[1] Requirements for determining transaction examples of unlisted stocks as the market price

[2] Whether it is legitimate to calculate the net profit and loss value per share of an unlisted stock falling under Article 17-3 (1) 1 of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (negative in principle) by Article 56 (1) 1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (negative)

[1] In the case of unlisted stocks with low market value, where there is a transaction example, the transaction value shall be deemed the market value and the stock value shall not be evaluated by the supplementary assessment method stipulated in the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007). However, in order to recognize such transaction example as the market value, the market value means the objective exchange value formed by the general and ordinary transaction. Thus, in order to recognize such transaction example as the market value, the circumstances should be acknowledged that the transaction in question properly reflects the objective exchange value as of the donation date.

[2] Each subparagraph of Article 17-3(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Finance and Economy No. 425 of March 19, 2005) provides that the net value of the property for the latest three years is not calculated, or that it would be unreasonable to calculate the net value of the property for the latest three years because the net value of the property for the latest three years is abnormal, and thus, barring any special circumstance, Article 56(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18627 of December 31, 2004; hereinafter “Enforcement Decree of the Inheritance Tax and Gift Tax Act”) provides that the net value of the property for the latest three years shall not be calculated based on the weighted average value of the property for the latest three years under Article 56(1)2 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Finance and Economy) or the net value of the property for the latest three years period. This legal principle applies mutatis mutandis.

[1] Article 60(1), (2), and (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007); Article 49(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18627 of Dec. 31, 2004) / [2] Articles 63(1)1 (c) and 65(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007); Articles 54(1), 56(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18627 of Dec. 31, 2004); Article 49(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18627 of Dec. 31, 2005)

[1] Supreme Court Decision 200Du1287 decided Jul. 28, 200 (Gong2000Ha, 1952) Supreme Court Decision 2003Du4447 decided Nov. 26, 2004 / [2] Supreme Court Decision 2006Du16434 decided Dec. 11, 2008

Plaintiff 1 and two others (Attorneys Kim Jong-soo et al., Counsel for the plaintiff-appellant)

Head of Namyang District Tax Office and two others

Seoul High Court Decision 2010Nu19234 decided November 10, 2010

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. As to the second ground for appeal

Article 60(1) and (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “Gift”) provides that, where the value of donated property is based on the market price as of the date of donation and it is difficult to calculate the market price, the value of the donated property shall be based on the value appraised by the supplementary method stipulated in Articles 61 through 65, taking into account the type, size, transaction circumstances, etc. of the pertinent property. Meanwhile, Article 60(2) of the Inheritance Tax and Gift Tax Act provides that “Where the market price under paragraph (1) is freely traded between many and unspecified persons and is recognized as the market price under the conditions as prescribed by the Presidential Decree, such as expropriation, public sale, appraisal price, etc.” The former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18627, Dec. 31, 2004; hereinafter “Enforcement Decree of the Inheritance Tax and Gift Tax Act”) provides that the transaction price is objectively recognized as one of the relevant transaction value.

Therefore, in the case of unlisted stocks with low market value, where there is a transactional fact, the price of the stocks shall be deemed the market price and the price of the stocks shall not be evaluated by the supplementary evaluation method stipulated in the Inheritance and Gift Tax Act. However, since the market price means the objective exchange price formed by the general and normal transaction, in order to be recognized as the market price, the circumstances that can be seen as properly reflecting the objective exchange value at the time of the donation date should be acknowledged (see Supreme Court Decisions 2000Du1287, Jul. 28, 200; 2003Du4447, Nov. 26, 2004, etc.).

The lower court, citing the reasoning of the first instance judgment, 1, 2, 3, 40 shares were calculated on March 9, 204 by Nonparty 1 to Nonparty 2, 3, 100 shares of the Centre 2, 400 (Plaintiff 12,100 shares, 2, 50 shares) to 30,00 shares, 40 shares, 2, 30 shares, 40 shares, 7, 40 shares, 40 shares, 7, 40 shares, 40 shares, 50 shares, 40 shares, 50 shares, 70 shares, 40 shares, 40 shares, 50 shares, 40 shares, 50 shares, 40 shares, 50 shares, 40 shares, 50 shares, 40 shares, 50 shares, 60, 166, shares, 306, 406, shares, and 500 shares, respectively.

Based on the aforementioned factual basis, the lower court determined that, in light of the fact that the purchase of the instant shares and the acquisition of forfeited shares were made in a series of process related to the management right change of the non-party company and that the acquisition price was set at KRW 50,000 per share every time after the purchase of the instant shares, 50,000 per share, which is the acquisition price of the Plaintiffs’ acquisition price of the instant shares and forfeited shares, shall not be deemed to reflect the objective exchange value formed by general and normal transaction among many unspecified persons, and furthermore, the non-party 3 and non-party 4 shall not be deemed to fall under the interests of the non-party company as well as the employees of the non-party company and the non-party 4, even before the transaction between the non-party 3 and the non-party 4 was made at KRW 50,00 per share, which is the transaction price between the non-party 3 and the non-party 4, it is difficult to reasonably reflect the objective exchange value.

In light of the above provisions, legal principles, and records, the judgment of the court below is just, and there is no error in the misapprehension of legal principles as to Article 49 (1) 1 of the Enforcement Decree of the Inheritance and Gift Tax Act as otherwise alleged in the ground of appeal. The ground of appeal on this part

2. Regarding ground of appeal No. 1

A. Article 63(1)1 (c) and Article 54 of the Enforcement Decree of the Inheritance and Gift Tax Act, which provides for the supplementary evaluation method of unlisted stocks, provides that the value per share of unlisted stocks shall be the weighted average value of net profit and loss per share (the interest rate determined and publicly notified by the Commissioner of the National Tax Service in consideration of the weighted average amount of net profit and loss per share for the last three years year maturity per share ± net asset value per share (the net asset value of the relevant corporation ± total number of issued stocks) and net asset value per share (the net asset value of the relevant corporation ± total number of issued stocks) at the ratio of 3 and 2 of the Inheritance and Gift Tax Act, in cases where liquidation procedures of the corporation subject to assessment are in progress within the gift tax, or where it is deemed difficult to continue its business due to

In addition, Article 56 (1) of the Enforcement Decree of the Inheritance and Gift Tax Act provides that "the weighted average amount of net profits and losses per share for the preceding three years" shall be the value under subparagraph 1, namely, "(the net profits and losses per share for the business year that has become one year before the base date of appraisal x 3) ＋ (the net profits and losses per share for the business year that has become two years before the base date of appraisal x 2) ＋ (the net profits and losses per share x 1) 】 1/6 】 It shall be the value calculated by the formula under subparagraph 1 3 (the average amount of net profits and losses per share for the business year that has become three years before the base date of appraisal x 1/6) 】 Where it is unreasonable to determine the value of net profits and losses per share for the preceding three years, or where it is prescribed by the Ordinance of the Ministry of Finance and Economy by the Ordinance of the Ministry of Finance and Economy for reasons such as abnormal increase in the net profits and losses per share for the preceding three years, it shall be prepared within 20 days and 5 days per share.

Article 17-3(1) of the Enforcement Decree of the Inheritance and Gift Tax Act provides for the reasons that it would be unreasonable to calculate the net profit and loss per share based on the fact that the net profit and loss per share for the preceding three years is not calculated or that the net profit and loss per share for the preceding three years is abnormal. Thus, barring any special circumstance, the net profit and loss per share based on the "average amount of net profit and loss per share for the preceding three years" under Article 56(1)1 of the Enforcement Decree of the Inheritance and Gift Tax Act cannot be calculated (see Supreme Court Decision 2006Du16434, Dec. 11, 2008). Such legal principle provides for the method of calculating the net profit and loss per share based on the value of net asset under Article 56(1)2 of the Enforcement Decree of the Inheritance and Gift Tax Act, which is not the value of net asset under Article 56(1)1 of the Enforcement Decree of the Inheritance and Gift Tax Act, which is not the value of net asset under Article 56(1).5 of the Act.

B. According to the reasoning of the judgment below and the evidence duly admitted by the court below, the non-party company was a corporation which commenced business on April 29, 2002 and was less than three years after the commencement of business as of March 9, 2004 and April 7, 2004, which is the base date for appraisal. The defendants calculated the average weighted value of net income for the last two years, all of which are 376,646 won and 17,133 won used as the basis for calculating the value of donated property in relation to the imposition of gift tax in this case. However, the non-party company reported on the net income for the last two years, approximately 34 million won in 2002, about 834 million won in 203, about 168 billion won in 2004, about 68 billion won in net assets or about 68 billion won in net assets within the base date for assessment, or about 608 million won in net assets within 200 million won in 208.

Examining these facts in light of the aforementioned provisions and legal principles, it is unlawful to calculate the net profit and loss value per share of the stocks of the non-party company based on the value under Article 56(1)1 of the Enforcement Decree of the Inheritance and Gift Tax Act because the non-party company constitutes “where the business is less than three years after the commencement” as stipulated in Article 17-3(1)1 of the Enforcement Decree of the Inheritance and Gift Tax Act. Furthermore, in light of the business period or financial status of the non-party company, it cannot be deemed that the calculation of the net profit and loss per share based on the weighted average amount of net profit and loss per share, which is similar to the value under Article 56(1)1 of the Enforcement Decree of the Inheritance and Gift Tax Act, is objectively and reasonably reasonable. Thus, it is also unlawful

Nevertheless, the court below calculated the net profit and loss per share based on the value of subparagraph 2, on the premise that the net profit and loss per share based on the value of subparagraph 2 can be assessed on the basis of the value of subparagraph 1 or the value similar thereto, on the basis of the weighted average amount of net profit and loss per share during the latest two years per share, and determined that each disposition imposing gift tax of this case, calculated on the basis of the value of donated property, is lawful. In so doing, the court below erred by misapprehending the legal principles on the supplementary method of assessment of unlisted stocks, which affected the conclusion of the judgment. The ground of appeal pointing this out is with merit.

3. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Jeon Soo-ahn (Presiding Justice)