Plaintiff 1 and seven others (Bae, Kim & Lee LLC, Attorneys Kang Sung-dae et al., Counsel for the plaintiff-appellant)

Head of the East District Tax Office and five others (Law Firm LLC, Attorneys Kim Jin-jo et al., Counsel for the plaintiff-appellant)

October 30, 2015

Seoul Administrative Court Decision 2014Guhap63190 decided March 5, 2015

1. Revocation of a judgment of the first instance;

2. All plaintiffs' claims are dismissed.

3. The costs of the lawsuit are assessed against the Plaintiffs.

1. Claim: To revoke all the disposition of imposition of the attached Form 1 against the Plaintiffs by the Defendants.

2. Purport of appeal: It is so ordered;

1. Details of the instant disposition

A. On December 20, 2007, a non-listed corporation (hereinafter “instant merger company”) merged didiho Lake Co., Ltd. (hereinafter “instant merger”), a non-listed corporation (hereinafter “instant merger”) and changed the name of the corporation to didiho Lake Co., Ltd. (hereinafter “instant merger”).

B. During the above merger, the merger ratio was determined as 0.4 shares of the instant merged company with the registered common shares of the instant merged company, and there was no separate payment of the merger subsidy or additional payment of the capital.

C. The Plaintiffs, as indicated below, hold 257,143 shares of the merged company of this case (hereinafter “the merged party”). As a result of the merger of this case, the Plaintiffs were allocated a total of 102,857 shares of the instant company (hereinafter “new shares of this case”) in lieu of the merger of this case pursuant to 0.4.

[Attachment]

Serial 1 25,000 Preferred to in the main sentence of the Plaintiff’s Schedule 1 25,000 Preferred to in the real name of the merged shares of the Plaintiff, 10,000 Preferred to in the main sentence, and 3325,000 Preferred to in the 29.225,000 Preferred to in the 208, Dec. 29, 2008; 30,000 Preferred to in the 75,00 Preferred to in the 30,00 Preferred Shares 4457,143 Preferred to in the 22,857 Preferred to in the 22,857 Preferred to in the 50,00 Preferred to in the 20,00 Preferred to in the 25,00 Preferred to in the 25,00 Preferred to in the 25,00 Preferred shares

D. On December 29, 2008, Plaintiffs 1, 2, and 3 (hereinafter “three persons, including Plaintiff 1”) reported and paid gift tax based on the title trust with respect to each of the 10,000 shares (total 30,000 shares) among the new shares of the instant merger that were received through the instant merger on December 29, 208, on the ground of the termination of the title trust, on the ground of the cancellation of the title trust. On the other hand, with respect to each of the 25,00 shares (total 75,00 shares) of the instant new shares of the instant merger that were nominal by Nonparty 1, the title trust was reported and paid.

E. From January 20, 2010 to April 1, 2010, the director of the Seoul Regional Tax Office determined that the instant company was under title trust with the Plaintiffs from 2004 to 2008 (hereinafter “the first investigation”), and applied Article 45(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “No. 4, 5, 8, 6, and 7”) to the Plaintiff (five including Plaintiff 4, Plaintiff 6, Plaintiff 7; hereinafter “Plaintiff 4”) with respect to the title of the trust property under the name of Article 45(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 828, Dec. 31, 2007; hereinafter “certificate”).

F. According to the above notification, the head of the regional tax office, the head of the regional tax office, the head of the regional tax office, the head of the regional tax office, the head of the Suwon District tax office, the head of the Suwon District tax office, and the head of the Samsung District tax office imposed gift tax on five (5) persons, including Plaintiff 4, etc., on the ground that the above plaintiffs were trusted in title by Nonparty 1. The five (5) persons, including Plaintiff 4, etc., paid gift tax accordingly, on December 31, 2010 when paying gift tax, 72,857 shares out of the new shares of the instant merger in their names (hereinafter “title transfer”) were converted into the real name (hereinafter “the title transfer”) in the name of Nonparty 1, three (3) including Plaintiff 1, and five (4) including Plaintiff 4, etc., prior to the conversion into the real name of Nonparty 1).

G. After November 2013, the director of the Seoul Regional Tax Office: (a) conducted an investigation of gift tax on the Plaintiffs (hereinafter “the second investigation”); and (b) determined that Nonparty 1, the Plaintiffs received as compensation for the instant merger district owner, separately from the instant merger district owner (hereinafter “second title trust”); (c) notified the Defendants of the determination and notification of gift tax to the Plaintiffs by applying the provision on constructive gift of title trust property under Article 45-2(1) of the Inheritance Tax and Gift Tax Act; and accordingly, (d) the Defendants imposed gift tax on the Plaintiffs as indicated in the attached disposition No. 1 (hereinafter “each disposition of this case”).

H. The Plaintiffs were dissatisfied with each of the instant dispositions and filed an appeal with the Tax Tribunal on January 9, 2014, but the Tax Tribunal dismissed the appeal on April 22, 2014, and filed the instant lawsuit on July 17, 2014.

[Reasons for Recognition] Unsatisfy, Gap evidence Nos. 1 through 8, Eul evidence Nos. 1, 2 and 7, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

(1) The assertion that the regulation on deemed donation of title trust property does not apply

The instant new shares for the instant merger are merely substitutes acquired in lieu of the instant merger owner due to the instant merger, and there is no new title trust, and there is no possibility of additional tax avoidance in addition to the possibility of tax avoidance following the title trust for the instant merger owner. In the instant merger, there is no possibility of avoidance of additional capital gains tax because it is a merger between unlisted corporations, different from the merger of the company that differs from the listing of the instant merger. Therefore, the instant new shares for the instant merger cannot be applied to the instant merger, and thus, each disposition of the instant case is unlawful.

(2) Claim for duplicate tax audit

Each disposition of this case is unlawful since it was conducted as a result of a tax investigation in violation of the prohibition of duplicate tax investigations.

B. Relevant statutes

Attached Form 2 shall be as listed in attached Table 2.

C. Determination

(1) Determination on the assertion that the provision on constructive gift of title trust property does not apply

(A) Relevant legal principles

Article 45-2 (1) of the Inheritance Tax and Gift Tax Act provides that "where the actual owner and the nominal owner are different from the property (excluding land and buildings) which requires a registration, etc. for the transfer or exercise of the right, the value of the property shall be deemed to have been donated to the actual owner by the nominal owner on the date when the registration, etc. is made to the nominal owner (where such property is the property requiring a transfer of title, it refers to the day following the end of the year following the year in which the date of acquisition of ownership falls), notwithstanding Article 14 of the Framework Act on National Taxes." This provision does not apply to "where the property is registered, etc. in another person's name without any purpose of avoidance of tax or where the actual owner who has acquired the ownership fails to make a transfer of title under the name of the actual owner and the nominal owner under an agreement or communication between the actual owner and the nominal owner, and thus, the purpose of legislation of the above provision is to effectively prevent the act of title trust (see Supreme Court Decision 2007Du15780, Feb. 14, 2008).

Meanwhile, the legislative purport of Article 45-2(1) of the Inheritance and Gift Tax Act is to recognize exceptions to the principle of substantial taxation by effectively preventing the act of tax avoidance using the title trust system, so the proviso of the same Article shall apply only if the purpose of the title trust is not included in the purpose of tax avoidance, and the taxes prescribed in the proviso shall not be limited to the gift tax, and the burden of proving that there was no purpose of tax avoidance in the title trust (see, e.g., Supreme Court Decision 2003Du13649, Dec. 23, 2004). Therefore, the burden of proving that there was no purpose of tax avoidance, other than the purpose of tax avoidance, can be proved by the method of proving that there was no purpose of tax avoidance. However, the nominal owner who bears the burden of proof was not related to the tax avoidance to the extent that there was no purpose of tax avoidance in the title trust, and there was no obvious purpose of tax avoidance in the future, and it shall not be proven to the extent that the owner has no ordinary doubt by objective and supporting evidence (see Supreme Court Decision 200202Du384.294.

(B) We examine whether the provision on deemed donation of title trust property can be applied to the instant new shares issued through the instant merger in light of the aforementioned legal principles.

1) Determination as to whether a new title trust exists

In full view of the following circumstances, the previous title trust relationship should be deemed to have been terminated at the same time due to the extinguishment of the merger price by merger. The existing title truster and the title trustee should be deemed to have committed a new title trust act by acquiring new stocks under the name of the title trustee under an agreement or communication. Therefore, it is reasonable to deem that there was a title trust act between the Plaintiffs and Nonparty 1 as to the new stocks through merger other than the instant merger agreement.

(1) In cases of a merger by absorption, the shares of the surviving company are allocated to the shareholders of the extinguished company. According to the merger ratio, where the number of shares of the surviving company allocated as in this case is reduced compared to the number of shares held by the shareholders of the extinguished company, shares may be combined in preparation for the allocation of shares and the procedures for the consolidation of shares shall apply mutatis mutandis at the time of capital reduction (Articles 530(3), 440 through 443 of the Commercial Act). In such cases, as the period for submission of old shares expires and the shares certificates are invalidated, the legal relationship arising from the title trust of the first trust shall naturally be extinguished due to the extinguishment of the merger district, which is the property of the first trust between the

② Furthermore, in the above merger procedure, the shareholder of the merged company is allocated the relevant new shares in accordance with the merger agreement. However, there is a means to escape from the merger, such as a special resolution of the general meeting of shareholders and the appraisal right of the opposing shareholder of the merger (Article 522-3 of the Commercial Act). The shareholder of the merger principal who does not exercise the appraisal right, like the comprehensive share swap, fails to exercise such right, thereby acquiring new shares through failure to exercise such right. Therefore, if the title trustee of the merger principal fails to take the procedure of real name conversion without exercising the appraisal right even though the merger procedure was under way, it should be deemed that there was an agreement or communication about the title truster’s separate title trust of the existing new shares after the merger trustee

(3) On the other hand, shares are shareholders' rights or shareholders' rights. The above rights to commend shares include rights to claim dividends and the right to claim dividends in addition to voting rights to participate in collective decision-making of a stock company. However, the voting rights, the right to claim dividends, the right to claim dividends, and the right to claim dividends, the right to claim dividends, and the right to claim dividends from the merged company arising from the merger shares are entirely different from the subject, contents, etc. of the right to claim dividends.

④ The acquisition of new shares and the acquisition of shares by one shareholder are equal to the property value of the surviving company’s new shares that are allocated to the surviving company for the purpose of the merger only when the merger ratio is fair. However, the rights given by one share owner of the previous merger are related to the net asset value of the extinguished company, and the rights given by one share owner of the new shares by the merger are presented all the net asset value of the extinguished company before the merger with the surviving company.

(5) The act of completing a title trust and transfer of title is different from the act of newly acquiring new shares for a new merger under the name of a title trustee after being allocated new shares for the principal of the merger without conversion of real name for the principal of the merger, with the proceeds of disposing of the principal of the merger.

④ Inasmuch as there exist new shares under a new title trust agreement with respect to the new shares for a merger without exercising a stock option in the merger procedure, and the acquisition price of the extinguished old shares for a merger procedure is the same as economic value, it cannot be deemed that two shares are legally identical, on the ground that there exist the same economic value.

7) The Plaintiffs asserted that, citing Supreme Court Decision 2008Du2330 Decided February 10, 201, new shares of a surviving company or a newly incorporated company cannot be subject to a new title trust to the effect that the new shares of a merger are merely a substitute for the principle of merger. However, the above judgment is not a direct precedent as to whether the difference may be included in deductible expenses in calculating the income amount of the pertinent business year, where the market price of the shares of the surviving company or the newly incorporated company falls short of the acquisition price of shares of the merged company.

2) Determination on the purpose of tax avoidance

A) We examine whether the Plaintiffs and Nonparty 1 had the purpose of evading tax by title trust through the title trust of new shares issued through the instant merger.

B) Facts of recognition

The following facts are not disputed between the parties, or may be admitted by each entry in Eul evidence 5-1, Eul evidence 6-1 to 3, Eul evidence 9-1 to 5:

① In 2006, the business year immediately before the merger of this case, the net loss in the current business year was 22.1 billion won, and the merged company of this case was 1.9 billion won, but the net loss in the current business year was 27.3 billion won before that.

(2) The shareholding ratio of each company involved in the merger in this case shall be as follows:

The sum of the specially related parties of Nonparty 150.15, Nonparty 135.67 (i) Nonparty 2 (i) and Nonparty 2 (i) 13.37, in total, 100 Nonparty 3 (i.e., at the time of the merger) Nonparty 8.13 (i.e., the merger) included in the main text of the Table, 57.17.17, Nonparty 130.36, the sum of the specially related parties of the merged company of this case (i.e., Nonparty 130.11, Nonparty 41.84, Nonparty 11 (i.e., the merger of this case) and 57.17

③ With respect to global income tax in 2007, at the time of the instant merger, Nonparty 1 applied 35%, the highest tax rate. Of the Plaintiffs, Plaintiff 1, Plaintiff 3, and Plaintiff 2 applied 8%, respectively, 17%, and Plaintiff 6 applied 26% tax rate.

④ The instant company paid interim dividends of KRW 8,058,833,00 in 201, as the surplus from the unclaimed profits was accumulated in KRW 34.6 billion in 2007 and KRW 81.0 billion in 2008. As such, even though the interim dividends were paid, the company’s surplus from un disposed profits as of the end of 201 was KRW 184,369,239,389 in 201.

C) In light of the legal principles as seen earlier, insofar as a new title trust act is acknowledged with respect to the new shares issued by the merger of this case, the purpose of tax avoidance shall be presumed. In full view of the facts acknowledged earlier and the following circumstances revealed by the evidence as seen earlier, the evidence submitted by the Plaintiffs alone is insufficient to recognize that there is no purpose of tax avoidance, and there

① The purpose of tax avoidance is to be determined as at the time of title trust. However, Nonparty 1 applied 35% of the global income tax in 2007 as at the time of the instant merger. However, in the event that real name conversion was not made, Nonparty 1 is merely subject to the global income tax rate of 8% for Plaintiff 1, Plaintiff 2, Plaintiff 3, and Plaintiff 2, and Plaintiff 6, and Nonparty 1 is subject to the global income tax rate of 26% for a merger with Plaintiff 1, Plaintiff 3, Plaintiff 2, and Plaintiff 6. Accordingly, Nonparty 1 is likely to evade the global income tax for a merger with Plaintiff 1, and Plaintiff 2, Plaintiff 3, Plaintiff 2, and Plaintiff 2, and Plaintiff 6. As such, the Plaintiff’s global income tax rate of 8,058, 83,000 won was the largest share of the Plaintiffs’ global income tax rate of less than 1, Plaintiff 3, Plaintiff 8, and Plaintiff 3808,681.68.

② In addition, while the merged company did not have a distributable profit because of its low performance, the merged company of this case reached a considerable amount of distributable profit, it was highly probable that dividends will be realized later with respect to the new stocks of this case. Therefore, even if actual dividends were made after conversion of real name, it cannot be deemed that there was no tax avoidance purpose for dividends that will have accrued in the future at the time of the merger when the second title trust was held.

③ In addition, in the case of the shares newly issued by the merger district or the merger, the Plaintiffs claim that Nonparty 1 and its specially related parties, all of which are the actual shareholders, become an oligopolistic shareholder group, and have no additional purpose of tax avoidance after the merger. However, even if secondary tax liability exists as an oligopolistic shareholder (the aggregate of shares held by specially related parties exceeds 50%), the scope of liability is proportional to the shareholding ratio of the relevant shareholder. In this case, in the instant case, the shareholding ratio of Nonparty 1 and its specially related parties, due to Nonparty 1’s failure to convert the existing title trust relationship into real name at the time of the merger, led to Nonparty 1 and its specially related parties’ shareholding ratio from 10% to 57.17%, and thus, the

④ As long as the act of separate title trust exists with respect to new shares issued through a merger, there is no evidence to deem that there was an obvious objective irrelevant to the tax avoidance to the extent that it is recognized that there was no tax avoidance purpose in the title trust with respect to the new shares issued through

⑤ The Plaintiffs cited Supreme Court Decision 2009Du21352 Decided July 14, 201, stating that the same applies to the case where the actual owner of shares and the nominal owner have been allocated without compensation in a different state. However, the foregoing decision does not change in the net assets, profits, and the shareholding ratio of shareholders of the issuing corporation due to the allocation of gratuitous shares, while in this case, between the merged company and the merged company, by issuing new shares to the shareholders of the merged company, the surviving company’s capital has increased from 660,00,000 to 2,460,00,000 won as the surviving company’s capital has increased from 660,000 to 2,460,00,000 won, and the actual shares ratio of previous shareholders

(C) Therefore, the plaintiffs' above assertion is without merit.

(2) Judgment on the assertion of double tax investigation

(A) Relevant legal principles

Article 81-4(2) of the Framework Act on National Taxes provides that “A tax official shall not conduct a reinvestigation on the same item of taxation and the same taxable period except in cases where there is clear evidence to prove a suspicion of tax evasion (Article 1); where it is necessary to conduct an investigation on the other party to the transaction (Article 2); where there is error in relation to two or more business years; or where it is similar thereto, and where it is prescribed by Presidential Decree, it shall not be conducted a reinvestigation on the same item of taxation and the same taxable period.” Here, even if the subject of reinvestigation falls under the same item of taxation, it shall not be deemed as violating the principle of prohibition of duplicate investigation (see Supreme Court Decision 2004Du10470, Jan. 14, 2005). In cases where a tax official made a correction disposition and a taxation disposition due to an error in the initial tax investigation and such error, it shall be deemed that the tax investigation conducted prior to such a disposition is illegal (see Supreme Court Decision 2010Du6083, Jan. 27, 2011).

(B) Facts of recognition

The following facts are not disputed between the parties, or may be acknowledged by each entry in Gap evidence 5 to 8, and Eul evidence 7:

① The person subject to the investigation of Article 1 is six persons, including the instant merger company (the instant merger company, the merged company, the new ginseng company, the Hando Construction Co., Ltd., the Hando Construction Co., Ltd., the non-party 1 and the non-party 4). The purpose of the investigation is to conduct an integrated investigation of corporate taxes from January 2004 to December 2008 (including corporate tax, value-added tax, source tax, and stock changes, etc.: Provided, That the merged company of the instant case is up to December 2007) and the property tax for each of the above individuals from January 200 to December 208.

② The subject of the second investigation is the Plaintiffs, Nonparty 1, and Nonparty 5’s representative director of the merged company of this case, and the purpose of the investigation is the gift tax from January 2, 2007 to December 2, 2008 (specifically, it is the suspicion of title trust donation of stocks issued at the time of the merger of this case based on the initial title trust).

(C) In light of the above legal principles, the first and second investigations in this case cannot be deemed as a duplicate tax investigation, in full view of the facts acknowledged earlier and the following circumstances revealed by the evidence mentioned earlier.

① In addition, the subject of the first investigation was not included in the subject matter of the investigation by the Plaintiffs as six persons including the instant merger company (the instant merger company, the instant merged company, the instant merger company, the new ginseng company, the Korea Self-Governing Construction Corporation, the Korea Self-Governing Construction Corporation, Nonparty 1 and Nonparty 4), and the purpose of the first investigation is to conduct an integrated investigation into corporate tax (including corporate tax, value-added tax, source tax, and stock changes) with respect to each of the above corporations, and there is no evidence to deem that the investigation into the deemed donation of title trust with respect to the newly issued stocks following the instant merger of the Plaintiffs, such as stock changes, was naturally included in the investigation. It is unreasonable to view that the investigation into the individual shareholders including stock changes at the time of the integrated investigation into corporate tax system

② On the other hand, the second investigation is an investigation on the gift tax (specificly, the suspicion of title trust donation of the shares issued at the time of the merger based on the initial title trust) from January 2007 to December 2008 against the Plaintiffs, and thus, it appears that there exists a separate investigation from the first investigation and the purpose of the investigation.

(D) Therefore, the plaintiffs' above assertion is without merit.

3. Conclusion

Therefore, all of the plaintiffs' claims are dismissed due to the lack of reason, and the judgment of the court of first instance is unfair, so the defendant's appeal is accepted and the judgment of the court of first instance is revoked and all of the plaintiffs' claims are dismissed. It is so decided as per Disposition.

[Attachment Omission]

Judges Cho Jong-tae (Presiding Judge)