Plaintiff (Law Firm Song-dong, Attorney Han-young et al., Counsel for the plaintiff-appellant)

The Director of Gangnam District Office

on March 24, 2004

Seoul Administrative Court Decision 2001Gu22112 delivered on December 26, 2002

1. Of the judgment of the first instance court, the part against the Plaintiff falling under the order of revocation shall be revoked. The part exceeding KRW 42,442,50 of the disposition imposing gift tax on the Plaintiff on September 1, 2001 by the Defendant shall be revoked.

2. The plaintiff's remaining appeal is dismissed.

3. One-third of the total litigation costs is the plaintiff's and the remainder is the defendant's own expense.

The judgment of the first instance shall be revoked. The disposition of imposition of gift tax of KRW 133,963,280 against the Plaintiff on September 1, 2001 shall be revoked.

1. Details of taxation; and

The reasoning of this court's explanation is as stated in Paragraph (1) of the reasoning of the judgment of the court of first instance, and therefore, it is citing it by Article 8 (2) of the Administrative Litigation Act and Article 420 of the Civil Procedure Act.

2. Determination on the legitimacy of the instant disposition

A. Whether the exemption of this case is subject to the legal fiction of donation under Article 41 of the Act

(1) The plaintiff's assertion

Article 41 of the Act should be interpreted as a provision on presumption of gift. Thus, the exemption of obligation in this case is not subject to Article 41 of the Act for the following reasons.

① At the time, Nonparty Company was unable to recover its claims against Nonparty 1 and Nonparty 2 due to a considerable amount of debt exceeding 4.3 billion won, etc., and thus, there was no property value. Therefore, the exemption from its obligations cannot be deemed to have been transferred with economic value, and thus, it cannot be deemed as a gift.

② The instant debt exemption is inevitable for improving the financial structure of the non-party company without the purpose of evading gift tax. In light of the purport of Article 40-7(1) of the former Regulation on Tax Reduction and Exemption (Act No. 5561, Sept. 16, 199) of the former Regulation on Tax Reduction and Exemption Act (Act No. 5561, Sept. 16, 199), a shareholder may not be deemed as a donation for the purpose of improving

[Related Statutes]

The Regulation of Tax Reduction and Exemption Act (amended by Act No. 5561, Sep. 16, 1998)

(1) Where a corporation referred to in the main sentence of Article 40-6 (1) receives assets without compensation from its stockholders, etc. on or before December 31, 1999 and satisfies the requirements under the following subparagraphs, the relevant asset value (limited to the amount exceeding the deficit as determined by the Presidential Decree) shall not be added to its gross income in calculating its income for the relevant business year:

2. The relevant corporation shall obtain an approval (including a modified approval for the approved contents; hereafter in this Article, the same shall apply) for its plan for improvement of financial structure or self-help plan according to the following classifications:

(a) In the case of a corporation which is not a financial institution: It shall submit a financial restructuring plan including the contents of stockholders’ assets donated and a redemption plan to financial institutions to the Financial Institutions Council for approval; and

(2) Determination

(A) The provision on the constructive gift of profits through transaction with a specific corporation under Article 41 of the Act provides that, for example, if real estate is donated to a profit-making corporation with deficits, from the standpoint of transferee, gift tax is not imposed pursuant to the proviso of Article 4(1) of the Act, which is the provision on exemption from gift tax for profit-making corporations. However, since the gift income is appropriated for compensating for losses, it is not subject to corporate tax as it is not included in the gross income, it is not subject to corporate tax. Ultimately, the shareholder of the deficit corporation has the same economic effect as the share ratio of the corporation among the value of the gift property, and the tax has the same economic effect as the gift received, but the tax is to prevent the occurrence of the result that the shareholder of the deficit corporation and the person in special relationship with the shareholder, etc. of the corporation, etc., donated property to the corporation, exempted from the debt, and thereby, received actual profits regardless of whether the donor had any intention of gift, it shall be deemed not a presumption provision,

(B) In addition, as seen below, since the actual net asset value of the non-party company increases due to the debt exemption in this case, it cannot be deemed that the non-party 1 and the non-party 2's claim is a nominal cause with no economic value. Article 41 of the Act on the Regulation of Tax Reduction and Exemption applies regardless of whether it is intended to avoid gift tax. Thus, Article 40-7 (1) 2 (a) of the former Regulation of Tax Reduction and Exemption Act is a newly established provision after the debt exemption in this case, and the scope of application is limited to donations according to the financial restructuring plan approved by the financial institution council, and thus, the purport of the above provision cannot be invoked.

(C) Therefore, in this case, the non-party company is a specific corporation under Article 31 (1) 1 of the Enforcement Decree of the 196 and Article 31 (1) 1 of the 197 business year before the business year to which the date of the debt exemption belongs, and the exemption of the debt to the non-party company constitutes the donation and other similar transactions under Article 31 (2) 1 of the 19. The non-party 1 and the non-party 2 are the plaintiff's punishment as the father who is the non-party company's shareholder and the non-party 1 are the related person under Article 19 (4) of the 1 of the 1996 and Article 19 (2) 1 of the 197 business year to which the date of the debt exemption belongs. Thus,

(b) Calculation of the donated value;

(1) The plaintiff's assertion

(A) The value of the deemed donation due to the exemption from the obligation of this case shall be calculated by multiplying the value of one share, which is increased by the gains from such exemption, in accordance with the language and text of Article 31(5)1 of the former Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 15971, Dec. 31, 198; hereinafter “Enforcement Decree”), by the number of donees. Under Article 63(1)1(c) of the Act, Articles 54 and 55 of the Enforcement Decree of the Act, the net asset value of the non-party company shall be calculated by dividing the value of the non-party company’s non-listed stocks by the net asset value of the non-party company’s total issued and outstanding stocks, by the number of plaintiff’s before and after exemption from the obligation of this case. If, at any time, the value of the non-party company’s stocks is below 0 won per share without value, the value of the non-party company’s stocks shall be calculated as 00 won before and after exemption from the obligation of this case’s 60.

(B) The Defendant calculated the net asset value of the non-party company based on the market price assessed retroactively on the land, building and machinery of the non-party company. Such retroactive appraisal is for the purpose of imposing gift tax, and cannot be deemed the market price under the latter part of Article 60(1) of the Act. The calculation of net asset value based on such retroactive appraisal is contrary to the purport of Article 49(1) of the Enforcement Decree, and it excessively conflicts with Article 60(3) of the Act that provides for supplementary

(C) According to the latter part of Article 55(1) of the Enforcement Decree of the Family Affairs Act, if the assessment of the net asset value of the non-party company is based on the market price appraisal rather than the supplementary assessment method, the acquisition value of the non-party company's stocks before the exemption of the debt of this case, even if the assessment value is based on the acquisition after the exemption of the debt of this case, since the value per stock of the non-party company's stocks before the exemption of the debt of this case is still zero won, the value of deemed donation (1,924 won x 149,072 note x 286,914,528 won

(2) Relevant statutes

former Inheritance Tax and Gift Tax Act (amended by Act No. 6048 of Dec. 28, 1999)

Article 60 (Principles, etc. of Appraisal) (1) The value of property on which inheritance tax or gift tax is levied under this Act shall be based on the market price as of the date the inheritance commences or the date of donation (hereinafter referred to as "date of appraisal").

(3) In the application of the provisions of paragraph (1), where it is difficult to compute the market price, the assessed value shall be based on the methods prescribed in Articles 61 through 65 in consideration of the type, scale, transaction status, etc. of the relevant property.

Article 61 (Appraisal of Real Estate, etc.) (1) The appraisal of real estate and rights to real estate shall be made according to methods prescribed by each of the following subparagraphs:

1. Land: Individual land price under the Public Notice of Values and Appraisal of Lands, etc. Act;

2. Building: Value based on the current base value as prescribed by the Presidential Decree;

(6) Other facilities and structures shall be the value appraised by the methods prescribed by the Presidential Decree in consideration of the value necessary for the re-construction or re-acquisition on the evaluation base date.

Article 63 (Appraisal of Securities, etc.) (1) The appraisal of securities, etc. shall be made by the following methods:

1. Appraisal of stocks and investment shares:

(c) Stocks and equity shares not listed on the Korea Stock Exchange other than those under item (b) shall be appraised according to the methods prescribed by Presidential Decree in consideration of corporation assets and profits;

The Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 15971 of Dec. 31, 1998)

(1) Except as provided in paragraph (2), stocks and investment shares (hereinafter in this Article referred to as “non-listed shares”) not listed on the Korea Stock Exchange as prescribed in Article 63 (1) 1 (c) of the Act shall be the value assessed by the following formula:

A person shall be appointed.

(2) Where any unlisted stocks fall under any of the following subparagraphs, the appraised value according to the net asset value shall govern:

2. The stocks or equity shares of a corporation that has losses exceeding the total amount of earnings which belong or comes to belong to each business year under the Corporate Tax Act continuously from the business year that ends on the day before the base date of appraisal in the business year that falls within three years before the base date of appraisal;

Article 55 (Calculation Method of Net Assets Value) (1) The net asset value under Article 54 (1) shall be the value calculated by subtracting liabilities from the value appraised by the assets of the corporation as of the evaluation base date under the provisions of this Act. In such cases, such appraisal may be based on the market value appraisal document of a reliable appraisal institution as prescribed by the Ordinance of the Prime Minister.

The former Enforcement Rule of the Inheritance Tax and Gift Tax Act (amended by the Ordinance of the Ministry of Finance and Economy No. 79 of May 7, 199)

(1) For the purpose of Article 49 (1) 2 of the Decree and Article 55 (1) of the Decree, the term “public appraisal institution as prescribed by Ordinance of the Prime Minister” means an appraisal corporation under the Public Notice of Values and Appraisal of Lands, etc. Act.

(3) Determination

(a)Methods of calculating the value deemed donated;

Article 31(5) of the Enforcement Decree provides that profits which shareholders, etc. of a specific corporation are deemed to have been donated pursuant to Article 41(1) of the Act shall be calculated by multiplying the number of stocks or equity shares increased by "the value per share of the relevant controlling shareholders, etc." due to the value of donated stocks, exemption from debts, etc. In this context, the increased value per share of stocks, etc. shall be calculated by comparing the value of stocks, etc. before and after the gift transactions. As such, since the increased value per share of stocks, etc. should be calculated by comparing the value of stocks, etc. before and after the gift transactions, the value of the property on which gift tax is levied is levied shall be compared in principle with the market value pursuant to Article 60(1)1(c) of the Act. If it is difficult to calculate the market value, the value of the stocks, etc. shall be calculated by considering the value of the stocks, etc., before and after the supplementary method of assessment, the value of the stocks, etc., calculated by calculating the value of the stocks, etc., before and after the increase value of the stocks, shall be considered as 2.

Accordingly, under the above calculation method, the amount of deemed donation for the plaintiff should be calculated by the above calculation method.

(B) Calculation of the value per share of the shares of the non-party company

The following facts are not disputed between the parties, or can be acknowledged in full view of the purport of the entire pleadings in each of the evidence Nos. 10-1, 2, 11, 12, and No. 10-14.

1) The non-party company is a company that carries on the manufacture and sale of automobile parts while possessing a large number of machinery and appliances in real estate and factories, such as four parcels outside of Chungcheongnam-gun (detailed lot number omitted) and four factories on the land, five dormitories buildings, neighboring apartment houses, 3 neighboring apartment houses, etc., and is a company that supplies automobile parts.

2) According to the balance sheet of the non-party company, which settled accounts as of May 28, 1998, the asset value of the non-party company is KRW 14,071,028,57 as stated in the table of asset assessment statement as shown in attached Table 1. However, if the real estate and machinery are calculated as the supplementary assessment method as stipulated in Articles 60(3), 61(1), and 61(6) of the Act, the asset value of the non-party company is KRW 11,519,530,937 as stated in the table of asset list of the same specification, and the real estate and machinery is reduced by KRW 2,51,497,640 as stated in the column of asset list of the same specification above the asset value on the balance sheet. If the asset value of the non-party company is calculated in accordance with the appraisal statement of the Korea Appraisal Board (Evidence No. 14, and the method set forth in the latter part of Article 55(1) of the Enforcement Decree) of the Enforcement Decree).

3) 위 각 자산가액에서 별지 2. 순자산가액계산서 기재와 같이 법인세법상 유보금액을 더하고 이연자산 등 선급비용을 공제하여 실제 보유한 자산총계를 계산한 다음 이 사건 채무면제 전의 대차대조표상의 부채총계 14,110,152,621원을 공제하여 이 사건 채무면제 전의 소외 회사의 순자산가액을 산정하면 , 보충적 평가방법에 의할 경우 별지 2. 순자산가액계산서 ㉠란 기재와 같이 －4,227,798,168원(1주당 가액은 －4,403원, 원 미만 버림, 이하 같다.)이 되고, 시가감정결과에 따를 경우 같은 계산서 ㉢란 기재와 같이 －2,342,486,662원(1주당 가액은 －2,440원)이 되며, 이 사건 채무면제로 인하여 감소된 부채총계 9,920,439,883원을 기준으로 이 사건 채무면제 후의 소외 회사의 순자산가액을 산정하면, 보충적 평가방법에 의할 경우 같은 계산서 ㉡란 기재와 같이 －38,085,430원(1주당 가액은 －39원)이 되고, 시가감정결과에 따르면 같은 계산서 ㉣란 기재와 같이 순자산가액은 1,847,226,076원(1주당 가액은 1,924원)이 된다.

(C) Whether the computation of net asset value based on the market price appraisal is lawful

The above appraisal commission for the land, building and machinery of the non-party company is aimed at evaluating the value of the non-party company's net asset value based on the net asset value of the non-party company in calculating the market value of the non-party company in accordance with Article 60 (3) of the Act. Thus, it does not conflict with the above provision. According to Article 55 (1) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act and Article 15 (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. 79 of May 7, 1999) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, the net asset value of the company in relation to the appraisal of non-listed stocks can be based on the market value report by the appraisal agency under the Public Notice of Values and Appraisal of Lands, etc. of Lands, etc. of the market value in order to properly reflect the market value in the case of the appraisal of the non-party company's asset value (see Supreme Court Decision 95Nu18629, Dec. 10, 1996).

In addition, the main sentence of Article 60 (1) of the Act provides that "the value of property on which inheritance tax or gift tax is levied under this Act shall be the market price as of the date commencing the inheritance or the date of donation." Article 60 (2) of the same Act provides that "the market price under the provisions of paragraph (1) shall be the value which is generally deemed to be established when transactions are freely conducted between many and unspecified persons and which is recognized as the market price under the conditions as prescribed by the Presidential Decree, such as the expropriation and public sale price and the appraisal price." Article 49 (1) of the Enforcement Decree of the Act provides that "The market price shall be recognized as the market price under the conditions as prescribed by the Presidential Decree, such as expropriation and public sale price and the appraisal price" in Article 60 (2) of the Act provides that "it shall include the value confirmed by the provisions of one of the following subparagraphs from June of the base date of appraisal, before the base of return on the tax base of inheritance tax or gift tax, and it shall be deemed that the market price is not the market price under Article 20 (3).

(d)an assessment of the value of a stock increased and the value of deemed gift;

According to the above facts, the net asset value of the non-party company before the debt exemption is incidental to KRW 2,342,486,662, and the net asset value of the non-party company before the debt exemption is incidental to KRW 0 per share. Since the net asset value after the debt exemption is KRW 1,847,226,076, the net asset value of the non-party company after the debt exemption is 1,924 won per share, the value of the non-party company's shares increased due to the debt exemption of this case shall be 1,924 won. The fact that the stocks of the non-party company owned by the plaintiff are 149,072 shares is 149,072 shares as above. The profit that the plaintiff deemed to have donated due to the debt exemption of this case is 286,914,528 won ( KRW 1,924 won x 149,072 shares). Based on this, when the plaintiff calculates the amount of the gift tax to be paid, the non-party 24204,204.24.

(e) Sub-committee

Therefore, the plaintiff is obligated to pay gift tax of KRW 42,442,50 on the profits accrued from the debt exemption of this case. The defendant's disposition of this case on which gift tax was imposed on the premise that the entire amount of the debt exemption should be the donated value even if the value per share is calculated as an incidental value before the debt exemption of this case is made, is unlawful within the extent exceeding the above scope. Thus, the plaintiff's above assertion is justified within the above scope

3. Conclusion

Therefore, under the premise that the disposition of this case is unlawful, the plaintiff's claim of this case is accepted within the scope of the above recognition, and the remaining claims are dismissed as it is without merit. The judgment of the court of first instance that has different conclusions are unfair within the above recognition scope. Thus, the part against the plaintiff in the judgment of the court of first instance which has partially accepted the plaintiff's appeal and dismissed the plaintiff's remaining appeal as it is without merit. It is so decided as per Disposition by the assent of all.

[Attachment]

Judges Mobile-Smoking (Presiding Judge)