A. The purport of Article 26 (1) of the former Income Tax Act (amended by Act No. 4281 of Dec. 31, 1990) concerning constructive dividend

(b) Purport of the main sentence of Article 26 (1) 2 of the same Act;

C. Purport of the proviso of Article 26(1)2 of the same Act

(d) In determining the existence of the fictitious dividend under Article 26 (1) 1 of the same Act, the meaning of "amount required to acquire the stocks of the corporation concerned" and whether the face value of free-of-charge allocated by capitalizing the asset revaluation reserve, etc. is included (negative)

A. Fictitious dividend under Article 26 (1) of the former Income Tax Act (amended by Act No. 4281 of Dec. 31, 190) is the purpose of imposing deemed dividend in light of the principle of tax equity, in cases where the profit reserved in the company is returned to the shareholders or investors due to the reasons stipulated in each subparagraph of the above Article of the same Act in the form of legal reserve, earned surplus reserve, and other voluntary reserve, etc., not distributed out out of the surplus which is a corporate management performance, and the profit reserved in the company is reverted to the shareholders or investors.

B. Where a corporation’s surplus is transferred to capital, it shall maintain the company’s property to the extent increased by the increase in capital due to the transfer of the company’s surplus by the window of the capital adequacy, so it is only possible to reserve the company’s property, and when the earned surplus reserve is transferred to capital again, the earned surplus reserve shall be accumulated again to a certain extent. Since the accumulated ratio of the earned surplus reserve due to the increase in the capital reserve or the revaluation reserve is possible to reserve the corresponding company’s property, economic benefits similar to cash dividends shall belong to the stockholders or investors when the surplus is transferred into capital or financing, and Article 26(1)2 of the same Act provides that “where all or part of the corporation’s surplus funds are transferred to capital or financing, the value of the stocks or shares received by the stockholders, employees, or other investors” in the main sentence is due to this reason

C. Article 26 (1) 2 of the same Act provides that "the capital reserve under the provisions of Article 459 of the Commercial Act and the revaluation reserve under the Assets Revaluation Act shall be excluded in case where the capital is transferred to the capital," and the purpose of the provision is not to impose non-taxation on the value of the stocks received by the stockholders, etc. following the capital transfer, but to promote the capital transfer in order to protect the company creditors and promote the rationalization of corporate management by raising the company's credit rating through the capital transfer, in consideration of the policy, it shall not be deemed as the income from the capital transfer, and it shall not be deemed as the income from the capital transfer in case of the capital transfer in order to promote the rationalization of corporate management, and it shall be reasonable to view that the taxation has been reserved until the amount of the prescribed excess amount or the increased amount of reserved profit has occurred.

D. In determining whether there is an income from constructive dividend under Article 26 (1) 1 of the same Act, the face value of gratuitousism allocated by capitalizing the revaluation reserve in accordance with the proviso to Article 26 (1) 2 of the same Act shall not be deemed as the basis for concluding that the capitalizing the revaluation reserve is included in the "amount required for acquiring the stocks of the corporation in question", and the required amount shall be deemed as the amount actually paid for acquiring the stocks of the corporation in question, and otherwise, the acquisition value is received without compensation for the gratuitous share allocated according to capitalizing the revaluation reserve. Thus, since the acquisition value is actually included in the acquisition value of the stocks previously held, it shall not be deemed as the "amount required for acquiring the stocks of the corporation in question".

Article 26 (1) of the former Income Tax Act (amended by Act No. 4281 of Dec. 31, 1990)

A. Supreme Court Decision 91Da10565 delivered on September 10, 1991 (Gong1991, 2509)

[Judgment of the court below]

Head of Yongsan Tax Office

Seoul High Court Decision 89Gu9229 delivered on February 8, 1990

The judgment below is reversed and the case is remanded to Seoul High Court.

As to the ground of appeal by Defendant Litigation Performers

According to the reasoning of the judgment below, the court below determined that the above non-party's 6,400 shares of the above non-party company's company's 6,400 shares (1,000 won per share) were acquired without compensation from the above company as of December 27, 1980 when the above company acquired 810,00 shares of the above company's 8.5 billion shares as of December 23, 1985, and owned 450,000 shares as of December 23, 1985 because the above company acquired 80,000 shares from the above non-party's 50,00 shares for acquisition of the above non-party's 80,000 shares under the premise that the above non-party's 50,000 shares were not subject to acquisition of the above 80,000 won shares of the above company's 80,000 won shares under the premise that the above non-party's 1080,05,000,00.

However, the purpose of Article 26 (1) of the Income Tax Act is to make a constructive dividend in light of the principle of taxation equity in cases where the profit reserved in the company is returned to the shareholders or investors in the form of legal reserve, earned surplus reserve, or other voluntary reserve without outflow outside the company's company's performance, and such profit is substantially similar to the cash dividend (see Supreme Court Decision 91Da10565 delivered on September 10, 191). In addition, when a corporation's surplus is transferred to capital, it shall maintain the company's property to the extent that it is increased due to the transfer of the company's surplus by its capital adequacy, so it is possible to accumulate the earned surplus reserve again within a certain limit, and even if the earned surplus reserve is converted, it is possible to reserve the company's property in the form of capital surplus or the earned surplus reserve equivalent thereto, so it shall be reverted to the shareholders or investors who have invested in the company's capital stock.

Therefore, Article 26 (1) 2 of the Income Tax Act (amended by Act No. 4281 of Dec. 31, 1990) provides that "where all or part of a corporation's surplus is transferred to capital or financing, the value of stocks or shares that the stockholders, employees, or other investors receive shall be deemed to be the fictitious dividend for this reason." However, the above proviso provides that "the capital reserve under Article 459 of the Commercial Act and the revaluation reserve under the Assets Revaluation Act are excluded in capital" shall not be exempted from taxation on the value of the stocks that the stockholders, etc. receive through capital transfer, but the purpose of the provision is not to protect the company creditor through capital transfer, to promote the rationalization of corporate management by raising the credit rating, it shall not be deemed as the fictitious dividend income, and it shall not be deemed that the capital transfer of the above capital reserve, etc. is made in capital gains, and it shall be deemed that there is a reservation of the amount in excess or the amount in excess as prescribed in Article 26 (1) 1, 3, 4, and 5.

Therefore, in order to determine whether the value of the property received by the shareholders, employees, and other investors due to the retirement or reduction of capital of a corporation under the provisions of the above proviso is in excess of the amount required for the acquisition of the stocks concerned by the shareholders, employees, and other investors, the value of the property received by the shareholders, employees, and other investors at their own share due to the retirement or reduction of capital of the corporation cannot be viewed as the basis for concluding that the face value of free-of-charge allocated by the capitalizing the revaluation reserve is included in the "amount required for the acquisition of stocks of the corporation concerned", and the required amount refers to the amount actually disbursed for the acquisition of stocks of the corporation concerned. The acquisition value is in fact included in the acquisition value of stocks previously held, so it cannot be viewed as the "amount required for the acquisition of stocks of the corporation concerned".

Nevertheless, the court below erred by misapprehending the legal principles as to constructive dividend at the time of stock retirement, since it is reasonable to view that the amount required for acquiring the pertinent shares is the value of the total shares including the above gratuitous shares. The revocation of the taxation disposition in this case is erroneous in the misapprehension of legal principles as to the constructive dividend at the time of stock retirement.

It is so decided as per Disposition by the assent of all participating Justices on the bench that the judgment of the court below is reversed and the case is remanded to the court below.

Justices Yoon Young-young (Presiding Justice) Park Young-dong Kim Jong-ho