Korea Pharmaceutical Co., Ltd. (Law Firm Gyeong & Yang, Attorneys Jeong Jin-soo et al., Counsel for the plaintiff-appellant)

Head of Suwon Tax Office

December 9, 2011

Suwon District Court Decision 2009Guhap9476 Decided November 4, 2010

1. The plaintiff's appeal is dismissed.

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

1. Purport of claim

The disposition imposing corporate tax and value-added tax on January 2, 2009 by the Defendant against the Plaintiff is revoked (the Plaintiff was at the trial and excluded from the purport of the claim through the following process: (a) the part of the notice of change in the amount of income stated in the attached disposition list 2 of the first instance court’s claim as of January 2, 2009 from the purport of the claim; (b) the Defendant revoked ex officio the part against the Defendant as to the notice of change in the amount of income stated in the attached disposition list 2 of the first instance trial following the issuance of the first instance judgment; (c) the Plaintiff revoked the claim corresponding to the notice of change in the amount of income that was revoked ex officio; and (d) at the same time, the Seoul Regional Tax Office, other than the Defendant, requested the Seoul Regional Tax Office to rectify the remaining amount of income on the ground that the Defendant is the subject of the notice of change in the amount of income remaining in the purport of the claim; and (d) the Plaintiff permitted the application for additional correction, but the Plaintiff finally withdrawn the claim against the Seoul Regional Tax Office on November 6, 2011).

2. Purport of appeal

The judgment of the first instance court is revoked. The disposition imposing corporate tax and value-added tax on January 2, 2009 against the plaintiff is revoked (the plaintiff and the defendant filed an appeal against the part against each party on the notice of change in the amount of income stated in the attached disposition No. 2 of the first instance court's judgment on January 2, 2009, but the plaintiff and the defendant's appeal on this part are excluded from the notice of change in the amount of income stated in the attached disposition No. 2 of the attached disposition No. 2 of the first instance court's judgment, which affected the purport of the claim through the above process, so the plaintiff and the defendant's appeal on this part become retroactively null and void

1. Details of disposition;

(a) Tax investigation and defendant disposition by the director of the Seoul Regional Tax Office;

Around August 2008, the director of the Seoul Regional Tax Office investigated the Plaintiff’s tax investigation with respect to the Plaintiff (hereinafter “Plaintiff”) (hereinafter “Plaintiff”) as indicated in the following Paragraph (b), including corporate tax, etc., and filed a complaint against the Plaintiff and the Nonparty, etc. with the prosecutor’s office on December 1, 2009. Around November 2, 2008, the Defendant notified the director of the Seoul Regional Tax Office of the aforementioned investigation results, notified the Plaintiff of the imposition of corporate tax and value-added tax on January 2, 2009 as indicated in the separate disposition list 1, and the content of each disposition is as listed in the following Paragraph (b).

B. Details of the tax audit and disposition by issue

1) False appropriation of welfare expenses, etc. (hereinafter “Dispute ①”)

A) Tax investigation content: at the time of filing corporate tax for each business year from 2003 to 2007, the Plaintiff filed corporate tax by falsely appropriating the amount equivalent to 6 billion won for welfare expenses and travel expenses, and on May 30, 2006, the Plaintiff filed corporate tax return by falsely appropriating the amount equivalent to 1 billion won for credit purchase amount, personnel expenses, etc. at the time of filing corporate tax return for each business year from 2000 to 2005.

B) Details of disposition: The portion paid as incentives to the business members out of the amount falsely appropriated as welfare expenses, etc. shall be ratified as personnel expenses, and the remainder (hereinafter referred to as “influence expenses”) shall be excluded from deductible expenses, and the corporate tax in the business year of 200-2007 as stated in the attached Form 1

2) Error errors in the inclusion of advisory fees in deductible expenses (hereinafter referred to as “inception”).

A) The content of the tax investigation: On March 16, 2004, the Plaintiff entered into a contract for delegation of financial consulting services with ACI Co., Ltd. (hereinafter “ACI”) and on April 16, 2004, paid to ACI KRW 672 million (excluding value-added tax; hereinafter “Dispute advisory fee”); however, the issue-based advisory fee is the cost to be borne by the KTB network (hereinafter “KB”) which is the major shareholder of the Plaintiff or by the hospitals of Korea.

B) Details of disposition: 672 million won of advisory commission was excluded from deductible expenses in the year of 2003 to 2004, and was reflected in the corporate tax for the business year of 2003 to 2004 listed in the attached disposition list 1, and was excluded from the 1st value added tax in 2004, and was reflected in the 1st value added tax in the attached disposition list 2004.

3) Error in deductible expenses, such as loans, claims, etc. (hereinafter “indeption”) for a person with a special relationship

A) Tax investigation contents: (1) On October 15, 2003, when concluding a contract on the transfer of technology and marketing rights with the Korea DDR, a special relationship corporation (hereinafter referred to as the "Korea DDR"), a total of KRW 1.770 million including KRW 70 million, was not recovered due to the default of the Korea DDR; (2) on April 22, 2004, the unrepaid KRW 470 million was included in the bad debt depreciation cost; and (3) the amount of KRW 1.5 billion was adjusted in the deductible expenses by deeming the unrepaid credit as the bad debt depreciation cost at the closing date of the settlement of accounts in 2007. (2) While concluding a contract on the transfer of technology and marketing rights with the Korea DDR on September 25, 2003, the amount of KRW 1.5 billion was to be paid in the deductible expenses; and (3) the promissory note was delivered on September 26, 2003, but delivered KRW 400,5006.5 billion.

B) Details of disposal: 470,000,000 won which was not recovered and the returned promissory note 400,000,000 won shall be deemed as the loan bad debt depreciation cost against a person with a special relationship, and shall be included in deductible expenses in the business year of 2007 as stated in the attached Form 1.

4) Error misunderstanding that investment loss of equity law is included in deductible expenses (hereinafter “Dispute No.4-1”).

A) The content of the tax investigation; (a) On April 13, 2004, the total amount of KRW 62,000 of the shares of DMF 62,400,000 prior to the merger, which was manufactured and sold medical appliances, etc., was acquired in total prior to the merger, and assessed the shares as equity law in accordance with the corporate accounting; and (b) thereafter, the cumulative total of KRW 7,494,00,000,000,000 (hereinafter “the cumulative share acquisition loss amount”) accrued prior to the merger, was included in deductible expenses at the time of the merger, and then the tax adjustment was made in deductible expenses even though it was necessary to make the tax adjustment in excess of deductible expenses.

B) Details of disposal: The amount of stock evaluation loss at issue is included in the calculation of losses in the business year of 2006 and was reflected in the corporate tax of 2006 listed in the attached disposition list 1.

5) The error of depreciation of goodwill (hereinafter “Dispute No.4-2”)

A) The content of the tax investigation: (a) the amount of KRW 11.14 billion exceeding the net asset value of the book value of the invested stocks of DMF is appropriated as (ju) DMF business rights (hereinafter “c) and the amount of KRW 1.36 billion in each business year in 2006 and 207, respectively; (b) the amount of KRW 1.6 billion in total, KRW 2.4 billion in total, and KRW 3.56 billion in each business year, but the above goodwill is not subject to redemption under tax law.

B) Contents of disposition: The amount of depreciation at issue 3.546 billion won was included in the corporate tax for the business year 2006, 2007 as shown in the separate disposition list 2006, 2007, as stated in the separate disposition list 1.

(c) the previous trial procedure and related criminal cases;

1) On March 31, 2009, the Plaintiff filed an appeal with the Tax Tribunal against each of the dispositions of the Defendant, but the Tax Tribunal dismissed the appeal on December 21, 2010.

2) A criminal judgment of conviction was finalized on the violation of the Punishment of Tax Evaders Act, such as the evasion of corporate tax against the Plaintiff and the Nonparty, etc. (Seoul High Court Decision 2009No3202 Decided April 29, 2010).

[Ground of recognition] Facts without dispute, Gap evidence Nos. 6, 7, 8, 29, Eul evidence Nos. 1 and 8 (including each number), the purport of the whole pleadings

2. Whether each disposition is lawful;

A. Judgment on the issue ①

1) The plaintiff's assertion

The key issue cost is from January 1, 200 to December 31, 2007, [from October 1, 2003 to December 31, 2007, from January 1, 2000 to December 31, 2007, the part related to the above issue is viewed as including the plaintiff in the main part related to the above issue; hereinafter the same shall apply] drugs, and medical appliances, and so, the sales unit cost, entertainment expense, and other deductible expenses should be included in deductible expenses.

2) Relevant statutes

ii) Corporate Tax Act

Article 19(2)

(1) Deductible expenses shall be the amount of losses incurred by transactions which reduce the net assets of a corporation, excluding return of capital or financing, disposition of surplus funds, and what is provided for in this Act.

(2) Losses referred to in paragraph (1) shall be losses or expenses incurred in connection with the business of a corporation which are generally accepted as ordinary or directly related to profit, except as otherwise expressly prescribed by this Act and other Acts.

3) Determination

A) Order of determination

In principle, Article 19(2) of the Corporate Tax Act provides that “the cost of loss or expense generated or spent in connection with the business of the corporation is generally accepted as normal or directly related to profit.” Here, “generally accepted cost” refers to the cost that is deemed to have been disbursed under the same situation with respect to other corporations engaged in the same kind of business as the person liable for duty payment. Whether such cost is determined objectively by comprehensively taking into account the process, purpose, form, amount, effect, etc. of the disbursement, and barring special circumstances, the cost that is paid in violation of social order is excluded (see Supreme Court Decision 2007Du12422, Nov. 12, 2009, etc.).

Specifically, the Plaintiff argues that “The Plaintiff has only legal regulation on the rebates of drugs at the level of unfair trade practices on the Monopoly Regulation and Fair Trade Act (Evidence 5 of the A), criminal punishment, or tax law issues are not raised directly. The pharmaceutical industry has no product choice in the field where the distribution channel and the market price are strictly regulated, and there is no absolute product choice to any doctor, so the offering of rebates has become a pharmaceutical industry and the medical appliances industry established practices. The Plaintiff’s offering of rebates means a waiver of business that inevitably makes it inevitable for the Plaintiff to pay rebates to medical institutions, such as doctors and medical appliances industry, and does not pay rebates. The Plaintiff’s offering of rebates means a waiver of business that makes it inevitable for the Plaintiff to pay rebates in cash at a certain rate ( approximately approximately 20 per cent) of the prescribed amount (including approximately 20 per cent) according to the performance of prescription for a certain period of time, and then pays in cash according to the record of prescription.” The Plaintiff asserts that rebates is not contrary to social order, but should be recognized as incidental expenses, entertainment expenses, expenses, and other losses.

Therefore, on the premise that rebates is recognized as loss, the first determination is made as to whether rebates is extremely contrary to social order, and then the determination is made as to whether it constitutes sales expenses, entertainment expenses, and other losses.

B) Whether the offering of rebates is extremely contrary to social order

Even if the offering of rebates has been harded as a practice of the pharmaceutical industry, etc. as seen earlier, in full view of the following, the practices of rebates are not ordinary to be socially acceptable, but are contrary to the social order, due to the error in the industry, and is extremely contrary to the social order. Therefore, even if the expenses incurred therein bring about a decrease in the company’s net assets, it cannot be recognized as losses.

(1) The Fair Trade Commission imposes legal sanctions on the practices of rebates by imposing corrective orders and penalty surcharges on the act of inducing customers of a pharmaceutical company. The mere fact that the precedents of criminal punishment or tax imposition do not seem to exist, it is difficult to view that the practices of offering rebates are not unlawful and that it should be recognized as a usual or legitimate practice. If a doctor affiliated with a national or public university hospital offered rebates to the Plaintiff’s assertion, the intent and provider is a crime of bribery and offering of bribe, and if a doctor affiliated with a private university hospital offered rebates to the Plaintiff’s assertion to the doctor, the doctor and provider is more unlawful than the degree of each criminal punishment due to the crime of receiving property in breach of trust and the

(2) The offering of rebates, which is identified by the Fair Trade Commission, mainly refers to the offering of meal expenses in high-class restaurants, such as product presentation meetings, or the provision of food expenses, credit card loans, etc. In addition, the offering of rebates by the Plaintiff’s assertion is more direct, affirmative, and explicit than the above offering method, and thus, the degree of illegality is more strong.

(3) The offering of rebates by a pharmaceutical company may cause social waste and ultimately cause damage to consumers. Large pharmaceutical companies maintain their monopoly status through the offering of rebates, and thereby lose the opportunity to develop new drugs due to the decrease in the amount of research and development investment, and further transfer the cost of rebates to consumers who do not have a pharmaceutical choice, which is the cause of the increase in pharmaceutical prices, if the profits acquired therefrom are offered as rebates.

(4) There is no evidence to deem rebates to be inevitably required by medical institutions or pharmaceutical companies under the national health insurance system generally applied in Korea.

(5) The amount of rebates funds is bound to be executed as a non-financial expense created through window dressing accounting, etc.; non-financial funds are premised on embezzlement, window dressing accounting, tax evasion, unfair trade practices, etc.; and if the tax law includes such expenses as deductible expenses and deducts them from taxable income, it would be unlimited to allow the unlawful state.

(6) The Supreme Court Decision 2008Du7779 Decided June 23, 2009, which held that the inclusion of expenses in deductible expenses in deductible expenses should be reasonable for the purpose of obtaining illegal income in the calculation of deductible expenses, barring special circumstances such as serious violation of social order, etc., is a case where the disbursement of compensation made by a trust bank concurrently in consultation with other commercial banks in order to prevent a large-scale termination and withdrawal situation of the existing trust contract, etc. in the situation of foreign exchange crisis, the disbursement of compensation made by the trust bank concurrently in consultation with other commercial banks should be included as deductible expenses under the Corporate Tax Act, not only as entertainment expenses, but also as it is necessary for business, but also as ordinary expenses in light of social norms.

(7) There is no evidence that the tax practice to the extent that is subject to trust protection has been established. There is no evidence that there is a consensus to recognize inclusion of deductible expenses in future similar cases.

C) Sales incidental expenses, entertainment expenses, and other losses

(1) If the other party is a business-related person and the purpose of expenditure is to promote smooth progress in transactional relations by promoting friendship among business-related persons through entertainment, etc. among the expenses paid by a corporation for a business, such expenses shall be deemed entertainment expenses under Article 25(5) of the Corporate Tax Act. However, if the disbursement details, nature, amount, etc. are recognized as normally required in relation to the sale of goods or products in light of sound social norms or commercial practices, then such expenses constitute sales incidental expenses recognized as losses under Article 19(1) of the Corporate Tax Act and Article 19 subparag. 1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302, Feb. 4, 2009) (see Supreme Court Decision 2007Du12422, Nov. 12, 2009).

However, in light of the illegality of the practices to offer rebates as seen earlier, the key expenses cannot be deemed as sales incidental expenses that are normally required in light of sound social norms. In light of the daily rate and purpose of offering rebates by the Plaintiff’s assertion, it cannot be deemed as entertainment expenses, which are the amount paid for the promotion of smooth progress of transactional relations by the act of entertainment, etc., by boosting friendship with business-related persons.

(2) On the other hand, the Corporate Tax Act comprehensively prescribes the scope of earnings and losses as a whole, not through the conclusion of the scope thereof, but through the examples of the special provisions thereof, and stipulates the matters of non-deductible expenses and inclusion in deductible expenses as special cases. Therefore, the reduction of total assets in principle should be deemed as deductible expenses unless it is listed in the non-deductible expenses, etc. In addition, according to the above provisions, it is reasonable to include the expenses paid in order to obtain illegal income in deductible expenses, regardless of whether it is prohibited under other Acts, in principle, in deductible expenses should be imposed according to the taxable capacity and net income should be subject to taxable expenses regardless of whether it is prohibited under other Acts and subordinate statutes (see, e.g., Supreme Court Decisions 96Nu6158, May 8, 1998; 2008Du7799, Jun. 23, 2009).

However, as seen earlier, the offering of rebates is a wrongful practice in the industry as an expenditure of illegal costs, and there are special circumstances that the inclusion of deductible expenses in deductible expenses is extremely contrary to social order.

D) Whether rebates expenses for key expenses were paid

In an administrative litigation seeking revocation on the grounds of illegality of taxation, in principle, the tax authority bears the burden of proof as to the legality of disposition and the existence of taxation requirement facts. However, as to the existence of special circumstances in light of empirical rule, the taxpayer has the burden of proof or burden of proof with respect to the amount of expenses to be included in deductible expenses which are the basis of corporate tax income determination, in principle, the tax authority bears the burden of proof with respect to the amount of expenses to be included in deductible expenses, which are the basis of corporate tax income determination. However, as there are cases where the taxpayer bears the burden of proof with regard to the taxpayer taking into account the equity of the parties, the taxpayer's burden of proof is disputed whether some of the reported expenses is actual expenses, and the taxpayer's burden of proof has been proved to the extent that the purpose of use of the expenses claimed by the taxpayer and the other party to the payment has been proved to the extent that the taxpayer was proved to the extent that the taxpayer did not have any other burden of proof with regard to the same amount, the taxpayer's burden of proof has to be easily presented from the taxpayer (see, 2005Du366, etc.).

However, in this case, the Plaintiff presented only the relevant criminal judgment (No. 29-1 and 2) that recognized the existence of false amount in welfare expenses, travel expenses, transportation expenses, etc., and asserted that there was actual payment of considerable expenses in business expenses, etc. in accordance with the business practices, and provided rebates to the doctors, and there is no presentation of evidentiary materials verifying the payment of rebates, such as the specific counterpart to the payment of rebates, the date of payment, etc., or only some of them are presented. Therefore, it is difficult to conclude that the entire cost of the issue is the cost actually provided as

E) Sub-decision

Therefore, it is legitimate to exclude the issue costs from deductible expenses related to the issue ①. Therefore, the plaintiff's above assertion is without merit.

B. Judgment on key issues ②

1) The plaintiff's assertion

In order to overcome managerial crisis, the Plaintiff entered into an advisory contract with AC as a consulting company on the acquisition, merger, etc. of a company on March 15, 2004, and directly receives advisory services for the acquisition of the shares of DMF and the expansion of capital through capital increase by issuing new shares, and paid the advisory fees for the issue as remuneration. Therefore, the Plaintiff’s work is related to the Plaintiff’s work.

2) Relevant statutes

ii) Corporate Tax Act

Article 27 (Non-Inclusion of Expenses not Related to Business in Calculation of Losses)

The following amounts of expenses paid by a domestic corporation for each business year shall not be included in deductible expenses for the purpose of calculating the amount of income for the relevant business year:

2. An amount of expenditure that is deemed unrelated directly to the business of the legal entity as prescribed by Presidential Decree, except subparagraph 1.

3) Determination

According to the statement in Gap evidence No. 15, the plaintiff's contract was made with ACI on March 15, 2004. However, according to the evidence No. 27, No. 27, No. 2, and the whole purport of the oral argument, the date of reporting the value of shares of the DMF is the earlier, and the plaintiff's (ju) acquisition of shares of the DMF was made in the process of taking over the plaintiff's management right from the KTB, which is actually controlled by the plaintiff's hospitals around Jan. 2004, and the KTB or the KTB hospitals in Korea requested ACI to provide advisory services, and the service cost is also acknowledged. According to the above facts, according to the above facts, the consultation fee can be deemed to have been paid as the consideration of the advisory service provided by the KTB or the Korean advisory service.

Therefore, it is legitimate that the defendant excluded the issue from deductible expenses because the advisory fee cannot be viewed as expenses directly related to the plaintiff's business only with the contract signed by the plaintiff on March 15, 2004 between the plaintiff and ACI. Therefore, the plaintiff's argument as to the issue (2)

C. Judgment on the issues ③

1) The plaintiff's assertion

On October 17, 2003, the Plaintiff lent KRW 770 million to the specially related person to KoreaDS, and recovered KRW 200 million on October 23, 2003, and paid KRW 300 million on January 2, 2004. Since KoreaDS was in bankruptcy and became impossible to recover its claim since it became impossible to recover its claim due to the failure to pay it as the contract deposit, and as the Plaintiff ceased to exist between the specially related person with KoreaDS at the time of the settlement of bad debt, allowances for bad debts may be included in the above balance amount of KRW 870 million (the Plaintiff asserts that, unlike the content of the Defendant’s disposition, not only KRW 470 million, which was deemed to have been recovered in the tax investigation but also KRW 870 million,000,000,000,000,000,000,000 refunded promissory notes returned to the Plaintiff).

2) Relevant statutes

Periodical Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008)

Article 34 (Inclusion of Bad Debt Allowance in Calculation of Losses)

(1) Where a domestic corporation appropriates allowances for bad debts as losses in order to appropriate for bad debts of credit sales, loans or other corresponding claims in each business year, they shall be included in deductible expenses within the limit of the amount calculated as prescribed by Presidential Decree in calculating the income amount for

(2) The amount of bonds which cannot be recovered by such causes as the debtor's bankruptcy, etc. as prescribed by the Presidential Decree (hereafter in this Article, referred to as the "deductible expenses") from among bonds held by a domestic corporation shall be included in deductible expenses in calculating

(3) The provisions of paragraphs (1) and (2) shall not apply to claims falling under any of the following subparagraphs:

2. Medicines falling under Article 28 (1) 4 (b).

Article 28 (Non-Inclusion of Interest Paid in Calculation of Losses)

(1) The interest on any of the following borrowings shall not be included in deductible expenses in calculating the income amount of a domestic corporation for each business year:

4. Of interest on loans paid during each business year by a domestic corporation which acquires or holds assets falling under one of the following items, the amount calculated under the conditions as prescribed by the Presidential Decree (limited to interest on loans equivalent to the value of the relevant assets):

(b) Provisional payments, etc. prescribed by the Presidential Decree to a person with a special relationship under the provisions of Article 52 (1) without connection with the business of the relevant corporation; and

3) Determination

Whether a transaction constitutes a transaction between the specially related parties subject to non-deductible expenses pursuant to Articles 34(1) and (3)2, and 28(1)4(b) of the former Corporate Tax Act shall be determined as at the time of the transaction. The issue of whether a transaction constitutes a transaction between the specially related parties subject to non-deductible expenses pursuant to Article 34(1) and (3)2, and Article 28(1)4(b) of the former Corporate Tax Act shall be determined as at the time of the transaction. As long as the Korea DDR was a specially related party at the

Therefore, the plaintiff's argument regarding the issue No. 3 is without merit.

D. Determination as to the issue (4)-1

1) The plaintiff's assertion

On April 13, 2004, the Plaintiff acquired all of the shares of (State), DMF, which is an extinguished corporation, with the acquisition price of KRW 22.9 billion, and the Plaintiff appropriated KRW 11.11 billion as (State), 1.1 billion after acquiring shares, and then deducted KRW 1.36 billion in each business year in 2006 and 2007, and then deducted KRW 2.24 billion in total, KRW 3.6 billion in total, and KRW 3.546 million in each business year. In addition, on May 29, 2006, the Plaintiff included losses of 7.49 billion in corporate tax at the time of the merger of DMF as corporate tax for the business year of 2006.

On May 29, 2006, the Plaintiff: (a) merged DMF and succeeded to its assets and liabilities; (b) retired all the shares of DMF (i.e., 6,200 shares acquired on April 13, 200 and assessed as equity method by acquiring the entire shares of 6,200 shares) held at that time; and (c) as a result, the net assets of the DMF’s net asset value of 14,915,814,160 shares that were succeeded to the merger fall short of KRW 22,409,326,540,000,000,000,000,000 won, which were 7.493,512,380,000,000 won, which were terminated; and (d) the

2) Relevant statutes

ii) Corporate Tax Act

Article 19 (Scope of Deductible Expenses)

(1) Deductible expenses shall be the amount of losses incurred by transactions which reduce the net assets of a corporation, excluding return of capital or financing, disposition of surplus funds, and what is provided for in this Act.

(2) Losses referred to in paragraph (1) shall be losses or expenses incurred in connection with the business of a corporation which are generally accepted as ordinary or directly related to profit, except as otherwise expressly prescribed by this Act and other Acts.

Article 22 (Non-Inclusion of Appraisal Losses in Calculation of Losses)

The appraisal loss on assets held by a domestic corporation shall not be included in the calculation of losses in calculating the income amount for each business year: Provided, That this shall not apply to the appraisal loss arising from the appraisal of assets pursuant to the provisions of Article 42 (2) and (3).

3) Determination

A) (State) Whether loss due to the retirement of stocks of DMF is subject to inclusion in deductible expenses

(1) For the following reasons, where the merged corporation holds the stocks of the extinguished corporation prior to the merger and retires the entire stocks of the extinguished corporation, it is reasonable to view that the profits and losses from the retirement are capital transactions included in the merger profit and loss.

① If a merged corporation holds new shares of the merged corporation without retiring the shares of the merged corporation at the time of the merger with an extinguished corporation (hereinafter “combined shares”), and then retires shares later without disposing of new shares, the retirement of the above new shares constitutes capital transactions in the nature of capital refund. However, even in cases where the merged corporation retires shares of the merged corporation without allocating new shares of the merged corporation at the time of the merger with an extinguished corporation, there is time interval between the merged corporation and the entire retirement without allocating new shares of the merged corporation, but it is the same as in cases where the merged corporation retires shares after allocating new shares after the merger (this is the result of acquiring the treasury shares upon delivery of new shares of the merged corporation, but it does not constitute acquisition by succession from the merged corporation with the original assets owned by the merged corporation, and thus, profits or losses from the disposal of the new shares do not constitute gains from the merger (see Supreme Court Decision 2004Du3755, Jun. 10, 2005). However, it is reasonable to deem that all new shares already retired through the merger with profits or losses from the merger.

② According to the provisions of the Corporate Tax Act and the Commercial Act, acquiring and disposing of treasury stocks as part of the capital reduction procedure, or acquiring and disposing of treasury stocks through a corporate merger has the nature of return or payment of capital. Therefore, it is reasonable to view it as capital transaction since it has the nature of return or payment of capital. However, the acquisition and disposal of treasury stocks other than the above constitutes a transaction that increases or decreases net assets, and it constitutes a transaction of profit and loss of assets subject to corporate tax (Supreme Court Decision 94Nu21583 delivered on April 11, 1995). In light of the above legal principles, the combined stocks acquired by the merged corporation prior to the merger are extinguished, and thus, it would be converted into the treasury stocks of the merged corporation due to new stocks issued by the merged corporation corresponding to the combined stocks, etc., which is in the nature

(2) Therefore, even if there were KRW 7.493,512,380,00,000,000,000 in the account book as alleged by the Plaintiff, the fact that the Plaintiff’s shares were retired at the same time as the merger constitutes capital transactions, and thus, the loss incurred by the retirement is not included in the calculation of losses.

B) Preliminary Judgment

Even if the retirement of the entire shares of the Plaintiff at the same time as the merger is a profit and loss transaction that does not fall under capital transaction, in order to recognize the inclusion of losses in the calculation of losses in the calculation of losses for the shares of the extinguished corporation held prior to the merger as alleged by the Plaintiff, there should be a legitimate evaluation of the shares at the time of the acquisition of the merged corporation's shares, and on this premise, legitimate evaluation losses for the shares of the extinguished corporation

In addition, in light of the non-deductible loss of the assets under Article 22 of the Corporate Tax Act as to the non-deductible loss of the merged corporation's stocks held by the merged corporation before the merger, where the merged corporation does not deliver new stocks at the time of the merger with respect to the succession of the assets and liabilities at the time of the merger, the merged corporation's loss of the loss of the merged corporation should be included in the calculation of the income amount of each business year and the tax adjustment in addition to the calculation of the same amount should be additionally conducted. If the surviving corporation does not deliver new stocks at the time of the merger with respect to the stocks held by the merged corporation, if the surviving corporation does not deliver the stock in the course of the merger, the "voluntary evaluation of the assets" would result in the result of recognizing the non-deductible loss of the merged corporation's stocks.

However, in this case, there is no evidence that the plaintiff had a legitimate evaluation at the time of acquiring all of the shares of the (State) DMF, and there is also a tax adjustment in addition to the inclusion of the issue share appraisal losses in deductible expenses, and the tax adjustment in deductible expenses again should be implemented. Thus, it is legitimate that the defendant excluded the amount of the issue share appraisal losses from deductible expenses in the business year 2006

C) Sub-determination

Therefore, the plaintiff's argument about the issue ④-1 is without merit.

E. Determination on key issues ④-2

1) The plaintiff's assertion

(State)In the merger of DMF, the Plaintiff assessed the net asset value of the shares as KRW 14.8 billion, approximately KRW 3.7 billion, the outstanding difference in the removal of investment, as its goodwill, and thus constitutes the subject of depreciation.

2) Relevant statutes

Periodical (amended by Act No. 10423, Dec. 30, 2010)

Article 23 (Non-Inclusion of Depreciation Costs in Loss)

(2) Fixed assets under the provisions of paragraph (1) mean assets prescribed by the Presidential Decree, such as buildings, machinery, equipment and patent rights, except land.

The former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22814, Jun. 8, 2010)

Article 24 (Scope of Depreciable Assets)

(1) For the purpose of Article 23 (2) of the Act, the term “property as prescribed by the Presidential Decree such as buildings, machinery, equipment and patent rights” means the fixed assets under each of the following subparagraphs (excluding the property under paragraph (2); and hereinafter referred to as the “ deprecia

2. Intangible fixed assets falling under any one of the following items:

(a) Goodwill, design right, utility model right, trademark right;

(4) Among the goodwill under paragraph (1) 2 (a), where a merged corporation or a corporation newly established by division (including a counterpart corporation to a division and merger; hereafter in this paragraph the same shall apply) evaluates and succeeds to the evaluation of assets of a merged corporation or divided corporation (including a extinguished counterpart corporation to a division and merger), the goodwill appropriated by the merged corporation or the corporation newly established by division (including a extinguished counterpart corporation to a division and merger) shall be deemed depreciable assets, limited to assets of business value for which compensation is paid, due to trade names, trade

3) Determination

According to Article 24(4) of the former Enforcement Decree of the Corporate Tax Act, the business rights of the merged corporation appropriated at the time of the merger with the merged corporation shall be evaluated and succeeded to the assets of the merged corporation. ② The merged corporation may be a depreciable asset of the merged corporation limited to the assets of the merged corporation, which are worth business value due to the trade name, transaction relations, and other trade secrets of the merged corporation. However, in this case, the plaintiff's assertion in itself can only be recognized as succeeded to the assets of the extinguished corporation at the time of the merger, and it shall not be deemed as the evaluation and succession of the assets of the extinguished corporation (State), and there is no evidence to deem otherwise that

Therefore, since the business rights of DMF appropriated at the time of merger cannot be the object of depreciation assets, the plaintiff's issues (iv)-2 on different premise are without merit.

3. Conclusion

Therefore, the plaintiff's claim shall be dismissed as it is without merit. The judgment of the court of first instance is just and it is so decided as per Disposition by the assent of all participating Justices.

[Attachment List omitted]

Judges Kim Jae-sik (Presiding Judge)