[1] The purpose of deeming the title trust or delayed transfer of title under Article 41-2(1) of the former Inheritance Tax and Gift Tax Act as the donation, and the method of interpreting the relevant statutes

[2] In case where shares are inherited due to the death of a title truster after a title truster becomes a title truster due to a title trust, whether the provision on constructive gift for transfer of title, which is the second general title, is applicable under Article 41-2(1) of the former Inheritance Tax and Gift Tax Act (negative)

[1] Inasmuch as title trust is deemed to have been deemed to have been donated under Article 41-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003), deeming that the title trust was a donation or delayed transfer of title is deemed to have been delayed is identical to the substance and name of the property possession, and to impose gift tax without the substance of the donation in order to achieve policy objectives such as preventing tax avoidance. This is subject to the imposition of gift tax regardless of the existence of an act or fact, which is the fundamental basis for the imposition of tax, and thus, the interpretation of analogical interpretation or expanded interpretation should be strictly avoided in interpreting and applying the relevant statutes.

[2] According to Article 41-2(1)(hereinafter “the provision of this case”) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; hereinafter “former Inheritance and Gift Tax Act”), where a transferee of stocks fails to transfer for a long time, the primary taxpayer of gift tax is the transferor who is in the position of the title trustee. However, if the provision of this provision is applied, it can be deemed that the transferor of stocks directly participated in the formation of the same appearance as the title trust due to the neglect of transfer of title, and thus, it is difficult to view that the presumption of tax avoidance purpose is reversed by reporting the tax base, etc. of capital gains tax or ownership change of the title trustee pursuant to the proviso of Article 41-2(2) of the former Inheritance and Gift Tax Act, and thus, the title trustee does not have any legal relationship between the transfer agent and the transfer agent’s acquisition of real estate under title trust and the transfer of ownership for a certain period of time after the first date of transfer of title trust (the provision of title trust).

[1] Article 41-2(1) and (2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; see current Article 45-2(1) and (2) (see current Article 45-2(3)); Article 9 of the Addenda to the Inheritance Tax and Gift Tax Act (amended by Act No. 681, Dec. 18, 2002); Article 41-2(1) and (2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; see current Article 45-2(3)); Article 10 of the Act on Special Measures for the Registration of Real Estate under Actual Titleholder’s Name; Article 2(1) of the Real Estate Registration Act

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

The Head of Gangnam District Tax Office and 14 others (Law Firm Governing Province, Attorneys Cho Byung-hwa et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2013Nu45722 decided September 26, 2014

All appeals are dismissed. The costs of appeal are assessed against the Defendants.

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

1. Article 41-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 203; hereinafter “former Inheritance and Gift Tax Act”) provides that “where the actual owner and title holder are different from the property (excluding land and buildings; hereinafter in this Article the same shall apply), the value of the property shall be deemed donated to the actual owner on the date when the ownership is registered, etc. as the title holder (where such property is subject to transfer, referring to the date following the end of the year following the date on which the acquisition date of ownership is included) on the date when the transfer of ownership is registered as the title holder, notwithstanding Article 14 of the Framework Act on National Taxes.” (hereinafter referred to as “instant provision”. This is also subject to the second provision providing that “Where the ownership transfer of real estate is deemed donated in the name of title holder during the first year after the date on which the transfer of ownership is deemed donated, the following provision regarding property shall be deemed to belong to the title holder.”

Meanwhile, Article 9 of the Addenda to the former Inheritance and Gift Tax Act (amended by Act No. 6780, Dec. 18, 2002) stipulates that “Transitional Measures on Title Trust Property” is “Transitional Measures on Title Trust Property” and that ownership shall be acquired prior to the enforcement date of the amended Act, and ownership shall be deemed to have been acquired on the date of enforcement of the Act with respect to the portion for which the transfer of ownership is not made as of the enforcement date ( January 1, 2003). Accordingly, in the case of a property already trusted prior to the amendment, ownership shall be deemed to have been acquired on January 1, 2003. Therefore, it was stipulated that a transfer of ownership shall be made by December 31, 2004,

In addition, Article 41-2 (2) of the former Inheritance and Gift Tax Act provides that "where property has been registered, etc. in the name of another person, and a transfer has not been made in the name of the actual owner, it shall be presumed that there is a tax avoidance purpose: Provided, That this shall not apply to the case where the transferor files a report on the change of ownership along with a report under Articles 105 and 110 of the Income Tax Act or a report under Article 10 of the Securities Transaction Tax

As seen above, deeming the title trust as a donation or delaying the change of title to be deemed a donation under the instant provision, imposing gift tax in the absence of the substance of the donation for the purpose of achieving policy goals, such as consistent with the substance and name of the property possession, and preventing tax avoidance, etc. As such, the said gift tax is imposed regardless of the existence of an act or fact, which is the fundamental basis for the imposition of tax, and thus, ought to be strictly avoided in interpreting and applying the relevant statutes.

2. Review of the reasoning of the lower judgment and the record reveals the following facts.

1) From December 27, 1975, Nonparty 1, the president of ○○ Group, the father of the Plaintiff, title trusted 133,265 shares of ○○ Industry Co., Ltd. (hereinafter “instant shares”) to 23 persons, including Nonparty 2, the vice president of ○○ Group, etc. (hereinafter “instant shares”).

2) Nonparty 1 died on November 2, 1996, and the Plaintiff inherited the instant shares, the Plaintiff maintained the name of the existing title trustee without changing the title by December 31, 2004, a transfer period under Article 9 of the Addenda of the former Inheritance and Gift Tax Act (amended by Act No. 6780, Dec. 18, 2002).

3) Accordingly, the Defendants imposed gift tax pursuant to the instant provision on Nonparty 2, etc., the title trustee, and imposed the same gift tax on the Plaintiff, deeming that the Plaintiff had a joint and several tax liability as a title truster.

4) The Defendants cited the provision on deemed donation of title trust among the instant provision, and primarily asserted the provision on deemed donation of title trust and Article 9 of the Addenda thereto.

3. First of all, we examine whether the provision on deemed donation of title trust among the instant provision regarding title trust of the instant shares can be applied (ground of appeal Nos. 1 and 2).

According to the reasoning of the judgment below, in order to apply the provision on the constructive gift of title trust among the instant provision, the court below rejected the Defendants’ assertion that the provision on the constructive gift of title trust becomes a lawful provision on the instant disposition on the ground that there exists an agreement on the constructive gift of title trust between the actual owner of the instant shares and the existing title trustee, and that there is no evidence to acknowledge that there was no agreement on the title trust between the Plaintiff and

Inasmuch as the recognition of facts and the selection and evaluation of evidence, which form the basis thereof, are contrary to logical and empirical rules and do not deviate from the bounds of the principle of free evaluation of evidence, the fact-finding court belongs to the exclusive authority of the fact-finding court. Moreover, the title trustee did not raise any objection against the inheritance of the title truster who has held the shares in title trust without changing the title holder, and the heir’s exercise of shareholders’ rights based on the shares in title trust cannot be the basis for imposing a new gift tax on the title trustee, and such circumstance alone cannot be presumed to have led to an agreement establishing a new title trust relationship between the heir and the title trustee. Therefore, the lower court is justifiable in so determining, contrary to what is alleged in the grounds of appeal, to the effect that the provision on the constructive gift in title trust cannot be applied. In so doing, the lower

4. Next, we examine whether the provision on deemed donation of transfer of title among the instant provision can be a legitimate legal basis for the instant disposition (ground of appeal No. 3).

1) The provision on deemed donation of transfer of title stipulates that, in a case where a person who acquired stocks fails to transfer the ownership for a long time and thereby becomes invalid as a result of the former owner’s trust, unless the purpose of tax avoidance is denied, the provision on deemed donation of title is the same as the case where the title trust agreement was reached, insofar as the purpose of tax avoidance is not denied. This is an exceptional provision that stipulates that a person who acquired stocks is subject to deemed donation even if there is no agreement on the application of the provision on deemed donation of title trust, which is the requirement for the application of the provision on deemed donation of title trust, and imposes an obligation to transfer the ownership within a certain period of time on the person who acquired the stocks, and if so, the other party is treated as a title trustee and

In light of the language and text of the aforementioned provision and the system, in a case where a transferee of stocks does not change a title for a long time, the primary taxpayer of gift tax is the transferor in the position of the title trustee upon the application of the provision. However, the transferor of stocks can be deemed to have directly involved in the formation of appearance such as the title trust due to the neglect of transfer of title. Furthermore, the presumption of tax avoidance purpose can be reversed by reporting the tax base, etc. of capital gains tax or securities transaction tax pursuant to the proviso of Article 41-2(2) of the former Inheritance and Gift Tax Act, thereby getting out of the subject of deemed donation. On the other hand, in a case where the transferred stocks are inherited, the existing title trustee is already subject to the provision on deemed donation of real estate under title trust on the initial date of transfer of title, and it is reasonable to deem that the transfer of real estate was not subject to a legal act to form legal relations, beyond automatic succession of the title trust relationship between the title trustee and the heir, and that there is no means to enforce transfer of ownership by the title trustee itself in the future.

2) Examining the factual relations as seen earlier in light of the aforementioned legal principles, even if Nonparty 1, the title truster of the instant shares, died, and the Plaintiff, the heir, did not complete the change of ownership of the instant shares within the transfer period under Article 9 of the Addenda of the former Inheritance and Gift Tax Act, it cannot be deemed as subject to the provision on deemed donation of gift of transfer of ownership.

Although the lower court’s explanation of this part of its reasoning is somewhat inappropriate, the conclusion that the instant disposition was unlawful is justifiable. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on the scope of application of the provision

5. Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kwon Soon-il (Presiding Justice)