[1] In a case where there is no reasonable ground to believe that the parties to a transaction who transferred or acquired property at a low price had properly reflected the transaction price at a normal price, and there is an objective reason to deem that the transferor’s transfer of property at a reasonable market price was an abnormal transaction price from a reasonable economic person, whether there is a “justifiable reason for the transaction practice” under Article 35(2) of the former Inheritance Tax and Gift Tax Act (affirmative)

[2] The burden of proving that “no justifiable ground exists in light of transaction practice” among the requirements for imposing gift tax under Article 35(2) of the former Inheritance Tax and Gift Tax Act (=the taxation authority)

[1] The legislative purport of Article 35(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2015; hereinafter “former Inheritance Tax Act”) is to: (a) in a case where profits equivalent to the difference between the price and the market price are actually gratuitously transferred by means of manipulating the transaction price for the benefit of the transaction partner; (b) thereby imposing gift tax on the benefit of the transaction partner; and (c) thereby, to cope with and promote fair taxation by imposing tax on the benefit of the transaction partner. However, in a transaction between unrelated parties, there is a difference between the price and the market price, and it is difficult to view that the difference was donated to the transaction partner solely on the basis that there is a difference between the price and the market price. Article 35(2) of the former Inheritance Tax and Gift Tax Act added a taxation requirement that “any transaction between unrelated parties, unlike a transaction between related parties,

In full view of these facts, it is reasonable to view that there was a reasonable ground to believe that the parties to a transaction who transferred or acquired property at a low price had a reasonable reason to believe the transaction price at a normal price that reflects the objective exchange value, and, even if there was no such reason, there was an objective reason that the transferor could not be viewed as the transfer of property at a reasonable market price from a reasonable economic standpoint, there is “justifiable reason for transaction practice” under Article 35(2) of the former Inheritance and Gift Tax Act.

[2] In order for a tax assessment under Article 35(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2015) to be lawful, the transferee not only acquired the property from a person who is not a specially related person at a price significantly lower than the market price, but also the tax authority should prove that there is no justifiable reason in light of the transaction practice.

[1] Article 35(2) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 13557, Dec. 15, 2015); Article 26(5) (see current Article 26(3) and (7) (see current Article 26(4)) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 26960, Feb. 5, 2016) / [2] Article 35(2) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 13557, Dec. 15, 2015)

[1] [2] Supreme Court Decision 2012Du20915 Decided June 12, 2014 / [1] Supreme Court Decision 2013Du5081 Decided August 23, 2013 (Gong2013Ha, 1731) / [2] Supreme Court Decision 2011Du22075 Decided December 22, 2011 (Gong2012Sang, 194)

Plaintiff (Law Firm LLC, Attorneys Gyeong-soo et al., Counsel for the plaintiff-appellant)

Deputy Director of the Tax Office

Seoul High Court Decision 2017Nu36160 decided August 24, 2017

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

The grounds of appeal are examined.

1. Article 35(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2015; hereinafter “former Inheritance Tax Act”) provides that where a person, other than a specially related person, acquires any property from a person who is not a specially related person at a price substantially lower than the market price without justifiable grounds, the transferee of the property shall be presumed to have received a donation of an amount equivalent to the difference between the price and the market price, and the amount equivalent to profits prescribed by Presidential Decree shall be deemed to be the value of donated property to the person who has acquired such profits. Article 26(5) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 26960, Feb. 5, 2016; hereinafter “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”) provides that the amount calculated by subtracting the price from the market price of the acquired property is 30/100 or more of the market price.

The legislative purport of Article 35(2) of the former Inheritance and Gift Tax Act is to: (a) in a case where profits equivalent to the difference between the price and the market price are de facto gratuitously transferred by means of abnormal methods that manipulate the transaction price for the benefit of the transaction partner, to cope with and promote fair taxation by imposing gift tax on the profits earned by the transaction partner. However, since the transaction between unrelated parties does not coincide with each other; (b) it is generally difficult to deem that the difference was donated to the transaction partner solely on the basis that there is a difference between the price and the market price, and thus, Article 35(2) of the former Inheritance and Gift Tax Act added the taxation requirement of “for the transaction between unrelated parties, there is no justifiable reason in light of the transaction practice.”

In full view of these facts, it is reasonable to view that there exists a reasonable ground to believe that the parties to a transaction who transferred or acquired property at a low price had reasonable grounds to believe that the transaction price was properly reflected in the objective exchange value, and, even if there were no such grounds, there was an objective reason that the transferor could not be deemed to have been abnormal from a reasonable economic standpoint, even if the transferor did not transfer property at a reasonable price, there was a justifiable reason under Article 35(2) of the former Inheritance and Gift Tax Act (see Supreme Court Decision 2013Du5081, Aug. 23, 2013).

Meanwhile, in order to lawful taxation under Article 35(2) of the former Inheritance and Gift Tax Act, the taxation authority should prove not only that the transferee acquired property from a person who is not a specially related person at a price significantly lower than the market price, but also that there is no justifiable reason in light of transaction practices (see Supreme Court Decision 2011Du22075, Dec. 22, 201).

2. A. The court below found the following facts by taking full account of the adopted evidence.

(1) The same company (hereinafter “instant company”) was an unlisted corporation established on October 12, 2009, and operated a vehicle leasing business on behalf of its employees in the field of pharmaceutical packing services and on behalf of its employees, among non-listed corporations established on October 12, 2009.

(2) In the process of purchasing the shares of the instant company from Nonparty 1, who is not a related party, the Plaintiff acquired 2,000 shares of the said company (hereinafter “instant shares”) at KRW 15,000 per share (hereinafter “the instant transaction price”) on February 28, 2013, referring to the assessment result (18,884 won per share) of the accounting corporation of the lender accounting corporation.

(3) The Defendant calculated the value of the instant shares as KRW 305,91 per share in accordance with the supplementary evaluation method under Article 63 of the former Inheritance and Gift Tax Act, and imposed gift tax on the Plaintiff by applying Article 35(2) of the former Inheritance and Gift Tax Act and Article 26(5) and (7) of the Enforcement Decree of the former Inheritance and Gift Tax Act, but issued the instant disposition additionally imposing gift tax by reflecting the appraised value of the goodwill on January 4, 2016.

B. Based on its reasoning, the lower court determined that the instant disposition was lawful on the ground that: (a) it was difficult to view the transaction value of the instant shares as the market price that appropriately reflected the objective exchange value of the instant shares; and (b) it was insufficient to deem that the sales of the instant shares was objectively determined at the time of assessing the instant shares; (b) the Plaintiff acquired 50% shares of the instant company at one time, which are secured by half of the decision making right of the instant company; and (c) it is difficult to obtain the Plaintiff’s acquisition of shares at a price lower than the appraised value of the lender accounting firm; and (d) the instant company was dependent only on the packing service business, which serves as the main part of the sales right of the instant company, but it was anticipated that the sales amount of the instant company would increase due to the increase in the sales amount of the Plaintiff at the time, on the ground that there was no justifiable reason in light of trade practice, as the Plaintiff acquired the shares

3. First, the lower court did not err by misapprehending the legal doctrine regarding the market price under Article 35(2) of the former Inheritance and Gift Tax Act in determining that the transaction value of the instant shares cannot be deemed as the market price. However, the lower court’s determination that the acquisition of the instant shares cannot be justified in light of the following circumstances revealed by the record is difficult to accept.

A. (1) Around November 201, 2012, the 2013 Company notified the instant company that the vehicle rental service provided by the instant company was used only until September 2013. In fact, the use of the vehicle rental service was suspended on or around September 2013. Furthermore, in light of the superior position of the instant company of the 2013 Company, it is highly probable that a lender accounting firm would have objectively planned the suspension of the vehicle rental service at the time of evaluating the instant shares. Even if the sale of the vehicle rental service was not determined as shown in the lower judgment, it would be reasonable to consider such circumstances in determining the transaction price in the instant case.

(2) In addition, considering the fact that the estimated amount of future profit of the instant company among the evaluation results of the lender accounting firm was not significantly different from the actual profit and loss of the instant company in 2013 and 2014, and that the increase in the sales revenue of the closed temperature did not lead to the increase in the operating profit of the instant company, as well as that of the instant company, it is difficult to view that it was improper for the Plaintiff and Nonparty 1 to finally determine the sales revenue of the instant company based on the appraised value of the accounting firm, in light of the fact that there was a net loss of KRW 44,072,240, and KRW 26,514,545, since the suspension of the vehicle rental business around September 2013.

(3) Although Nonparty 1 is the Plaintiff’s middle school building, it is difficult to see that there was a special relationship for allocating profits to the Plaintiff, and at the time, the real estate owned by it was in an economically difficult condition, such as seizure. In addition, although the instant transaction price falls short of the appraised value of the lender accounting firm, Nonparty 1 transferred the instant shares to KRW 15,000 per share, which is about 2 years after acquisition, and obtained considerable gains on transfer. In light of the fact that Nonparty 1 transferred the instant shares to KRW 15,000 per share, the instant transaction price is likely to have been determined by free negotiations between the parties to the transaction.

(4) Meanwhile, Nonparty 1 and Nonparty 2 held 50% each of the shares of the instant company, and Nonparty 1 transferred the shares held by them to the Plaintiff. Thus, it is difficult to view that the said transaction entails a prior management right of the instant company.

B. Examining the aforementioned circumstances in light of the legal principles as seen earlier, there is room to deem that there was a reasonable ground to believe that the parties to the transaction at the time of acquiring the instant shares were KRW 15,000 per share of the objective exchange value of the instant shares, or there was an objective reason to deem that Nonparty 1’s transfer of the instant shares at the said price was an abnormal from the perspective of a reasonable economic person. Accordingly, the lower court should have further deliberated on this point, and should have determined whether there was no justifiable reason in light of the practice of the transaction of the instant shares transfer.

C. Nevertheless, without sufficiently examining this point, the lower court determined that the Plaintiff’s acquisition of the instant shares from Nonparty 1 to KRW 15,00 per share by reason of its stated reasoning does not have justifiable grounds for transaction practices. In so doing, the lower court erred by misapprehending the legal doctrine on “justifiable grounds in light of transaction practices” under Article 35(2) of the former Inheritance and Gift Tax Act, thereby failing to exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment. The allegation in the grounds of appeal assigning this error is with merit.

4. Therefore, 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 Cho Jae-chul (Presiding Justice)