In cases of calculating the “value of value immediately before the merger of an unlisted corporation with a special relationship” in order to calculate the profits donated to the merger of an unlisted corporation, whether the “value of value immediately before the merger of the merged corporation” can be calculated on the basis of the “average average amount of net profit and loss per share for the last three years” under Article 56(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (negative in principle), and whether this legal doctrine also applies to cases where the “value of value immediately before the merger of the merged corporation” is calculated in order to calculate the respective profits under Article 88(1)8(a) of the former Enforcement Decree of the Corporate Tax Act and Article 11 subparag. 9

Article 38 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003); Article 28(3) through (6) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 17828, Dec. 30, 2002; hereinafter “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”) to calculate the “value of value before the merger of an unlisted corporation” in order to calculate the profits donated by a merger of an unlisted corporation with a special relationship pursuant to Article 28(3) through (6) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, it is reasonable to view that the value of net profits per share cannot be calculated on the basis of the “average average value of net profits and losses per share for the preceding three years” under Article 56(1)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 8658, Dec. 1, 2002; hereinafter the same shall apply).

Articles 38 and 63(1)(c) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 7010, Dec. 30, 2003); Articles 28(3), (4), (5), and (6), 54, and 56(1)1 and 2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 17828, Dec. 30, 2002); Articles 17-3(1)4 of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 342, Dec. 31, 2003); Articles 11(9), 8(1)8(1), and 8(6)8(a)6(6) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 17826, Dec. 30, 202)

Supreme Court Decision 2010Du26988 Decided April 26, 2012 (Gong2012Sang, 900)

[Plaintiff-Appellant] Jin Jin Jinsi Co., Ltd. (Law Firm Barun, Attorneys Park Tae-tae et al., Counsel for plaintiff

Head of Ansan Tax Office

Seoul High Court Decision 2010Nu18934 decided December 9, 2010

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Regarding ground of appeal No. 1

Article 15(1) and (3) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) and Article 11 subparag. 9 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17826, Dec. 30, 2002; hereinafter the same) provide for a “gains distributed from a specially related person due to capital transactions under the provisions of each item of Article 88(1)8” as one of the profits to be included in gross income when calculating a domestic corporation’s income for each business year. Article 88(1) of the former Enforcement Decree of the Corporate Tax Act, which provides for the type of wrongful calculation, provides for the method of calculating gains under Article 88(2)8(a) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 2013, Aug. 28, 2008; hereinafter the same).

The court below determined that the "profit received by distribution from a specially related person due to capital transactions" under Article 11 subparagraph 9 of the former Enforcement Decree of the Corporate Tax Act is corresponding to the "profit distributed by capital transactions to a specially related person due to capital transactions" under Article 88 (1) 8 of the former Enforcement Decree of the Corporate Tax Act, and it is reasonable to view that the "profit received by distribution from a specially related person due to unfair merger" under Article 11 subparagraph 9 and Article 88 (1) 8 (a) of the former Enforcement Decree of the Corporate Tax Act can be calculated by applying mutatis mutandis the provisions of Article 28 (3) through (6) of the former Enforcement Decree of the Corporate Tax Act pursuant to Article 89 (6) of the former Enforcement Decree of the Corporate Tax Act.

In light of the purport and structure of the above relevant provisions, the above determination by the court below is just and acceptable. Contrary to the allegations in the grounds of appeal, there were no errors in the misapprehension of legal principles as to the calculation of profits under Article 11 subparagraph 9 of the former Enforcement Decree of the Corporate Tax Act.

2. Regarding ground of appeal No. 2

A. Article 38 of the former Inheritance and Gift Tax Act and Article 28(3) through (6) of the former Enforcement Decree of the former Inheritance and Gift Tax Act (amended by Presidential Decree No. 2010, Jan. 1, 2011; Presidential Decree No. 20148, Feb. 21, 2011; Presidential Decree No. 2010, Feb. 22, 2011; Presidential Decree No. 20135, Feb. 21, 201; Presidential Decree No. 20135, Feb. 22, 2011; Presidential Decree No. 20135, Feb. 2, 2011; Presidential Decree No. 20135, Feb. 3, 2012; Presidential Decree No. 20135, Feb. 2, 201; Presidential Decree No. 20135, Feb. 3, 2012>

Meanwhile, Article 54 of the former Enforcement Decree of the Inheritance and Gift Tax Act, which provides for the supplementary valuation methods of unlisted stocks upon delegation under Article 63(1)1(c) of the former Inheritance and Gift Tax Act, provides that the value per share of unlisted stocks shall, in principle, be the net value per share (the weighted average amount of net profits and losses for the last three years per share ¡Àthe average interest rate formed in financial markets). However, if the net value per share falls short of the net asset value per share (the net asset value of the relevant corporation ¡± total number of stocks issued), the value per share shall be the value assessed according to the net asset value per share.

In addition, Article 56 (1) of the former Enforcement Decree of the Inheritance and Gift Tax Act provides that "the weighted average amount of net profits and losses per share for the preceding three years" shall be the value under subparagraph 1, namely, [3] + (the net profits and losses per share for the business year that has become two years before the base date of appraisal x (2) + (1%) + (1/6) calculated by the formula of 1/6; where the relevant corporation's net profits and losses per share for the business year that has become three years before the base date of appraisal x 3] 】 Where it is unreasonable to determine the value of net profits and losses per share for the preceding three years, or where it is determined by the Ordinance of the Ministry of Finance and Economy to determine the value of net profits and losses per share for the preceding three years, the weighted average amount of profits and losses per share for two years or more before the base date of appraisal : the value of net profits and losses per share before the base date of appraisal ; the value of net profits and losses per share within three years before the base date of appraisal ;

In light of the language, purport, structure, etc. of these provisions, where calculating the “value of the stock immediately before the merger of an unlisted corporation” in accordance with Article 38 of the former Inheritance Tax Act and Article 28(3) through (6) of the Enforcement Decree of the former Inheritance and Gift Tax Act, barring any special circumstance, it is reasonable to deem that the “amount of net profit and loss per share for the last three years” cannot be calculated on the basis of the “amount of net profit and loss per share for the preceding three years” under Article 56(1)1 of the Enforcement Decree of the former Inheritance and Gift Tax Act, which is the value of the “amount of average profit and loss per share” under Article 56(1)2 of the former Enforcement Decree of the Corporate Tax Act, or the “amount of average profit per share” under Article 56(1)2 of the former Enforcement Decree of the Corporate Tax Act (see, e.g., Supreme Court Decision 201Du88889, Apr. 26, 2012).

B. According to the reasoning of the judgment of the court below, ① the Plaintiff, as the shareholder of the non-listed corporation, calculated the weighted average of 1st 7th 5th 202 shares of the original telecom with 0th 1st 5th 200, the net value of the shares of the non-listed corporation (hereinafter “the merger”) calculated by multiplying the 1st 6th 5th 1st 2002 shares by the net value of the shares of the 1st 5th 6th 2nd 7th 6th 1st 6th 6th 200, the net value of the shares of the 1st 5th 5th 6th 6th 2nd 1st 6th 6th 7th 207, the total value of the shares of the 1st 5th 6th 6th 2nd 1st 6th 6th 6th 2nd 6th 2nd 3th 3th 2007.

C. Examining these facts in light of the legal principles as seen earlier, it is unlawful for the Defendant to calculate the value of the stock immediately before the merger of original telecom, a corporation merged, based on the “the weighted average amount of net profit and loss for the last three years per share,” which is the value of Article 56(1)1 of the former Enforcement Decree of the Inheritance and Gift Tax Act, in calculating the profits distributed by the Plaintiff due to the merger of this case.

D. Nevertheless, the lower court determined otherwise, based on the weighted average amount of net profit and loss for the last three years per week, the Defendant calculated the value of the stock immediately before the merger of original telecom, and determined that the disposition imposing the corporate tax of this case, calculated by the Plaintiff as a result of the merger, was lawful. In so determining, the lower court erred by misapprehending the legal doctrine on the supplementary method of assessing unlisted stocks, thereby adversely affecting the conclusion of the judgment by misapprehending the legal doctrine on the supplementary method of assessing unlisted stocks, thereby affecting the conclusion of the judgment.

3. Conclusion

The lower judgment is reversed without further proceeding to decide on the remaining grounds of appeal, 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 Lee Sang-hoon (Presiding Justice)