Cho High Court Decision 201Do3523 ( November 24, 2011)

The calculation of the value of donated property shall not be deemed an objective and reasonable method.

It cannot be deemed that calculating the value of donated property is based on objective and reasonable methods, and it is unlawful against predictability or taxation, contrary to the predictability or equity, by increasing the value of donated property only when it is subject to gift tax by gratuitously transferring or contributing the profits equivalent to the difference between the value of stocks and the value of stocks before the donation of real estate

2012Revocation of disposition of imposing gift tax, etc.

Ansan

The Director of Gangnam District Office

June 12, 2012

July 26, 2012

1. The Defendant’s imposition of KRW 000 on the gift tax of March 3, 2006 against the Plaintiff on July 1, 201 shall be revoked.

2. The plaintiff's remaining claims are dismissed.

3. 1/10 of the costs of lawsuit shall be borne by the Plaintiff, and the remainder by the Defendant, respectively.

The disposition of imposition of KRW 000 on the gift tax of February 27, 2006 against the plaintiff on July 1, 201 and the defendant on July 1, 201 is revoked.

1. Details of the disposition;

A. At the time of January 2006, LA owned 5,000 shares (10% of the total number of outstanding shares) issued by the OO building company, an unlisted corporation (the trade name was changed to XX stock company on January 20, 2010; hereinafter referred to as 'the sub-party company'). B. LA transferred 548 shares of the non-party company (10.96% of the total number of issued shares; hereinafter referred to as 'the shares of this case') to the Plaintiff, who is a specially related person (foreign village) on February 27, 2006, as the non-party company, at the face value of 00 won per share (hereinafter referred to as 'the transfer of this case').

(C) On February 28, 2006, DoB, the Plaintiff’s external investigation division, donated to the non-party company the buildings of 42-1 large 2,112 square meters and 3rd floor (hereinafter “the real estate of this case”) in Seoul Special Metropolitan City, Gwanak-gu, and completed the registration of ownership transfer of the real estate of this case in the name of the non-party company on March 3, 2006. The non-party company included 00 won in the gross income for the donation of the real estate of this case, and reported and paid 00 won of the corporate tax for the business year of 2006.

E. On April 201, the director of the Seoul Regional Tax Office: (a) conducted an investigation on the change of stocks with respect to the non-party company; and (b) applied the provision regarding the transfer of stocks in this case’s stock at a low price transfer among the related parties; (c) imposed capital gains tax on the non-party company; (d) deeming the difference between the transfer value of this case and the value assessed by the supplementary assessment method of the non-party company’s stocks as the gift income from a low price transfer; and (e) imposed gift tax on the Plaintiff, the transferee; and (e) the non-party company notified the Plaintiff of taxation data to impose gift tax by deeming

F. Accordingly, on July 1, 201, the Defendant decided and notified the Plaintiff on February 27, 2006 of the gift tax imposition of KRW 000 on the gift tax of this case (hereinafter “the imposition of gift tax of this case”) and KRW 000 on the gift of this case on March 3, 2006 (hereinafter “the imposition of gift tax of this case”) with respect to the gift of this case on March 3, 2006, and the imposition of gift tax of the first and second gift tax of this case (hereinafter “the disposition of this case”).

G. On September 23, 2011, the Plaintiff filed an appeal with the Tax Tribunal on September 23, 201 against the instant disposition, but received a separate decision on November 24, 201.

[Ground of Myanmar] Class A, Nos. 1, 2, and 3 (including branch numbers for those with numbers; hereinafter the same shall apply), Category B, and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) Imposition of gift tax of this case

The Defendant imposed a transfer income tax on the difference between the transfer value of the instant shares and the appraised value calculated by the Defendant’s supplementary assessment methods with respect to the instant stock transaction. The Defendant: (a) deemed the Plaintiff as the transferee of the instant shares as a donation; and (b) rendered the disposition imposing the gift tax of the instant case; and (c) constitutes double taxation as to the difference between the market value and the actual transaction value, and thus, is in violation of the principle of substantial taxation.

2) Imposition of gift tax No. 2 of the instant case

The second gift tax imposition of this case is unlawful for the following reasons.

(A) The absence of a gift by the branchB against the plaintiff

AB only donated the instant real estate to the non-party company, which led to the increase in the value of the shares of the non-party company owned by the Plaintiff, such increase is merely an incidental effect due to the Plaintiff’s real estate donation to the non-party company, and thus, it cannot be deemed that there was any gift to the non-party company of the branchB.

(B) Illegal in the calculation method of value of donated property

Even if there is a gift made by the branchB against the Plaintiff, the Defendant imposed the gift tax of this case on the basis of Articles 2(3) and 42(1)3 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8139, Dec. 30, 2006; hereinafter “Inheritance Tax and Gift Tax Act”). Article 2(3) of the Inheritance Tax and Gift Tax Act does not provide for the method of calculating the value of the donated property, and Article 42(1)3 of the Inheritance Tax and Gift Tax Act on the calculation of the value of the donated property is entirely different from the gift of this case, so it is unlawful to calculate the value of the donated property by applying Article 42(1)3 of the Inheritance Tax and Gift Tax Act, since the subject of Article 42(3)

(c) Taxation on unrealized benefits;

The imposition of gift tax of this case was conducted on unrealized gain, which is a share value equivalent to the second gift tax, and in order to impose unrealized gain, it should be premised on resolving the issues such as the bee and accurate measurement of gain subject to taxation, and the establishment of supplementary regulations regarding the decline in the value of assets. Nevertheless, the Defendant’s imposition of gift tax by deeming the increase in the value of stocks, which is unrealized gain, as gain subject to taxation without resolving such prior issues, is contrary to the principle of excessive prohibition under the Constitution.

(D) Double taxation of corporate tax and gift tax

Although the non-party company already paid corporate tax on the donation of the instant real estate, it violates Article 2(2) of the Inheritance Tax and Gift Tax Act prohibiting double taxation on the same taxable object.

(E) Violation of imposition of penalty tax

Even if the second gift tax disposition (main tax portion) of this case is lawful, the Defendant authoritatively interpreted that the gift tax is not imposed on the matters similar to the gift of the real estate of this case several times until March 2006. Since the Plaintiff trusted the gift of this case at the time of March 2006 and did not report and pay the gift tax, it constitutes a case where there is a justifiable reason for violating the Plaintiff’s duty to report the gift tax. Accordingly, the penalty tax portion of the disposition imposing the second gift tax of this case is unlawful.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Determination on the legality of the disposition of gift tax No. 1 of this case

1) As gift tax and capital gains tax vary between the requirements and timing for establishing tax liability and taxpayers, in a case where the tax authority imposes each disposition, it shall be determined in accordance with the respective taxation requirements, and if both of them meet the respective taxation requirements, it shall not be possible to impose only one tax unless there is a special provision excluding double application. Article 2(2) of the Inheritance Tax and Gift Tax Act provides that gift tax shall not be imposed when the donee imposes income tax on the donated donated donated property under Article 2(1) of the Income Tax Act. However, in light of the language and content thereof and the nature of the gift tax as a supplement tax on the gift, where gift tax is imposed on the donee, it does not fall under a special provision excluding double application of capital gains tax provisions as a single class of income where income tax is imposed on the donee (see, e.g., Supreme Court Decisions 98Du11830, Sept. 21, 199; 2002Du12458, May 13, 2003).

2) As seen earlier, with respect to the transfer of Non-Party Company’s shares to the Plaintiff at a low price, the Defendant imposed gift tax on the Plaintiff regarding the difference between the actual transfer value of the shares and the value assessed by supplementary assessment methods under the Commercial and Commercial Act. Meanwhile, the Defendant imposed transfer income tax on the Plaintiff by using the assessed value as the transfer value.

3) Examining these factual relations in light of the aforementioned legal principles, the imposition of gift tax and the imposition of capital gains tax on 1.0 per cent shall not be deemed to constitute double taxation on the grounds that the subject of taxation differs from the subject of taxation. Therefore, the imposition of gift tax on 1.0 does not constitute a violation of Article 2(2) of the Inheritance Tax and Gift Tax Act.

D. Determination on the legality of the imposition of gift tax No. 2 of this case

1) Whether a 'donation' which is subject to gift tax against the plaintiff by the branchB exists

A) Whether the taxation can be made by applying Article 2(3) of the Inheritance Tax and Gift Tax Act

(1) Introduction and purport of the complete comprehensive gift taxation

The former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; hereinafter “former Inheritance Tax and Gift Tax Act”) borrowed the concept of donation under the Civil Act with no definition provision on the concept of donation. The concept of donation borrowing is nothing more than the concept of donation under the Civil Act, but there is no way to prevent the avoidance of gift tax through an irregular donation. Therefore, there is a number of regulations on donation (Articles 32 through 42 of the former Inheritance Tax and Gift Tax Act). However, the provision on individual donation has been pointed out that there is a problem that it is impossible to cope with a new type of gift due to a new type of gift due to a financial product, financial technique, a variety of capital transaction, etc., and it has been set up the legal basis for the imposition of gift tax on the transfer of various forms of donation, and the so-called comprehensive donation donation under the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003).

(2) Contents of the complete comprehensive gift taxation

Article 2(1) of the Inheritance Tax and Gift Tax Act (amended by Act No. 7010 on December 30, 2003) provides that gift tax shall be imposed on another person's gift pursuant to Article 2(3) of the Inheritance Tax and Gift Tax Act ("the Inheritance Tax and Gift Tax Act") and Article 2(3) provides that "The term "donation" means a transfer of tangible or intangible property (including a transfer at a remarkably low price) in which economic value can be calculated, directly or indirectly, to another person (including a transfer at a remarkably low price) or an increase in the value of another person's property by means of contribution, or a separate concept of donation that is distinct from a gift under the Civil Act. Article 33 through 42 of the Inheritance Tax and Gift Tax Act provides that "the gift tax shall be imposed on another person

(3) Whether the taxation can be made by applying Article 2(3) of the Inheritance Tax and Gift Tax Act

As seen earlier, it is difficult to simply interpret Article 2(3) of the Inheritance Tax and Gift Tax Act as a confirmatory and declared provision in light of the system with other provisions, such as the introduction of the concept of donation with the due diligence under Article 2(3) of the Inheritance Tax and Gift Tax Act to impose gift tax on the gratuitous transfer of various unforeseeable forms of property or increase in the value of property, etc. (in cases of Article 2(3) of the Inheritance Tax and Gift Tax Act simply confirmatory and declared provision, there is a problem in which the tax basis on the issue corresponding to the existing deemed donation exists if it is considered as a confirmatory and declared provision under Article 2(3) of the Inheritance Tax and Gift Tax Act), etc. In light of the background, legislative purport, and the system with other provisions, it is reasonable to deem that the gift tax based on Article 2(3) of the Inheritance Tax and Gift Tax Act is possible to be imposed (see Supreme Court Decision 2008Du17882, Apr. 28, 2011).

B) Whether it constitutes one gift under Article 2(3) of the Inheritance Tax and Gift Tax Act

AB is a person in a special relationship with the Plaintiff and, within the scope of the Plaintiff’s share ratio by donation of the instant real estate to the non-party company, the value of the shares of the non-party company after the donation of the instant real estate and the value of the shares of the non-party company prior to the donation of the instant real estate has increased by free transfer or contribution. Therefore, it constitutes “donation” under Article 2(3) of the Inheritance Tax and Gift Tax Act, which is subject to gift

C) Sub-decision

Therefore, the branchB donated a profit equivalent to the increase in the value of the shares of the non-party company owned by the plaintiff (hereinafter referred to as "the donation of this case") to the plaintiff through the donation of the real estate of this case to the non-party company. Therefore, this part of the plaintiff's assertion

2) Whether the calculation of the value of the donated property is unlawful

A) Provisions pertaining to the calculation method of value of donated property

Article 2(3) of the Inheritance Tax and Gift Tax Act only provides for the taxable object subject to the application of the "total universalism of gift tax" and does not directly provide for the method of calculating the value of the donated property acquired through the donation. This seems to be due to the impossibility of the legislative form of the "total universalism of gift tax" in Article 2(3) of the Inheritance Tax and Gift Tax Act with respect to various and new types of modified donations, which are not in accordance with the form of donation under the Civil Act.

As seen earlier, the legislators introduced the complete comprehensive gift taxation of the gift tax and expanded the scope of the gift tax, while, with respect to the calculation of the value of the donated property (based on this, the tax base is calculated), Article 33 through Article 42 was introduced by converting the existing provision on individual donated property (Article 32 through 42 of the former Inheritance Tax and Gift Tax Act) into the example provision on the calculation of the value of the donated property under the title of Section 2 of Chapter 3 of the Inheritance Tax and Gift Tax Act.

In light of the background, legislative purport, etc. of the introduction of the complete comprehensive taxation of gift tax, it cannot be deemed that such legislative form is contrary to the legal principle of taxation requirements. However, considering the predictability of taxpayers related to the legal principle of taxation requirements, it is reasonable to view that in calculating the value of donated property in the case of the gift tax under Article 2(3) of the Inheritance Tax and Gift Tax Act, it is necessary to calculate the value by an objective and reasonable method by applying mutatis mutandis the same or similar taxation requirements, transaction type, economic substance, etc. among the example provisions of Articles 3

B) Whether the calculation of the value of the instant donated property is lawful

In calculating the value of donated property to the gift of this case, the Defendant calculated the amount equivalent to the difference of the value of donated property before and after the donation of this case by applying mutatis mutandis Article 42(1)3 of the Inheritance Tax and Gift Tax Act. In full view of the following circumstances, the Defendant’s calculation of the value of donated property to the gift of this case by applying mutatis mutandis Article 42(1)3 of the Inheritance Tax and Gift Tax Act cannot be deemed an objective and reasonable method, and it is unlawful against the taxpayer’s predictability or equity of taxation. Thus, this part of the Plaintiff’s assertion is with merit, and thus, the imposition of gift tax of this case 2 without further examining the remainder of

(1) The instant gift cannot be deemed as the type of transaction similar to the taxation requirements under Article 42(1)3 of the Inheritance Tax and Gift Tax Act or the type of transaction.

The defendant calculated the value of donated property by applying the above provisions mutatis mutandis, considering that the gift in this case is similar to the type of transaction under Article 42 (1) 3 of the Inheritance Tax and Gift Tax Act, especially in case of business acquisition, business exchange, business exchange, change of the corporation's organization, etc., the gift in this case cannot be deemed as the type of transaction similar to the type of transaction under Article 42 (1) 3 of the Traffic Tax Act.

① Article 42(1)3 of the Inheritance Tax and Gift Tax Act provides that the value of donated property shall be the profits earned by investment, reduction of capital, merger, division, conversion, acquisition, and exchange of stocks by convertible bonds, etc. or transfer of business, business exchange, business exchange, change of the corporation’s organization, etc.

First, the former part of the above provision provides for the benefit of "an increase or decrease in corporate capital (referring to a capital transaction)." This provision provides for the benefit of direct or indirect profit resulting from a change in the appraised value of assets or shares without paying any ordinary payment due to the merger, division, reduction of capital, etc. of a corporation. It does not fall under the category of transactions stipulated in the former part of the above provision because the act of donation to the non-party company by the branchB is not the capital transaction which increases or reduces the capital of the non-party company, but the act of donation to the non-party company does not fall under the category of transactions which generate the increase or decrease in assets, and therefore it does not fall under the category of transactions stipulated in the above provision." (Second, in the latter part of the above provision, the above provision provides for the benefit of change in the ownership or value of the non-party company. It does not mean any transaction that changes in the shareholder's shares or the value of the company's shares, and it does not correspond to the category of donation and exchange of the non-party-party-party-party-2.

Article 41 (1) of the Inheritance Tax and Gift Tax Act provides that in case where shareholders, etc. of a specific corporation make profits from such specific corporation through transactions such as donation of properties to the specific corporation, the amount equivalent to such profits shall be one of the value of the donated properties of the specific corporation concerned. Article 31 (1) 1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 1989 of Feb. 28, 2007; hereinafter referred to as the "Enforcement Decree of the Inheritance Tax and Gift Tax Act") provides that the "specified corporation" shall be deemed to fall under the value of the donated properties of the specific corporation for the business year which includes the date of donation (see, e.g., Supreme Court Decision 200Da184060 of the Inheritance Tax and Gift Tax Act). It shall be deemed that the amount of losses incurred during the business year to which the date of donation belongs by the non-party corporation falls under the value of the donated properties under Article 18 (1) 1 of the Enforcement Decree of the Corporate Tax Act.

The legislative purport of Article 41 of the Inheritance Tax and Gift Tax Act is to impose gift tax on an irregular donation that gives benefit to shareholders, etc. of a specific corporation without bearing corporate tax on the amount of donation by offsetting the amount of donation by deficit (see, e.g., Supreme Court Decision 2008Du6813, Apr. 14, 201). In calculating the value of the donated property, Article 31(6)1 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that, inasmuch as the value of the donated property is calculated by multiplying the value of the donated property by the ratio of shares owned by the shareholders, etc. of the specific corporation to the amount of loss, it shall be free of the amount calculated by multiplying the value of the donated property by the ratio of shares owned by the shareholders, etc. of the specific corporation

However, by applying Article 42(1)3 of the Inheritance Tax and Gift Tax Act to the instant donation, the Defendant imposed gift tax on the Plaintiff, a shareholder of the non-party company, without considering all such circumstances, on the amount equivalent to the increased share value by receiving the instant real estate from the non-party company, without considering the non-party company’s corporate tax liability for one transaction to which the instant real estate was donated. This is contrary to equity as it causes a significant difference in tax burden by the tax authority without reasonable grounds (the non-party company included 00 won in the gross income for the donation of the instant real estate, and reported and paid KRW 00 won of corporate tax for the business year 2006, considering the fact that it reported and paid corporate tax as above, in applying Article 41 of the Inheritance Tax and Gift Tax Act, the portion that was not subject to corporate tax, namely, the portion that offseted the amount of gift by the value of the Plaintiff’s donated property, including the Plaintiff, and the Defendant did not impose gift tax on the Plaintiff’s total amount as KRW 00,000, including the Plaintiff’s donated property.

(4) The instant disposition of gift tax infringes on the legal stability and predictability of the taxpayer in light of the history of Article 41 of the Inheritance Tax and Gift Tax Act and the interpretation of the authority by the tax authorities.

Article 41 of the former Inheritance Tax and Gift Tax Act (wholly amended by Act No. 5193, Dec. 30, 1996) newly established Article 41 of the same Act, which stipulates that profits that have been divided into shareholders, etc. of a certain corporation through transactions such as donation of property to the relevant corporation by a person having a special relationship with shareholders, etc. of the specific corporation shall be deemed as donation, and thus, deemed as gift tax. As seen earlier, even if property donation is received, it is intended to prevent shareholders, etc. of the specific corporation having a special relationship with the donor from gaining profits without any tax burden through donation to the specific corporation, which is not subject to corporate tax due to losses. Since the provision of Article 2(3) of the former Inheritance Tax and Gift Tax Act was introduced at the time of the amendment of the Inheritance Tax and Gift Tax Act on December 30, 203, the provision of Article 41, which was taxed as deemed donation of profits through transactions with the specific corporation, was converted to an example provision for calculating the value of donated property through transactions with the specific corporation.

Since the introduction of the provision of the complete comprehensive gift tax, the tax authorities have authoritative interpretation that, in case where a taxpayer donated the property to a black corporation (a corporation with no loss) that is not a specific corporation (a corporation with no loss), the gift tax may be imposed pursuant to the comprehensive gift tax provisions of the complete gift tax, on the issue of whether the said shareholder may be subject to the gift tax (see, e.g., Supreme Court Decisions 4-85, Jun. 17, 2004; 4-4 team-409, Mar. 22, 2005; 4 team-539, Apr. 11, 2005). Such authoritative interpretation was maintained without being modified until March 3, 2006, when the gift of this case was made by the gift of this case.

In addition, the tax authority changed the previous authoritative interpretation by determining whether it constitutes Articles 2 and 42 of the Inheritance Tax and Gift Tax Act, etc., which can be imposed on shareholders in the above case at around 2007 (see, e.g., National Tax Service’s written questioning 4 team-1767 May 29, 2007). The Defendant appears to have imposed the gift tax of this case on the basis thereof, which goes against the predictability of taxpayers in light of the following circumstances.

① The instant gift is a type of transaction similar to the type of transaction stipulated in Article 41 of the Inheritance Tax and Gift Tax Act, and Article 41 of the Inheritance Tax and Gift Tax Act was newly established on December 30, 1996 to cope with such a modified gift, and it is difficult to view the instant gift as a new type of modified gift even after the full comprehensive gift of the gift tax was introduced. In addition, it is difficult to view that the instant gift was a new type of modified donation that could not be predicted in advance.

(2) Where a specific corporation (including a corporation that has losses) receives property from its shareholders for a considerable period of time even after the full comprehensive gift taxation was introduced, the tax authority imposed gift tax on its shareholders by applying Article 41 of the Inheritance Tax and Gift Tax Act, but where such property is donated to its shareholders, gift tax shall not be levied on its shareholders.

③ In 2007, the tax authority changed the previous authoritative interpretation by determining whether the gift tax can be imposed on shareholders in the same case as the gift in this case, based on the factual basis as to whether it falls under Articles 2 and 42 of the Inheritance Tax and Gift Tax Act. This seems to have changed the previous authoritative interpretation that has been maintained for a considerable period after the introduction of the complete comprehensive taxation of gift tax.

④ In particular, the issue of this case’s donation requires a fair and accurate calculation method of the tax base (which shall be calculated on the basis of the value of donated property) in terms of indirect benefit and unrealized gain. In light of the aforementioned circumstances, it is difficult to view that the value of the donated property calculated by the Defendant, calculated on the basis of Article 42(1)3 of the Inheritance Tax and Gift Tax Act, is based on the fair and accurate calculation method in light of the aforementioned circumstances (see, e.g., the instant donation is not a new type of donation that cannot be dealt with in advance, but a type of transaction similar to the type of transaction under Article 41 of the Inheritance Tax and Gift Tax Act, and its scope is unclear in relation to the provision of Article 41 of the Inheritance Tax and Gift Tax Act, and in comparison with the case where Article 41 of the Inheritance Tax and Gift Tax Act applies, it is inappropriate in terms of taxation on the value of the donated property. Meanwhile, even if other exceptional provisions on the calculation of the value of donated property are examined, it appears that the fair and accurate calculation method is provided for unrealized gain taxation.

3. Conclusion

The claim for revocation of the gift tax disposition of this case is justified, and the remaining claims are dismissed as they are groundless.