Plaintiff (Attorney Kim Dong-dong, Counsel for the plaintiff-appellant)

Daejeon Head of the District Tax Office

October 21, 2010

Daejeon District Court Decision 2009Guhap1374 Decided May 26, 2010

1. Revocation of a judgment of the first instance;

2. The Defendant’s imposition of capital gains tax of KRW 871,713,388 against the Plaintiff on January 2, 2008 shall be revoked.

3. All costs of the lawsuit shall be borne by the defendant.

The same shall apply to the order.

1. Details of the disposition;

A. On August 14, 2002, the Plaintiff transferred KRW 5,150,000,000 to the Defendant on September 8, 2006, the transfer price calculated based on the officially assessed individual land price in the Dong-dong Construction Co., Ltd. (hereinafter “Sidong Construction”) located as the representative director, and paid KRW 1,082,714,040 to the Defendant on November 30, 2006, by scheduled return of KRW 1,082,714,040,040 for the transfer income tax corresponding to the year 2006.

B. On August 22, 2007, the Director of the Daejeon Regional Tax Office: (a) viewed the appraisal value of KRW 9,018,540,000, which was conducted by the Plaintiff from the Korea Fire and Marine Insurance Co., Ltd. (hereinafter “Sigh appraisal”) in the course of obtaining a loan from the Plaintiff on August 22, 2006 as the market price; and (b) determined that the transfer of the instant land constitutes a transfer of a nominal construction at a low price; (c) notified the Defendant as taxation data by applying Article 101 of the former Income Tax Act (amended by Act No. 9270, Dec. 26, 2008; hereinafter “former Income Tax Act”); and (d) the Defendant corrected and notified the transfer income tax corresponding to the Plaintiff on January 2, 2006 as the transfer income tax of KRW 1,403,825,100.

C. On January 30, 2008, the Plaintiff appealed and filed a request for a trial with the Tax Tribunal. On December 31, 2008, the Tax Tribunal rendered a decision to re-examine the values appraised by the Defendant in an objective and reasonable manner on the comparative standard and the weight by factor, on the ground that the appraisal value at the market price was excessively assessed on the grounds that the Defendant erred in selecting a standard for comparison and the appraisal value at the market price was excessive.

D. Accordingly, the Defendant: (a) deemed the market value of KRW 7,570,827,00 calculated by requesting the Korea Appraisal Board and the Central Appraisal Board to appraise the market value of the instant land; and (b) deemed the market value of KRW 7,570,827,00 calculated by calculating the arithmetic mean of each of the appraisal values; and (c) accordingly, corrected and notified the transfer income tax for the year 2006 to KRW 871,713,390, which reduced the capital gains tax of KRW 532,11,710 from the amount initially

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 6, Eul evidence Nos. 1 through 3, Eul evidence Nos. 6 through 11, and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The plaintiff asserts that the disposition of this case is unlawful for the following reasons.

1) The Plaintiff’s transfer of the instant land to the name of the corporation under the Building Act does not constitute a transfer for the purpose of unfairly reducing the tax burden. The market price of the instant land calculated after the Defendant’s tax judgment is not a retroactive assessment, but not a market price for the selection of comparative standard sites and calculation of weight, etc., and the market price is unclear. Thus, the Plaintiff’s transfer of the instant land by using the value already applied to the publicly assessed individual land price as the transfer price does not constitute the denial of wrongful calculation. As such, the Plaintiff’s transfer of the instant land by using the value already applied to the publicly assessed individual land price does not constitute the denial of wrongful calculation.

2) A building owner who newly constructed a building on two lots, other than the Daejeon Seo-gu, Seosung-gu, Daejeon (Land Number 1 omitted) (Supreme Court Decision omitted), adjacent to the instant land, filed an application for a provisional disposition with the court, and thus, the construction of Seodong-dong was unable to construct a master complex apartment on the 5th underground floor and the 27th ground floor size of the instant land, which was scheduled to be constructed on the instant land. As a result, the multi-level utilization low-level utilization rate of the instant land was 5%, but the appraised value on the Defendant side, which was the basis of the instant disposition, did not reflect the appropriate market price without considering such circumstances.

3) According to the provisions of Article 167(6) of the Enforcement Decree of the Income Tax Act, where the transaction value falls under any of the market prices stipulated in Article 89 of the Enforcement Decree of the Corporate Tax Act with respect to transactions between individuals and corporations, the provisions on the denial of unfair act and calculation of transfer income cannot be applied. Thus, the transfer value of the instant land falls under one of the market prices stipulated in Article 89 of the Enforcement Decree of the Corporate Tax Act, and from the standpoint of the construction of the Dong Dong Dong Dong Dong Dong Dong Dong Dongdong, the Defendant cannot be denied the rejection of unfair act and calculation in relation

4) A building on the instant land was destroyed after the instant land was transferred to a clear construction. As such, KRW 1,600,000,000, and KRW 1,692,800,000, including acquisition tax and registration tax, and KRW 92,80,800,000, in total, should be included in the acquisition cost or necessary expenses of the instant land, the Defendant did not include the purchase price or acquisition tax, registration tax, etc. of the instant building in the acquisition cost or necessary expenses to be deducted in disposing of the instant land.

5) Even if all the claims asserted earlier are not accepted, KRW 6,953,769,00 calculated by the court appraiser should be deemed as the market price of the instant land, and the part exceeding the transfer income tax calculated based thereon should be revoked as it is unlawful.

B. Relevant statutes

It is as shown in the attached Form.

(c) Fact of recognition;

1) On August 14, 2002, the Plaintiff acquired the instant land and its ground reinforced concrete mix 21.2 square meters of amusement facilities, 211.2 square meters of neighborhood living facilities, 107.51 square meters of neighborhood living facilities, 107.19 square meters of neighborhood living facilities, 244 square meters of general restaurants (hereinafter “instant building”) from Taedong-si Round Co., Ltd., and in relation thereto, the Plaintiff paid KRW 1,305,000,000 of the purchase price (the Plaintiff reported the value of the instant land excluding the instant building value as KRW 1,305,00,000,000 for preliminary return of transfer income tax). In relation thereto, the Plaintiff paid KRW 92,800,000,000 in total, including acquisition tax and registration tax, to the Daejeon head of Daejeon Pungdong Port.

On the other hand, on August 20, 2002, the Plaintiff commenced a real estate rental business under the trade name "○○○○," and reported and paid the value-added tax and the comprehensive income tax on the rental income of the instant building until June 1, 2006. On the premise that the said building constitutes fixed assets for carrying on a real estate rental business, the Plaintiff included the value of the said building in the financial statements as fixed assets item, and then reported and paid the comprehensive income tax by including the depreciation costs of the instant building in the necessary expenses pursuant to Article 5(1)14 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 19890, Feb. 28, 2007; hereinafter "former Enforcement Decree of the Income Tax Act").

2) On January 19, 2006, the name Dong Construction was a juristic person established with housing construction business, real estate consulting business, real estate lease, sale and purchase business as its business purpose. The Plaintiff held 25% shares as the representative director of the said juristic person.

3) On September 8, 2006, the Plaintiff agreed to remove the instant building at KRW 5,150,000,000, based on the officially assessed individual land price, with the intention to transfer the instant land to the above-dong Construction in a specially related party.

Since then, on March 7, 2006, the building of this case was demolished, and on the ground of this case from the Daejeon Metropolitan City Mayor on March 7, 2006, the construction of the building of this case was commenced on January 18, 2007 after obtaining a construction permit from the Daejeon Metropolitan City Mayor to construct the apartment of 27 stories above the 5th underground floor and the apartment of 32,205 square meters above the 32,222 square meters above the 5th underground floor on the ground of this case. However, on May 22, 2005, the construction of the above main apartment was commenced on May 18, 2007 after obtaining a construction permit from the Daejeon Metropolitan City Mayor on the 27th underground floor from the 27th underground floor to the Seoul Central District Court on November 22, 2006, 2006 to seek the alteration of the above apartment complex construction permit to the above 26th underground apartment complex construction permit to the 208th underground apartment complex construction permit.

4) The Plaintiff and the Defendant submitted each of the following appraisal results on the land of this case to the Tax Tribunal in the process of examining the defects in the initial disposition, but all of them were rejected on the ground that they cannot be seen as the market price.

본문내 포함된 표 제출자 감정기관 감정가(원) 가격시점 작성일자 비교표준지 평가목적/의뢰자 원고 새한감정 5,933,250,000 2006. 1. 18. 2006. 1. 18. 봉명동 (지번 3 생략) 담보 ？ 나라감정 6,526,575,000 2006. 9. 8. 2007. 11. 26. 봉명동(지번 4 생략) 시가(명동건설) ？ 대한감정 6,360,440,000 2006. 9. 8. 2007. 11. 26. 봉명동(지번 4 생략) 시가(명동건설) 피고 가람감정 9,018,540,000 2006. 8. 21 2006. 8. 22. 봉명동 (지번 3 생략) 담보

The Tax Tribunal rendered a decision to the Defendant to re-examine the values appraised by objective and reasonable methods and to correct the tax base and amount according to the result thereof. Accordingly, the Defendant rendered the instant disposition by deeming the amount of KRW 7,570,827,00 calculated by calculating the arithmetic mean of the values calculated as follows to be the appraisal by the Korea Appraisal Board and the Korea Appraisal Board to be the market price:

The Korea Appraisal Board 7,523,361,000 comparison of individual factors on the date of preparation of the appraisal price at the time of the original price (cost 3 omitted) contained in the main sentence shall be 0.867 Central Appraisal on February 5, 2009 0.867 Central Appraisal on February 5, 2006 (number 3 omitted) 0.87,618,293,000 on September 8, 2006

On the other hand, an appraisal office selected by the court of first instance as an appraiser (hereinafter “appraisal”) has reviewed the appraisal results requested by the defendant and other various appraisal results on the land of this case as follows. The appraisal results are almost similar to the appraisal results of the above Korea Appraisal Board and the Korea Appraisal Board requested by the defendant. However, there is little difference in the comparison of other factors.

Comparison 6,953,769,000 on September 8, 2006, 200 on August 20, 2009, 0.860

5) On August 2008, Liven Insurance Co., Ltd., Ltd., for the purpose of establishing a security to determine whether to grant a loan to the construction of the instant land, had Livedong (hereinafter “Sivedong”) conduct an appraisal of the instant land at the time of price on August 27, 2008, and if Livedong, Livedong was to present the maximum utilization state at the time of price on August 27, 2008, the value of the instant land is KRW 9,967,860,000, and it was detrimental to its use due to the problem of the right to sunshine of the surrounding building, and thus, the value of the instant land would be KRW 4,485,537,000 if applicable.

Compared standard land for the purpose of the evaluation amount of the most effective use, which is the date of preparation of the appraisal organization's appraisal at the time of price (cost), contained in the main sentence, shall be 4,485,537,000, 9,967,860,000, 27 August 27, 2008

On the other hand, on February 2009, the NFF had a national appraisal corporation appraisal corporation (hereinafter “Ba appraisal”) appraise the market price of the instant land for the purpose of creating collateral. The national appraisal was assessed as KRW 6,645,240,000.

A security that the appraisal by the appraisal agency contained in the main text does not put the table (number 4 omitted) of February 13, 2009, for the purpose of calculating the low-income rate for the use of comparative standard land as of the date of preparation of the price base.

[Ground of recognition] Facts without dispute, the evidence mentioned above, Gap evidence Nos. 7 through 10, Gap evidence Nos. 12 through 25, Gap evidence No. 28 through 39, Eul evidence No. 14 through 22 (including each number), part of non-party 1's testimony of the first instance court, the result of the appraisal by the court of first instance, and the result of fact inquiry, the purport of the whole pleadings.

D. Whether the transfer of the instant land constitutes the denial of wrongful calculation

1) Details of the relevant legislation

Article 101(1) of the former Income Tax Act provides, “Where it is deemed that any act or computation by a resident having a special relationship with the resident has reduced unreasonably the tax burden on the relevant income due to transactions with the related resident, the income amount of the relevant year may be calculated regardless of such resident’s act or calculation.” Article 98(1) of the former Enforcement Decree of the Income Tax Act lists the relevant resident’s representative corporation; and Articles 167(3) and 98(2) of the Enforcement Decree of the same Act provide, “when it is deemed that any tax burden has been reduced unreasonably” list the “where an act or computation by a resident having a special relationship with the resident is made at a price lower than the market price” (Article 167(4) of the former Enforcement Decree of the Income Tax Act provides, “Where the transfer price falls under the market price due to a wrongful act before or after the date of acquisition by transfer of land, etc. with the related party, the transfer price shall be calculated based on the market price before or after the date of acquisition by wrongful act and Article 40 through 60 of the Inheritance Tax Act.”

Meanwhile, Article 60(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 9916, Jan. 1, 2010; hereinafter “former Inheritance Tax and Gift Tax Act”) provides that “The value of property on which inheritance tax or gift tax is levied shall be the market price as of the date of commencing the inheritance or the date of donation (hereinafter “date of appraisal”).” Article 60(2) provides that “The market price under the provisions of paragraph (1) shall be the value which is generally deemed to be established in the event of free transaction between many and unspecified persons.” Paragraph (3) provides that “Where it is difficult to calculate the market price in the application of the provisions of paragraph (1), the market price shall be deemed to be the market price under the conditions as prescribed by the Presidential Decree, such as the public sale price and appraisal price.” Article 61(1)1 of the former Inheritance Tax and Gift Tax Act provides that “Where it is difficult to calculate the market price, it shall be determined by the method prescribed in Articles 61 through 65 in consideration of the type, scale of appraisal and appraisal of individual individual land price.”

Article 49(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 20720, Feb. 29, 2008; hereinafter “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”) provides that “The amount recognized as the market price under the conditions as prescribed by the Presidential Decree, such as the expropriation, public sale price, and appraisal price, etc.” in Article 60(2) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act refers to the amount confirmed pursuant to one of the following subparagraphs in cases of sale, appraisal, expropriation, auction or public sale during a period of not more than 6 months before or after the base date of appraisal (3 months in cases of donated property). In addition, each subparagraph provides that ① if there is a fact of sale of the relevant property, the transaction price; ② if there is an appraisal value appraised by a reliable appraisal institution as prescribed by the Ordinance of the Ministry of Finance and Economy with respect to the relevant property, the average amount of the appraisal value; ③ if there is

(ii) the requirements for denial of wrongful calculation and the burden of proof

Under the Income Tax Act, in a case where a resident’s act of wrongful calculation is deemed to have avoided or reduced tax burden by abusing all the forms of transactions listed in each subparagraph of Article 98(2) of the Enforcement Decree of the Income Tax Act without a reasonable method by a person having a special relationship with the resident, the said act is deemed to have been denied by the person having a right to taxation, and the said act is deemed to have been objectively and reasonably reasonable in a manner prescribed by the law. In light of the economic person’s position, the determination of whether the economic rationality exists shall apply only to a case where it is deemed to have neglected the economic rationality due to the wrongful and unreasonable calculation of unfair acts. The determination of whether the transaction is economic rationality does not correspond to that of the transaction with a person having a special relationship by removing only the price relation of the transaction, but rather, whether the transaction is unfair in light of sound social norms and commercial practices (see, e.g., Supreme Court Decision 200Du15287, May 12, 2005).

Meanwhile, according to the relevant laws and regulations as seen earlier, when a resident transfers land to a related party below the market price, it constitutes the denial of wrongful calculation. Whether it constitutes the rejection of wrongful calculation, and in the case of the denial of wrongful calculation, the “market price” of land as of the taxation basis means the market price of land as prescribed by Article 60(2) of the former Inheritance Tax and Gift Tax Act. In a case where it is difficult to calculate the market price as above, the individual land price of the land calculated as a supplementary assessment method pursuant to Articles 60(3) and 61(1)1 of the same Act. Therefore, in order to deny wrongful calculation, it is necessary to first claim and prove the “market price” of the land as of whether it constitutes the denial of wrongful calculation, and the burden of proof is asserted against the tax authority asserting the rejection of wrongful calculation (see Supreme Court Decision 2003Du15287, May 12, 2005).

3) Whether the calculation constitutes rejection of unfair act and calculation

In order to examine whether the transfer of the instant land constitutes a wrongful calculation, first of all, it is necessary to examine whether the provisional appraisal of the instant land, each of the appraisal values based on new appraisal can be deemed the market price of the instant land under Article 60(2) of the former Inheritance Tax and Gift Tax Act, and whether the appraisal value based on retroactive appraisal can be deemed the market price of the instant land under the foregoing provision.

First, the appraisal value by sight falls within the period of three months before and after the date of transfer, but does not fall within the “where there exist appraisal values appraised by two or more reliable appraisal institutions.” Thus, it cannot be deemed that the market value under Article 60(2) of the former Inheritance Tax and Gift Tax Act and Article 49(1)2 of the Enforcement Decree of the same Act falls under the market value under the “market value” under Article 60(2) of the former Inheritance Tax and Gift Tax Act. However, since the market value under the language and text of Article 60(2) of the former Inheritance Tax and Gift Tax Act is not limited to those recognized as the market value under the conditions as prescribed by the Presidential Decree, each subparagraph of Article 49(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act is merely an example of the representative cases where the market value can be seen as the market value under the delegation of the above provision. However, since the market value includes the objective exchange value formed by normal transactions, the appraisal institution’s appraisal value can not be deemed as the market value in light of the aforementioned objective and reasonable appraisal value.

Next, the appraisal value based on new appraisal does not fall under the appraisal within the period of three months before and after the date of transfer, and the Tax Tribunal has judged that it is difficult to regard it as the market price in an objective and reasonable manner, and it is difficult to regard it as the market price.

Finally, the remaining appraisal values, excluding the appraisal values by sight appraisal and new appraisal values, are the retroactive appraisal values. As to whether such retroactive appraisal values can be seen as the market price under Article 60(2) of the former Inheritance Tax and Gift Tax Act, in light of the following, it is difficult to view the retroactive appraisal value of the instant land as the market price under Article 60(2) of the former Inheritance Tax and Gift Tax Act. Therefore, it is reasonable to view that the “market price” of the instant land, which serves as the basis for determining the denial of wrongful calculation, is the publicly assessed individual land price of the land calculated by the supplementary assessment method under Articles 60(3) and 61(1)1 of the former Inheritance Tax and Gift Tax Act.

① According to relevant Acts and subordinate statutes, such as the former Income Tax Act, “market price of land” as the basis for taxation in cases falling under the denial of wrongful calculation and in cases of the denial of wrongful calculation is based on the market price of land stipulated under Article 60(2) of the former Inheritance Tax and Gift Tax Act. In cases where it is difficult to calculate the market price as above, it is determined based on the publicly assessed individual land price of land calculated by supplementary evaluation methods pursuant to Articles 60(3) and 61(1)1 of the same Act. Therefore, where it is difficult to calculate the market price of land, it does not constitute denial of wrongful calculation even if a resident transfers land

② In the instant case, there was no particular assertion in addition to the assertion that at the time of the initial disposition of the instant case, the appraisal value by sight appraisal is the market value of the land stipulated in Article 60(2) of the former Inheritance Tax and Gift Tax Act, and the appraisal value by sight appraisal cannot be deemed as the market value as seen earlier.

③ Notwithstanding the absence of a mandatory provision on the basis of the appraisal value at the time of filing a transfer income tax return, if the tax authority recognizes the retroactive appraisal value at the market price under Article 60(2) of the former Inheritance and Gift Tax Act and grants a taxation accordingly, there is a inconsistency in which the provisions of Article 60(3) of the former Inheritance and Gift Tax Act, which provide for the supplementary assessment method, are not applied mutatis mutandis where it is difficult to calculate the market price due to the impossibility of the “case where it is difficult to calculate the market price” under Article 60(3) of the former Inheritance and Gift Tax Act. Meanwhile, it is unreasonable that the said provision

④ In reality, the market price under Article 60(2) of the former Inheritance Tax and Gift Tax Act does not necessarily exceed the publicly assessed individual land price, but the market price does not necessarily exceed the publicly assessed individual land price. The proviso of Article 49(1)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act also stipulates that the market price falls short of the publicly assessed individual land price. In a case where the market price falls short of the publicly assessed individual land price, a taxpayer may assert that the market price falls short of the publicly assessed individual land price and claim for the calculation of the transfer price based on the market price (see Supreme Court Decision 200Du5098, Aug. 2

⑤ Supreme Court Decision 2010Du8751 Decided September 30, 2010; Supreme Court Decision 2004Du2356 Decided September 30, 2005; Supreme Court Decision 99Du1595 Decided April 27, 1999, etc., cited by the Defendant as the case that regards the retroactive appraisal value as the market price, even if the tax authority assessed the acquisition value of assets as the officially assessed individual land price for the reason that the market price at the time of inheritance is difficult to assess the market price at the time of inheritance, and thus, if the market price at the time of inheritance at the time of conclusion of the fact-finding in the lawsuit seeking revocation, the purport of the Defendant’s argument that the tax assessment based on the retroactive appraisal value exceeds the legitimate tax amount, should be determined on the basis of the market price, and that the tax assessment based on the retroactive appraisal value is not legitimate or justifiable. Therefore, the Defendant’s assertion that the retroactive appraisal value should be the market price based on the above precedents is without merit.

④ According to Articles 96(2) and 99(1) of the Income Tax Act at the time of the transfer of the instant land, in cases where the land is transferred by December 31, 2006, the transfer price shall be calculated based on the publicly assessed individual land price of the relevant land, barring any special circumstance.

7) If the Plaintiff transferred the instant land to the Hodong Construction at a price exceeding the officially assessed individual land price, not the officially assessed individual land price, it is difficult to view that the Defendant, on the contrary, could have disposed of the Plaintiff’s income from the outflow of the construction, considering the excess price as the outflow of the construction. Therefore, it is difficult to view that the Plaintiff’s transfer of the instant land to the Hodong Construction as the officially assessed individual land price was lacking economic rationality

Therefore, the Plaintiff’s transfer of the instant land to the name-dong Construction, the representative director, to the officially assessed individual land price, does not constitute “when a resident transfers the land to a related party below the market price,” and thus does not constitute the denial of wrongful calculation.

In addition, around May 2005, prior to the transfer of the land in this case, there was a building permit for the building on the ground of 2 lots (number 1 omitted) other than the Dobong-dong, the neighboring land around May 2005, and the construction of the building was suspended, and the three-dimensional use of the land in this case was considerably impeded as seen earlier. If there are circumstances, it is reasonable to consider the above three-dimensional use low rate in assessing the value of the land in this case, and all the appraisal results, including the appraisal results of the court of first instance, are appraised by objective and reasonable methods, and it is difficult to see the market value as stipulated in Article 60 (2) of the former Inheritance Tax and Gift Tax Act.

Therefore, the instant disposition that the Defendant imposed on deeming the retroactive appraisal value as the market price under Article 60(2) of the former Inheritance Tax and Gift Tax Act on the premise that the transfer of the instant land constitutes the denial of wrongful calculation is unlawful.

3. Conclusion

Therefore, the plaintiff's claim of this case is justified without considering the remaining arguments of this case. The judgment of the court of first instance is unfair in conclusion, and it is decided to cancel the disposition of this case and cancel it. It is so decided as per Disposition.

[Attachment Form 5]

Judge Shin Young-young (Presiding Judge)