Cho High Court Decision 2010Du4075 (No. 28, 2011)

Prices formed by a normal transaction that reflects objective exchange values shall fall under the market price.

It is a price formed by normal transactions that properly reflects the objective exchange values of stocks and evaluate the appropriateness of the company by providing an accounting firm with objective accounting data, and determine the purchase price through substantial price negotiations, reflecting the management and financial status of the company.

2011Guhap23672 Revocation of Disposition of Imposition of Gift Tax

Gux

The Director of Gangnam District Office

October 25, 2011

December 1, 2011

1. The Defendant’s imposition of KRW 273,543,100,273,543,100,273,543,100,273,543,100,273,543,100, and the imposition of KRW 26,873,820 against the Plaintiff on September 1, 2010 shall be revoked.

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

The same shall apply to the order.

1. Details of the disposition;

A. On May 9, 2007, the Plaintiff acquired 10,000 shares issued by Non-Party 2, a non-party 2, a non-party 1,000 shares (hereinafter referred to as “the shares of this case”) (hereinafter referred to as “the shares of this case”) from Non-Party 2, the non-party 2, the non-party 3, the non-party 2, the non-party 2, the non-party 2, the non-party 2, the non-party 3, the non-party 2, the non-party 2, the non-party 3, the non-party 2, the non-party 3, the non-party 2, the non-party 3, the non-party 2, the non-party 3, the non-party

B. Around November 2009, the head of the tax office having jurisdiction over the non-party company's regional tax office of the non-party company assessed the value per share of 537,497 won based on the supplementary assessment method under the former Inheritance Tax and Gift Tax Act (amended by Act No. 9916, Jan. 1, 2010; hereinafter "former Inheritance Tax and Gift Tax Act") by deeming that the plaintiff acquired the shares of this case at low price from Song, etc. without justifiable grounds, and notified the defendant of the assessment of the difference between the value per share based on the above supplementary assessment method and the actual acquisition value of 10,000 won per share, which exceeds 30% of the difference between the value per share by the above supplementary assessment method and the actual acquisition value of 100,000 won per share (the total amount of KRW 273,534,570,308,370,370,374,275,3710, Sep. 1, 2010

C. The Plaintiff appealed and filed an appeal with the Tax Tribunal on November 25, 2010, but was dismissed by the Tax Tribunal on April 28, 201.

[Ground of recognition] Facts without dispute, Gap's evidence 1 to 4, Gap's evidence 2, Eul's evidence 1 to 4, Eul's evidence 3, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The instant disposition is unlawful for the following reasons.

① 10,000 won per acquisition value at the time of the instant transaction was determined on several occasions to maximize each other’s interests between unrelated Plaintiff and SongA, etc. In addition, in light of the fact that: (a) before the instant transaction, the accounting firm requested an accounting firm to conduct a financial performance of the Nonparty Company; and (b) the determination was made based on the net asset value of the Nonparty Company calculated as a result of the actual survey, the transaction value of KRW 100,000 per share, which is the transaction value of the instant case, was made in a general and normal manner; and (c) the objective exchange value at the time of the transaction falls under the market value that appropriately reflects the objective exchange value at the time of the transaction, the Defendant erred

② Even if the transaction of this case constitutes acquisition at a price significantly lower than the market price, in light of the following: (a) there is no special relationship between the non-related Plaintiff and SongA, etc.; (b) the Defendant did not assert and prove such circumstances; (c) there was an inevitable reason for management to promptly sell the stocks of this case due to the non-party company’s difficulties in operating conditions; and (d) the non-party company’s shares are traded at a price lower than the price calculated according to the supplementary assessment method ordinarily due to the transaction limitation; and (b) there is justifiable reason for the acquisition of the stock value of this case at KRW 10,00 per share in accordance with the transaction practice under Article 35(2) of the former Inheritance Tax and Gift Tax Act.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

(c) Fact of recognition;

1) Status, etc. of Nonparty Company’s stockholding

The Plaintiff is a representative director and a major shareholder of the OE Korea Co., Ltd. that manufactures and sells materials and components used in the automobile. Nonparty Co., Ltd. is a company that manufactures and sells synthetic fibres, which is a raw material of the materials used in the automobile and in the building, and the Plaintiff is a company that manufactures and sells synthetic Textiles, which is 10,000 won (on a face value, 10,000 won), the representative director of Song-A, whose wife KimB, 1,000 shares; 50 shares; 300 shares; 50 shares; 50 shares; 300 shares; 2,50 shares; 2,50 shares; 40 shares; 400 shares; and HH, the managing director, respectively.

2) Inspection and assessment of the Non-Party Company on the Non-Party Company’s actual inspection

Before the instant transaction, the Plaintiff and SongA et al. requested △ Accounting Corporation (hereinafter referred to as the “accounting corporation”) to conduct the financial affairs related to the Plaintiff’s H prior to the instant transaction, and the accounting corporation conducted the financial affairs of the Nonparty company on April 2007. As a result, on March 31, 2007, the net asset value of the Nonparty company was assessed as follows.

3) The management and financial status of the non-party company at the time of the instant transaction

A) The sales volume of Non-Party Company was reduced during the business year 2004-2006, and the increase of international oil, resulting in continuous increase in the raw material cost of synthetic fibres, which is the main product, and the export was reduced due to continuous decline in the exchange rate, and the supply price for the head of △△△, the largest business partner, the percentage of 65% of domestic sales, was reduced, and the sales volume was continuously decreased, but the alternative business partner was not secured.

B) Accordingly, during the same period, the non-party company decreased net income and its profit ratio as indicated in the following table. The net loss of KRW 293,844,00 was generated between the period immediately preceding the instant transaction and the period from January 3, 2007, and the future net loss was anticipated to continue to increase, and the inventory assets and liabilities were likely to increase rapidly, resulting in a financial crisis.

4) Details, etc. of acquisition degree of the instant shares

As seen earlier, on May 9, 2007, the Plaintiff entered into the instant contract with Song, etc. with the content that 10,000 shares shall be transferred to KRW 1 billion per share (1,00,000 per share). The main contents thereof are as follows (No. 2).

[Ground of recognition] Facts without dispute, Gap 2, 4, 5, 6, 9, 13 evidence, Gap 3-1, 2, 3, Gap 7-1 through 7, Eul 8-1 through 7, Eul 2, and the purport of the whole pleadings and arguments.

D. On the first argument, Article 35(2) of the former Inheritance Tax and Gift Tax Act (whether the transaction price in this case can be recognized as the market price) provides that the amount equivalent to the profits prescribed by the Presidential Decree shall be deemed as the value of the property donated to the person who acquired profits by considering the amount of money equivalent to the difference between the price and the market price in light of the transactional practice only when the person acquires the property from an unrelated party without any justifiable reason. Article 26(5) of the Enforcement Decree of the same Act (amended by Presidential Decree No. 20621 of Feb. 22, 2008) provides that the above "value of the transferred property which is remarkably lower than the market price" refers to the price where the value calculated by subtracting the price from the market price of the transferred property differs by 30/100 or more of the market price. Meanwhile, according to Article 60(1), (2), and (3) of the former Inheritance Tax and Gift Tax Act, the price on which the gift tax is levied shall be calculated on the current market price as of the sale price.

According to the above provisions, the appraisal of donated property, which serves as the basis for determining whether it is a 's remarkably low price', is based on the market price as of the date of donation, and the appraisal of donated property according to the supplementary evaluation methods as stipulated in Articles 61 through 65 of the former Inheritance Tax and Gift Tax Act, is a method of assessment that can be selected only when it is difficult to calculate the market price as of the date of donation, and the taxing authority has the burden of proving that it is difficult to calculate the market price. The "market price" here refers to an objective exchange price formed through a normal transaction in principle. In order for the transaction price to be deemed as the market price at the time of donation, it must be objectively viewed that the transaction price properly reflects the general and normal exchange price (see, e.g., Supreme Court Decisions 9Du2505, Feb. 11, 200; 2005Du5574, Aug. 23, 2007).

In light of the above legal principles, the defendant assessed the value of the shares of this case as 5,374,970,000 won (537,497 won per share) at an objective exchange price formed in normal transactions, and assessed the value of the shares of this case as 5,374,970,000 won (537,497 won per share) by supplementary evaluation method, on the ground that the plaintiff's acquisition of the shares of this case from the above report to the 3,42,864,00 won (1,000 won per share) is not considered to be based on the net asset value of the non-party company prepared by the accounting corporation, in view of the purport of the whole argument as to the statement of evidence Nos. 2 and the purport of the argument as a whole.

However, according to the following circumstances acknowledged as above, i.e., (i) the net asset value of the non-party company based on the book value of the non-party company is 3.4 billion won, or since real estate and inventory assets owned by the non-party company can exist additionally, the real net asset value is calculated as below 1.6 billion won, and (ii) the non-party company was at risk of insolvency with funds at the time of this case’s transaction and at an urgent rate of sales and net asset value, and (iii) the Plaintiff and SongA et al. were to assess the appropriate value of the non-party company’s shares by providing objective accounting data to the accounting firm prior to this case’s transaction and determine the purchase price through substantial price negotiations based on the consideration of the financial status and appraisal of the non-party company’s shares. (iv) Since the transaction of the shares of the non-party company was conducted in an equal relationship with the other party to the transaction, it is difficult to find that there is no reason to view that there is no difference between the parties to the transaction agreement.

Therefore, the disposition of this case, which was taken on the premise that the Plaintiff acquired the shares of this case at a price significantly lower than the market price, without further examining the remainder of the Plaintiff’s assertion.

3. Conclusion

The plaintiff's claim is justified and accepted.