[1] In determining whether a person constitutes “a person in a special relationship” under Article 101(1) of the former Income Tax Act, whether in both cases, whether not only the person in a special relationship but also the person in a special relationship should be determined based on his/her birth price (affirmative)

[2] In a case where the provisions such as Article 40 of the former Corporate Tax Act (amended by Act No. 40), where it is difficult to determine the attribution of profit and loss solely with the provisions of the former Corporate Tax Act, whether the attribution of profit and loss can be determined in accordance with the corporate accounting standards which are generally accepted as fair and reasonable accounting practices (affirmative in principle) / Whether the provision on the attribution of profit and loss under corporate accounting standards may be readily concluded as violating the principle of confirmation of right and duty solely on the grounds that the provision on the attribution of profit and loss does not expressly stipulate in the individual provisions of tax law (negative), and

[3] The case holding that, in a case where a new contract expense clause in relation to the conclusion of an insurance contract provides that "new contract expense", which is an amount paid as an insurance solicitor's solicitation allowance, store operating expense, etc., shall be treated as expenses by equally redeeming the relevant contract's maintenance period (seven years where it exceeds seven years) as other assets in the insurance business accounting rules, which are the basis of insurance business accounting rules related to insurance business, and the tax authority imposed tax on the premise that the new contract expense is included in total amount at the time when the new contract expense occurred, the provisions similar to the above new contract expense clause in the basic provisions of the Corporate Tax Act were stipulated at the request of the insurance company, and most insurance companies such as Gap corporation, etc. included the new contract expense in deductible expenses in proportion to the payment period of the insurance premium in accordance with the report of the corporate tax, the above new contract expense clause in question constitutes "standard or practice of corporate accounting" under Article

[1] Article 101(1) of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009; hereinafter the same) provides, “When the head of a district tax office or the head of a regional tax office having jurisdiction over the place of tax payment or the head of a regional tax office deems that any act or computation of a resident having capital gains has reduced unreasonably the tax burden on the relevant income through transactions with the relevant resident, he/she may calculate the amount of income for the pertinent year regardless of the resident’s act or calculation.” Furthermore, one of the related parties as mentioned above, Article 101(4) of the former Income Tax Act and Article 98(1)1 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010; hereinafter the same applies) stipulates that “in cases where it is deemed that a person with limited liability has a relationship with the relevant resident or a person with a special relationship with the relevant resident, the former Enforcement Decree of the Framework Act (amended by Presidential Decree No. 2038, Feb. 18, 2019) stipulates.

[2] Article 40 of the former Corporate Tax Act (amended by Act No. 8141 of Dec. 30, 2006; hereinafter the same) declares the principle of confirmation of rights and duties, etc., and provides for the specific period of attribution of earnings and losses according to the type of transaction. However, the provisions pertaining to the attribution of profits and losses under the tax law according to the type of transaction cannot be deemed to be a provision stipulating the attribution of profits and losses in its entirety as a completed manner by predicting the various types of transactions in the modern society. Thus, if it is difficult to determine the attribution of profits and losses, it is reasonable to interpret that the scope of attribution of profits and losses may be determined in accordance with the corporate accounting standards as stipulated in Article 43 of the former Corporate Tax Act, unless it is against the principle of confirmation of rights and obligations under the Corporate Tax Act, and it conforms with the purpose of Article 20 of the former Framework Act on National Taxes (amended by Act No. 911 of Jan. 1, 2010).

[3] In a case where the new contract expenses, which are the amount paid as an insurance solicitor's solicitation allowance, store operating expenses, etc., in relation to the conclusion of insurance contracts, are deemed as the assets under the insurance business accounting rules (established on December 10, 1998), which are the standards for insurance business accounting, and the tax authorities imposed tax on the premise that the amount of new contract expenses is included in deductible expenses at the time of the occurrence of new contract expenses, the case holding that the new contract expenses provisions are not only reasonable in compliance with the principle of response to profit-making expenses, but also that the new contract expenses, which are the basis for proportional distribution of deductible expenses, can be deemed as being included in deductible expenses under the former Corporate Tax Act (amended on December 10, 1998), but also in the premise that the new contract expenses are included in deductible expenses at the time of the occurrence of new contract expenses (hereinafter referred to as "new contract expenses provisions") under the general provisions of the Corporate Tax Act at the request of the insurance business circles, and that most of the insurance companies Gap et al. included the new contract expenses in deductible expenses in deductible expenses in the amount of 20.

[1] Article 101(1) and (4) of the former Income Tax Act (Amended by Act No. 9897, Dec. 31, 2009; see current Article 101(5)); Article 98(1)1 of the former Enforcement Decree of the Income Tax Act (Amended by Presidential Decree No. 22034, Feb. 18, 2010; see current Article 98(1) and Article 1-2(1) of the Enforcement Decree of the Framework Act on National Taxes; Article 20 subparag. 1 of the former Enforcement Decree of the Framework Act on National Taxes (Amended by Presidential Decree No. 22038, Feb. 18, 2010; see current Article 1-2(1)1); Article 882-2(2) of the Civil Act / [2] Article 90 of the former Enforcement Decree of the Corporate Tax Act (Amended by Act No. 8141, Dec. 30, 2006; 3019)

[1] Supreme Court Decision 87Nu619 delivered on October 11, 198 / [2] Supreme Court Decision 92Nu2936, 2943 delivered on October 23, 1992 (Gong1992, 3321)

Plaintiff 1 and four others (Attorneys Kim Jong-soo et al., Counsel for the plaintiff-appellant)

Head of tax office and two others

Seoul High Court Decision 2014Nu42591 decided October 22, 2014

All appeals are dismissed. The costs of appeal are assessed against each party.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Regarding the plaintiffs' grounds of appeal

A. Regarding ground of appeal No. 1

(1) Article 101(1) of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009; hereinafter the same) provides, “When the head of a district tax office or the head of a regional tax office having jurisdiction over the place of tax payment or the head of a regional tax office deems that any act or computation of a resident having capital gains has reduced unreasonably the tax burden on the relevant income through transactions with the relevant resident, he/she may calculate the amount of income during the relevant year regardless of the resident’s act or calculation.” Furthermore, one of the aforementioned related parties is one of the aforementioned Article 101(4) of the former Income Tax Act and Article 98(1)1 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010; hereinafter the same applies) stipulates that “in cases where a person with limited liability is a relative within the scope of 1 through 18, 2010>

(2) Review of the reasoning of the lower judgment and the record reveals the following facts.

① Nonparty 1’s children are Nonparty 2, Nonparty 3, and Nonparty 4. Nonparty 2 was adopted with Nonparty 5’s children, who are Nonparty 1’s private villages, and there are Nonparty 6, Nonparty 2, and Nonparty 7. Nonparty 6’s wife, Plaintiff 1, and Plaintiff 3, Plaintiff 4, Plaintiff 8, and Nonparty 5 were children. Meanwhile, Nonparty 3’s children are Nonparty 9, and Nonparty 4 were children of Nonparty 10.

② On March 31, 2005, the Plaintiffs, Plaintiff 8, and Nonparty 7 transferred 5,562,341 shares per share to Nonparty 9, Nonparty 10, and Nonparty 11 (hereinafter “transferees”) on the aggregate of the instant shares issued by juk Life Insurance Co., Ltd. (hereinafter “instant company”) (hereinafter “instant transfer value”).

③ The Defendants calculated the value of the instant shares as KRW 2,898 per share ( KRW 3,767 per share in addition to 30/100) in accordance with the supplementary evaluation method under Article 63 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax Act”) and imposed capital gains tax for the period from May 4, 201 to May 12, 201 on the Plaintiffs, respectively (hereinafter “instant disposition”).

(3) Examining these facts in light of the legal principles as seen earlier, Nonparty 9 and Nonparty 10, based on the birth price of Nonparty 2, constitutes “a person having a special relationship” as stipulated under Article 98(1)1 of the former Enforcement Decree of the Income Tax Act, inasmuch as Nonparty 6 (the Plaintiff 1’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband’s husband

(4) Although the lower court’s reasoning is somewhat inappropriate, the lower court’s conclusion to the same purport is justifiable, and contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal doctrine on the scope of persons specially related to adoption.

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

(1) citing the reasoning of the judgment of the court of first instance, the court below rejected the Plaintiffs’ assertion that the transfer value of this case falls under the market price formed in general and normal transactions, and even if the transfer value of this case cannot be seen as the market price, there is economic rationality in transferring the stocks of this case at that price, and thus, the provision of the denial

(2) Examining the record in light of the relevant provisions and legal principles, the lower court did not err in its judgment by misapprehending the legal doctrine on the computation of the market price and economic rationality in the wrongful calculation of capital gains, contrary to what is alleged in the grounds of appeal.

C. Regarding ground of appeal No. 4

(1) Article 40 (1) of the former Corporate Tax Act (amended by Act No. 8141 of Dec. 30, 2006; hereinafter the same) provides that "the business year of accrual of earnings and losses of a domestic corporation for each business year shall be the business year which includes the date on which the concerned earnings and losses are determined," and Paragraph (2) of the same Article provides that "necessary matters concerning the scope, etc. of the business year of accrual of earnings and losses under the provisions of paragraph (1) shall be prescribed by the Presidential Decree." Articles 68 through 71 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328 of Feb. 9, 2006; hereinafter the same) provides that "the business year of accrual of earnings and losses shall be the business year which includes the date on which the concerned earnings and losses are determined," and Article 43 of the former Corporate Tax Act provides that "where the concerned corporation continues to apply the concerned corporate accounting standards or practices with the exception of the business accounting practices of a domestic corporation's income for each business year."

(2) As above, Article 40 of the former Corporate Tax Act declares the principle of confirmation of rights and duties under paragraphs (1) and (2) of the same Article, and provides for the specific period of attribution of profits and losses depending on the type of transaction. However, the provisions on the reversion of profits and losses under the tax law pursuant to such type of transaction cannot be deemed as a provision which, as a complete conclusion, determines the attribution of profits and losses by predicting the various types of transaction in the modern society. Thus, if it is difficult to determine the attribution of profits and losses solely by the above provisions, it is reasonable to interpret that the scope of attribution of profits and losses may be determined in accordance with the corporate accounting standards which are generally accepted as fair and reasonable accounting practice, as stipulated in Article 43 of the former Corporate Tax Act (amended by Act No. 9911 of Jan. 1, 2010), and such interpretation accords with the purport of Article 20 of the former Framework Act on National Taxes (amended by Act No. 92Nu2936, Oct. 23, 1992).

(3) The reasoning of the lower judgment and the evidence duly admitted reveal the following.

(1) The term "new contract costs" in an insurance business means the amount disbursed as expenses, such as solicitation allowances, etc. for insurance solicitors in connection with the conclusion of an insurance contract, personnel expenses for places of business, goods expenses, diagnostic expenses, contract procurement expenses,

② Article 31 of the Accounting Rules of Insurance Business (amended on December 10, 1998) (hereinafter “instant new contract clause”) which is the basis of insurance business accounting related to insurance business provides that new contract costs and other assets shall be treated equally as expenses during the maintenance period (seven years if the period exceeds seven years) of the relevant contract by deeming the new contract costs and other assets. However, Article 68 of the amended Insurance Business Supervision Regulation (Public Notice of Financial Supervisory Commission) as amended on March 12, 199 also provides similar provisions, but the tax authority imposed tax on the premise that the total amount of the new contract costs should be included in deductible expenses at the time when the new contract costs occur.

③ Since then, corporations engaging in insurance business filed multiple civil petitions on the grounds that a large amount of losses incurred in the year in which the new contract expenses were incurred, even if a large amount of losses incurred in the year in which the new contract expenses were incurred, may be incurred in the calculation of losses due to the lapse of the period of deduction of losses carried forward (five years). Accordingly, in order to enable assetsizing the new contract expenses to be included in the calculation of losses in the future, the General Rule of Corporate Tax (amended on May 10, 2003) 40-7123 of the Corporate Tax Act provides that “the new contract expenses incurred by the long-term insurance contract (including recruitment allowances, store operating expenses, etc.) out of the project expenses paid by the corporation engaging in insurance business for each business year shall be included in the calculation of losses in the calculation of losses (where the period exceeds seven years, seven years)” (hereinafter “Common Provisions of this case”).

④ Under the General Provisions of the instant case, the instant company filed a revised corporate tax for the business year of 2003 (from April 1, 2003 to March 31, 2004) and filed a revised corporate tax for the business year of 2004. The other insurance companies also included the new contract expenses in the deductible expenses in proportion to the insurance premium payment period as well as in the instant company after May 2003.

(4) Examining these facts and the following circumstances revealed through the record in light of the legal principles as seen earlier, since the instant new contract expense provision constitutes “standards or practices for corporate accounting” under Article 43 of the former Corporate Tax Act, it is reasonable to include the said new contract expense in the deductible expenses in the total amount for the pertinent business year during which the payment was made, not in the total deductible expenses, but in the premium payment period (7 years where the period exceeds seven years) in proportion to the amount of the premium

① Insurance business is a type of business that requires high level of public interest, such as the interests of policyholders, and there is a high need to strictly observe the accounting rules, and the amended provisions of the Insurance Business Supervision also regulates and supervises the accounting of insurance companies by providing a content similar to the new contract clause in this case. In addition, as the instant provisions were newly established on May 10, 200 at the request of the insurance business company, the instant new contract clause is operated as a firm practice.

② Article 70(3) of the former Enforcement Decree of the Corporate Tax Act provides that the business year of accrual of insurance premiums received by a corporation operating a financial and insurance business shall be the business year to which the date on which such insurance premiums are actually received belongs. The new contract clause of this case, which provides for the allocation of deductible expenses in response to the receipt of such insurance premiums, may be deemed reasonable as well

(3) Inclusion of new contract costs in deductible expenses is treated as expenses in equal annual installments, and no special evaluation is accompanied. Thus, there is little possibility that corporations operating insurance business will arbitrarily manipulate taxable income by using the same.

④ In addition, even if new contract costs do not constitute intangible fixed assets listed in the items of Article 24(2)2 of the former Enforcement Decree of the Corporate Tax Act, such circumstance alone cannot be interpreted as not allowing the allocation of deductible expenses according to corporate accounting standards or practices regarding new contract costs.

(5) Therefore, the lower court did not err by misapprehending the legal doctrine regarding the timing of inclusion of new contract costs in deductible expenses, contrary to what is alleged in the grounds of appeal.

D. Regarding ground of appeal No. 5

(1) Article 63(1)1(c) of the former Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18989, Aug. 5, 2005; hereinafter “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”), which provides for the supplementary evaluation method of unlisted stocks, provides that the net value per share of unlisted stocks shall, in principle, be the net value per share (the weighted average value of net profits and losses for the preceding three years per share ± the rate determined and publicly announced by the Commissioner of the National Tax Service taking into account the distribution rate of corporate bonds with three years maturity) and net asset value per share (the net asset value ± total number of stocks issued by the relevant corporation ± the net asset value of the relevant corporation ± the net asset value of the relevant corporation) at the weighted average value of 3 years and 2 years per share of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18989, Aug. 5, 2005; hereinafter “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”).

(2) citing the reasoning of the judgment of the court of first instance, the court below determined that the transfer date of the instant shares was March 31, 2005, which was the end of the business year 2004 of the instant company, and thus, the “business year before the record date” should be deemed the business year 2004, and therefore, the net value of the instant shares should be calculated based on the net value of the shares from 2002 to 2004.

① The purpose of the amendment of the above provision on the net profit and loss amount per share for the preceding three years is to calculate the net profit and loss value without any need to settle accounts even when the evaluation base date is the end of the business year, and thus, it seems to be to include the net profit and loss amount for the pertinent business year in the evaluation.

(2) The calculation of net profit and loss value based on the net profit and loss value of the business year close to the evaluation base date is also consistent with the assessment of the stocks of this case.

(3) Examining the record in light of the foregoing provision and related legal principles, the lower court did not err by misapprehending the legal doctrine on the business year subject to the net profit and loss calculation, as otherwise alleged in the grounds of appeal.

E. Regarding ground of appeal No. 6

(1) The lower court rejected the Plaintiffs’ assertion on a different premise, citing the reasoning of the first instance judgment, on the grounds as indicated in its reasoning, on the grounds that the total amount of the insurance money for which the period of extinctive prescription expired cannot be appropriated as the debt.

(2) Examining the record in light of the relevant provisions and legal principles, the lower court did not err by misapprehending the legal doctrine on the dormant insurance money, contrary to what is alleged in the grounds of appeal.

2. As to the Defendants’ grounds of appeal

A. Article 55(1) of the former Enforcement Decree of the Inheritance and Gift Tax Act, which provides for the method of calculating the net asset value per share in the supplementary valuation method of unlisted stocks, provides that “net asset value” of the relevant corporation as of the base date of appraisal shall be “value obtained by deducting liabilities from the value assessed in accordance with Articles 60 through 66 of the Act as of the base date of appraisal.”

Meanwhile, with the amendment of the Enforcement Decree of the Inheritance and Gift Tax Act by Presidential Decree No. 21292 on February 4, 2009, Article 55(1) of the said Enforcement Decree added the part “if the net asset value is less than zero won, it shall be zero won.” Article 3 of the said Addenda provides that “The amended provisions of Article 55(1) of the said Enforcement Decree shall apply to the first evaluation of unlisted stocks after this Decree enters into force.”

B. In light of the following circumstances, the lower court determined that the net asset value of the instant company cannot be assessed as zero (0) won even if it is incidental to the net asset value, and that the amended provisions of the Enforcement Decree of the Inheritance and Gift Tax Act cannot be applied in assessing the instant shares.

(1) Prior to the amendment, Article 55(1) of the Enforcement Decree of the Inheritance and Gift Tax Act provides for the method of calculating the net asset value and does not stipulate that “if the net asset value is not more than zero won, it shall be zero won.” Thus, it is not allowed to legal fiction of the net asset value of the appendant (-) as zero won without express provision.

(2) Article 3 of the Addenda to the above case is interpreted as “the first evaluation of unlisted stocks after this Decree enters into force” and Article 55(1) of the Enforcement Decree of the amended Inheritance and Gift Tax Act applies only when the evaluation base date falls after the enforcement of the amended Enforcement Decree. Since the Plaintiffs transferred the instant stocks on March 31, 2005, which was before the enforcement date of the amended Enforcement Decree of the Inheritance and Gift Tax Act, they do not constitute “the case after the enforcement date of the amended Enforcement Decree of the Inheritance and Gift Tax Act.”

(3) If such interpretation is not carried out, a new tax law after the establishment of the tax-related act is retroactively applied to the tax-related facts that had already been established prior to the amendment, resulting in unfavorable consequences to the taxpayer.

C. Examining the record in light of the relevant provisions and legal principles, the lower court did not err by misapprehending the legal doctrine on the interpretation of tax laws and regulations and the principle of prohibition of retroactive taxation, contrary to what is alleged in the grounds of appeal

3. Conclusion

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

Justices Jo Hee-de (Presiding Justice)