Where a corporation distributes capital stock to another stockholder for the reason that the acquisition of treasury stocks is restricted under the Commercial Act in cases where it capitalizing the asset revaluation reserve and issues gratuitous stocks in the status of its own stocks, whether the value of the stocks in excess becomes deemed dividend.

Article 17 (2) 2 and 5 of the former Income Tax Act (amended by Act No. 6557 of Dec. 31, 2001)

Dam Chang-Appellee (Law Firm Namsan, Attorneys Gyeong-jin et al., Counsel for defendant-appellant)

Head of Yongsan Tax Office

Seoul High Court Decision 2002Nu16261 Delivered on June 13, 2003

The appeal is dismissed.

The costs of appeal are assessed against the Plaintiff.

1. In capitalizing the provisions of the proviso of Article 17 (2) 5 of the former Income Tax Act (amended by Act No. 6557 of Dec. 31, 2001; hereinafter “the Act”), where other stockholders or investors receive allocation of the amount of stocks or investment to their own stocks or investment shares held by the corporation as the value of the stocks or investment is not allocated to them, the amount of such stocks or investment shall be deemed as fictitious dividend. This provision applies to the case where new stocks are issued through capitalizing assets revaluation reserve without compensation under the proviso of Article 17 (2) 2 of the same Act, even though they are not subject to income tax as a matter of principle, if new stocks are issued through capitalizing the assets revaluation reserve in the status of treasury stocks owned by the corporation, the acquisition of treasury stocks is limited under the Commercial Act, and if other stockholders fail to issue new stocks without compensation to their own stocks, and thereby are allocated without compensation to them, the amount equivalent to the amount of new stocks paid without compensation by the corporation to other stockholders.

The lower court: (a) determined that the Plaintiff’s new shares were subject to 13,370,358,00 won as of March 31, 199; (b) the Plaintiff’s new shares were issued as new shares for the purpose of 23,426,452 and 3,314,264 shares; (c) the Plaintiff did not issue 53,05,67,410 shares for the purpose of 25,67, and 97,60 shares for the purpose of 26,00 shares to be issued without compensation; and (d) the Plaintiff did not issue 196,67,67,410 shares for the purpose of 36,00 shares for the purpose of 50,000 shares issued by the Plaintiff; (d) the Plaintiff’s new shares were subject to 23,72,610 shares and 424,580 shares for the purpose of 166,000 shares without compensation; and (e) the Plaintiff’s new shares to be issued without compensation.

In light of the records, the above fact-finding and judgment of the court below are just and acceptable, and there is no error in the misapprehension of facts due to the violation of the rules of evidence or violation of the law regarding the interpretation and application of Article 17 (2) 5 of the Act, as alleged in the grounds of appeal.

2. Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing plaintiff. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Jack-dam (Presiding Justice)