[1] In a case where the income tax under the Income Tax Act is levied on a donee, or is exempted or reduced from income tax under Article 41-5(1) of the former Inheritance Tax and Gift Tax Act, as to the profits accruing from the merger and listing, which are donated property under Article 41-5(1) of the former Inheritance Tax and Gift Tax Act, whether the said income tax violates Article 2(2) of the former Inheritance Tax and Gift Tax Act or the proviso thereto (negative)

[2] The time when the liability to pay gift tax on the profits accruing from a merger or listing under Article 41-5(1) of the former Inheritance Tax and Gift Tax Act is established (=the time of donation or acquisition of stocks, etc.) and the reference date to determine whether the profits accruing from a merger or listing constitute donated property excluded from summing-up under the proviso of Article 47(1) and (2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003)

[1] Income tax on constructive dividend under Articles 17(1) and 17(2)4 of the former Income Tax Act (amended by Act No. 8144, Dec. 30, 2006) is imposed by deeming that the value of new stocks acquired by the stockholders of a extinguished corporation in lieu of the stocks of the extinguished corporation exceeds the acquisition value of the stocks of the extinguished corporation as dividends. However, even if the value of new stocks acquired in lieu of the stocks of the extinguished corporation under Articles 27(1)1(b) and 27(1)2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 20618, Feb. 22, 2008) does not exceed the acquisition value of the stocks of the extinguished corporation, if the value of the new stocks acquired in lieu of the stocks of the extinguished corporation does not exceed the acquisition value of the stocks of the extinguished corporation, it shall not be imposed on the acquisition value of the donated property under Article 163(10)5 of the former Enforcement Decree of the Income Tax Act or the gift Tax Act (amended by Act No. 15 of the former Tax Act).

[2] Article 47(1) and proviso of Article 47(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003, and amended by Act No. 8828 of Dec. 31, 2007, hereinafter “amended Inheritance Tax and Gift Tax Act”) stipulate that the value of donated property under Article 41-5(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003, hereinafter “the former Inheritance Tax and Gift Tax Act”) (amended by Act No. 7010 of Dec. 30, 2003, excluding the sum of donated property (hereinafter “the former Inheritance Tax and Gift Tax Act”) shall be newly established to exclude the sum of donated property under Article 41-5(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2007).

Article 41-5(1) of the former Inheritance and Gift Tax Act stipulating that gift tax shall be imposed on stocks, etc. listed in the former Inheritance and Gift Tax Act, in order to promote tax equality by imposing taxes prior to the transfer of stocks, etc. at the time of the donation or acquisition of stocks, etc., by considering the de facto gratuitously transferred stocks at the time of the donation or acquisition of stocks, etc., and such merged or listed profits shall be calculated based on the date of settlement, which comes three months from the date of listing the relevant stocks, etc.

However, unlike ordinary donations, it is difficult to determine a donor or distinguish the gratuitous transfer of a donor and the increase in the value of assets held by the same person, unlike the benefits accruing from the merger and listing of donated property under Article 41-5(1) of the former Inheritance Tax and Gift Tax Act, and there is also a low possibility of using them as a means to avoid progressive tax rates. Accordingly, it is not consistent with the purport of the comprehensive taxation of re-donations to prevent the reduction of accumulated tax amount due to the division donation by cumulative taxation of multiple donations received from the same person. Considering these circumstances, the amended Inheritance Tax and Gift Tax Act may be deemed to have determined as the exclusion of the profits accruing from listing the

In addition, the gift tax base and tax amount can be calculated only when it can be calculated on the basis of the date of settlement, and the deadline for reporting the assessment of the gift tax base is three months from the date of settlement (the proviso of Article 68(1) of the amended Inheritance Tax and Gift Tax Act). Since the comprehensive taxation of the second donation is to calculate the gift tax base, it is reasonable to determine whether the gain of listing the merger constitutes the property subject to exclusion from summing-up.

In full view of these legislative intent and background, and the nature of the provision on donated property exclusion, the proviso of Article 47(2) of the amended Inheritance and Gift Tax Act shall be applied so long as the date of settlement of the gift tax of the merged profits after the enforcement of the amended Inheritance and Gift Tax Act arrives.

[1] Article 17(1) and (2)4 of the former Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006), Article 27(1)1(b) and 2, and Article 163(10) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 20618 of Feb. 22, 2008), Articles 2(2) and 41-5(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003) / [2] Article 41-5(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003), Article 27(1)1(b) and 2, and Article 163(10) of the former Enforcement Decree of the Income Tax Act

Plaintiff 1 and two others (Attorneys Lee Jae-de et al., Counsel for the plaintiff-appellant)

The Head of Seongbuk-gu Tax Office and two others (Law Firm LLC, Attorneys Kang-gu et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2013Nu29911 decided June 24, 2015

All appeals are dismissed. The costs of appeal are assessed against each party.

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

1. Judgment on the plaintiffs' grounds of appeal

A. Regarding ground of appeal No. 1

(1) Article 41-5(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003; hereinafter “former Inheritance Tax Act”) provides, “Where a person with a special relationship with the largest shareholder, etc. has received stocks, etc. of the relevant corporation from the largest shareholder, etc. or has acquired stocks, etc. of another corporation with donated assets, etc. or has acquired stocks, etc. of the relevant corporation from a person other than the largest shareholder, etc. with the relevant corporation or another corporation with a special relationship with the relevant corporation or another corporation within 3 years from the date of donation of the stocks, etc., the increased value shall be deemed to have been donated if the person who received stocks, etc., or acquired with compensation, has acquired the profits above the standard prescribed by the Presidential Decree in excess of the initial taxable amount of gift or acquisition value of the relevant stocks, etc.” (However, as amended by Act No. 7010 of Dec. 30, 2003, the time of merger was extended to 5 years before the amendment.

In addition, Article 2(2) of the former Inheritance and Gift Tax Act provides that “When the income tax under the Income Tax Act is imposed on donated property, gift tax shall not be levied on the donee.” As the former Inheritance and Gift Tax Act was amended by Act No. 7010 on December 30, 2003, the proviso is newly established, and such provision provides that “In this case, the same shall also apply where income tax is non-taxable or reduced under the Income Tax Act, etc.”

Meanwhile, Articles 17(1) and 17(2)4 of the former Income Tax Act (amended by Act No. 8144, Dec. 30, 2006; hereinafter the same) stipulate that the total amount of the cost of the merger, such as the new stocks acquired by the stockholders of the merged corporation and the money, etc., exceeds the acquisition value of the stocks of the merged corporation as one of the dividend income in the case of the merger. In addition, regarding the calculation of the income of such fictitious dividend, Article 27(1)1(b) and 2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 20618, Feb. 22, 2008; hereinafter the same) stipulates that the calculation of the income of such fictitious dividend is required under Article 44(1)1(b) and 2 of the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009) and if the market price of new stocks of the merger exceeds the face value of the merger.

Article 17(1) and (2)4 of the former Income Tax Act provides that income tax shall not be imposed on the portion corresponding to donated property even if a donee sells new stocks through a merger in the future, by deeming that the value of the new stocks acquired in lieu of the stocks of an extinguished corporation exceeds the acquisition value of the stocks of the extinguished corporation as dividends. However, in calculating income based on Article 27(1)1(b) and 2 of the former Enforcement Decree of the Income Tax Act, if the value of new stocks through a merger does not exceed the acquisition value of the stocks of the extinguished corporation in accordance with the calculation of income by deeming the value of the merged stocks as the face value of the merged stocks to be the face value of the stocks of the extinguished corporation, no income tax shall be imposed on the newly issued stocks. Furthermore, Article 163(10) of the former Enforcement Decree of the Income Tax Act provides that capital gains tax shall not be imposed on the portion corresponding to the donated property even if the donee sells the new stocks through a merger in the future. Therefore, where income tax is not imposed on the portion of the donated property in this case.

(2) The lower court determined that the income tax was not imposed on donated property under the Income Tax Act because the Plaintiffs, who are the donee of the listed interest in the merger, did not have any income tax as a result of the merger, and did not fall under the case of non-taxation or reduction under the Income Tax Act. Such determination by the lower court is based on the legal doctrine as seen earlier, and it did not err by misapprehending the legal doctrine on the scope of application under Article 2(2) of the former Inheritance Tax Act, contrary to what is alleged in the grounds of appeal.

B. Regarding ground of appeal No. 2

The lower court did not err in interpreting the instant provision in violation of the principle of property rights guarantee under the Constitution, the principle of proportionality, the principle of equality, the principle of no taxation without representation, etc. (see Constitutional Court Order 2013Hun-Ba372, Mar. 31, 2016).

C. Regarding ground of appeal No. 3

The grounds of appeal on this part are that the judgment of the court below, which held otherwise, is unlawful, because the plaintiffs merely acquired the shares of this case with their own funds, etc., and did not receive shares acquisition funds, cash donation from the non-party. Thus, the judgment of the court below which held otherwise is just an error in the selection of evidence or fact-finding which belongs to the exclusive authority of the court below

2. Judgment on the Defendants’ grounds of appeal

A. Article 47(1) and proviso of Article 47(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; Act No. 8828, Dec. 31, 2007; hereinafter “Revised Inheritance Tax and Gift Tax Act”) provides that the said proviso shall exclude the value of the donated property pursuant to the provisions of the provisions of this case, etc. (hereinafter “ donated property excluded from aggregate”) from the aggregate amount of the donated property, and shall not apply to the donated property where the aggregate amount of the donated property received from the same person within ten years prior to the pertinent donated property exceeds 10,00 won.

The instant provision stipulating that gift tax shall be imposed on the combined or listed profits, in the purport of promoting tax equality by imposing taxes on the transferred stocks, etc. by free of charge before the realization is anticipated at the time of donation or acquisition of stocks, etc., and that such combined or listed profits shall be deemed as the value of the property actually gratuitously transferred at the time of donation or acquisition, and such combined or listed profits shall be calculated on the basis of the settlement base date for which three months elapse from the date of listing the relevant stocks, etc.

However, unlike general donations, it is difficult to determine a donor or distinguish gratuitous transfer of a donor and an increase in the value of assets held by the same person, and there is also a low possibility of using them as a means of avoiding progressive tax rates. Accordingly, it does not conform to the purport of comprehensive taxation of re-donations, which seeks to prevent the reduction of accumulated tax due to divisional donations by cumulative taxation of multiple donations received from the same person. Considering these circumstances, the amended Inheritance Tax and Gift Tax Act can be deemed to have determined the profits listed in the merger as donated property excluded from the aggregate of donated assets.

In addition, the gift tax base and tax amount can be calculated only when it can be calculated on the basis of the date of settlement, and the deadline for reporting the assessment of the gift tax base is three months from the date of settlement (the proviso of Article 68(1) of the amended Inheritance Tax and Gift Tax Act). Since the comprehensive taxation of the second donation is to calculate the gift tax base, it is reasonable to determine whether the gain of listing the merger constitutes the property subject to exclusion from summing-up.

In full view of these legislative intent and background, and the nature of the provision on donated property exclusion, the proviso of Article 47(2) of the amended Inheritance and Gift Tax Act shall be applied so long as the date of settlement of the gift tax of the merged profits after the enforcement of the amended Inheritance and Gift Tax Act arrives.

B. In light of the proviso of Article 47(2) of the amended Inheritance and Gift Tax Act, the lower court determined that: (a) deeming that the Plaintiffs’ profits listed in the merger constitute donated property excluding aggregate donation, the Defendants’ determination and notification of gift tax by adding up the profits derived from the existing donated property was unlawful. The lower court’s reasoning was partly inappropriate, but it did not err by misapprehending the legal doctrine on the scope of application under the proviso of Article 47(2) of the amended Inheritance and Gift Tax Act, contrary to

3. Conclusion

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

Justices Kim Jae-hyung (Presiding Justice)