[1] Whether Article 31(4) of the former Inheritance Tax and Gift Tax Act can be applied to a case where a title trust is terminated and returned with respect to a title trust property deemed a donation (affirmative), and whether the same provision can be applied to a case where a title truster returns a title trust property in the name of a third party according to the direction of the title truster (affirmative)

[2] The case holding that in case where Party B, after title trust with Party B issued shares to Party B, changed the title trustee in the name of a third party within three months from the date of title trust, and the tax authority imposed gift tax on Party B pursuant to Article 45-2 of the former Inheritance Tax and Gift Tax Act on Party B, gift tax may not be imposed on Party B

[1] Article 31(4) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax Act”) provides that “where the donated property is returned by agreement between the parties concerned within the deadline for reporting the tax base of gift tax under Article 68 (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax and Gift Tax Act”), the donation shall be deemed not to have existed from the beginning: Provided, That the same shall not apply to cases where the tax base and tax amount are determined before returning the donated property: Provided, That Article 45-2 of the former Inheritance Tax and Gift Tax Act does not provide for excluding the application of the above provision to the title trust deemed as a donation; and the same shall apply to cases where the title truster or the title trustee returns the property under the title of the title truster, as well as to cases where the property is returned under the title truster’s name.

[2] The case holding that in case where Eul and Byung returned the shares held in title trust to the title truster within three months of the deadline for filing the gift tax base on the ground that Eul and Byung returned the shares held in title trust to the title truster within three months of the deadline for filing the gift tax base on the grounds that Eul and Byung returned the shares held in title trust to Eul and Byung, respectively, within three months from the date of title trust, and the tax authority imposed gift tax on Eul and Byung

[1] Articles 31(4), 45-2, and 68 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007) / [2] Articles 31(4), 45-2, and 68 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007)

Plaintiff 1 and four others (Law Firm Jeong, Attorneys Lee Jae-soo et al., Counsel for the plaintiff-appellant)

Head of the tax office, etc. and three others

Busan High Court Decision 2009Nu7233 decided April 6, 2011

Among the judgment below, the part on the imposition of gift tax on May 2, 2007 and the part on the imposition of gift tax on the title trust as of May 8, 2007 against Plaintiff 2 and the part on the imposition of gift tax on Plaintiff 5 are reversed, and this part of the case is remanded to Busan High Court. The appeals by Plaintiffs 1, 3, and 4 and the remaining appeals by Plaintiff 2 are dismissed. The costs of appeal by Plaintiffs 1, 3, and 4 are assessed against the same Plaintiffs.

We examine the grounds of appeal.

1. As to the grounds of appeal Nos. 1 and 2

The lower court determined that, according to the circumstances indicated in its reasoning, based on the evidence of employment, there was no evidence to acknowledge that the Plaintiffs acquired each of the following facts: (a) UDP shares (hereinafter “instant shares”) were nominal trust from the Nonparty; and (b) the title trust was not the purpose of tax avoidance.

In light of the relevant legal principles and records, the judgment of the court below is just, and there is no violation of the rules of evidence as alleged in the grounds of appeal.

2. As to the third ground for appeal

Article 31(4) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax and Gift Tax Act”) provides, “Where the property donated is returned within the deadline for reporting the tax base of gift tax under Article 68 (3) by agreement between the parties concerned after the donation, the donation shall be deemed not to have existed from the beginning: Provided, That the same shall not apply where the tax base and the amount of tax are determined before the return, except where the property is determined based on the gift pursuant to Article 45-2 of the same Act.” In light of the fact that the above provision does not apply to the title trust deemed to be a gift by agreement between the parties concerned or all of the cases where the property is returned within the deadline for reporting the tax base of gift tax is returned by the title truster or the title trustee, it shall be deemed that Article 31(4) of the former Inheritance Tax and Gift Tax Act applies to the case where the title truster returned the property under his/her name even if the property was returned.

According to the reasoning of the judgment below and the records, the Nonparty: (a) on January 12, 2007, held a title trust with Plaintiff 5 with 12,00 U.S. shares; (b) on May 2, 2007, the Nonparty changed the title trustee to Plaintiff 4 on May 31, 2007; (c) on May 2, 2007, the Plaintiff 2,500 U.S. shares; and (d) on May 8, 200, the title trustee was changed to Plaintiff 3 on May 31, 200; and (d) Plaintiff 5 and 2 did not hold the above shares. Accordingly, the Nonparty 5 and 2 returned the above shares that were trusted to the title truster within three months, the reporting deadline for filing gift tax base.

Examining this in light of the above legal principles, Plaintiff 5 and 2 cannot impose gift tax pursuant to Article 31(4) of the former Inheritance and Gift Tax Act on the fact that the said shares were trusted by the Nonparty.

Nevertheless, the lower court determined otherwise, that even if the title trust was terminated on the property deemed as a gift and the title of ownership was changed to the actual owner, the effect of the title trust is not extinguished retroactively, and thus, it still becomes subject to gift tax. In so doing, the lower court erred by misapprehending the legal doctrine on Article 31(4) of the former Inheritance and Gift Tax Act, thereby adversely affecting the conclusion of the judgment.

3. As to the fourth ground for appeal

The lower court acknowledged the facts as indicated in its reasoning based on its employment evidence, and determined that the Defendants’ disposition of this case was lawful on the ground that the net asset value per share under Article 54(2) of the former Inheritance and Gift Tax Act at the time of title trust of each of the instant shares was KRW 10,00,000.

In light of the relevant legal principles and records, the above judgment of the court below is just and acceptable, and there is no violation of the rules of evidence or incomplete deliberation as alleged in the grounds for appeal.

4. Conclusion

Therefore, among the judgment below, the part on the imposition of gift tax on May 2, 2007 and the part on the imposition of gift tax on the title trust as of May 8, 2007 against Plaintiff 2 and the part on the imposition of gift tax on Plaintiff 5 are reversed, and this part of the case is remanded to the court below for further proceedings consistent with this Opinion. The appeal by Plaintiff 1, 3, and 4 and the remaining appeals by Plaintiff 2 are without merit. The costs of appeal by Plaintiff 1, 3, and 4 are assessed against each losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Min Il-young (Presiding Justice)