice was established based on the date of the increase in the capital as of the date of the public announcement of the capital.

3. Conclusion

Therefore, the plaintiffs' claims are all dismissed as it is without merit. It is so decided as per Disposition.