The Home Homes Corporation (Attorney Lee Jae-chul et al., Counsel for the defendant-appellant)

Busan District Court Decision 200Hun-Ga46 delivered on September 1, 200

November 22, 2007

1. The plaintiff's claim is dismissed.

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

The Defendant’s disposition of imposition of dividend income amounting to KRW 2,482,837,640 against the Plaintiff on June 15, 2005 is revoked.

1. Details of the disposition;

A. On December 1983, the deceased non-party 1 (the deceased, May 13, 2007; hereinafter “the deceased”) transferred 4,450 non-listed shares issued by the Plaintiff at the time of the Plaintiff’s possession of KRW 13,643,00,00 to Nonparty 2’s welfare foundation (hereinafter “non-party 2’s welfare foundation”) on July 14, 2001, when working for the Plaintiff company as the production head of the Plaintiff company, such as boiler manufacturing company, and the brain disease (the outbreak on January 2, 2001) occurred as a sicker’s disease. On October 8, 2002, the deceased non-party 1 retired from the Plaintiff company as the managing director, and transferred 44,450 shares issued by the Plaintiff at the time of the Plaintiff’s issuance of the non-indicted 13,643,00,000 won (hereinafter “the shares in this case”). Nonparty 2, a social welfare foundation (hereinafter “non-party 2”).

B. Meanwhile, on November 15, 2002, the Plaintiff implemented the capital reduction procedure by voluntarily retiring the instant shares acquired as above.

C. On June 15, 2005, the Defendant decided and notified the Plaintiff of KRW 2,482,837,640 of the dividend income tax on the deceased in 2002 on the ground that the transfer of the deceased’s shares was part of the Plaintiff’s capital reduction procedure, and that the transfer margin constitutes the constructive dividend income as stipulated in Article 17(2) of the Income Tax Act (hereinafter “instant disposition”).

D. On July 29, 2005, the Plaintiff filed an appeal with the National Tax Tribunal on July 29, 2005, but was dismissed on October 26, 2006.

[Reasons for Recognition: Facts without dispute, Gap 1, 2, 4, 6 evidence, Eul 1, 5, and 6 evidence (including each number), the purport of the whole pleadings]

2. Whether the instant disposition is lawful

A. The parties' assertion

The defendant argues that the disposition of this case is lawful, since the plaintiff's acquisition of treasury stocks from the deceased was made as part of the procedure for capital reduction, it constitutes a constructive dividend for tax avoidance purpose. Accordingly, the plaintiff's transfer of treasury stocks is a separate act conducted without relation to the procedure for capital reduction due to the plaintiff's retirement of treasury stocks, and the transfer of treasury stocks to the non-party foundation is a mere transfer for the purpose of realization for the purpose of the capital contribution to the non-party foundation, and thus the disposition of this case, which is limited to the

(b) Related statutes;

Attached Form 2. The entry is as shown in Annex 2.

(c) Fact of recognition;

(1) After retirement from the Plaintiff Company, around June 2002, the Deceased delegated all matters concerning the purchase and sale of the instant shares and the contribution to the purchase and sale of shares to the incorporated foundation to be established in the future. However, around that time, the Plaintiff did not trade the instant shares. On June 18, 2002, the Plaintiff requested an identity accounting corporation to assess the Plaintiff’s shares. As of September 30, 2002, the appraised value per share of the non-listed shares issued by the Plaintiff was KRW 316,414.

(2) On October 7, 2002, the Plaintiff decided to hold a board of directors to purchase the instant shares at KRW 13,642,94,050 (the acquisition price per share). On October 8, 2002, the Plaintiff entered into a share purchase contract with the Deceased for the instant shares, and on the same day, entered into a transfer of the Plaintiff’s name for the instant shares, but did not pay the share purchase price.

(3) On November 14, 2002, the Plaintiff: (a) held a board of directors on November 14, 2002 and passed a resolution on the reduction of capital through the voluntary retirement of the instant shares pursuant to Article 438 of the Commercial Act; (b) held a temporary general meeting on November 15, 2002 and passed a special resolution thereon; and (c) on November 16, 2002, publicly announced the matters regarding the reduction of capital as above in the Economic Newspapers every day.

(4) On December 6, 2002, the Plaintiff deposited KRW 13,642,94,050 of the purchase price of the instant shares in a bank account opened under the name of the Deceased, as delegated by the Deceased, and completed the registration of change in the capital reduction on December 17, 2002.

(5) On December 3, 2002, the non-party foundation held a general meeting of promoters for the establishment of the Social Welfare Foundation, and completed the registration of incorporation on January 14, 2003, with the establishment permission obtained from the Minister of Health and Welfare on February 4, 2003, the representative of the non-party 3, who is the largest shareholder of the Plaintiff Company and the total number of the group of the Plaintiff Company and the non-party 10,320,818,600 won (at that time, the non-party 3 contributed its land, and the basic property of the non-party foundation is KRW 30,431,897,018).

(6) On December 6, 2002, the deceased newly prepared a sales contract for the share transfer date as of December 10, 2002, and reported and paid KRW 1,201,502,610 of the securities transaction tax on January 10, 2003, and capital gains tax on February 28, 2003, respectively. On February 14, 2003, the deceased’s bank account was withdrawn in KRW 12,253,000,000 of the remaining shares transfer price excluding each of the above tax amounts, and was contributed to the non-party foundation.

(7) Meanwhile, on March 10, 2004, Nonparty 8, the wife of Nonparty 3, was appointed as a new representative of Nonparty 3’s Foundation. The Plaintiff Company, as shown in attached Form 1, is both the husband and wife of his paternal blood relationship within the third degree of relationship, or the son and wife of his family, and the deceased is the external third village of Nonparty 8.

[Reasons for Recognition: Facts without dispute, Gap 3, 4, 6, 10 evidence, Eul 2, 3, 4, 5, 7 (including each number), the purport of the whole pleadings]

D. Determination

(1) Whether a sale of stocks constitutes a transfer of stocks which are assets transaction, or a retirement of stocks which are capital transaction or a refund of capital is to be determined based on the contents of the transaction and the intent of the parties concerned. However, under the substance over form principle, not simply depends on the contents or form of the contract in question, the entire process of the transaction should be actually identified and determined (see, e.g., Supreme Court Decisions 92Nu3786, Nov. 24, 1992; 2001Du6227, Dec. 26, 2002).

(2) According to Article 341-2(1) and (3) of the Commercial Act, the company may acquire its own shares within the scope not exceeding 10/100 of the total number of issued and outstanding shares by taking over the shares of the retired director or employee, etc., but at a reasonable time, dispose of them. The deceased requested the Plaintiff to purchase the shares of this case after the retirement of the Plaintiff and about 11 months. At the time, it was difficult to find the purchaser because the appraised value of the shares of this case was higher than 30,000 won, so it cannot be deemed that the Plaintiff acquired the shares of this case on the premise that the Plaintiff would resale the shares to a third party at a reasonable time, and thus, it cannot be deemed that the acquisition of the shares of this case constitutes the acquisition of treasury shares of the Plaintiff under Article 341-2 of the Commercial Act.

(3) around 1983, the Deceased acquired 500 shares of the Plaintiff Company (the face value of KRW 500) and sold 22,80 shares among them around 1984, but acquired 25,00 shares around 1986. January 1, 1986, the total shares became 6,070 shares as the value was changed from KRW 5,00 to KRW 5,000 per share, and the total shares were 38,380 shares issued without compensation around 192 and owned 44,450 shares (the number of shares issued by Nonparty 10, No. 200, No. 2200, No. 380, No. 2006). In light of the fact that the value of shares issued by the Deceased was 200,000 shares at the time of sale and purchase without compensation, it is difficult to conclude that the Plaintiff was 206,000,000 shares of the Plaintiff’s shares.

(4) After October 8, 2002, the Plaintiff completed the transfer of the title to the instant shares, on November 14, 2002, approximately one month after the date of the transfer, and on November 15, 2002, the board of directors and a special shareholders’ meeting were held to decide on the reduction of capital through the retirement of the instant shares. On December 3, 2002, the Plaintiff held a general meeting for the establishment of the non-party foundation on January 14, 2003 and completed the establishment registration on February 4, 2003, and carried out each procedure in extremely close order with the time to contribute to the non-party foundation the total amount of the instant shares other than each tax on February 14, 2003. If the deceased contributed to the non-party foundation, the non-party foundation may bear gift tax at the maximum tax rate of 50%, and if the Plaintiff makes a decision on the reduction of capital for consideration, the deceased’s maximum income tax rate of 36% can be assessed.

(5) The above circumstances and the relationship between the deceased and the plaintiff at the time of the transfer of the shares in this case, when determining the actual understanding of the whole process of the transaction, such as the parties' intent and the process of conclusion of the contract, the method of price determination, and the progress of transaction, etc., the acquisition and retirement of the shares in this case were conducted as part of a series of capital reduction procedures. The above recognition is insufficient to reverse, and there is no counter-proof, and since there is no counter-proof, the plaintiff acquired the shares in this case for the purpose of the retirement of shares as prescribed in Article 341 subparagraph 1 of the Commercial Act. Thus, the restriction on the transfer of shares in this case is legitimate.

3. Conclusion

Therefore, the plaintiff's claim of this case is without merit and it is so decided as per Disposition.

[Attachment 1]

Judges Shin Jin-ro (Presiding Judge) Lee Chang-soo