Busan District Court 2009Guhap851 ( December 24, 2009)

Cho High Court Decision 2008 Deputy0938 ( December 30, 2008)

In fact, if shares are transferred as part of the capital reduction procedure, it constitutes the fictitious dividend.

Where shareholders agree to transfer stocks to the representative of a corporation and the actual amount of stocks is paid by the corporation as part of the procedures for reducing the shares of the corporation, even if there was an agreement with the representative and the transfer of stocks, the marginal profit is deemed as capital transactions.

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

1. The plaintiff's appeal is dismissed.

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

The judgment of the first instance shall be revoked. The imposition of global income tax of KRW 64,113,540 on February 5, 2008, and global income tax of KRW 364,064,690 on global income of KRW 64,064,690 on global income of KRW 258,852,770 on May 20, 2008 shall be revoked by the Defendant against the Plaintiff.

1. Circumstances of the disposition;

The following facts are not disputed between the parties, or found in each entry in the evidence No. 1-4, evidence No. 11-6, evidence No. 13-1 through 3, evidence No. 17-1, 2, evidence No. 18-1 through 3, evidence No. 18-2, 3, evidence No. 12-2, and evidence No. 2 of No. 11-2.

A. On February 18, 2003, the Plaintiff transferred 35,887 shares of AA Shipping to 60 million won (hereinafter referred to as "the first share transfer") on February 18, 2003, and made a preliminary return and payment of capital gains tax of 21,476,700 on April 30 of the same year, and ② on August 12, 2005, the Plaintiff transferred 47,849 shares of AA Shipping to 2,952,187,602 shares of AA Shipping (hereinafter referred to as "the second shares transfer") and paid capital gains tax of 210,505,980 won on October 31 of the same year.

B. On the other hand, AA Shipping acquired its own shares from the Plaintiff and implemented the reduction procedure equivalent to the amount of each acquisition by means of retirement of the entire shares.

C. The Busan Regional Tax Office revealed that AA Shipping acquired its own shares in a regular business audit for the Defendant and immediately retires, and that each of the instant shares is a refund of capital of AA Shipping, not a transfer transaction, and calculated the constructive dividend income amount under Article 17(1)3 of the Income Tax Act and notified the Defendant of the taxation data.

D. Accordingly, on February 5, 2008, the Defendant: (a) decided and notified the Plaintiff of global income tax of KRW 64,113,540, global income tax of KRW 364,064,690, global income tax of KRW 369,480, global income tax of KRW 2005, global income tax of KRW 234,659,480, global income tax of KRW 2005, on the ground that the gains from transfer of each of the instant shares from transfer constituted income under Article 17(1)3 of the Income Tax Act; (b) confirmed that the Plaintiff’s shares of KRW 234,659,480 were trusted by the Plaintiff on May 20, 208; and (c) notified the Plaintiff of the scheduled return and payment of KRW 24,193,290, global income tax of KRW 290 as global income tax of KRW 205 (hereinafter referred to as “the Plaintiff’s imposition and payment”).

2. Whether the imposition and disposition of the instant case are proper; and

A. The plaintiff's principal

The Plaintiff entered into each share transfer contract with ParkCC. The Plaintiff merely changed the transferee of each share transfer contract of this case to AA Shipping at the request of ParkCC without knowing that AAA Shipping would take a capital reduction procedure through treasury stock retirement. Therefore, since each share transfer of this case is a personal share transaction between the Plaintiff and ParkCC, the instant disposition of this case, which regarded it as dividend income, is unlawful.

(b) Related statutes;

It is as shown in the attached Form.

(c) Fact of recognition;

The following facts may be acknowledged either as disputed between the parties or as a whole by taking into account the overall purport of arguments in each of the statements in Gap evidence Nos. 3, 8, 9, 14, 15, and evidence No. 16-1, 2, Gap evidence No. 27, 28, 29, 33, 34, 38, 39, 43, 44, 45, Eul evidence No. 2 through 14, and Eul evidence No. 15, 16-1, 2, and 17.

(1) On May 12, 198, the Plaintiff and ParkCC established AACC with three other investors, and the remaining investors except the Plaintiff and ParkCC recovered investments in 1995 through 1996 and left AACC shipping. ParkCC was a representative director of AAA Shipping, and the Plaintiff was working as an executive director and the head of Busan branch. Thereafter, the Plaintiff was dismissed from office at the Busan branch on October 16, 2001, and was dismissed from office on November 9, 2001. From April 25, 2002, the Plaintiff established and operated AACC as a shipping company.

(2) On November 2000, the Plaintiff came to know of the fact that ParkCC raised funds for non-financing in the course of the investigation by the prosecution with respect to other companies, and requested ParkCC to adjust the management rationalization and shares of AA Shipping. On October 13, 2001, ParkCC did not comply therewith, and filed a complaint with the prosecution against ParkCC on embezzlement and breach of trust.

(3) On December 11, 2001, ParkCC requested the Plaintiff to reach an agreement with the investigative agency. On December 11, 2001, the Plaintiff and ParkCC withdrawn the said complaint, and according to the asset assessment statement prepared by ParkCC, the Plaintiff agreed to pay 2 billion won for consolation money added to 300 million won to the Plaintiff, taking into account the Plaintiff’s contribution to the development of AA Shipping, to KRW 1.7 billion, 50 billion, based on the contribution to the development of AA Shipping. The main contents of the agreement are as follows (hereinafter “instant agreement”).

(1) The plaintiff shall withdraw a complaint immediately after a written agreement is prepared (paragraph (1)).

② At the end of the instant case, all data relating to ParkCC and AAA Shipping kept by the Plaintiff shall be promptly delivered to ParkCC, and no further participation shall be made directly or indirectly in the work of ParkCC and AA Shipping (Paragraph 6).

3. After the preparation of this Agreement, the Plaintiff promises to not claim any right except rights and obligations under this Agreement and the Schedule of Stock Transfer, attached to the Agreement, to the ParkCC and AA Shipping, or not to raise any problem (Paragraph 8).

④ ParkCC shall pay to the Plaintiff KRW 30 million when the agreement was notarized, KRW 30 million on May 14, 2002, KRW 200 million on August 14, 2002, KRW 14.20 million on October 14, 2002, KRW 200 million on December 14, 2002, KRW 200 million on the last day of 2003, KRW 2000 on the last day of 2004, KRW 200 million on the last day of 2005, and KRW 200 million on the last day of 2006, and thereby confirm that the agreement was settled collectively including not only the Plaintiff’s shares but also the Plaintiff’s contributions (Paragraph 10).

⑤ immediately after ParkCC pays the agreed amount to the Plaintiff as prescribed in paragraph (10) of this Article, the Plaintiff shall, to a person designated by the ParkCC, transfer in order the AA Shipping shares owned by the Plaintiff (100,982 shares in the Plaintiff’s name, and 18,642 shares in title trust to KimB). In such cases, the transfer value shall be KRW 10,000 per share, and the number of shares to be transferred shall be calculated at the rate of KRW 2 billion paid by the agreed amount (paragraph (11)).

(4) In accordance with the instant agreement, the Plaintiff received total of KRW 1,200,000 from the ParkCC and transferred 17,944 shares in AAA Shipping over two occasions to ParkCC. However, the total of KRW 600,000 and the corresponding share transfer amount are not carried out in order in accordance with the said agreement, and on January 15, 2003, the ParkCC paid KRW 600,000 to the Plaintiff three-minutes transfer of shares to ParkCC, and the Plaintiff completed a share transfer agreement to sell KRW 35,887 shares to the Plaintiff on February 18, 2003 at the request of the ParkCC, and the Plaintiff completed a contract to sell the AA Shipping shares to the Plaintiff at KRW 35,887,60,000,000 on February 18, 200, and paid KRW 600,000,00 to the Plaintiff on the same day.

(5) However, around the end of December 2003, the Plaintiff came to know of the fact that the funds raised by ParkCC that was not known to the Plaintiff constituted a million won, and submitted to the Seoul Regional Tax Office a written accusation as to the tax evasion, etc. following the creation of the AA Shipping funds and the data on the AA Shipping funds. On December 17, 2003, the Plaintiff filed a complaint with ParkCC at the Seoul District Public Prosecutor’s Office.

(6) On April 29, 2004, ParkCC, which was subject to investigation by an investigative agency, actively requested the Plaintiff to reach an agreement, and entered into an agreement with the Plaintiff on April 29, 2004, with the content that ParkCC would pay 12 billion won to the Plaintiff for the agreement on withdrawal of the Plaintiff’s criminal complaint, consolation money, and the transfer price of the remaining AATR stocks of the Plaintiff, and the Plaintiff’s criminal complaint and the National Tax Service’s complaint are revoked.

(7) However, upon completion of the criminal complaint case against oneself and the National Tax Service’s accusation case, ParkCC filed a complaint against the Plaintiff on July 28, 2004 with the Seoul Central District Public Prosecutor’s Office as a crime of conflict. According to the agreement under the above paragraph (6), ParkCC and AA Shipping filed a complaint (Seoul Central District Court 2004Gahap6204) against the notarial deed of promissory notes issued and delivered jointly to the Plaintiff by the agreement under the above paragraph (6).

(8) After that, on April 11, 2005, ParkCC and AA Shipping jointly and severally paid 3.1 billion won to the Plaintiff in installments (including 1.6 billion won until June 30, 2005, 350 million won until December 31, 2005, 350 million won until June 30, 2006, and 80 billion won until December 31, 2006). ② The Plaintiff received 1.6 billion won from ParkCC and AA Shipping to receive 1.6 billion won until June 30, 2005, the Plaintiff and the Plaintiff did not complete mediation and mediation with respect to all shares (including shares held in title trust to GB) of AA Shipping owned by the Plaintiff, and at the same time the Plaintiff did not complete mediation and mediation with respect to the Plaintiff and all persons designated by ACC (including shares held in title trust to GB).

(9) According to the instant conciliation, on August 12, 2005, the Plaintiff, KimB, and AAB drafted a contract (as of August 12, 2005, on a total of KRW 47,849 shares in AA Shipping 29,207 shares and KRW 18,642 shares in the name of the Plaintiff, and KRW 2,952,196,70 shares in the name of KimB. The Plaintiff received the first payment of the instant conciliation and at the same time transferred all share certificates to AA Shipping (as of this case, KRW 1.6 billion). On the day of the instant sales contract, AA Shipping paid KRW 1.6 billion to the Plaintiff on the date of the said sales contract, and paid the remainder in accordance with the schedule set forth in the instant conciliation.

(10) Meanwhile, on January 27, 2003, prior to the transfer of shares, AAA Shipping held a provisional shareholders' meeting on the agenda of acquiring its own shares and reducing its capital. Here, the Plaintiff’s 35,887 shares were purchased at 16,719 won per share, and the Plaintiff’s 35,887 shares were resolved to reduce its capital by retiring its purchased shares. On February 12, 2003, AA Shipping announced that the creditors who have an objection to the reduction of capital would raise an objection after disclosing the above contents of the resolution. In addition, AA Shipping held a provisional shareholders’ meeting on August 9, 2005, prior to the transfer of shares 2, AA Shipping held a provisional shareholders’ meeting on the agenda of acquiring its own shares and reducing its capital. According to the instant adjustment, AA Shipping’s resolution on the reduction of capital was made by the Plaintiff’s 201,000 won per share, and the Plaintiff’s 2015.

(11) On March 13, 2003, the AA Shipping changed the total number of issued and outstanding shares from 362,50 to 326,613 shares on January 27, 2003; the total amount of capital from 3,625,00,000 to 3,266,130,000 won (the reduced amount of 358,870,000 won purchased from the plaintiff and retired from the plaintiff; 35,8870,00 won is the total amount of face value of 35,887 shares); the change was made on March 22, 200; the total number of issued and outstanding shares was changed from 280,70 to 238,308,308,408; and the total amount of capital was changed from 208,308,408,308,4080 shares on August 9, 2005.

(12) As of December 31, 2003, the capital stock of AA Shipping was reduced to 3,266,130,000 won from December 31, 2002 on the balance sheet as of December 31, 2003, and 241,130,000 won (the amount calculated by subtracting the reduced amount of capital from 600 million won from 358,870,000 won) was reduced to 3,266,130,000 won. After the transfer of 200, the capital stock of AA Shipping on the balance sheet as of December 31, 2005 was reduced to 2,80,870,870,000 won from 3,232,380,300,000 won, and 240,706,79,709,79,709,79,709,740,79,7,2000.

D. Determination

(1) Fictitious dividend under Article 17 (1) of the Income Tax Act is an economic benefit substantially similar to cash dividend in cases where the profit reserved in the company is returned to the shareholders or investors in the form of legal reserve, earned surplus reserve, or other voluntary reserve without outflow out of the surplus which is a corporate management performance and is reverted to the shareholders or investors due to the reasons stipulated in each subparagraph of the said Article, and such profit is deemed as a dividend in light of the principle of taxation, and thus, it is imposed in light of the principle of taxation. The issue of interpretation of legal act is whether the sale of shares falls under the transfer of shares, or the redemption of shares or the refund of capital, which is a capital transaction, is a matter of legal act. However, in light of the principle of substantial taxation, it is not merely dependent on the contents or form of the relevant contract, but should be determined by practically understanding the entire process of the transaction, such as the process of concluding the contract, the method of determining the price, and the progress of the transaction (see, e.g., Supreme Court Decision 2001Du62

(2) According to the above facts, the agreement of this case was determined as KRW 2 billion, including the shares of AA Shipping owned by the Plaintiff and the shares of AA Shipping owned by the Plaintiff, in return for transferring the shares of AAA Shipping held by the Plaintiff to a person designated by the GCC, and it is difficult to view the agreement as a simple stock transaction between the Plaintiff and BACC.

② As the Plaintiff came to know of the fact that the Non-Performing Fund of AA Shipping was KRW 12 billion for the transfer of the remaining shares, the agreement was reached between ParkCC and AA Shipping on the price for the transfer of the shares, and thereafter, in the litigation procedures of the claimant for a non-notarial deed issued and delivered to the Plaintiff, ParkCC agreed on the price for the transfer of the remaining shares of the Plaintiff at KRW 3.1 billion for the transfer of the 2nd shares. As such, the amount set forth in the instant adjustment is difficult to view only as the price for the transfer of shares. ③ The par value of 10,00 won for the AA Shipping shares was assessed as KRW 16,719 at the time of the transfer of the 1nd shares, and the price for 1st share shares was assessed as KRW 61,698 at the time of the transfer of the 2nd shares and the amount of 1nd shares of the Plaintiff or the 1nd 2nd NA shares, which were calculated by the agreement between the Plaintiff and the 1st NA shares.

Comprehensively taking account of the above circumstances, each of the instant shares transfer is not a general share transfer between the Plaintiff and ParkCC, but a beneficial owner of AAA Shipping, and ParkCC was made in order to resolve disputes surrounding the operation of AAA Shipping and arrange the Plaintiff’s share in AA Shipping. As such, it is reasonable to deem that the instant shares transfer was made as part of the capital reduction procedure by means of a capital reduction of the AA Shipping, and that the Plaintiff’s share transfer constitutes a refund of paid-in capital by means of a stock retirement, on the basis of the amount identified by the Plaintiff among the assets possessed by AA Shipping in the form of non-financing, based on the agreement between the Plaintiff and ParkCC, and that the Plaintiff’s shares were sold to AA Shipping, and that the purchase price was appropriated for the capital reduction of the corporation.

(3) Therefore, the difference between the purchase price of each of the instant shares and the amount needed by the Plaintiff to acquire each of the instant shares shall be deemed as income constructive dividend under Article 17 (1) 3 of the Income Tax Act. Therefore, the Plaintiff’s assertion is without merit.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and the judgment of the court of first instance is just and it is dismissed as it is so decided as per Disposition.