[1] Where a corporate shareholder of the merged company acquires the shares of the surviving company or the newly incorporated company in lieu of the shares of the merged company due to a merger of the merged company, if the market price of the shares acquired as a substitute falls short of the acquisition price of the shares previously held, whether the difference may be included in deductible expenses as special loss of the invested assets

[2] The nature of the additional tax under the Corporate Tax Act, and whether the additional tax may be imposed in a case where there is a justifiable reason for not being able to cause a taxpayer to neglect his/her duty (negative)

[1] Where a corporation, a stockholder of the merged company, acquires the stocks of the surviving company or the newly incorporated company in lieu of the stocks of the merged company, the replacement of the stocks of the merged company and the surviving company or the newly incorporated company is not a disposal of the stocks of the merged company at its own will, but a replacement of the stocks of the surviving company or the newly incorporated company is merely a substitution of the stocks of the surviving company or the newly incorporated company, which are assets held by the merged company, as a result of the merger with another company. Therefore, even though the market price of the surviving company or the newly incorporated company does not reach the acquisition price of stocks of the merged company, such difference is merely an appraisal value of assets, and it shall not be included in its deductible expenses in calculating its income for the pertinent business year. In addition, even if the acquisition price of stocks of the merged company does not reach the acquisition price of the stocks of the newly incorporated company, it shall not be included in its deductible expenses under Article 19 subparag. 5 of the former Corporate Tax Act (wholly amended by Presidential Decree No. 1597, Dec. 31, 1998).

[2] Under the Corporate Tax Act, an additional tax is a kind of administrative sanction that takes place when a taxpayer corporation imposes an obligation to return a faithful tax base and pay a tax amount in order to ensure the propriety of taxation, and if he/she neglects the performance of his/her duty as a means of securing the obligation. Such a sanction cannot be imposed in cases where there is a conflict of opinion due to a significance in the interpretation of the tax law beyond a simple scope of land or misunderstanding under the interpretation of the tax law, and it is not unreasonable for the taxpayer to be unaware of his/her duty due to the absence of knowledge of the duty, or where there is a circumstance in which it is deemed that the performance of the duty cannot be expected to be significantly expected to the party.

[1] Article 9 (see current Article 14), Article 17 (see current Article 40), Article 19 subparagraph 5 (see current Article 16 (1) 5) of the former Corporate Tax Act (wholly amended by Act No. 5581 of Dec. 28, 1998), Article 12 (see current Articles 11, 19), Article 37 (1) (see current Article 72), Article 45-3 (2) subparagraph 1 (see current Article 14 (1) 1) of the former Enforcement Decree of the Corporate Tax Act (wholly amended by Presidential Decree No. 15970 of Dec. 31, 1998); Article 76 of the Corporate Tax Act / [2] Article 2 subparagraph 4 and Article 47 (1) of the Framework Act on National Taxes; Article 76 of the Corporate Tax Act

[2] Supreme Court Decision 2002Du66 decided Aug. 23, 2002 (Gong2002Ha, 2237)

Hyundai Construction Co., Ltd. (Attorneys Lee Im-soo et al., Counsel for the defendant-appellant)

Head of the tax office;

Seoul High Court Decision 2006Nu20770 decided Dec. 28, 2007

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. The facts of the instant case are as follows.

On December 31, 1998, the Plaintiff acquired 301,293 shares (=2,850,191 shares x 0571 shares x 0571 shares x 0.10 (the share allocation ratio to the shares of the non-party 1 corporation) in lieu of the shares of the non-party 1 corporation as the non-party 1 corporation was merged into the non-party 2 corporation. On December 31, 1998, the Plaintiff acquired 301,293 shares of the non-party 2 corporation in lieu of the shares of the non-party 1 corporation. The final market price of the shares of the non-party 2 corporation at the Korea Stock Exchange as of the date of the above merger was 5,980 won per share.

In filing a corporate tax return for the business year 198, the Plaintiff deemed that the Plaintiff acquired shares of the non-party 2 corporation in return for the transfer of shares of the former non-party 1 corporation through the replacement of the said shares. The Plaintiff calculated the market price of the non-party 2 corporation (=5,980 won x 301,293 shares) as the transfer price of shares of the non-party 1 corporation, and calculated the acquisition price of shares of the non-party 1 corporation as 19,748,517,60 won, which is the difference between the acquisition price of shares of the non-party 1 corporation and KRW 17,946,785,460 (hereinafter “the difference in the issue of this case”).

2. We examine the first ground for appeal.

In the event that a corporation, which is a shareholder of the merged company, acquires the shares of the surviving company or the newly incorporated company (hereinafter “merged shares”) on behalf of the shares of the merged company (hereinafter “merged shares”), the replacement of such merged shares with such merged shares is not a disposal of the merged shares and acquisition of the merged shares at its own will by the relevant corporation, but a replacement of the merged shares is merely a substitution of the merged shares, which is an asset owner owned by the relevant corporation, as a result of the merger with another company. Therefore, even if the market price of the merged shares does not reach the acquisition price of the merged shares, such difference is merely an appraisal loss of assets and cannot be included in the calculation of the income amount for the relevant business year.

In addition, Article 19 subparag. 5 of the former Corporate Tax Act (wholly amended by Act No. 5581, Dec. 28, 1998; hereinafter the same) and Article 45-3 subparag. 1 of the former Enforcement Decree of the Corporate Tax Act (wholly amended by Presidential Decree No. 15970, Dec. 31, 1998; hereinafter the same) provide that the face value of new stocks of merger shall be deemed as a dividend in excess of the acquisition value of the merger principal acquisition value. On the contrary, the replacement of stocks due to the merger of the merged company itself as a result of taxation, unless there is any express provision that the loss of the merged company, which was a stockholder of the merged company, is included in the loss of the merged company, even if the value of new stocks of the merger falls short of the acquisition value of the merger principal,

In light of the above legal principles, the court below is just in holding that the difference in the issue of this case is merely an appraisal loss of the assets and cannot be included in deductible expenses as a special loss of the invested assets, and there is no error of law such as misunderstanding of legal principles as to the nature of merger, etc.,

3. We examine the second ground for appeal.

The court below determined that, in principle, the former Corporate Tax Act does not recognize profit and loss realized as profit and loss, and in addition, the corporate accounting practices such as the accounting of this case at the time of the merger cannot be deemed to have been applied, unless there is any express provision that the profit and loss is realized, except for the case of deemed dividend as prescribed in the former Corporate Tax Act, etc., in the case of deemed to be replaced by new shares due to the merger, which is the corporate shareholder of the merged company.

In light of relevant regulations and records, the judgment of the court below is just and acceptable, and there is no error in the misapprehension of legal principles as to the application of corporate accounting standards as otherwise alleged in the ground of appeal.

4. We examine the third ground for appeal.

Under the Corporate Tax Act, an additional tax is a kind of administrative sanction when a taxpayer corporation imposes an obligation to return a tax base and pay a tax amount in good faith in order to ensure the propriety of taxation and neglects its performance as a means of securing the obligation. Such a sanction is a kind of administrative sanction. It cannot be imposed where there is a justifiable reason to believe that a taxpayer cannot be aware of his/her obligation due to a conflict of opinion due to a significance in the interpretation of the tax-related Acts beyond a simple scope of land or misunderstandings, etc. If there is a circumstance where the taxpayer can reasonably present it, or where there is a circumstance where it is deemed that the performance of his/her obligation is difficult to expect to the parties, such as where there is a circumstance where it is difficult to expect that the taxpayer is negligent in performing the obligation (see Supreme Court Decision 2002Du666, Aug. 23, 2002, etc.).

As seen earlier, the lower court determined that the Plaintiff’s accounting of this case was merely based on legal reasoning and did not constitute a justifiable ground for neglecting the Plaintiff’s duty to report and pay the corporate tax of this case, taking full account of the following: (a) the difference between the value of the new shares of this case and the new shares of this case when the new shares of this case are replaced by the new shares of this case due to the merger under the former Corporate Tax Act; (b) the value of the new shares of this case before the Plaintiff’s report of the corporate tax of this case falls under the valuation profit and loss of assets in principle; and (c) the Commissioner of the National Tax Service interpreted the difference as not including the difference in the value of the new shares of this case

In light of the above legal principles and records, the judgment of the court below is just and acceptable. Contrary to the allegations in the grounds of appeal, there were no errors in the misapprehension of legal principles as to the legitimate grounds for exemption of additional tax

5. 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 on the bench.

Justices Kim Ji-hyung (Presiding Justice)