Cho High Court Decision 2006No3643 ( December 05, 2008)

Donation as to the transfer of low prices of unlisted stocks of a private teaching institute

In light of the fact that shares are transferred between the representative and employees of a corporation and the fact that the transaction value is difficult to reflect the objective exchange value, etc., it is legitimate to calculate the market price of low-price transferred shares by supplementary evaluation methods.

The contents of the decision shall be the same as attached.

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The Defendant’s disposition of imposition of KRW 1,212,926,120 against the Plaintiff on August 10, 2006 is revoked.

1. Details of the disposition;

A. From January 15, 1999 to December 31, 2003, the Plaintiff served as the representative director of the FF Research Institute (hereinafter “FF Research Institute”) located in ○○○-gu Seoul Special Metropolitan City, 693-2, and on December 2, 2002, the Plaintiff acquired 10,500 non-listed stocks of FFF Research Institute (hereinafter “instant shares”) from KimB holding 19,500 won per share of 1,000 won from among the total issued shares of FF Research Institute on December 2, 2002 (hereinafter “instant transaction”).

B. The head of the ○○○ Tax Office conducted an integrated investigation of the FF Institute's corporate tax for the 2002 business year, with respect to the FF Institute's 202 business year, deemed that the said transaction constituted "an employee of the FF Institute whose investment is controlled by KimB," and Article 35 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; hereinafter referred to as the "Act") and Articles 26 and 19(2) of the Enforcement Decree of the Act (amended by Presidential Decree No. 17828, Dec. 30, 2002; hereinafter referred to as the "Enforcement Decree of the Act"), "the acquisition of property at a price lower than the market price by transfer from a person with a special relationship under Article 63(1)1 (c) of the Act and Article 54 of the Enforcement Decree of the Enforcement Decree of the Act," and thus, the Defendant evaluated the net asset value at the time of this case's 2,301,8.

[Reasons for Recognition] In the absence of dispute, Gap evidence No. 1.9, Eul evidence No. 1, Eul evidence No. 2-3, Eul evidence No. 3-1 through 5

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

(1) In light of Article 35(1)1 of the Act, in cases where the transferee of the property takes over the property from a person in a special relationship at a price lower than the market price, the transferee of the property becomes a person liable for gift tax, and as such, the "person in a special relationship" under Article 35(1)1 of the Act refers to a person in a relationship under each subparagraph of Article 19(2) of the Enforcement Decree of the Act with the transferee (Article 25(4)1 of the Enforcement Decree of the Act). Thus, as in this case, in cases of a low-price transfer under Article 35(1)1 of the Act, as in Article 35(1)1 of the Act, it should be determined whether the transferor is in a relationship under each of the above subparagraphs, i.e., the transferee, and whether there is a special relationship. However, the instant disposition

(2) As examined below, the value of KRW 10,00 per share of the Plaintiff’s acquisition of the instant shares constitutes the market price that reflects the objective exchange value at the time of the transaction by means of general and normal methods, and thus, the instant disposition by the Defendant’s application of the supplementary evaluation method is unlawful.

(A) The Plaintiff, who is an English instructor of the FF Institute for several years, demanded the FF Institute to participate in the actual management of the FF Institute, requested the KimB, a major shareholder, to take over some of the shares of the Company, and the compromise was formed on December 2, 2002, and acquired the shares of this case from KimB at a price of KRW 10,000 per share.

(B) Since then, on March 26, 2003, the Plaintiff: (a) purchased 24,500 shares at a price of KRW 5,500 per share of 5,000 per share; (b) however, on December 31, 2003, the Plaintiff liquidated the relationship with the FFA by transferring 20,000 shares out of the shares of FFA, which the Plaintiff possessed, to E on January 9, 2004, to 15,00 shares, at each 10,00 shares, from among the shares of FFA, which were held by the Plaintiff, at a price of KRW 10,00 per share; and (c) thereafter, transferred 5,00 shares of FFA that were held by EM to KimD at a price of KRW 10,00 per share; and (d) transferred 10,00 shares of FFAD at a price of KRW 10,00 per share to KimD.

(C) On October 26, 2005, EE transferred 20,000 shares of the FF Institute to Kim H at a price of KRW 13,000 per share. KimD also transferred 20,000 shares of F Institute to KimCC at a price of KRW 13,00 per share.

(D) Although the Plaintiff did not have transacted before acquiring the instant shares, but upon examining the details of transacted in the shares of the FFFFA since its establishment, all transactions took place between KRW 5,000 per share and KRW 13,000 per share.

(3) On April 24, 2006, the FFA decided to file a revised tax return in order to be exempted from criminal punishment after receiving a prior notice of tax investigation from the head of the ○○ Tax Office, and received a revised tax return from 2001 to 2005 business year from May 2, 2006, a day before the commencement of the tax investigation. The FFA received a revised tax return on May 2, 2006, a day before the commencement of the tax investigation. In this process, it was treated as an omission of income of KRW 80 million for 201 business year without reflecting all relevant expenses, etc., because it did not properly examine all the documents or evidence that have delayed time, and accordingly, the amount of net profit and loss for 2001 business year increased normally. Accordingly, it constitutes a case where the amount of net profit and loss increases normally due to the instant case, and thus, the Defendant’s disposition of imposition of subparagraph 13 of Article 56(1) of the Enforcement Decree of the Act cannot be calculated by applying the instant taxation method.

(4) Considering that the Defendant’s application of the supplementary assessment method under Article 63(1)1 of the Act was lawful when the instant disposition was rendered by the Defendant, the amount of the instant shares should be calculated by deducting the amount of KRW 221,926,270, which was calculated in duplicate in the amount of sales in the account book, from the amount of KRW 800,278,00, which was recognized as the omission of revenue in the business year 2001, as a result of the tax investigation, by the following: (a) the person in charge of the FF Institute reported the corporate tax for the year 201, around March 200 and reflected in the amount of sales in the account book.

(A) From January 1, 2001 to December 31, 2002, the FFA opened an account under the name of KimA with respect to the expenses for teaching materials and the revenue or expenditure of the mother’s death, and managed the money for the deposit of funds. In other words, the FFA received the payment for the sales of the teaching material cost sold to the students with the above non-financial passbook, and paid the purchase price for the teaching material supplied by the transaction parties such as the publishing company by withdrawing the funds in the above passbook.

(B) However, most of the transaction partners, such as publishing companies, have issued a tax invoice and claimed for teaching material costs. As such, the FFA could not omit a tax return on each amount corresponding to the amount of each tax invoice that is paid to the transaction partners, such as publishing companies, by paying for the purchase price of teaching material. Accordingly, the FFA reported regular corporate tax for each pertinent business year on the amount equivalent to the amount of the tax invoice that can be collected. In the case of a corporate tax return for 2001 business year, the FFA reflected it at the regular corporate tax return for each pertinent business year, and even in the case of a tax return for 2001 business year, the period of attribution of the amount of 192,979,370 won corresponding to the portion of the tax invoice for the

(C) On the other hand, the FFA, despite the occurrence of the cost of purchasing the above teaching materials, failed to include all sales from the sales of the above-mentioned teaching materials, and thus, deemed that 15% sales profit of the above teaching materials amounting to 192,979,370 won belonging to the business year 201 was generated, and thus, the FFA reflected 221,926,270 won (==192,979,370 wonx1.15) in the sales amount at the time of settlement of accounts for the purpose of receiving teaching materials.

(D) However, in the process of filing a revised return of corporate tax on May 2, 2006 on May 2, 2006, the FFA filed a revised return without considering the address of the amount of KRW 221,926,270, which was originally reflected in the annual corporate tax return for the business year of 2001. As a result, the total amount of KRW 800,278,000 deposited in the passbook of non-funds is recognized as an omitted amount of sales. Therefore, the FFA would overlap the amount of KRW 221,926,270 out of the omitted amount of sales.

(b) Related statutes;

It is as shown in the attached Table related statutes.

C. Determination

(1) Judgment on the Plaintiff’s first argument

In this case, the plaintiff should determine whether the transferor has a special relationship on the basis of the plaintiff, who is the transferee. Since KimB was the representative director of FF Institute, a corporation controlled by investment by KimB, the plaintiff was an employee of the controlling corporation, and from the perspective of KimB, KimB is not an employee, and therefore, the plaintiff cannot be deemed a person with a special relationship. Therefore, the plaintiff cannot be deemed a transferee of low-price transfer as a transferee of low-price transfer.

Article 35 (1) 1 of the Act provides for a transferor or transferee (hereinafter referred to as a "transferor, etc.") and a person who has a special relationship with an employee (including an executive officer of a corporation under control by investment) in relation to the scope of "a person having a special relationship" under Article 35 (1) 1 of the Act, who takes over a property at a price lower than the market price, and Article 26 (4) 2 of the Act provides that a transferor of the property shall be deemed a donee, and where the property is transferred to a person having a special relationship with another person at a price higher than the market price, the transferor of the property shall be deemed as a donee, and a person who is in a relationship with an employee (including an executive officer of a corporation under control by investment).

In light of the purport of Article 26(4)1, Article 19(2)2, and Article 13(6)2 of the Enforcement Decree of the same Act, the term “special relationship” refers to “a relationship between a transferor, etc. and an employee (including an officer of a corporation controlled by an investment),” and it means that a person who has a special relationship is regarded as a person who has a special relationship with a transferor, etc., as alleged by the plaintiff. In light of the purport of Article 35(1)1 and 13(6)2 of the same Act, the term “special relationship” refers to “a relationship between a transferor, etc. and an employee (including an officer of a corporation controlled by an investment).

Therefore, since the plaintiff is an executive officer of FF Institute, which is a corporation by KimB's investment, and the plaintiff and KimB are related parties, the disposition of this case on the premise that the plaintiff was transferred at a low price from KimB in a special relationship is legitimate. Therefore, the plaintiff's allegation in this part is without merit.

(2) Judgment on the second argument by the Plaintiff

In the case of unlisted stocks not listed on the Korea Stock Exchange, if there is an example of the transaction that seems to properly reflect the objective exchange values, such price shall be deemed to be the market price. However, if there is no such example or it is difficult to calculate the market price by any other means, its value shall be appraised in accordance with the complementary evaluation methods under the Act. Here, the market price refers to the objective exchange price formed through normal transaction in principle. In order to fall under the market price at the time of donation, there should be circumstances that the transaction price objectively reflects the general and normal exchange value, and there should be no changes in the price between the donation and the above transaction date (see, e.g., Supreme Court Decision 9Du2505, Feb. 11, 200).

As to the instant case, since the Plaintiff acquired the instant shares from KimB, a person with a special relationship, it is difficult to view that the value of KRW 10,000 per share is reflected in the objective exchange value, and the value of the instant shares based on the deemed donation should be assessed as of December 2, 2002, and the Plaintiff’s assertion that the value per share of the FFF Institute was formed between March 26, 2003 and October 26, 2005, during the period from March 26, 2003 to October 26, 2005, is 5,000 won and 13,000 won after the date of the said evaluation, it is difficult to calculate the market price in a way other than the complementary evaluation method. Accordingly, the Plaintiff’s assertion in this part is without merit.

(3) Judgment on the third assertion by the Plaintiff

However, as alleged by the Plaintiff, the circumstance that the person in charge of FFA in charge of the FFA in charge of filing a revised return on corporate tax for the business year 2001 recognized that there was an omission of 80 million won in import in the process of filing a revised return on corporate tax for the business year 2001 and that the net amount of profit and loss for the business year 2001 has been significantly increased shall not fall under any of the grounds under the latter part of Article 56(1) of the Enforcement Decree of the Act and the latter part of Article 56-3(1) of the Enforcement Decree of the Act, which prescribes that the weighted average amount of net profit and loss for the last three years per share, which is the basis for calculating the amount of deemed donation, shall not be deemed to fall under any of the grounds under the latter part of Article 56(1) of the Enforcement Decree of the Act and the Enforcement Rule

(4) Judgment on the plaintiff's fourth argument

The Plaintiff’s assertion is that this portion of money deposited in the Non-Fund account under the name of KimA, which overlaps with KRW 800,278,00, which was recognized as an omission of sales in the year 201 by the FFFFFFFFFFFFFF’s return of the initial corporate tax, and KRW 221,926,270, which was already appropriated as the expense of the teaching material belonging to the business year 2001 at the time of the return of the initial corporate tax. This is premised on the fact that the revenue of the teaching material acquired in 2001 by the FFFFF KFFA was deposited and managed into the Non-Fund account under the name of KimA. The testimony by the witness KimA alone is insufficient to acknowledge that the expense of the teaching material in 201 by the FFA was deposited into the said Non-Fund account, and there is no other evidence to support this portion of the Plaintiff’s assertion without any further need

(5) Sub-committee

Therefore, the Plaintiff’s assertion disputing the illegality of the instant disposition is without merit, and the instant disposition is lawful.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.