[1] The meaning of "market price" of transferred stocks when determining whether the transfer of stocks to the Association-registered corporation is subject to the avoidance of wrongful calculation

[2] The case affirming the judgment below which held that the disposition of capital gains tax was lawful on the ground that the transfer of the shares by a shareholder to a specially related person was unjustly reduced in tax burden, in case where the shareholder transferred the shares of the Association-registered corporation to the Association-registered corporation

[1] Article 101(1) and (4) (see current Article 101(5)) of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009); Article 167 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18173, Dec. 30, 2003); Article 60(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 5493, Dec. 31, 1997); Article 60(1) and (2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780, Dec. 18, 2002); Article 60(1) and (3) of the former Enforcement Decree of the Income Tax Act (amended by Act No. 1981, Dec. 13, 200; Presidential Decree No. 18197, Mar. 19, 2002)

Plaintiff (Law Firm Hun-Ba, Attorneys Im-soo et al., Counsel for the plaintiff-appellant)

Head of the tax office;

Seoul High Court Decision 2007Nu33148 decided May 15, 2008

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. Article 167 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18173, Dec. 30, 2003) by delegation of Article 101(4) of the former Income Tax Act (amended by Presidential Decree No. 1897, Dec. 31, 2009) provides that with regard to the wrongful calculation of transfer income, “If it is deemed that the tax burden has been reduced unfairly by acquiring more than the market price or transferring less than the market price in transactions with a specially related person, the acquisition price or transfer price thereof shall be calculated based on the market price” (Article 167 of the former Enforcement Decree of the Income Tax Act) provides that “In applying paragraph (4) of the same Article, the market price shall be calculated based on the values appraised by applying mutatis mutandis the provisions of Articles 60 through 64 of the Inheritance Tax and Gift Tax Act and Articles 49 through 59 of the Enforcement Decree of the same Act.”

In addition, Article 60(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780, Dec. 18, 2002; hereinafter “the Act”) provides that “the value of property on which inheritance tax or gift tax is levied under this Act shall be the market price as of the date of commencing the inheritance or the date of donation (hereinafter “date of appraisal”). In this case, the value assessed by the method of appraisal stipulated in Article 63(1)1(a) and (b) (excluding cases falling under the provisions of Article 63(2)) shall be deemed as the market price,” and Article 63(1)1(a) of the Act provides that “the average of the daily closing price of the Korea Stock Exchange, which is published every two months before and after the date of appraisal, shall apply mutatis mutandis to the method of appraisal of stocks of the Association-registered corporation,” and Article 63(1)1(b) of the same Act provides that “In such cases, the Korea Stock Exchange shall be deemed as the standard market price.”

Meanwhile, Article 63(3) of the Act provides that "in applying the provisions of paragraph (1)1, 20/100 of the value assessed under the provisions of paragraph (1) 1 shall be added to the value assessed under the provisions of paragraph (1) 1 for the largest shareholder or largest investor as prescribed by the Presidential Decree and the shareholders or investors specially related to such shareholder (hereafter in this paragraph, referred to as the "large shareholder, etc."), but where the largest shareholder, etc. holds in excess of 50/100 of the total number of outstanding stocks of the relevant corporation, 30/100 shall be added

Article 60(1) of the Act was newly established on December 30, 1996 by Act No. 5193 of Dec. 30, 196. The legislative purport of the Act is to assess stocks of an Association-registered corporation in principle, but the legislative purport of the Act lies in the assessment of stocks of an Association-registered corporation, but there is a possibility that the price on the day of a specific transaction, which has been traded, may cause a large price fluctuation, depending on the situation on the trading date, and thus, if the price on the day of the transaction is considered to be the market price, it is difficult to exclude the arbitraryness and ensure objectivity. In addition, the structure and contents of the above provision directly stipulate the method of appraisal without restriction as to the method of appraisal of stocks of an Association-registered corporation. In light of the purport of the wrongful calculation system and the harmonious operation with the substance over form principle, in determining whether the transfer of stocks of an Association-registered corporation is subject to the avoidance of wrongful calculation, the transfer price of stocks should be deemed to be the average price of stocks of the Association-registered corporation under Article 60(1).

2. According to the reasoning of the judgment below, on July 31, 2001, the plaintiff transferred the shares of this case owned by the plaintiff to Royers Co., Ltd. (hereinafter "Royers"). The plaintiff transferred the shares of this case to 9,900 won which are the closing price of the Royers Co., Ltd. on the trading day immediately preceding the trading day through over-the-counter trading. The defendant's disposal of the shares of this case to 11,938 won calculated by adding the average amount of 9,949% of the base price of the Association's securities business every two months before and after the transfer date calculated pursuant to the latter part of Article 60 (1), Article 63 (1) 1 (b), and Article 63 (3) of the market price of this case to 9,949 won, and since the transfer of the shares of this case to lower price than the above market price is deemed to have reduced tax burden unfairly, the defendant's disposal of the shares of this case to 390% per stock transfer date.

In contrast, the court below held that the transfer price of this case constitutes the market price per stock of this case at the time of transfer under the premise that the assessment of the value of the property by the supplementary assessment methods stipulated in Articles 61 through 65 of the Act is limited to cases where it is difficult to calculate the market price as of the base date of appraisal, and the provision on the certificate of the largest shareholder under Article 63 (3) of the same Act applies only to cases where the value of stocks is assessed by the supplementary assessment methods under Article 63 (1) 1, etc. of the same Act. Such determination by the court below is erroneous in the misapprehension of legal principles as to the market price of the stocks of the Association-registered corporation in the calculation

3. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Yang Sung-tae (Presiding Justice)