[1] The standard for determining whether a sale of shares constitutes a transfer of shares, which is an asset transaction, or a refund of shares or capital as an asset transaction

[2] In a case where a corporation acquires shares from the deceased for the purpose of refunding its investments by retiring its shares pursuant to Article 341 subparagraph 1 of the Commercial Act as part of the capital reduction procedure, the case affirming the judgment below holding that the disposition of notifying the corporation of the dividend income tax withheld at source on the ground that the transfer margin of shares is deemed as dividend income to the deceased was lawful

[3] Whether the method of calculating constructive dividend income under Article 17 (2) 1 of the former Income Tax Act is unconstitutional

[1] Whether a sale of stocks constitutes a transfer of stocks as an asset transaction, or constitutes a stock retirement or a refund of capital, which is a capital transaction, is a matter of interpretation of legal act, and should be determined based on the substance and intent of the parties. However, under the substance over form principle, not simply depends on the contents or form of the contract in question, the entire process of the transaction, such as the parties’ intent and the process of concluding the contract, the method of determining the price

[2] The case affirming the judgment below holding that since a corporation's acquisition of shares exceeding 13 billion won of the total appraised by the deceased was made for the purpose of withdrawing shares pursuant to Article 341 subparagraph 1 of the Commercial Act as part of the capital reduction procedure and refunding investments to the above corporation, the transfer margin of shares is deemed as dividend income to the deceased and the disposition of notifying the corporation of the dividend income tax withheld from the above corporation is lawful.

[3] Fictitious dividend income under Article 17 (2) 1 of the former Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006), i.e., the value of the property that the shareholder received due to the retirement of stocks or the reduction of capital, among the amounts in excess of the amount required for the shareholder to acquire the pertinent stocks, the said legal provision does not leak out to the company among surplus funds, which are corporate management performance, and includes not only the profits reserved in the company but also the increased value during the holding period of the pertinent stocks that are irrelevant to the reserved interest, but also the said legal provision does not distinguish them, but also includes the issue of legislative policy and the legislative purport of the deemed dividend income and the public interest aspect of the efficiency of tax collection. Thus, it cannot be deemed that the said legal provision deviates from the legislative discretion scope, and thus violates Article 11 of the Constitution of the Republic of Korea or violates Article 23 of the Constitution of the Republic of Korea.

[1] Article 14 of the Framework Act on National Taxes, Article 20 of the Enforcement Decree of the Framework Act on National Taxes, Articles 341, 341-2 (1) and (3), and 343 (1) of the Commercial Act, Article 17 (2) 1 of the former Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006) / [2] Article 14 of the Framework Act on National Taxes, Article 20 of the Enforcement Decree of the Framework Act on National Taxes, Articles 341, 341-2 (1) and (3), and 343 (1) of the Commercial Act, Article 17 (2) 1 of the former Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006) / [3] Articles 11 and 23 of the Constitution, and Article 17 (2) 14 of the former Income Tax Act (amended by Act No. 8147 of Dec. 30, 206)

[1] Supreme Court Decision 92Nu3786 delivered on November 24, 1992, Supreme Court Decision 2001Du6227 delivered on December 26, 2002 (Gong2003Sang, 534)

The Home Homes Corporation (Attorneys Lee Im-soo et al., Counsel for the defendant-appellant)

Deputy Director of the Tax Office

Seoul High Court Decision 2008Nu1964 decided October 10, 2008

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

The grounds of appeal are examined.

1. As to the grounds of appeal Nos. 1 through 4

Article 17(2)1 of the former Income Tax Act (amended by Act No. 8144, Dec. 30, 2006; hereinafter the same) provides that “The amount of money and the value of other property acquired by the stockholder due to the retirement of stocks or the reduction of capital exceeds the amount required for the stockholder to acquire the stocks, shall be deemed to have been distributed to the stockholder concerned.”

In addition, the proviso of Article 343(1) of the Commercial Act provides that “stocks may be retired only in accordance with the provisions on the reduction of capital,” and Article 341 of the Commercial Act provides that “the company shall not acquire its own shares on its own account except for the retirement of shares (Article 1).” In addition, Article 341-2(1) and (3) provides that “the company may acquire its own shares within the extent that does not exceed 10/100 of the total number of issued and outstanding shares by taking over the shares of retired directors, etc. so that it may acquire them within the extent that it can distribute dividends within a reasonable period, but shall dispose of them at a

On the other hand, whether the sale of shares constitutes a transfer of shares, or the retirement of shares or the refund of capital, which are assets transaction, should be determined based on the contents of the transaction and the intent of the parties concerned. However, under the substance over form principle, not simply depends on the contents or form of the contract in question, the entire process of the transaction, such as the parties’ intent and the process of concluding the contract, the method of determining the price, and the progress of the transaction, should be grasped and judged (see, e.g., Supreme Court Decisions 92Nu3786, Nov. 24, 1992; 2001Du6227, Dec. 26, 2002).

The lower court acknowledged the facts as indicated in its reasoning, and determined that the Plaintiff Company’s acquisition of the shares of the Plaintiff Company 2 cannot be deemed as acquisition of its own shares by 341-2 of the Commercial Act, in light of the fact that the Plaintiff Company 2 retired on July 31, 2001 and requested the Plaintiff Company to purchase the shares after about 11 months, and that the Plaintiff Company’s acquisition of the shares of the Plaintiff Company 2 cannot be deemed as 0. The Plaintiff Company’s temporary sale of the shares of the Plaintiff Company 2, excluding the Plaintiff Company’s 1’s retirement and her disease, was for 00,000,000,000 won for 10,000,000,0000 won for 20,000,000,000 won for 20,0000,000 won for 20,000,000 won for 20,000,000 won.

In light of the above provisions, legal principles, and records, we affirm the judgment of the court below as just and there are no errors in the misapprehension of legal principles as to the act of acquiring stocks or the principle of substantial taxation as otherwise alleged in the ground of appeal.

2. Regarding ground of appeal No. 5

Fictitious dividend income under Article 17 (2) 1 of the former Income Tax Act, i.e., the amount in excess of the amount required by the shareholder to acquire the relevant stocks from the value of the property received by the shareholder due to the retirement of stocks or reduction of capital, may include not only the profits reserved in the company but also the increased value during the period of holding the relevant stocks in the form of legal reserve, earned surplus reserve, and other voluntary reserve regardless of the reserved profits, among the surplus funds which are the performance of corporate management, but also the increased value during the period of holding the relevant stocks, which are irrelevant to the reserved profits. However, the above legal provision is a matter of legislative policy to impose dividend income without distinguishing it separately. In light of the legislative intent of the deemed dividend income and the public interest aspect of the efficiency of tax collection, the above legal provision cannot be deemed to have exceeded the bounds of reasonable discretion of the legislator, and thus, it cannot be deemed to have violated Article 11 of the Constitution of the Republic of Korea, which provides for the principle

Therefore, we cannot accept this part of the ground of appeal that the above legal provision applied by the court below to this case is unconstitutional.

3. Conclusion

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

Justices Jeon Soo-ahn (Presiding Justice)