[1] In a case where there was a reasonable ground to believe that the transaction partner is making a transaction by appropriately reflecting the objective exchange value, or there was a ground to view the transaction under such terms and conditions as normal from a reasonable economic person’s perspective, whether the transaction partner may be deemed to have justifiable grounds under Article 42(3) of the former Inheritance Tax and Gift Tax Act (affirmative) and whether gift tax may be imposed on the basis of Article 42(1) of the same Act (negative in principle)

[2] In a case where Gap corporation issued bonds with warrants in the form of private placement, Eul corporation acquired them in whole and sold them to Byung corporation by separating them, Eul corporation purchased warrant certificates from Byung corporation which is the largest shareholder and representative director of Eul corporation, and exercised them, and filed a claim for correction by asserting that it did not constitute subject to gift tax, but the tax authority rejected the claim, the case affirming the judgment below holding that Article 40 (1) 2 Item (b) of the former Inheritance Tax and Gift Tax Act cannot be used as the basis for taxation, and the gift tax cannot be imposed by applying Article 42 (1) 3 of the same Act in light of all the circumstances

[1] Article 42(1) and (3) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 11130, Dec. 31, 201) / [2] Article 2(4) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 11130, Dec. 31, 201; see current Article 14(3)); Article 40(1)2(b) and Article 42(1)3 of the former Framework Act on National Taxes; Article 2(6)1 of the former Securities and Exchange Act (Amended by Act No. 8635, Aug. 3, 2007; see current Article 9(11) of the Financial Investment Services and Capital Markets Act); Article 2(7) (see current Article 9(12) of the Enforcement Decree of the Financial Investment Services and Capital Markets Act; Article 2(1) of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act (Amended by Presidential Decree No. 2014, Dec. 27, 2089)

[1] Supreme Court Decision 2015Du3270 Decided January 25, 2017 (Gong2017Sang, 475) / [2] Supreme Court Decision 2013Du5081 Decided August 23, 2013 (Gong2013Ha, 1731), Supreme Court Decision 2012Du20915 Decided June 12, 2014, Supreme Court Decision 2013Du2495 Decided February 12, 2015 (Gong2015Sang, 486), Supreme Court Decision 2017Du61089 Decided March 15, 2018 (Gong2018Sang, 743), Supreme Court Decision 2015Du51979 Decided April 11, 2019 (Gong2018Du516197 Decided April 29, 2019)

Plaintiff (Law Firm Jeong, Attorneys Jeong Jong-jin et al., Counsel for the plaintiff-appellant)

Seoul Regional Tax Office (Law Firm, Attorneys Cho Jae-ho et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2015Nu68279 decided May 17, 2017

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

The grounds of appeal are examined.

1. As to the grounds of appeal Nos. 1 and 2

A. Article 40(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 2011; hereinafter “former Inheritance Tax Act”) provides, “In cases where a person acquires, acquires, or transfers convertible bonds, bonds with warrant (referring to warrant certificates where preemptive rights are separated) or other stocks, or bonds entitled to take over stocks (hereinafter “convertible bonds, etc.”) or obtains profits falling under any of the following subparagraphs by converting, exchanging, or taking over stocks with convertible bonds, etc., he/she shall be deemed as the value of property donated to the person who has obtained such profits.” Article 40(1) of the former Inheritance Tax and Gift Tax Act provides, “In cases where the largest shareholder of the corporation that issued convertible bonds, etc. or a person specially related to the largest shareholder thereof, who has acquired the convertible bonds, etc., has acquired, acquired, or acquired stocks, etc., from the corporation in proportion to the number of stocks owned by him/her, and has received, issued, etc. profits in excess of the value of convertible bonds, etc.”

B. In full view of the adopted evidence, the lower court acknowledged the fact that the future NEex Co., Ltd. (hereinafter “LEex”) issued the instant bonds in the form of private placement on September 18, 2008, and one bank (hereinafter “IE”) divided the total amount of 20 million won from the acquisition of the bonds and sold them to the MED Securities Co., Ltd. (hereinafter “Mez Securities”), and on the same day, sold 16 copies of the above 20th of the 20th of the 20th of the 20th of the 20th of the 20th of the 20th of the 20th of the 20th of the 20th of the 20th of the 20th of the 20th of the 20th of the 20th of the 2

(1) In order to be subject to Article 40(1)2(b) of the former Inheritance and Gift Tax Act, the Mesz securities that sold warrant certificates to the Plaintiff constitute an underwriter under Article 2(7) of the former Securities and Exchange Act (amended by Act No. 8635 of Aug. 3, 2007 and enforced February 4, 2009; hereinafter the same shall apply) which were applied at the time of sale.

(2) In order to constitute an underwriter pursuant to Article 2(7) of the former Securities and Exchange Act, an act falling under any of the subparagraphs 1 through 3 of Article 2(6) of the former Securities and Exchange Act shall be conducted, and in particular, Article 2(6)1 of the former Securities and Exchange Act lists one of such acts “the acquisition of all or part of the securities from an issuer for the purpose of selling them in the issuance of the securities” as one of the above acts. Furthermore, in order to constitute an “public sale” under the above provision, Article 2(4) of the former Securities and Exchange Act and Article 2-4(2) of the former Enforcement Decree of the Securities and Exchange Act (amended by Presidential Decree No. 20947, Jul. 29, 2008; Presidential Decree No. 2 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act) must be at least 50 persons who received an offer to sell or are solicited to purchase the securities already issued.

(3) However, it is difficult to deem that Mez securities acquired 20 copies of the warrant certificates issued in total of 500 million won and sold 16 copies of such warrant certificates to the Plaintiff immediately, and that at that time, Mez securities were intended to make an offer to sell or invite 50 investors to make an offer to purchase.

(4) As such, Mez securities cannot be deemed to have committed an act falling under Article 2(6)1 of the former Securities and Exchange Act, and cannot be deemed to have committed an act falling under Article 2(6)2 and 3 of the same Act. Thus, Mez securities cannot be deemed to have been in the position of underwriter under Article 2(7) of the former Securities and Exchange Act at the time of selling the warrant certificates.

C. Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and the record, the lower court did not err by misapprehending the legal doctrine on interpretation and application of Article 40(1)2 Item (b) of the former Inheritance and Gift Tax Act and Article 2(7) of the former Securities and Exchange Act, contrary to what is alleged in the grounds of appeal.

2. As to the third ground for appeal

A. Article 42(1) of the former Inheritance and Gift Tax Act provides, “In cases where profits falling under any of the following subparagraphs, other than donations under Article 40, have been earned above the standard prescribed by Presidential Decree, such profits shall be deemed the value of donated property to the person who has acquired such profits.” Article 42(1)3 provides, “The profits earned from transactions which increase or decrease the capital of a corporation, such as the conversion, acquisition, and exchange of stocks by convertible bonds, etc. pursuant to the provisions of Article 40(1).” Meanwhile, Article 42(3) provides, “The said profits shall not apply where a transaction between persons who are not in a special relationship, is deemed to have

The legislative purport of Article 42(1) of the former Inheritance and Gift Tax Act, which requires a trading partner to levy gift tax on the profits earned by the trading partner when the trading partner actually transfers profits generated from the acquisition and exercise of preemptive rights to the trading partner by abnormal means, is to cope with and promote fairness in taxation. However, in the case of transactions between unrelated parties, it is inevitable to allow the trading partner to gain gift by waiver of opportunities to make profits easily and easily obtained by himself/herself. As such, Article 42(3) of the former Inheritance and Gift Tax Act provides that Article 42(1) of the former Inheritance and Gift Tax Act does not apply to cases where “justifiable cause for trading practice” exists. Therefore, even if the trading partner gains profits from the acquisition and exercise of preemptive rights through the trading between unrelated parties, there is no reasonable ground to believe that the trading partner should appropriately exchange the stocks, or from a reasonable economic perspective, it is reasonable to deem that there is no justifiable reason to impose gift tax under Article 25(2)14 of the former Inheritance and Gift Tax Act.

B. In light of the following circumstances, the lower court determined that the Plaintiff cannot impose gift tax by applying Article 42(1)3 of the former Inheritance and Gift Tax Act, on the ground that the Plaintiff’s acquisition of warrant certificates from Mez securities cannot be deemed as having justifiable grounds in light of transactional practices.

(1) At the time of the issuance of the instant bonds, the future Niex was anticipated to have a drop in the stock price and a large investment loss. As such, as Miz securities, the Miz securities continued to hold the warrant certificates and immediately sold them, rather than undermining the risk of stock price fluctuations, and immediately recovered profits from the issuance of the instant bonds at an early stage. It cannot be deemed that such choice of Miz securities lacks rationality.

(2) The Plaintiff, the largest shareholder, was found to have sought four copies of the 20 warrant certificates that were acquired from one bank, but the remaining 16 copies were not found to have been purchased. As such, the cases where the financial institutions that acquired bonds with warrants sold the bonds with warrants directly to the related parties, such as the largest shareholder of the issuing corporation, can also be found in the electronic publication system of the Financial Supervisory Service.

(3) The Mez securities purchased the above 16th warrant certificates in KRW 36 million, and sold them to the Plaintiff in KRW 256 million, thereby causing loss in the sale of KRW 80 million. However, since Mez securities received KRW 90 million from the future Ntex, it could have accrued profit in KRW 10 million.

(4) Ultimately, the future NEex raises necessary funds at a favorable interest rate, and one bank and MENE securities, instead of gaining profits from their respective business activities, the Plaintiff, the largest shareholder of the future NEex, seems to have contributed to the urgent financing of future NEex by inserting personal property.

C. Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and the record, the lower court did not err in its judgment by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules, or by misapprehending the legal doctrine on “justifiable cause in light of transaction practice” under Article 42(3) of the former Inheritance and Gift Tax Act

3. Conclusion

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 Jo Hee-de (Presiding Justice)