Plaintiff (Attorney Lee Jae-soo, Counsel for the plaintiff-appellant)

Head of Seocho Tax Office

February 23, 2006

Seoul Administrative Court Decision 2003Gudan542 delivered on April 26, 2005

1. The defendant's appeal is dismissed.

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

1. Purport of claim

The Defendant’s disposition of imposition of capital gains tax of KRW 290,246,210 on August 2, 2002 against the Plaintiff shall be revoked.

2. Purport of appeal

The judgment of the first instance is revoked. The plaintiff's claim is dismissed.

1. Details of the disposition;

The following facts are either disputed between the parties, or acknowledged in Gap evidence 1-1, 2, 1-1, 1-5, 1-2, and 1-5, by taking into account the whole purport of the pleadings:

A. On August 3, 1999, the Plaintiff, the representative director of the non-party 1 corporation, transferred 12,947 shares (hereinafter “instant shares”) out of 18,263 shares (the par value per share of 10,000 won) held in title with the non-party 2 to the non-party 3, and subsequently, on October 31, 199, the Plaintiff, the representative director of the non-party 1 corporation, transferred the instant shares to the non-party 3.

B. Meanwhile, on September 13, 1999, the non-party 1 corporation engaged in the business of manufacturing computers and peripheral devices divided the shares with a face value of 10,000 won into shares with a face value of 500 won. On November 15, 1999, the non-party 1 corporation reported securities to the Financial Supervisory Commission for the purpose of corporate disclosure.

C. Accordingly, the Defendant assessed the instant shares at a low price to Nonparty 3, a person with a special relationship by applying mutatis mutandis the method of determining the market price pursuant to Article 57(1)1 of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 1660 of Dec. 31, 1999; hereinafter the same shall apply) and then assessed the Plaintiff as KRW 9,00 per share (180,000 per market price if the method of determining the market price pursuant to Article 63(3) of the Enforcement Decree was applied mutatis mutandis to the method of determining the market price pursuant to Article 57(1)1 of the Inheritance Tax and Gift Tax Act (hereinafter “Enforcement Decree”). Based on the foregoing, the Defendant assessed the Plaintiff as KRW 10/100 per share since the shares transferred at a low price pursuant to Article 63(3) of the Enforcement Decree were shares of the largest shareholder, then notified the Plaintiff of the transfer income tax for the year 29,290,290.

2. Whether the instant disposition is lawful

A. The parties' assertion

With respect to the Defendant’s assertion that the disposition of this case is lawful in light of the circumstances of disposition and relevant Acts and subordinate statutes, the Plaintiff asserts that the disposition of this case based on Article 63(2)1 of the Act and Article 57(1)1 of the Enforcement Decree of the Act is unlawful, since the Plaintiff filed a securities report with the Financial Supervisory Commission on November 15, 199, which was subsequent to the date of the transfer of the shares of this case (the date of August 3, 1999), and the shares of this case are not subject to Article 63(2)1 of the Act, and Article 57(1) of the Enforcement Decree of the Act is invalid because it deviates from the scope of delegation under Article 63(2)1 of the Act.

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

(1) Whether the instant shares are subject to Article 63(2)1 of the Act

Article 63(2) of the Act provides that "any of the following stocks shall be appraised by the method prescribed by Presidential Decree in consideration of the business feasibility, transaction status, etc. of the relevant corporation, notwithstanding paragraph(1)1," and subparagraph 1 of the same paragraph provides that "the stocks of a corporation that has reported to the Financial Supervisory Commission for the purpose of corporate disclosure" shall be amended by Act No. 6780 on December 28, 2002, the above provision was amended by Act No. 6780 on December 28, 2002."

In light of the principle of no taxation without law, or the requirements for non-taxation or tax exemption, and the interpretation of tax laws is strictly interpreted according to the text of the law unless there are special circumstances, and it is not allowed to expand or analogically interpret without reasonable grounds (Supreme Court Decision 2002Du6781 Decided May 27, 2004).

However, Article 63(2)1 of the Act provides that the scope of taxation on the difference in the market price due to the listing of unlisted stocks is to increase the taxpayer’s tax burden due to the application of the provision to expand the scope of taxation on the difference in the market price due to the listing of unlisted stocks, and thus, the necessity of such strict interpretation is greater. As seen in the literal difference before and after the amendment, the above provision is deemed to require that the stocks of the corporation that filed a securities return should be the stocks of the corporation at the time of the establishment of taxation requirements, and unlike the text of the Act, it cannot be interpreted to expand the scope of taxation on the stocks

Therefore, the shares of this case, which reported securities after the transfer date of this case, are not subject to Article 63 (2) 1 of the Act, and are not traded with the Korea Stock Exchange (Article 63 (1) 1 (a) of the Act) or registered with the Korea Securities Dealers Association (Article 63 (1) 1 (b) of the Act). Thus, the method of evaluation can only be subject to Article 63 (1) 1 (c) of the Act.

(2) Whether Article 57(1) of the Enforcement Decree is invalid beyond the scope of delegation by this mother law

Article 63(2)1 of the Act provides that a parent corporation under the foregoing provision shall delegate only the method of evaluating the stocks of a corporation that has filed a securities report with the Financial Supervisory Commission to the Presidential Decree.

However, Article 57(1) of the Enforcement Decree, upon delegation, provides for the purport that “any stocks under the provisions of Article 63(2)1 of the Act, during the period from six months immediately before the report of securities (in the case of stocks subject to gift tax, three months) to the first listing on the Korea Stock Exchange as of the base date of appraisal, shall be the larger of the value under the provisions of subparagraph 1 and the value assessed under the provisions of subparagraph 2,” and provides for the method of appraisal as well as the scope of stocks subject to appraisal. The scope of stocks subject to assessment is expanded by including the stocks of the corporation whose report of securities was made within six months thereafter, even if the report of securities was not made at the time of the establishment of the taxation requirement.

This would be invalid because it would result in the increase of the taxpayer's tax burden beyond the delegation scope and purpose of the parent law.

(3) As such, this case’s stocks are not subject to Article 63(2)1 of the Act, and Article 57(1)1 of the Enforcement Decree that received delegation from the above provision is null and void. Thus, in evaluating the stocks of this case, the above provisions cannot be applied. As seen earlier, since the stocks of a corporation traded in the Korea Stock Exchange or registered with the Korea Securities Dealers Association on August 3, 199, which is the transfer date, are not the stocks of a corporation as of August 3, 199, the value should have been assessed by the method as stipulated in Article 63(1)1(c) and Article 54(1) of the Enforcement Decree.

Nevertheless, the defendant's disposition of this case imposing capital gains tax on the basis of the value assessed by the method under Article 63 (2) 1 of the Act and Article 57 (1) 1 of the Enforcement Decree of the Act is unlawful.

3. Conclusion

Therefore, the plaintiff's claim is reasonable, and the judgment of the court of first instance is just and the defendant's appeal is dismissed as it is without merit. It is so decided as per Disposition.

Judges Kim Yong-sung (Presiding Judge) Jin-sung (Presiding Judge)