Cho High Court Decision 2010Da3675 (Law No. 29, 2011)

Objects of gift tax on stock listing marginal profits shall include free capital increase, etc.

It cannot be deemed that there was a justifiable reason not to mislead the violation of the duty to report and pay taxes on the sole ground that the taxable object of gift tax on the stock listing marginal profits includes capital increase without consideration, stock allocation, capital increase with consideration, and capital increase with consideration to a third party, and the tax investigation did not impose taxes on the new stocks with consideration.

2011Guhap4696 Revocation of Disposition of Imposition of Gift Tax

Nam

Head of Suwon Tax Office

May 18, 2012

June 1, 2012

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The imposition of gift tax of KRW 000 (including additional tax of KRW 000) imposed on the Plaintiff on July 1, 2010 shall be revoked.

1. Details of the disposition;

A. On December 1, 2004, the Plaintiff, who was an officer of XX (hereinafter referred to as the “instant company”), acquired 18,000 shares of the instant company, which were unlisted companies at the time when the Plaintiff was the largest shareholder of the instant company, pursuant to Article 41-3(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 9916, Jan. 1, 2010; hereinafter referred to as the “Inheritance Tax and Gift Tax Act”).

B. As the instant company conducted capital increase with capital increase on December 22, 2005, the Plaintiff acquired 4,500 shares that it owned (hereinafter “instant new shares”) in face value at KRW 000 per share.

C. Around January 2008, the Plaintiff’s shares increased to 2200 shares (i.e., the original acquisition shares + 4000 shares for the instant case) by dividing the company’s shares from 000 won per share to 000 won per share (i.e., the original acquisition shares + 180,000 shares for the instant case). Accordingly, the shares of the instant company were listed at the KOSDAQ on January 25, 2008.

D. The Busan Regional Tax Office conducted an integrated investigation with respect to the instant company from August 10, 2009 to September 30, 2009, and imposed gift tax on the Plaintiff on KRW 000 on the profits accrued from listing 18,000 shares originally acquired. However, the gift tax was not imposed on the profits accrued from listing 4,500 shares for the instant case.

E. On January 25, 2010, the Board of Audit and Inspection issued a request to audit the business affairs of the Busan Regional Tax Office to levy taxes on the benefits arising from the listing of the instant shares with compensation, and on July 1, 2010, the Defendant imposed a gift tax of KRW 000 (including additional tax of KRW 000) on the Plaintiff as the value of donated stocks (hereinafter “instant disposition”).

F. On September 17, 2010, the Plaintiff filed an appeal with the Tax Tribunal on the instant disposition, but the Tax Tribunal rendered a decision to dismiss the Plaintiff’s claim on June 29, 201.

[Ground of Stabilization] Facts without dispute, Gap evidence Nos. 1 through 4, Eul evidence Nos. 1 and 2, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1. The assertion that the listed marginal profits from stocks issued with capital increase are not subject to gift tax

A) The language and text of Article 41-3(6) of the Inheritance Tax and Gift Tax Act provides that “in the application of the provision of paragraph (1), new shares acquired through capital increase shall be included.” Since shares received through capital increase are not donated or received at a cost from the largest shareholder, it does not meet the requirements of paragraph (1), and thus, it does not constitute Article 41-3(6) of the same Act. If gift tax is imposed on the listed marginal profits from stocks acquired through capital increase on the ground

B) Meanwhile, even under the Commercial Act, shares issued with capital increase is an independent share separate from the original shares acquired, and is not a right attached to the previous shares. Therefore, the shares issued with capital increase cannot be deemed as subject to gift tax on the ground that they are subordinate interests of the previous shares acquired.

C) In addition, in calculating the listing marginal profit under Article 31-6(4) and (5) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, the amount calculated by multiplying the amount obtained by subtracting the value per share as of the date of donation from the date of the date of settlement of accounts by the number of shares issued, thereby calculating the increase in the value of shares from the date of donation to the date of listing, and calculating the listing marginal profit subject to taxation subtracting this amount from the increase in the value of shares, considering the net value of the company from the date of listing to the date of listing as the actual value of the company. The above provision does not fully consider the change in the actual value of the company’s capital increase based on the premise that only the shares received without compensation, which do not change the real value, are included in the calculation of the listing marginal profit. Therefore, the shares

D) It is possible to issue capital increase to shareholders in addition to the shareholder allocation method and the third party allocation method. It is unreasonable to interpret that gift tax is imposed only when capital increase is made through the shareholder allocation method and that taxation is not imposed in cases where capital increase is made through the third party allocation method with the same effect.

E) In cases of interpreting that the listed marginal profits are included in the listing marginal profits of stocks that are subject to the gift tax under Article 41-3(1) and (6) of the Inheritance Tax and Gift Tax Act, (1) of Article 41-3(6) of the Inheritance Tax and Gift Tax Act imposes gift tax on the stocks that are paid for and acquired as consideration on the corporation; (2) this is irrelevant to the legislative purpose of Article 41-3(1) through (3) of the Inheritance Tax and Gift Tax Act, which seeks to achieve balance in taxation by imposing taxes on profits accruing from listing; and (3) as such, it violates the principle of excessive prohibition under the Constitution by infringing on the appropriateness of means, minimum damages, and balance of legal interests, and (4) as such, it can be seen that the amount of gift tax is more than five years after the date when the first largest shareholder received stocks from the date of taxation; and (4) as such, it is reasonable to interpret that the gift tax is imposed on the stocks that are subject to the gift tax, regardless of the legal stability and predictability of the amount of gift tax, and to be imposed on the gift tax without consideration.

Therefore, in light of the interpretation of Article 41-3(1) and (6) of the Inheritance Tax and Gift Tax Act, the pertinent disposition imposing gift tax on the exchange marginal profits of new stocks with consideration is unlawful, since the exchange marginal profits of new stocks with consideration are not included in the subject of gift tax.

2) The assertion that there are grounds for not imposing additional tax

Even if the listing marginal profit of the stock with consideration is subject to gift tax, the Defendant imposed tax pursuant to the opinion of the Board of Audit and Inspection after being pointed out by the Board of Audit and Inspection even though it was conducted a tax investigation on August 10, 2009 on the stock exchange marginal profit of the stock with consideration, and whether to impose gift tax on the stock exchange marginal profit of the stock with consideration to be paid with consideration constitutes a conflict of opinion under the tax law among the tax authorities. Therefore, since the Plaintiff cannot expect the return and payment of gift tax on the premise that it is subject to taxation from the beginning, the Plaintiff’s failure to pay gift tax is deemed to have a justifiable reason, and thus, the part of penalty tax in the instant disposition is unlawful. Even if there is no justifiable reason due to the comparison of opinion under the interpretation of the Family Tax Act, the Defendant notified the wrong tax investigation result that the Plaintiff is not subject to gift tax on August 10, 2009. Since the failure of the Plaintiff to pay the presumed tax after the notice was entirely due to the Defendant’s wrong tax investigation result, it is unlawful to impose penalty tax imposed on the Plaintiff.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) The legislative intent of Article 41-3 of the Inheritance Tax and Gift Tax Act is to determine that stocks issued with capital increase are not subject to gift tax. Since the amendment is a provision newly established on December 18, 2002 through an amendment, the legislative purpose of Article 41-3 of the Inheritance Tax and Gift Tax Act is to enable a special person with special interest, such as his/her children, to obtain enormous market value profits arising from the listing of the Korea Securities and Exchange (referring to the listing of stocks listed on the securities market or the KOSDAQ market) by using internal information that is not open to the public regarding the management of the company, and furthermore, when the largest shareholder, etc. donated non-listed stocks or transferred stocks to a special person, such as his/her children, etc. through taxation on the listing profits, thereby imposing a gift tax on the profits increased by the listing of stocks per se in order to prevent an irregular and irregular manner of taxation or transfer thereof, the amendment seems to have not been subject to gift tax even if the former amendment was made to enable the person with special interest to use additional stocks as a means of taxation (see Article 14).

B) In addition, the language and text of Article 41-3(6) of the Inheritance Tax and Gift Tax Act merely provides that “the acquisition of stocks shall include new stocks that a corporation issues in order to increase its capital (including the amount of investments).” It does not distinguish whether the new stocks are capital increase or capital increase without compensation, and whether it is a shareholder allocation or a third party allocation even with respect to capital increase or capital increase. Therefore, according to the language and text of the above provision, it is interpreted that the scope of “acquisition of stocks, etc.” is included in both capital increase or capital increase, capital increase, or capital increase, and capital increase, which are paid to a third party. In addition, the language and text of the above provision also stipulates that the scope of “acquisition of stocks, etc.” does not extend among the requirements of Article 41-3(1) of the same Act. Accordingly, it cannot be deemed that the same provision only provides for capital increase for capital increase without compensation, which is the same as the original shares divided.

C) Meanwhile, as alleged by the Plaintiff, Article 41-3(6) of the Inheritance Tax and Gift Tax Act applies only where new shares meet the requirements of Article 41-3(1) of the Inheritance Tax and Gift Tax Act, and where the same Article applies only where new shares are issued with the funds received from the largest shareholder, as the shares received without compensation from the relevant corporation are also acquired without compensation from the relevant corporation and thus, insofar as shares are not received from the largest shareholder or received with compensation from the relevant corporation, it would result in unreasonable consequences not meeting the requirements of Article 41-3(1) of the Inheritance Tax and Gift Tax Act, and Article 41-3(6) of the Inheritance Tax and Gift Tax Act provides that "in applying Article 41-3(1) of the Inheritance Tax and Gift Tax Act, the acquisition of shares, etc. shall include new shares, etc. received by the corporation upon the issuance of new shares (i.e., the acquisition of shares by the corporation), and thus, the issuance of new shares shall be deemed as not being applied to the largest shareholder under Article 41-3(6).

D) In calculating the listing marginal profit under Article 31-6(4) and (5) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, the Plaintiff only calculates the listing marginal profit calculated by subtracting this amount from the increase in the company’s actual value by considering the company’s profit cumulative amount from the date of donation or the date of acquisition before the listing as the increase in the company’s actual value. It does not consider the change in the company’s real value. Thus, it is alleged that it is premised on the premise that the stocks acquired as the underlying beneficiary under Article 41-3(6) of the Inheritance Tax and Gift Tax Act are not included in the stocks acquired as the underlying beneficiary under Article 31-6(5) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, but Article 10-4(1) of the Enforcement Rule of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 74 of Apr. 23, 2009) provides that the net profit per share should be calculated as the amount of net profit acquired for the purpose of unlisted stock.

E) As seen earlier, Article 41-3 of the Inheritance Tax and Gift Tax Act provides that, for the purpose of obtaining large profits from the listing of stocks, etc. by using internal information on the company, where the largest shareholder, etc. donated unlisted stocks to a specially related person prior to listing or transfers them for price, etc., the largest shareholder is subject to taxation by allocating profits from listing, not only the stocks itself, but also the stocks donated by the largest shareholder. In such a sense, Article 41-3 of the Inheritance Tax and Gift Tax Act provides that, even if new stocks are acquired for price by paying the price for stocks received, the price is merely the price for stocks itself, but not the price for creative gains. In addition, where a specially related person, such as the largest shareholder, etc., who is in a position to use information that is not disclosed on the company’s management, etc. obtained listed stocks more than the standard prescribed by the Enforcement Decree of the Inheritance Tax and Gift Tax Act, and the taxation on the listing profits is imposed, where both the largest shareholder, etc., who received donations or stocks with capital increase without compensation, and received them directly from the largest shareholder.

Meanwhile, Article 41-3 subparag. 1 of the Inheritance Tax and Gift Tax Act limits the scope of donee's specially related persons such as the largest shareholder who is in the position to use information that is not open to the public in relation to the company's business management, etc., and limits the scope of listing marginal profits subject to taxation to be above the standard prescribed in Article 31-6 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, and limits the listing of stocks to five years in consideration of the reality that the period of two to three years is required in preparation for

Therefore, the provision on the inclusion of new shares received as a result of the reason of Article 41-3(6) of the Inheritance Tax and Gift Tax Act does not violate the principle of excessive prohibition or the principle of equality.

F) The taxation requirement under Article 41-3 of the Inheritance Tax and Gift Tax Act provides that ① a person having a special relationship with the largest shareholder, etc. of an unlisted corporation shall either donate or acquire stocks of the unlisted corporation from the largest shareholder, etc. or obtain new stocks for consideration; ② the relevant stocks shall be listed within five years from the date of donation or acquisition; ③ the relevant stocks shall be gain more than the standard prescribed in Article 31-6 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act due to an increase in the value of stocks under the listing. Therefore, all taxation requirements shall be satisfied at the expense when the stocks are listed. As such, Article 41-3(2) of the Inheritance Tax and Gift Tax Act provides that the listed gains shall be calculated on the basis of the settlement base date at the time when the stocks are listed, it shall be possible to predict the value of donated assets and the amount

In addition, Article 41-3(1) of the Inheritance Tax and Gift Tax Act provides that the gift tax shall be imposed by calculating the profits acquired by the listing under Article 31-6 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act in case of the taxation of the gift tax on the profits accruing from the listing. However, Article 41-3(3) of the Inheritance Tax and Gift Tax Act provides that the person who gains from the listing shall calculate the tax base and tax amount of the gift tax by adding the profits to the original taxable value of the gift tax shall be imposed. It is merely that Article 41-3(3) of the Inheritance Tax and Gift Tax Act provides that the issue of the gift tax on the stocks itself and the gift tax on the profits accruing from the listing of the stocks concerned shall be imposed in addition to the original taxable value of the gift tax, and it shall not be deemed that Article 41-3(6) of the Inheritance Tax and Gift Tax Act provides that the taxation of the gift tax on the stocks itself shall not be deemed to violate the taxation requirement principle

G) In addition, Article 41-3 of the Inheritance Tax and Gift Tax Act, unlike the donation of a different kind of property, is subject to the taxation of profits derived from the listing, rather than the donation of a different kind of property, and thus, the size of such profits can be assessed properly only after the listing is actually completed. Therefore, it cannot be deemed that there is a discrimination against the case of donation of

H) Therefore, in light of the legislative intent and contents of Article 41-3 of the Inheritance Tax and Gift Tax Act, the new shares under Article 41-3(6) of the Inheritance Tax and Gift Tax Act include new shares resulting from capital increase with consideration. Such interpretation cannot be deemed as contrary to the principle of excessive prohibition, the principle of clarity of taxation requirements, the principle of tax equality and the principle of ability to pay. Thus, the Plaintiff’s assertion on this part

2) Determination as to the allegation that the imposition of penalty tax is illegal

A) In order to facilitate the exercise of taxation rights and the realization of tax claims, additional tax under the tax law is an administrative sanction imposed under the conditions as prescribed by the individual tax law in cases where a taxpayer violates various obligations, such as a return and tax payment, without justifiable grounds, and it is unreasonable for the taxpayer to be aware of such obligations, and thus, it is unreasonable for him/her to be reasonably present or to expect the performance of his/her obligations to the party concerned, and in cases where there are justifiable grounds that make it unreasonable for him/her to be aware of such obligations, such imposition may change (see Supreme Court Decision 2003Du4089, Apr. 15, 2005).

B) From August 10, 2009 to September 30, 2009, the Busan Regional Tax Office imposed gift tax on the profits from listing of the originally issued stocks after conducting a tax investigation with respect to the non-party company, while it did not impose gift tax on the profits from listing of the original issued stocks. However, as seen earlier, the following circumstances, which are acknowledged as comprehensively considering the overall purport of arguments in the statement in subparagraph 3, i.e., ① the “tax investigation case on stock change” distributed by the National Tax Service around March 2008, which is the case of taxation on the listed stocks: (i) the Plaintiff did not appear to have any justifiable reason to view that the Plaintiff did not have any justifiable reason to impose gift tax on the non-party company by failing to review the above case collection; and (ii) the above public official did not appear to have any reason to view that the Plaintiff did not have any justifiable reason to impose gift tax on the newly issued stocks.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.