Plaintiff (Law Firm Il, Attorneys Im Jong-ro et al., Counsel for the plaintiff-appellant)

Head of Jinju Tax Office

March 31, 2010

Changwon District Court Decision 2009Guhap865 Decided October 1, 2009

1. Revocation of a judgment of the first instance;

2. The Defendant’s imposition of capital gains tax of KRW 76,303,220 against the Plaintiff on August 4, 2008 shall be revoked.

3. All costs of the lawsuit shall be borne by the defendant.

The same shall apply to the order.

1. Details of the disposition;

A. On March 1, 2004, the Plaintiff succeeded to 29 pieces of land (hereinafter “instant real estate”) including 1,264 square meters of land in Seocho-gu, Seoul Special Metropolitan City (hereinafter “Seoul Special Metropolitan City”). On November 2, 2007, the Plaintiff transferred 23 lots of land, which is KRW 3,345,249,79,790 (the price for 23 lots of land, which is set up a right to collateral security as seen below, is KRW 3,317,59,310) to the Gyeonggi-do Special Metropolitan City Development Corporation.

B. As above, at the time inheritance took place, 23 lots of the instant real estate (hereinafter “instant mortgaged real estate”) and 3 lots of land, including 248 square meters in Jinsi-si, Jinsan-si (hereinafter “2 omitted), prior to Jinsi-si, the maximum debt amount, which is the joint security, was set up as 80 million won, and the actual claim amount of the said collateral was KRW 560 million.

C. On January 31, 2008, the Plaintiff, while filing a preliminary return on the transfer income tax for the year 2007 on the instant real estate with the Defendant, deemed the value of the instant collateral real estate as KRW 702,128,527 by allocating the maximum debt amount of the instant collateral security to the Defendant according to the ratio of the publicly assessed individual land price of the instant collateral security, and the other six parcels calculated the acquisition value of the instant real estate according to the publicly assessed individual land price.

D. However, on August 4, 2008, the Defendant calculated the acquisition value of the instant real estate by regarding the value of the instant real estate as KRW 491,232,041 in a pro rata distribution method, which is the actual claim amount of the said right to collateral security, on the ground that the Plaintiff, “the value of the property created by collateral security, which is not the maximum claim amount, but the actual claim amount secured by the relevant property as of the evaluation base date, shall be evaluated as the actual claim amount as of the said right to collateral security, and then notified the Plaintiff of correcting the transfer income tax reverted to the year 2007 and to additionally pay KRW 76,303,220.

E. The Plaintiff filed a request with the Commissioner of the National Tax Service on October 28, 2008, but was dismissed on January 18, 2009.

[Reasons for Recognition: Each entry of Gap evidence 1, 3 (including paper numbers), Eul evidence 1, 3, and 4]

2. Whether the disposition is lawful;

A. The plaintiff's assertion

1) Article 66 of the Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2008; hereinafter the same shall apply) and Article 63(1)3 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 20621 of Feb. 22, 2008; hereinafter the same shall apply) provide as the assessment amount of the inherited and donated property, the “amount of the claim secured by the pertinent property” as the assessment amount of the inherited and donated property, but the instant disposition that deemed as the “actual claim” secured by the pertinent property is unlawful.

2) The market price of the instant mortgaged real estate is at least KRW 702,128,527, which is the maximum debt amount, calculated proportionally according to the ratio of the individual individual land price of each of the pertinent real estate. Thus, the instant disposition is unlawful.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) The meaning of "the amount of claims secured by the property in question" determined on the basis of the appraised value of the inherited property created as a collateral.

A) Contents of the relevant laws and regulations

(1) In calculating gains on transfer of inherited assets under Article 97(1)1 of the Income Tax Act and Article 163(9) of the Enforcement Decree of the Income Tax Act, the value assessed under the provisions of Articles 60 through 66 of the Inheritance and Gift Tax Act as of the date of commencing the inheritance shall be considered as the acquisition value and shall be deducted from the transfer value.

(2) Article 60(1) of the Inheritance and Gift Tax Act provides that the value of the inherited property shall be calculated based on the market value as of the date commencing the inheritance, and Article 60(2) of the same Act provides that where it is difficult to calculate the market value, the value of the inherited property shall be calculated based on the method stipulated in Articles 61 through 65. Meanwhile, Article 66 Subparag. 1 of the Inheritance and Gift Tax Act provides that in the case of a mortgaged land, the value of the inherited property shall be calculated based on the value assessed in accordance with the provisions of Article 60 of the Inheritance and Gift Tax Act and the amount of credit secured by the relevant

(3) Article 63(1)3 of the Enforcement Decree of the Inheritance and Gift Tax Act provides that “The value appraised in accordance with the Presidential Decree on the basis of the amount of claims secured by the relevant land” under Article 66 of the Inheritance and Gift Tax Act shall be “the amount of claims secured by the relevant property as of the base date for appraisal” in the case of property for which the right to collateral

B)Review

Examining the contents, structure, and intent and history of the provision as seen below, “the amount of claims secured by the relevant property as of the base date of appraisal” under Article 63(1)3 of the Enforcement Decree of the Inheritance and Gift Tax Act is not the maximum amount of claims secured by the relevant property, but rather the actual amount of claims secured by the relevant property as of the base date of appraisal.

(1) Article 63(1)3 of the Enforcement Decree of the Inheritance and Gift Act provides that “the amount of claims secured by the pertinent property as of the evaluation base date,” and does not provide that “the maximum amount of claims secured by the pertinent property” is “the maximum amount of claims secured by the said property”. Article 63(2) of the Enforcement Decree of the said Act provides that “the maximum amount of claims secured by the right to collateral security established on the pertinent property shall be the maximum amount of claims.” Thus, Article 63(1)3 of the Enforcement Decree of the said Act provides that “the amount of claims secured by the relevant property

(2) Examining the history of the pertinent provision of the Enforcement Decree of the Inheritance and Gift Tax Act, with respect to the appraisal of the value of the property on which the right to collateral security was created, the said provision was stipulated as “the maximum amount of claims secured by the pertinent property” until December 31, 1990, and until December 31, 1998, the said provision was stipulated as “the value, if there is a value appraised by an appraisal business operator under the Public Notice of Values and Appraisal of Lands, etc. Act to create the pertinent right to collateral security,” and thereafter, the said provision provides as “the amount of claims secured by the pertinent property as of the base date of appraisal

(3) Examining the developments leading up to the amendment of the Enforcement Decree of the Inheritance and Gift Tax Act and the legislative intent thereof, the first “peremptory amount of claims” of the right to collateral security under the Enforcement Decree of the Inheritance and Gift Tax Act was changed to the “preemptive value at the time of establishment of a collateral security on the ground that there is a problem that the value of the property created by collateral security is higher than the market price when the property created by collateral security was set in consideration of the company’s credit. In other words, the “preemptive value at the time of establishment of a collateral security” was also revised as of December 31, 1998 for solving the problem that is not considered depreciation from the appraisal date to the

(4) With respect to the property on which a mortgage, etc. has been created, the special provision that "the larger amount of the appraised value under Article 60 of the Inheritance and Gift Tax Act (market price or supplementary assessment method) and the amount of the credit secured by the pertinent property as prescribed by Presidential Decree is stipulated as the value of the pertinent property" is to prevent any inconsistency that deducts the amount exceeding the individual property value from other property values when calculating the pertinent property according to the market price or supplementary assessment method. Thus, Article 63 (1) 3 of the Enforcement Decree of the Inheritance and Gift Tax Act specifically provides that "the amount of credit secured by the pertinent property as of the base date for appraisal" shall be prescribed as the "amount of credit secured by the relevant property as of the base date for appraisal," while resolving the above problems.

2) Whether the market price of the instant mortgaged real estate is at least 702,128,527 won

A) In imposing transfer income tax on inherited assets based on the actual market price at the time of the acquisition, even if the tax authority assessed and imposed the acquisition value of the pertinent assets as the officially assessed individual land price for the reason that it is difficult to assess the market price at the time of the inheritance of the pertinent assets, if the market price at the time of the inheritance of the pertinent assets is proven at the time of the completion of the fact-finding lawsuit, it shall be determined based on the market price, and then whether the amount of the tax imposed exceeds the reasonable tax amount. Here, “market price” means, in principle, an objective exchange price formed through a normal transaction, but this is a concept that includes the value assessed in an objective and reasonable manner. Thus, if there is no exchange price through a transaction, the appraisal price at a reliable appraisal institution may be deemed to be “market price,” and even if the value is determined by the retroactive appraisal (see Supreme Court Decisions 2004Du2356, Sep. 30, 200; 202Du10377, Mar. 12, 2004).

B) In full view of the provisions of Article 66 of the Inheritance and Gift Tax Act on “Special Cases Concerning the Appraisal of Property on which a mortgage, etc. has been created, the market price of the instant collateral should be the value of the property if the market price of the instant collateral is larger than the amount of the secured debt. Therefore, even when calculating capital gains tax, the market price of the instant collateral security should be the acquisition price of the instant collateral security even at the time of calculating capital gains tax. Therefore, if the market price of the instant collateral security is at least KRW 702,128,527, the instant disposition that issued an additional payment of tax amount of KRW 76,303,220 after deeming the acquisition price of the instant real estate as at KRW 491,232,041 and correcting capital gains

C) On March 1, 2004, the plaintiff succeeded to the real estate of this case from the non-party who was the husband on March 1, 2004, and transferred it after receiving KRW 3.3 billion on November 2, 2007. Thus, the market price of the real estate of this case at the time of inheritance which was 3 years and 8 months before the time of transfer seems to have been considerably high even at the time of inheritance. The reasonable comparative standard is selected, and the market price appraisal results of the Sam Chang Chang Corporation of the trial court which seems to have been appraised in an objective and reasonable manner taking into account the land price fluctuation rate, the location, shape, environment, and utilization of the pertinent real estate, etc. as of March 1, 2004, the market price of the real estate of this case at the time of commencing the inheritance shall be at least KRW 702,128,527,000.

D) Therefore, the instant disposition that deemed the value of the instant mortgaged real estate as KRW 491,232,041, which was lower than KRW 702,128,527, was unlawful.

3. Conclusion

Therefore, the plaintiff's claim of this case is accepted on the grounds of its reasoning, and the judgment of the court of first instance is unfair on the grounds of its conclusion, and it is so decided as per Disposition after cancelling the judgment of the court of first instance and cancelling the disposition of this case.

Judges Lee Jong-Un (Presiding Judge)