The date of donation which serves as the basis for calculating profits in relation to “the deemed donation based on the person who has received a gift” under Article 39 of the former Inheritance Tax and Gift Tax Act (=the date of payment

In order to calculate the profit gained by the underwriter of new stocks in the “the deemed donation based on the person who has acquired the new stocks” under Article 39 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003), the evaluation base date of the stocks before the capital increase refers to the “the date of donation” under Article 60(1) of the former Inheritance Tax and Gift Tax Act, and the “the date of donation” refers to the date when the ownership of the right becomes final and conclusive, i.e. the date of acquisition of donated property. In full view of the relevant provisions of the former Inheritance Tax and Gift Tax Act and the contents of Article 423(1) of the Commercial Act, the time of acquisition of the stocks, which is the date of donation, which serves as the basis for calculating the profit in the above deemed donation, refers to the date of capital increase.

Articles 39(1)1(c), 60(1), and 63(1)1 of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 7010, Dec. 30, 2003); Articles 23, 29(3)1, and 52-2 subparag. 2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 17828, Dec. 30, 2002);

Plaintiff 1 and 26 others (Seo Law Firm, Attorneys Nam-gi et al., Counsel for the plaintiff-appellant)

Head of Gangnam District Tax Office and 12 others

Seoul Criminal Administration Act (Law No. 2006Guhap2749 delivered on June 20, 2006)

March 14, 2007

1. All appeals filed by the plaintiffs are dismissed.

2. The costs of appeal are assessed against the Plaintiffs.

The judgment of the court of first instance is revoked. Each disposition of imposition on the plaintiffs in the separate sheet of imposition shall be revoked.

1. Details of the disposition;

The following facts may be acknowledged, either in dispute between the parties or in full view of the contents of Gap evidence 1-1-27, Eul evidence 2-1-24, Eul evidence 1-1-27, Eul evidence 2-1-2, Eul evidence 2-1-2, 2-3, and the whole purport of pleadings:

A. On April 25, 2001, Dong New Esti Co., Ltd. (hereinafter “Dong New Esti”) opened a board of directors on April 25, 2001, and resolved to issue new shares 13,935,540 shares (hereinafter “instant shares”) to 36 persons, including the Plaintiffs, at the 1,700 won per share (the amount calculated by taking an arithmetic mean of the average of the monthly closing price per month, the average closing price per week per week, and the recent closing price per week from the day immediately before the date of the resolution of the board of directors pursuant to Article 57(2)3 and (4) 3 of the Regulations on the Issuance, Public Disclosure, etc. of Securities).

B. On May 16, 2001, the plaintiffs acquired the corresponding part of the shares of this case by exchanging the shares of this case on an equal amount with 402,54 shares of cyber pulse network (58,850 won per share, par value of 5,000 won) owned by each of them, and the shares of this case.

C. The defendants having jurisdiction over the domicile of the plaintiffs are deemed to have acquired the shares of this case at a price lower than the market price according to the results of a change in the shares of Dong New Esti x (the number of shares generated before the increase x the increase in the number of new shares x the increase in the number of shares) ± (the number of shares issued before the increase x the increase in the number of shares issued before the increase x the increase in the number of shares) ± (the number of shares issued before the increase x the increase in the number of shares issued before the increase x the increase in the number of shares) ± (the number of shares issued before the increase x the increase in the number of shares) 1,700 won per share and the average market price per share of Dong Esti 26 won per share from the date of the payment of the share price to the date preceding the payment date for the share price shall be deemed to have accrued to each of the plaintiffs in the list of shares to be subject to imposition of the same tax amount per 20 years or less."

D. On June 21, 2005, the plaintiffs filed a request with the National Tax Tribunal for a trial against the disposition of this case on June 21, 2005, but the National Tax Tribunal dismissed all the plaintiffs' claims on October 25, 2005.

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

(1) In calculating profits from the capital increase under the former Enforcement Decree of the Inheritance Tax Act, the Defendants’ average closing price per share from the date two months prior to the date of the payment of the stock price to the date of the payment of the stock price. However, the Plaintiffs are legally calculated by the resolution of the board of directors in accordance with the Securities and Exchange Act, the Securities and Exchange Act, and the provisions on the issuance and public disclosure of securities, and the Plaintiffs are aware that the stock price per share should be acquired according to the amount determined by the resolution of the board of directors. Therefore, considering the circumstances of unexpected changes from the date of the resolution of the board of directors by calculating the stock price per share before the date of the payment of the stock price, considering the assessment of the stock price per share as at the date of the resolution of the board of directors is against the principle of no taxation without law, as it is without predictability and legal stability. Therefore, the instant disposition of taxation based on the date of the

(2) In addition, the Defendants’ deeming the payment date of stock price as the base date for calculation of the assessment value per share before the capital increase is to prevent unlawful donation. Therefore, the Defendants’ intent of tax evasion or avoidance should be required. Thus, the instant disposition of taxation that is based on the assessment value per share before the capital increase is unlawful (the Plaintiffs considered the Defendants as the base date for calculation of the assessment value per share before the capital increase on the grounds of Articles 39-01, 39-292 of the Inheritance Tax and Gift Tax Act, which is based on the general rules of the above general rules, as the Defendants considered the payment date of stock price as the base date for calculation of the assessment value per share before the capital increase. In addition, if there is no intention of tax evasion, it is null and void without any limitation on the above general rules of the above, and therefore, it is unlawful in view of the forms and contents of the above provisions of the relevant laws and regulations, but the above general rules of taxation are not related to the above internal administrative rules of the Defendants, and thus are not related to the legality of the pertinent imposition disposition of taxation.

B. Relevant statutes

Attached Form "Related Acts and subordinate statutes" shall be as stated.

(c) Markets:

(1) As to the legitimacy of the instant disposition, which is calculated by setting the base date for calculating the assessment value per share prior to the capital increase as the payment date of share capital

(A) According to Article 39(1)1(c) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; hereinafter “former Inheritance Tax Act”), where new stocks are issued by a corporation in order to increase its capital at a price lower than its market price, those who are not stockholders of the corporation concerned shall be deemed to have received a donation of the amount equivalent to the profits they gain by directly obtaining new stocks from the corporation. In Article 39(3) of the same Act, the method of calculating profits and other necessary matters shall be prescribed by the Presidential Decree. Article 29(3) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides for the method of calculating the above profits. Accordingly, the value of profits a person who has received new stocks shall be determined by ① [in case of issuing new stocks to increase its capital x the number of new stocks before increase x the number of new stocks before increase x the number of new stocks to be allocated) ± (in case of increase in the number of stocks per stock by the number of new stocks before increase) per stock increase.

In addition, Article 60(1) of the former Inheritance Tax Act provides that the value of the property on which inheritance tax or gift tax is levied shall be based on the market price as of the date of commencing the inheritance or donation ("date of appraisal"), and again, according to Article 63(1)1(a) and (b) of the former Enforcement Decree of the same Act, the method of appraisal of stocks of an Association-registered corporation prescribed by the Presidential Decree shall be determined by applying mutatis mutandis the method of appraisal of stocks traded with the Korea Stock Exchange for two months before and after the base date of appraisal to the average market price of the Korea Stock Exchange per day which is published every two months before and after the base date of appraisal: Provided, That where it is inappropriate to be based on the average amount due to a cause such as capital increase or merger, etc. during two months before and after the base date of appraisal, the average amount of the period calculated as prescribed by the Presidential Decree among two months before and after the base date of appraisal, and in case of capital increase or merger, etc. after the base date of appraisal under Article 52-2(2) of the former Enforcement Decree of the same Act, the same period shall be the average period

Accordingly, in order to calculate the benefits received by the Plaintiffs who acquired new shares, the “value per share before the person who acquired the shares” should be calculated first. Here, the standard date of appraisal of the shares before the capital increase shall be the “date of donation” pursuant to Article 60(1) of the former Inheritance Tax Act, and the “date of donation” shall be the date when the ownership of the rights is determined, i.e., the “date of acquisition of donated property”.

Furthermore, as otherwise alleged by the plaintiffs, when interpreting the acquisition time of shares, "the date of donation" as stated in this case, there may be unfair points that the person to whom new shares are allocated should bear the gift tax unexpectedly at the time of the resolution of the board of directors when the increase in the share price after the resolution of the board of directors or the public announcement date of the increase in the capital. However, in the above provisions of the former Inheritance Tax Act and Article 423 (1) of the Commercial Act, when the person who subscribed to new shares performs the payment or investment in kind, he/she has the right and duty as a shareholder from the following day of the due date. Article 23 (1) of the former Enforcement Decree of the Inheritance Tax Act does not directly apply to the case of deemed donation under Article 39 of the former Inheritance Tax Act, but Article 23 (2) of the former Enforcement Decree of the Inheritance Tax Act, which prescribes the time of acquisition of general donated property, where the donated property is shares or investment shares, it appears objectively confirmed that the donee has acquired shares on the date of receiving dividends or the exercise of shareholders' rights.

(B) As seen earlier, the Defendants’ computation of the market price of the instant shares based on the payment date of the shares is lawful as it is based on the interpretation of the relevant statutes (Article 39-01 of the General Rules of the Inheritance Tax and Gift Tax Act provides that “the case where the Defendants received the relevant profits” in Article 39(1) of the former Inheritance Tax and Gift Tax Act refers to the payment date of shares in the case of capital increase is merely a concrete interpretation of the aforementioned relevant statutes. Furthermore, the Enforcement Decree of the Inheritance Tax and Gift Tax Act amended by Presidential Decree No. 17828, Dec. 30, 202 explicitly states that the calculation of profits pursuant to Article 29(4) of the same Act shall be based on the payment date of shares shall be based on the payment date of shares). Accordingly, the Plaintiffs’ assertion that the Defendants’ calculation of the market price based on the payment date of shares violates the principle of no taxation without law

(C) Furthermore, even though 1,700 won per share of the acquisition price of the instant shares is legally calculated in accordance with the provisions on the issuance and public disclosure of securities, and the Plaintiffs did not have any awareness of the profits deemed donated by acquiring the shares as the price calculated as above, the above provisions merely stipulate certain restrictions on the standards, etc. for the issuance of new shares in order to ensure the fairness and transparency of the terms and conditions of issuance of new shares and the solicitation procedure for subscription, and Article 39(1) of the former Inheritance Tax Act does not require awareness of the profits deemed donated in its establishment by deeming the profits equivalent to the difference to be donated in the event shares are acquired at a price lower than the market price with the above provisions separate legislative purpose. Thus, the acquisition price of the instant shares was legally calculated in accordance with the relevant provisions, and thus, it cannot be calculated as the profits deemed as donated under the provisions of the former Inheritance Tax Act.

(2) Whether or not tax evasion or intent to avoid is required

The plaintiffs argued that the assessment value per share before the date of the payment for share capital is to prevent lawful donation, and thus there should be intent to evade or avoid such taxes. However, in order to prevent unlawful donation, the value of the property subject to inheritance tax or gift tax under Articles 60(1), 63(1)1(a) and (b) of the former Inheritance Tax Act, and Article 52-2(2) of the former Enforcement Decree of the Inheritance Tax Act shall be based on the market price as of the date of commencing the inheritance or donation (hereinafter “date of appraisal”). In determining the market price, stocks of the Association-registered corporation prescribed by the Presidential Decree shall be calculated on the basis of the average value of the shares of the Association-registered corporation after the date of appraisal in calculating the market price as of the date of the commencement of the inheritance, merger, etc., if any of the causes, such as the increase or merger, etc., occurs after the date of appraisal, it shall be calculated on the basis of “the date of payment for share” from the date two months before the date of appraisal on the donation date to the date.

3. Conclusion

Therefore, since the disposition of this case by the defendants is all lawful, the plaintiffs' claim is dismissed in its entirety as it is without merit, and the judgment of the court of first instance is just in its conclusion, and the plaintiffs' appeal is dismissed in its entirety as it is without merit. It is so decided as per Disposition.

Judges Cho Jong-jin (Presiding Judge)