Plaintiff 1 and one other (Law Firm Gyeong & Yang, Attorneys Gyeong-soo et al., Counsel for the plaintiff-appellant)

Head of Sungnam Tax Office

May 17, 2007

1. All of the plaintiffs' claims are dismissed.

2. The costs of lawsuit are assessed against the plaintiffs.

The defendant's disposition rejecting to correct the gift tax against the plaintiffs on May 25, 2005 is revoked.

1. Details of the disposition;

A. On July 25, 1979, Osung District Co., Ltd. (hereinafter referred to as "Osung District Co., Ltd.") is a corporation established by the Non-Party, the plaintiffs' set up for the business purpose of manufacturing and selling the Alley District Co., Ltd., the plaintiff 1, as the representative director of Osung District, holding 43,584 shares (5%) out of 80,000 shares issued by Osung District Co., Ltd. (hereinafter referred to as "Osung District Co., Ltd.") and 16,67 shares (20.8%) and the non-party holding 14,416 shares (18%) respectively.

B. Although there was no loss carried forward before the business year 2003, it was caused a big loss due to the depression of the related industry in the above business year, and the Nonparty decided to donate the real estate owned by it to the Austria in order to compensate for the said loss.

C. On December 22, 2003 and December 24, 2003, the Plaintiffs heard the reply that a corporation that did not carry forward any losses and only carried forward in the business year to which the date of donation belongs as a result of questioning through the Internet, shall not be subject to a separate gift tax on the shareholders of the corporation that received the donation from a person with a special relationship because it does not fall under a specific corporation under Article 41 of the Inheritance Tax and Gift Tax Act, and Article 31(1) of the Enforcement Decree

D. On December 29, 2003, the Nonparty donated shares of 3,751.7/1700 (hereinafter “instant gift”) out of the 17,692.4m2 in the Yyang-dong (number omitted) factory site of 2,93,829,400m2, to the Mayang-dong (hereinafter “instant land”). In fact, the Nonparty donated shares of 3,751.7m2 (hereinafter “instant gift”) to the Masan-dong land during the business year of 2003, and the Nonparty actually incurred losses of 1,886,316,736m2 in the Masan-dong land.

E. On February 23, 2004, the plaintiffs, by specifically disclosing the contents related to the donation of the land of this case to the National Tax Counseling Center, asked whether the above donation is deemed to have been made through a specific corporation and whether the plaintiffs should pay the gift tax to the shareholders through a specific corporation. As a result, after hearing the response to the purport that even a corporation with losses for the business year to which the donation date belongs even if there was no loss carried forward, it constitutes a specific corporation. On March 29, 2004, the plaintiffs 1 and 369,59,520 won, and 56,38,290 won, respectively, were reported and paid to the defendant on March 29, 2004 as gift tax on the amount equivalent to the profits the plaintiffs acquired from the donation of this case.

F. After that, on September 1, 2004, the plaintiffs filed a claim for correction of the tax base and tax amount of gift tax originally paid on the ground that the corporation, such as the misunderstanding place where no loss was carried forward to the defendant and only the loss in the business year to which the donation date belongs, does not constitute a specific corporation to which the deemed donation of profit through transaction with a specific corporation applies. However, on May 25, 2005, the defendant issued a disposition rejecting each of the above requests for correction against the plaintiffs (hereinafter "the disposition of this case").

[Ground of recognition] Facts without dispute, Gap 1 through 5 evidence, Gap 6-1, 2, Eul 1-1, 2, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

For the following reasons, the plaintiffs asserted that the deemed donation of profits through transactions with specific corporations is applied only to corporations which have a loss carried forward, but there is no loss carried forward, i.e., corporations which have only losses in the business year to which the date of donation belongs, and that the disposition of this case should be revoked as it is unlawful.

(1) In Article 31(1)1 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, which provides that “loss” shall include “loss” in the business year to which the date of donation belongs, which serves as the basis of the instant disposition, shall not be recognized as contradictory to the main sentence and content of the same subparagraph.

(2) Article 41(1) of the Inheritance Tax and Gift Tax Act, with respect to the scope of a specific corporation subject to the application of deemed donation for the benefit of transaction with a specific corporation, the reason why the amendment was made to a corporation with "loss" was to expand the scope of the specific corporation to a corporation with a loss carried forward within five years immediately preceding the business year in which the date of donation that can be compensated for as the profit of financing assets falls, and it does not aim at applying the said deemed donation provision by deeming the specific corporation as having a loss incurred during the business year to which the date of donation belongs, although there

(3) If Article 31(1)1 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that even a corporation which does not carry forward any losses but has only losses for the business year to which the date of donation belongs shall be included in a specific corporation, the said provision violates Article 41(1) of the Inheritance Tax and Gift Tax Act, and is invalid beyond the scope of delegation by the parent law.

(4) In a case where a corporation without any loss brought forward receives a donation from a specially related person in the middle of the business year, even if the corporation was in a state of loss as at the date of donation, its net profit may accrue at the end of the business year concerned, depending on the degree of loss, business status, market situation, etc., and any objection may occur. Thus, at the time of donation, it cannot be predicted at all as to whether the pertinent corporation would incur loss in the business year to which the date of donation belongs, and whether the shareholder or investor would be liable to pay the gift tax pursuant

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

(1) Article 41 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003; hereinafter the same shall apply) provides that "loss" exists, or the profits that a person with a special relationship with the shareholders or investors of a corporation under business suspension or closure (hereafter in this Article referred to as "specific corporation") divided into the shareholders or investors of the specific corporation through a transaction of donation of property to the specific corporation shall be deemed to have been donated to the shareholders or investors of the specific corporation, and that the amount equivalent to the profits shall be deemed to have been donated to the shareholders or investors of the specific corporation, and that the amount equivalent to the profits shall be deemed to have been donated to the shareholders or investors of the specific corporation pursuant to Article 31 (1) 1 of the Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 1817 of Dec. 30, 2003; hereinafter the same shall apply) shall be deemed to have been donated to the Korea Stock Exchange until the business year under Article 18 (1) 4 of the Corporate Tax Act.

In addition, Article 13 subparag. 1 and Article 14(2) of the Corporate Tax Act, and Article 18(1)1 of the Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18174, Dec. 30, 2003) provide that the “amount of losses carried forward” shall be losses incurred in the business year that began within five years from the beginning date of each business year, which are not deducted in calculating the tax base for each business year thereafter.

(2) According to the language and text of Article 41(1) of the Act, it is difficult to view that the above losses are losses or losses incurred during the business year before the donation date to be made. (2) Where a person with a special relationship provides property or services to a corporation free of charge or at low prices which is a shareholder, the provisions of Article 41(1) of the Act stipulate that losses or losses shall be borne by the specific corporation within the scope of losses or losses incurred during the pertinent business year which are deemed to fall under the category of donated property which belongs to the specific corporation at the time of donation. The provisions of Article 41(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act stipulate that losses or losses shall be borne by the specific corporation within the scope of losses or losses generated during the pertinent business year which are deemed to fall under the category of donated property which belongs to the specific corporation at the time of donation.

Meanwhile, in light of the timing of receiving the gift of this case from the non-party and the amount of losses incurred to the Austria in the business year 2003, etc., it is evident that Austria had already incurred losses before Austria was included in the value of the land of this case. Thus, the disposition of this case based on the provision of Article 41 (1) 1 of the Act and Article 31 (1) 1 of the Enforcement Decree of the Act is lawful, and the plaintiffs' assertion is without merit.

3. Conclusion

Therefore, the plaintiffs' claims are dismissed in entirety as it is without merit. It is so decided as per Disposition.

[Attachment]

Judges Jami-gu (Presiding Judge)