In assessing the net profit and loss value of unlisted stocks, whether it is permissible to calculate the "net profit and loss amount", which serves as the basis for calculating the net profit and loss value per share, by adding the reserves under Articles 4 and 9 of the former Restriction of Special Taxation Act to the income for each business year (negative

Article 4 of the former Restriction of Special Taxation Act (amended by Act No. 7839 of Dec. 31, 2005) or research and human resources development reserves under Article 9 are established to cover expenses to be incurred in the replacement of business assets or new acquisition, research and human resources development, etc. by the specified taxable period in the future. Where such reserves are appropriated as deductible expenses, they were later included in deductible expenses within a certain amount without asking for whether they are actually disbursed within the scope of amount, and they were subsequently returned or returned temporarily in accordance with the aforementioned provisions. Ultimately, such reserves are merely for the purpose of delaying the imposition of taxes for a certain period of time by including the returned amount in deductible expenses when calculating the income amount in the business year for which they were first appropriated as deductible expenses, and merely for the purpose of calculating the returned amount in the business year in which they were later returned in accordance with the provisions of Article 20 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 20350, Apr. 26, 201).

Articles 60(1) and (2), 60(3), and 63(1)1(c) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007); Articles 54(1) and (2), and 56(3)1 and 2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 20621 of Feb. 22, 2008); Articles 4(3) and 9 of the former Restriction of Special Taxation Act (amended by Act No. 7839 of Dec. 31, 2005)

Ora Co., Ltd. (Law Firm Cheong, Attorneys Park Chang-soo et al., Counsel for the plaintiff-appellant)

The director of the tax office

Seoul High Court Decision 2011Nu2110 decided August 17, 2011

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

The grounds of appeal are examined.

1. Article 60 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “Premium Tax Act”) provides that the value of inherited and donated property shall be calculated based on the market price as of the base date of appraisal. Paragraph (2) provides that “The market price” shall be construed as “the value which is generally accepted when free transactions are conducted between many and unspecified persons,” and Paragraph (3) provides that “the market price shall be calculated based on the supplementary valuation methods stipulated in Articles 61 through 65, taking into account the type, scale, transaction circumstances, etc. of the pertinent property. In addition, Article 63(1)1(c) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “non-listed stocks shall be appraised according to the weighted average net asset value per share and net asset value per share guaranteed by the Commissioner of the National Tax Service in principle by taking into account the net asset value per share and net asset value per share.”

Meanwhile, Article 56(3) of the Enforcement Decree of the Inheritance and Gift Tax Act provides that the net amount of profit and loss, which serves as the basis for calculating the net value per share in a business year under the provisions of Article 14 of the Corporate Tax Act, shall be based on the amount calculated by subtracting the amount under the provisions of subparagraph 2 from the amount calculated by adding the amount under the provisions of subparagraph 1 to the amount calculated under the provisions of subparagraph 1 of the Corporate Tax Act. This is to accurately grasp the value of the stock as of the base date of appraisal by calculating the “net profit and loss” after deducting the amount of loss, etc. (Article 14) from the deductible expenses when calculating the income amount for each business year due to tax policy reasons.

However, Article 4 of the former Restriction of Special Taxation Act (amended by Act No. 7839, Dec. 31, 2005; hereinafter “Special Act”) or research and human resources development reserve under Article 9, which is at issue in the instant case, are established to cover expenses to be incurred in the replacement, new acquisition, research and human resources development, etc. of business assets during a certain taxable period in the future. Where such reserve is appropriated as deductible expenses, it shall be included in deductible expenses within a certain amount without asking whether it has been actually disbursed or not, and shall be returned equally or returned temporarily throughout a certain taxable period in accordance with the aforementioned provisions. Ultimately, in order to achieve a certain policy purpose, it is merely to defer the imposition of tax for a certain period of time by including the returned amount in the processing as deductible expenses for the business year when calculating the income amount for the pertinent business year, which is later returned after being added to deductible expenses, and it is clear that such establishment and deductible expenses may not affect the profit, loss, or stocks value of the relevant corporation.

Therefore, it is not allowed to calculate the “net profit and loss” that serves as the basis for calculating the net profit and loss value per share by adding the amount of reserves under Articles 4 and 9 of the Special Provision, which are merely gross income, to the income for each business year (the latter part of Article 56(3) of the Enforcement Decree of the Inheritance and Gift Tax Act provides that where the allowances or reserves included in deductible expenses are temporarily returned according to the provisions of tax-related Acts for the calculation of income for each business year, the corresponding amount shall be added to the income for each business year in which the corresponding amount is returned. However, unlike the returned amount of reserves under Articles 4 and 9 of the Special Provision, which are at issue in this case, the special provision regarding the case where the allowances or reserves that do not fall under gross income for the processing are temporarily returned).

2. In the same purport, the court below was just in holding that the disposition of this case was unlawful on the ground that the transfer of the Plaintiff’s stocks of this case, based on the value per share of the above company’s stocks calculated on the basis of the value per share of the above company’s stocks calculated on the basis of the return of the reserves of this case, which was established by the Defendant pursuant to Articles 4 and 9 of the Special Act on the Trade, Industry and Energy, was “low price transfer” as the type of wrongful calculation under Article 88(1)3 of the Enforcement Decree of the Corporate Tax Act, and contrary to the allegations in the grounds of appeal, the court below did not err by misapprehending the legal principles as

3. 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 Lee In-bok (Presiding Justice)