Cho High Court Decision 201Do1308 ( October 26, 2011)

In order to apply exceptions to deemed donation at the time of issuance of new stocks, the procedures for soliciting subscription must be required.

The board of directors passed a resolution to issue new shares only for 49 persons in total. Accordingly, the issuance of new shares can not be deemed as falling under the "distribution by the method of public offering of securities, which is an exception to the deemed donation due to capital increase." Therefore, the taxation of gift tax is lawful and the donation profits are based on the date of payment of the price

2011Guhap9683 Revocation of Disposition of Imposition of Gift Tax

XX

O Head of tax office

August 31, 2011

September 21, 2011

1. All of the plaintiff's claims are dismissed.

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

The imposition of each gift tax stated in the separate sheet notification tax column against the Plaintiff on March 2, 2011 by the Defendant shall be revoked.

1. Details of the disposition;

A. On April 10, 2007, a KOSDAQ-listed corporation (hereinafter referred to as “Nonindicted Company”) held a board of directors on April 10, 2007, and resolved to issue 4,262,430 shares of registered ordinary shares to 49 members including the Plaintiff in accordance with a third party allocation method.

B. The Plaintiff participated in the above subscription to new shares on May 4, 2007 and purchased 42,120 new shares on the same day and paid 484,380,000 won for the same day, and 49 members acquired 4,262,430 shares in total, and paid 49,017,945,00 won in total.

C. As of May 3, 2007 as of May 3, 2007, the Defendant acquired new shares at a price lower than the market price and subsequently received KRW 88,831,081 in total from the existing shareholders through the offering of new shares through the above offering of new shares, on the basis that as of May 3, 2007, the period prior to the payment date of the shares was 13,609, the value per share of the non-party company’s shares assessed at a price lower than the market price, and accordingly, the Defendant received a donation of KRW 88,831,081 in total from the existing shareholders through the offering of new shares, and against the Plaintiff, Article 39(1)1 (a) and (c) of the Inheritance Tax and Gift Tax Act (hereinafter “Gift Tax Act”) on the aggregate of KRW 14,137,390 (including additional tax as stated in the attached list) (hereinafter “instant disposition”).

D. On March 22, 2011, the Plaintiff filed an appeal with the Tax Tribunal on the instant disposition, and was dismissed on August 26, 201 by the Tax Tribunal.

[Ground for Recognition: there is no dispute, Gap evidence 1 through 3, 5 through 8, Eul evidence 4-1 through 16, Eul evidence 1-1 through 16, Eul evidence 2, and the purport of the whole pleadings]

2. Judgment on the Defendant’s defense prior to the merits

A. Defendant’s defense

The plaintiff filed a request for judgment without filing a request for review on the disposition of this case, and simultaneously filed a request for judgment is unlawful as it does not go through the previous trial procedure.

B. Determination

1) The fundamental purport of the exclusive principle of administrative appeal is to give an administrative agency an opportunity to reflect and utilize professional knowledge of the administrative agency at the time of filing a lawsuit. Thus, even if there was an error of law that does not meet the requirements for the exclusive disposition at the time of closing argument in the fact-finding court, if the person satisfies the requirements for the exclusive disposition at the time of closing argument in fact-finding court, the defect of the defect is cured (see Supreme Court Decision 86Nu29, Apr. 28, 1987). In addition, pursuant to Articles 81, 55, 56, and 65 of the Framework Act on National Taxes, an identical disposition cannot be filed in duplicate with a request for examination or adjudgment under this Act, and administrative litigation against an illegal disposition under Article 55 cannot be filed without going through a request for examination or adjudgment under this Act and a decision thereon, if the decision is not notified within 90 days from the date of

2) On March 22, 2011, the Plaintiff filed a request for a judgment with the Tax Tribunal on the instant disposition on March 23, 201, and then rendered a decision to dismiss the request on August 26, 201 of the same year, which is apparent in fact that 90 days have passed since the filing date of the said request for judgment, even though the Plaintiff filed the instant lawsuit on March 23, 201, as seen earlier. According to the above recognized facts, the instant lawsuit satisfies the requirements of the principle of administrative appeals as of the closing date of the argument in this case, and therefore the Defendant’s defense is therefore groundless.

3. Whether the instant disposition is lawful

A. The plaintiff's assertion

For the following reasons, the instant disposition is unlawful.

1) Article 39(1) of the Gift Tax Act (amended by Act No. 8635, Aug. 3, 2007; hereinafter the same) provides that where new stocks are issued and sold by means of public offering of new stocks pursuant to Article 2(3) of the Securities and Exchange Act (amended by Act No. 8635, Aug. 3, 2007; hereinafter the same), the Defendant’s arbitrary interpretation that only if new stocks are allocated by means of public offering, it constitutes non-taxable goods, thereby violating the principle of no taxation without

2) In calculating the profit from capital increase pursuant to Article 29(3)1 of the Enforcement Decree of the Gift Tax Act, the Defendant calculated the “value per share before capital increase” on the basis of the date of the public notice of capital increase (the date of April 10, 2007) and made the instant disposition in violation of Article 18(3) of the Framework Act on National Taxes, by calculating the “value per share before capital increase” on the basis of the date of public notice of capital increase.

3) Article 39(2) of the Inheritance Tax and Gift Tax Act is premised on the establishment of a taxation unit by donor. Thus, when gift tax is imposed as of May 4, 2007, the date of payment of stock price, based on the shareholder registry as of May 4, 2007, the Defendant calculated the donation amount by donor based on the shareholder registry as of December 31, 2006.

4) The Plaintiff acquired shares under the condition of rescission upon entering into a new shares subscription contract with the non-party company under the condition of protection, and thus, the Defendant assessed the shares acquired by the Plaintiff pursuant to Article 65 of the Gift Tax Act, but assessed the shares acquired by the Plaintiff pursuant to Article 63

5) The Defendant calculated the “value per share before capital increase” on the basis of the publication date of capital increase in imposing gift tax on the issuance of new shares at the time of the Plaintiff’s acquisition of shares from Nonparty Company. As such, the Plaintiff did not report and pay gift tax on the shares acquired by the Plaintiff on the basis of the publication date of capital increase in accordance with the Defendant’s taxation practice, the Plaintiff’s failure to report and pay gift tax. Therefore, there is a justifiable reason not to cause the Plaintiff’s failure

(b) Related statutes;

It is as shown in the attached Table related statutes.

C. Determination

1) As to the first argument

A) Article 39 (1) 1 (a) and (c) of the Gift Tax Act provides that where a corporation issues new stocks at a price lower than the market price of the new stocks to increase its capital, a person who is not a shareholder of the corporation shall levy gift tax by deeming the amount equivalent to such profits as the value of property donated to the person who has acquired such profits: Provided, That where a stock-listed corporation or Association-registered corporation under the Securities and Exchange Act allocates new stocks by means of public offering of new stocks under Article 2 (3) of the Securities and Exchange Act, excluding such cases, and Article 2 (3) of the Securities and Exchange Act provides that "in case where a corporation issues new stocks at a price lower than the market price of the new stocks to the person who has acquired such stocks, it shall be deemed that it solicits new stocks to acquire them by means of public offering of new stocks under the conditions as prescribed by the Presidential Decree" and Article 2-4 (1) of the Enforcement Decree of the Securities and Exchange Act provides that the person who has received new stocks from the date of solicitation of new stocks shall be excluded from the issuance of new stocks.

In light of the above relevant provisions, where a corporation issues new stocks at a price lower than their market price in order to increase its capital, a person to whom such profits are allocated shall obtain profits equivalent to the difference between the market price and the value of the donated property. The gift tax shall be imposed by including the amount equivalent to the value of the donated property. In the case of the allotment of new stocks by means of securities offering under the Securities and Exchange Act, even if a person gains profits through discount, the imposition of gift tax shall be exempted. If a stock-listed corporation or Association-registered corporation issues new stocks by means of public offering under the Securities and Exchange Act and other relevant Acts and subordinate statutes, such as the Securities and Exchange Act, the imposition of gift tax shall be exempted. This is reasonable to view that the issue price of the stocks shall be excluded from the category of stocks subject to taxation because it is difficult to view that a stock-listed corporation or Association-registered corporation grants a fair competitive trading process within the Korea Stock Exchange or Association-registered corporation, even if a discount is issued, to protect the general and third parties’ investment.

On the other hand, Article 2-4 (4) of the Enforcement Decree of the Securities and Exchange Act (amended by Presidential Decree No. 2-4 of the Securities and Exchange Act) is a newly introduced system at the time of partial amendment on February 24, 1998 to prevent the issuer from being subject to the regulation of publication for investor protection, not including the case where the issuer issued a single new stock against the minority of 50 thousands, and where the issuer resells it again to 50 or more persons again. Thus, it conforms with the purport of Article 39 (1) 1 (a) and (c) of the Inheritance Tax Act (which does not include profits from the low-price issue under Article 39 (1) 1 (c) of the Inheritance Tax Act as an exception to the inclusion in the value of donated property. It does not include any allocation by the deemed to prevent the regulation of publication for the purpose of investor protection. It is limited to a general public offering where the number of persons who are solicited to acquire new securities issued is more than 50.

Furthermore, in order to constitute "distribution by the method of public offering of securities" under Article 2-4 (5) of the Enforcement Decree of the Securities and Exchange Act, which is an exception that does not include profits from the issue at a low price under Article 39 (1) 1 (a) and (c) of the Inheritance and Gift Tax Act in the value of donated property, it is not limited to the method of solicitation of subscription, namely, advertisement through newspapers, broadcasting, magazines, etc., distribution of printed matters, such as notice and publicity leaflets, holding of an investment presentation meeting, electronic communication, etc., but at least there is a need to notify that the securities will be issued or sold, or provide guidance on

B) In addition, the tax-related law is a rapidly changing and diverse economic phenomenon, while performing various economic and policy purposes and social security purposes. As such, the interpretation of Article 39(1)1(a) and (c) of the Inheritance Tax Act should be permitted to the extent that it does not seriously undermine the legal stability and predictability oriented by the principle of no taxation without law. As such, construing Article 39(1)1(a) and (c) of the Inheritance Tax Act as above is contrary to the principle of no taxation without law or strict interpretation (see, e.g., Supreme Court Decision 2007Du4438, Feb. 15, 2008).

C) On April 10, 2007, the board of directors passed a resolution to issue new shares only with 49 persons including the plaintiff on April 10, 2007. Accordingly, the issuance of new shares can not be deemed as falling under the "distribution by the method of public offering of new shares", which is an exception to the deemed donation due to the offering of new shares as provided by Article 39 (1) 1 (a) and (c) of the Gift Tax Act. In addition, there is no evidence to deem that the non-party company was subject to the "invitation" procedure under Article 2-4 (5) of the Enforcement Decree of the Securities and Exchange Act, and therefore,

2) As to the second argument

A) With respect to the calculation of profits that are deemed to have been donated at a low price under Article 39(1)1(a) and (c) of the Gift Tax Act, Article 29(3)1 of the Enforcement Decree of the same Act provides that the calculation of profits under Article 39(3)1 of the same Act shall be made by multiplying the amount calculated by subtracting the ‘paid value per new stock x the number of stocks issued before capital increase x the number of stocks issued before capital increase x the number of stocks increased by capital increase x the number of stocks issued by capital increase x the number of stocks issued by capital increase x the number of stocks issued by capital increase + the number of stocks increased by capital increase by capital increase x the number of stocks issued by capital increase by capital increase : Article 29(4)(c) of the Enforcement Decree of the same Act provides that the calculation of profits under paragraph (3) of the same Act shall be made on the basis of the payment date of

In full view of the language and purport of the above provisions, and the purport of legislation, and the effect of acquiring shares due to capital increase, the value of shares acquired by an underwriter should be calculated as at the time of payment, barring any special circumstances, as such, as the price of shares should be calculated based on the time of payment, barring special circumstances, for the calculation method of profits arising from capital increase by a third party allocation method, the assessment value per share prior to capital increase should be conducted not on the date of resolution of the board of directors on capital increase pursuant to Article 29(4) of the Enforcement Decree of the Inheritance Tax Act, but on the basis of the day preceding the date of payment of shares (see, e.g., Supreme Court Decision 2007Du7949, Aug. 20, 2009).

On the other hand, the principle of retroactive taxation prohibition under Article 18(3) of the Framework Act on National Taxes applies only to cases where there are special circumstances that, even if the principle of legality is sacrificeed, the protection of taxpayer's trust is deemed to accord with justice. The practice of national tax administration generally accepted by taxpayers pursuant to that provision refers to the extent that, even if erroneous practices are committed, it is recognized that it is not unreasonable for taxpayers to trust such practices by accepting it as legitimate to a general taxpayer who is not a specific taxpayer. The mere fact that there was an expression of public opinion as to the standard of interpretation of tax law does not necessarily mean that such practices may not be deemed to exist, and the burden of proving such interpretation or practice is the taxpayer (see, e.g., Supreme Court Decision 2005Du2858, Jun. 29, 2006).

B) According to this case’s return to health class, ① the Defendant’s evaluation value per share before the date of resolution of the board of directors, not on April 10, 2007, but on May 3, 2007, the day before the date of payment of the share price, as seen earlier. ② According to the above evidence, the basic rule of the gift tax provides that “in the case of listed corporations and KOSDAQ-listed corporations under Article 63(1)1(b) of the Enforcement Decree of the Gift Tax Act, the value per share before the increase of the capital shall be the average value of the Korea Securities and Futures Exchange market value, which was published before the date of the increase of the capital, and that “the value per share before the increase of the capital” under Article 63(1)1(b) of the Enforcement Decree of the Inheritance Tax Act shall be deemed lawful on the basis of the date of appraisal of the 20th day before the date of the increase of the capital by the National Tax Service on June 28, 2004.”

3) As to the third argument

In full view of the purport of the arguments in Gap evidence 7 and Eul evidence 2, the defendant confirmed the fact that the non-party company became a minority shareholder as of December 1, 2007 through May 3, 2007, based on the list of shareholders as of December 31, 2006, and confirmed the details of changes in the shares from January 1, 2007 to May 3, 2007, and found that KimA, holding 67,740 shares of the non-party company (total issued shares 2.35%), among the above shares, transferred 37,740 shares totaled on April 17, 207, and 10,000 shares among the above shares were transferred to 37,740 shares as of May 4, 2007, based on the changes in the ownership of the non-party company's shares. Accordingly, the plaintiff's assertion that the shares were held by the defendant is consistent with the above circumstances.

4) On the fourth argument

A) The term “conditional right” under Article 65(1) of the Gift Tax Act refers to the additional clauses of a juristic act dependent on the nature of an uncertain fact in the future. Therefore, the term “Conditional right” refers to a right for which the fulfillment of a condition has not become definite and which either of the parties has the expectation or possibility to obtain a certain benefit due to the fulfillment of the condition (see Article 149 of the Civil Act).

B) In full view of the purport of the entire arguments in the statement of evidence Nos. 1 through 3 and 5, it can be acknowledged that the Plaintiff was able to have been protected by the Korea Securities Depository for six months after the issuance of 42,120 new shares by the non-party company that acquired on May 4, 2007. This is merely a limited disposition of the above new shares for a certain period under an agreement between the non-party company and the Plaintiff, and it cannot be deemed that the legal effect of the above new shares acquisition depends on the gender of uncertain facts in the future. Therefore, it is reasonable to deem that the above right to the above new shares cannot be seen as a "conditional right" under Article 65 (1) of the Inheritance Tax Act. Thus, the plaintiff's above assertion is

5) As to the fifth argument

A) Under the tax law, where a taxpayer violates various obligations, such as a tax return and tax payment, without justifiable grounds, in order to facilitate the exercise of the right to impose taxes and the realization of a tax claim, a taxpayer’s intention and negligence is not considered, but does not constitute justifiable grounds that do not constitute a breach of his/her duty (see, e.g., Supreme Court Decisions 9Du3515, Aug. 20, 199; 2002Du10780, Jun. 24, 2004).

B) In the instant case, there was a circumstance that the General Rule 39-292 of the Gift Tax Act, as seen earlier, stipulates that the “value per share before the person who acquired rights” shall be calculated on the basis of the day preceding the date of the person who acquired rights. However, inasmuch as Article 29(4) of the Enforcement Decree of the Gift Tax Act newly established on December 30, 2002 explicitly stipulates that the calculation of profits under Article 29(3) of the Enforcement Decree of the Gift Tax Act shall be based on the date of payment of stock price, the above facts alone cannot be deemed as having any justifiable reason for the Plaintiff to be not attributable to the Plaintiff’s violation of the duty to report and pay taxes. Thus, the Plaintiff’s assertion is without merit

4. Conclusion

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