[1] The meaning of market value of the transferred listed stocks when determining whether they are subject to wrongful calculation of capital gains

[2] Where the largest shareholder of a listed corporation transfers listed stocks traded on the Korea Stock Exchange to the Korea Stock Exchange market price per share of the stocks of the listed corporation on the day of such transfer through large-scale trading, the case affirming the judgment below that the imposition of capital gains tax under Article 101 (1) of the former Income Tax Act is lawful on the grounds that such abnormal trading is not added to the largest shareholder

[1] Article 60(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780, Dec. 18, 2002) newly established at the time of wholly amending the Act by Act No. 5193, Dec. 30, 1996; however, the legislative purport of Article 63(1)1 Item (a) of the former Inheritance Tax and Gift Tax Act stipulating that the value assessed by the method of appraisal as stipulated in Article 63(1)1 Item (a) shall be regarded as the market price in order to exclude arbitability in the evaluation and ensure objectivity; the legislative purport of Article 60 and Article 63(1)1 Item (a) of the former Inheritance Tax and Gift Tax Act concerning the method of appraisal of listed stocks; the purport of the system of wrongful calculation and omission; and each of the above provisions is to determine whether the market price of transferred stocks is subject to wrongful calculation of capital gains, unless there are special circumstances, shall be deemed that only the average value of the shares of the shareholders and subsequent shareholders of the Korea Stock Exchange is the market price.

[2] In a case where the largest shareholder of a listed corporation transfers listed stocks traded in the Korea Stock Exchange to a person with a special relationship at the market price per share of the stocks of the listed corporation on the same day through a large-scale sale of listed stocks on the same day, the case affirming the judgment of the court below that imposition of capital gains tax under Article 60 (1), Article 63 (1) 1 (a), and Article 63 (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780 of Dec. 18, 2002), the market price per share of the stocks of the listed corporation, which are listed stocks and the largest shareholder, was added to the average amount of the closing market price of the Korea Stock Exchange per day before and after the transfer date calculated in accordance with Articles 63 (3) and 20% of the former Inheritance Tax and Gift Tax Act (amended by Act No. 9897, Dec. 31, 2009) was lawful.

[1] Article 101(1) and (4) (see current Article 101(5)) of the former Enforcement Decree of the Income Tax Act (amended by Act No. 9897, Dec. 31, 2009); Article 167 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18173, Dec. 30, 2003); Article 60(1) of the former Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 5493, Dec. 31, 1997); Article 60(1) and (3) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Act No. 6780, Dec. 18, 202); Article 20(1) and (3) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 1801, Dec. 1, 2003); Article 30(1)5 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 271301.

Plaintiff

Head of Seocho Tax Office

Seoul High Court Decision 2007Nu21145 decided Feb. 19, 2008

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

The grounds of appeal are examined.

Article 167 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18173, Dec. 31, 2009) upon delegation of Article 101(4) of the former Income Tax Act (amended by Presidential Decree No. 18173, Dec. 30, 2003) provides that with regard to wrongful calculation of transfer income, if it is deemed that the tax burden has been reduced unfairly by transferring the land, etc. in excess of the market price or below the market price in the transaction with the related parties under paragraph (4), the acquisition price or transfer price thereof shall be calculated at the market price. In applying paragraphs (5) through (4) of the same Article, the market price shall be calculated by applying mutatis mutandis the provisions of Articles 60 through 64 of the Inheritance Tax and Gift Tax Act, and Articles 49 through 59 of the Enforcement Decree of the same Act.

In addition, Article 60(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780, Dec. 18, 2002; hereinafter "the Inheritance Tax and Gift Tax Act") provides that "the value of property on which inheritance tax or gift tax is levied under this Act shall be the market price as of the date of commencing the inheritance or of donation (hereinafter "evaluation base date"). In this case, the value appraised by the evaluation methods provided for in Article 63(1)1 (a) and (b) (excluding cases falling under the provisions of Article 63(2)) shall be deemed as the market price." Article 63(1)1 (a) of the same Act provides that "the average value of the daily final market price of the Korea Stock Exchange, which is published on a two-month basis before and after the evaluation base date, shall be added to the value of shares appraised by the largest shareholder or the largest shareholder, etc. and the largest shareholder, etc. (hereinafter "the largest shareholder, etc." in applying paragraph (1) 1 of the same Article 100.

In light of the legislative purport of Article 60(1)1(a) of the Inheritance and Gift Tax Act (amended by Act No. 5193, Dec. 30, 1996) which provides that in principle, in order to exclude arbitraryness and ensure objectivity in evaluation, the value assessed by the evaluation methods stipulated in Articles 63(1)1(a) of the Inheritance and Gift Tax Act shall be regarded as the market price; the legislative purport of Articles 60 and 63 of the Inheritance and Gift Tax Act concerning the evaluation method of listed stocks; the purport of the system of wrongful calculation and calculation, and the above contents, etc., in determining whether the listed stocks are subject to wrongful calculation of capital gains, the market price of the transferred listed stocks shall be deemed as the market price in accordance with the latter part of Article 60(1) of the Inheritance and Gift Tax Act, unless there are special circumstances. In addition, it is reasonable to view that only the average daily market price of the Korea Stock Exchange, which was published on each day before and after the date of transfer calculated according to the evaluation method under Article 63(1)1) of the Act.

According to the reasoning of the judgment below, the court below acknowledged that the plaintiff was the largest shareholder (21%) of the non-party 1 corporation (hereinafter "the company of this case"), which is a listed company, and that the plaintiff's Dong non-party 2, who is a specially related person, transferred 500 shares (2%; hereinafter "the shares of this case") of this case to 3,450 won (hereinafter "transfer price") of the stock exchange of this case on the same day through a large-scale sale of the company's shares on May 13, 2002 to 3,450 won ("the transfer price of this case"). The court below determined that the company's disposal of the shares of this case as listed shares of this case and the market price of the largest shareholder of the company of this case constitutes 60 (1) (Ga), 63 (1) 1 (a), and 63 (3) of the Inheritance and Gift Tax Act, was legitimate because it constitutes an economic rationality of the company of this case to 3,8920% or 760 won.

In light of the above provisions, legal principles, and records, the judgment of the court below is just, and there is no error of law such as misunderstanding of legal principles as to the market price of listed stocks in the calculation of transfer income as alleged in

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.

Justices Kim Nung-hwan (Presiding Justice)