[1] The legislative intent of Article 42(1) of the former Inheritance Tax and Gift Tax Act and the case where it is difficult to deem that there is a “justifiable cause for transaction practice” under Article 42(3) of the same Act

[2] The burden of proving that there is no “justifiable cause for transaction practice” under Article 42(3) of the former Inheritance Tax and Gift Tax Act (=the taxation authority), the degree of proof, and the case where there is a need to prove that there is a special circumstance that the taxpayer should be deemed as a normal transaction

[1] The legislative purport of Article 42(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 9916, Jan. 1, 2010; hereinafter “former Inheritance Tax Act”) that requires a transaction partner to levy gift tax on the gains from the acquisition of preemptive rights and the exercise of such rights in an abnormal manner is to cope with variable donation acts and promote fair taxation. However, it is an exceptional reason to allow a transaction partner to gain gift from the said transaction by giving up an opportunity to gain benefits generally and easily. Thus, Article 42(3) of the former Inheritance Tax and Gift Tax Act provides that where a transaction partner does not have any special relationship, unlike those arising from a transaction between unrelated parties, to obtain benefits from the acquisition of preemptive rights and the exercise of such preemptive rights, and thus, the transaction partner does not have any reasonable ground to believe that there is no reasonable ground to believe that the transaction partner should have an adequate exchange value, or that there is no reasonable ground to believe that there exists an objective transaction terms and conditions between the transaction partner and the transaction partner’s legitimate and reasonable opportunity under the former Tax Act.

[2] In an administrative litigation seeking revocation on the grounds of illegality of taxation, the tax authority bears the burden of proving the legality of taxation disposition and the existence of a taxation requirement fact. Thus, in the transaction between unrelated parties, the burden of proving that there is no justifiable ground for the transaction practice under Article 42(3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 9916, Jan. 1, 2010) is the principle by the tax authority. However, if the tax authority is a reasonable economy, it can prove that there is no justifiable ground for the transaction practice by submitting the data on the objective circumstance, etc. that the transaction did not have been traded under such conditions as at the time of the transaction. If it is proved to a considerable extent, it is necessary to prove that there is a special reason that a taxpayer could easily submit specific data on the transaction circumstance, the reason for determining the transaction conditions, etc. in light of the difficulty of proof or the concept of fairness.

[1] Article 42(1)3 and (3) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 9916, Jan. 1, 2010) / [2] Article 42(3) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 9916, Jan. 1, 2010)

[2] Supreme Court Decision 2011Du22075 Decided December 22, 2011 (Gong2012Sang, 194)

Plaintiff (Law Firm LLC, Attorneys Kang Han-hun et al., Counsel for the plaintiff-appellant)

[Defendant-Appellee] The Head of Si/Gun/Gu Office (Attorney Lee Jae-in et al., Counsel for defendant-appellee)

Busan High Court Decision 2013Nu1355 decided October 25, 2013

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

The grounds of appeal are examined.

1. Article 42(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 916, Jan. 1, 2010; hereinafter “Gift”) provides, “In cases where profits falling under any of the following subparagraphs, other than donations under Articles 33 through 41, 41-3 through 41-5, 44, and 45, have been acquired above a certain standard as prescribed by the Presidential Decree, such profits shall be deemed the value of the property donated to the person who has acquired such profits.” Article 42(1)3 provides, “In cases where profits have been acquired above such standard as prescribed by the Presidential Decree, such profits shall be deemed the value of the property donated to the person who has acquired the said profits.”

Meanwhile, Article 42(3) of the Inheritance and Gift Tax Act provides that “Where it is deemed that there is a justifiable reason for transaction practice in the application of the provisions of paragraph (1), it shall not apply to persons other than the person having a special relationship.”

(4) On December 14, 2004, the lower court determined that the period for exercising preemptive rights was from January 14, 2005 to December 13, 201 when the non-party 2 and the non-party 3 corporation (hereinafter referred to as the " non-party 1") acquired 7.4 from the non-party 1 and the non-party 2's exercise price of the above 7.0-day warrant certificates, the non-party 2's exercise price of the non-party 1 and the non-party 2's exercise price of the non-party 1 and the non-party 2's exercise price of the non-party 1 and the non-party 2's exercise price of the non-party 1 and the non-party 3's exercise price of the non-party 2's exercise price of the non-party 4 and the non-party 2's exercise price of the non-party 1 and the non-party 2's exercise price of the non-party 2's exercise price

Furthermore, the lower court: (a) under the premise that the transaction between unrelated parties does not coincide with each other; (b) the fact that the price of the warrant certificates is much lower than the theoretical price less than the price derived from the date of acquisition of the warrant certificates was traded; (c) under the premise that there is no material to identify the specific relationship between the transferor, Nonparty 1, 2, and Mauck Fund, and the Plaintiff; and (d) if the price fluctuations in the relevant stocks occur until the new stocks acquired by the exercise of the preemptive rights are listed, the actual transaction price of the warrant certificates is likely to be much lower than the theoretical price; (c) the lower court determined that the U.S. shares fell from 725 won per share to 650 won per share on March 5, 2007, and that the Plaintiff’s sale of the new stocks purchased from the 2007 U.S. shares did not appear to have been justifiable in light of the theoretical principle that the Plaintiff acquired the warrant certificates from the perspective of 207 U.S. dollars to 2940.

3. However, it is difficult to accept such a determination by the lower court for the following reasons.

A. The legislative purport of Article 42(1) of the Inheritance and Gift Tax Act stipulating that gift tax shall be imposed on the profits earned by the other party to the transaction in cases where the transaction partner actually transfers profits from the acquisition and exercise of preemptive rights to the other party by abnormal means is to cope with variable donation acts and promote fairness in taxation. However, in the case of the transaction between the unrelated parties, not in conflict with the interests of the other party, allowing the other party to obtain gift profits while giving up opportunities to obtain such profits through the general and easy transaction. As such, Article 42(3) of the Inheritance and Gift Tax Act provides that unlike the interests arising from the transaction between the unrelated parties, if the transaction partner has a reasonable reason to believe that the transaction partner should obtain profits from the acquisition and exercise of preemptive rights, or if it is deemed that there is a justifiable reason for the other party to the transaction from the viewpoint of an economic person, such as where there is no reasonable reason to believe that the transaction partner would have made a transaction with the view of an objective transaction terms and conditions, such as where it is difficult to apply the objective transaction terms and conditions to the transaction partner, without any specific reason.

Meanwhile, in an administrative litigation seeking revocation of a taxation disposition on the grounds of illegality, the tax authority bears the burden of proving the legality of the taxation disposition and the existence of the taxation requirement fact. Thus, in the transaction between unrelated parties, the burden of proving that there is no justifiable ground for transaction practice under Article 42(3) of the Inheritance and Gift Tax Act is also the principle that the tax authority bears the burden of proving that there is no justifiable ground for transaction practice (see, e.g., Supreme Court Decision 2011Du22075, Dec. 22, 2011). However, if the tax authority is a reasonable economic person, it can be proven that there is no justifiable ground for transaction practice by submitting data on the objective circumstance that the transaction did not have been traded under such conditions as at the time of the transaction. If it is proved to a considerable extent, it is necessary to prove that there is a special circumstance that a taxpayer can easily submit specific data on the transaction circumstance, the reason for determining the transaction conditions, etc. in light of the difficulty of proof or the concept of fairness.

B. According to the reasoning of the judgment below, even if the transfer date of the warrant right of this case had already arrived at the time of the transfer of the warrant right of this case, and the Plaintiff could have exercised the preemptive right within six days from the date following the date when the Plaintiff purchased the warrant right of this case. Thus, it seems that there was no particular obstacle in determining the transaction price of the transferor Nonparty 1, 2, and Maurc Fund by exercising the preemptive right of this case by directly exercising the preemptive right of this case, and by taking due account of the anticipated interest, it seems that there was no particular obstacle in determining the transaction price. Since the transfer date of the non-party 1, 2, and Maurc Fund was all KOSDAQ-listed corporations, it is difficult to find a third party to purchase the stocks which were acquired within the number of days when the exercise date of the preemptive right of this case was freely traded on the KOSDAQ market. Therefore, as long as the transferor could have acquired the profits in a short period by directly exercising the preemptive right of this case by disposing of the new stocks,

In addition, according to the records, although there was a change to a certain degree in the price of the warrant right of this case at the time of the Plaintiff’s acquisition and exercise of the warrant right of this case, since the price of the warrant right of this case was temporarily lowered later, the price was restored to an original share price level within about 3,4 months after the temporary decline in the price. However, as at the time of transfer of the warrant right of this case, there was sufficient time to exercise the preemptive right when the period of exercise of the preemptive right of this case remains longer than 4 years, or when the price of the warrant right of this case is under the increase in the share price, there was a change to a certain degree in the price of the warrant right of this case at the time of its acquisition and exercise, barring special circumstances, such as that there was a situation where the price of the warrant right of this case has a fundamental impact on the value of the stocks of the SP and SPS, it is difficult to view that the parties to this case’s price was considerably lower than the theoretical price of the warrant of this case, and thus, there were no reasonable transactions between the Plaintiff and the transferor.

Furthermore, according to the reasoning of the judgment below, at the time of issuing the warrant certificates of this case, the Plaintiff’s father Nonparty 3 was the representative director of the Non-Party 3 and his specially related persons held 36.89% of the Non-Party 3’s shares of the Non-Party 4.18% of the Non-Party 3’s shares of the Non-Party 3’s shares of the Non-Party 3 and 44.18% of the Non-Party 1 and 2 were transferred after holding 522,450 shares of the Non-Party 3’s shares of the Non-Party 3, which were in a special relationship with the non-party 3 around 207. Thus, even if the above transferor and the Plaintiff did not have a direct relationship

In light of the aforementioned circumstances, in a case where the aforementioned transferor and the Plaintiff are a reasonable economy in which interests conflict with each other based on the evidence submitted by the Defendant, it can be deemed that the objective circumstance that the said transferor and the Plaintiff did not trade under the above terms and conditions as at the time of transfer of the instant warrant certificates has been proven to a considerable extent. Thus, barring special circumstances, barring any special circumstance, it is difficult to deem that the said transferor and the Plaintiff’s transaction constituted “justifiable cause in light of transaction practices” under Article 42(3) of the Inheritance and Gift Tax Act, and it cannot be concluded that the instant disposition is illegal disposition that failed to meet the taxation requirements unless the Plaintiff proves that there are special circumstances that the Plaintiff could easily submit specific materials concerning the transaction details of the instant warrant certificates, the reasons for determining transaction prices, etc., and the documents submitted by the Plaintiff cannot be deemed as sufficiently proven that such special circumstances exist. However, it is difficult to deem

C. Nevertheless, solely on the grounds indicated in its reasoning, the lower court determined that the instant disposition was unlawful on the ground that the transaction between the transferor and the Plaintiff was “justifiable cause in light of transaction practice.” In so doing, the lower court erred by misapprehending the legal doctrine on the burden of proof or the necessity of proof as to the existence of “justifiable cause in light of transaction practice” under Article 42(3) of the Inheritance and Gift Tax Act, thereby adversely affecting the conclusion of the judgment. The allegation in the grounds of appeal assigning this error

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 Ko Young-han (Presiding Justice)