[1] Requirements for the application of the unfair act denial provision under Article 55 (1) of the former Income Tax Act

[2] In a case where a shareholder’s lending of money to a company with a special relationship under Article 111(1)5 of the former Enforcement Decree of the Income Tax Act prior to the transfer of stocks becomes impossible to impose capital gains tax on the transfer of stocks because the company goes out of the status of a corporation holding stocks as a real estate, whether the lending of money is subject to the avoidance of wrongful calculation under Article 55(1) of the former Income Tax Act (negative)

[1] Under the principle of no taxation without law, where a party’s transaction with a party as an act of tax evasion can be denied the validity of the calculation of the transaction, notwithstanding the legal form, there must be individual and specific denial provisions under the principle of no taxation without law. Article 55(1) of the former Income Tax Act (amended by Act No. 4281 of Dec. 31, 190) provides for the denial of wrongful calculation. Article 111(2) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 13194 of Dec. 31, 190) provides for the types of wrongful calculation that reduces income tax burden under subparagraphs 1 through 5, and each of the above provisions provides for the types of wrongful calculation that excludes income tax burden under Article 111(2)5 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 13194 of Dec. 31, 190) and thus, it cannot be deemed that the act of wrongful calculation or calculation of necessary expenses for the pertinent year.

[2] In a case where a shareholder's lending of funds to a company with a special relationship under Article 111 (1) 5 and 1 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 13194 of Dec. 31, 190) prior to the transfer of stocks is not subject to transfer income tax on the transfer of stocks because the ratio of land and building value to the total asset value of the company as of the date of transfer of stocks is lower as of the date of stock transfer, the company goes out of the position of a corporation with real estate under Article 4-2 (1) 1 (a) of the Enforcement Decree of the same Act, and thereby becomes unable to impose transfer income tax on the transfer of stocks by the shareholder, such lending of funds by the shareholder is merely affecting the company's asset holding form, and it is apparent that it does not fall under any of the causes under each subparagraph of Article 111 (2) 1 through 4 of the Enforcement Decree of the same Act, and it cannot be deemed an act unreasonably reduced in the calculation of total revenue amount or necessary expenses.

[1] Article 5 (1) (see current Article 101 (1)) of the former Income Tax Act (Amended by Act No. 4281, Dec. 31, 1990); Article 111 (1) and (2) (see current Article 98 (1) and (2) of the former Enforcement Decree of the Income Tax Act (Amended by Presidential Decree No. 13194, Dec. 31, 1990); Article 23 (1) 3 (see current Article 94 subparagraph 4), Article 5 (1) (see current Article 101 (1)) of the former Income Tax Act (Amended by Act No. 4281, Dec. 31, 1990); Article 111 (1) and (2) (see current Article 98 (1) and (1) (see current Article 98 (1) and (2) 1) of the former Income Tax Act (Amended by Presidential Decree No. 13194, Dec. 31, 1990)

[1] Supreme Court Decision 91Nu13571 delivered on September 2, 1992 (Gong1992, 3030) Supreme Court Decision 95Nu5301 delivered on May 10, 1996 (Gong199Ha, 1910)

Plaintiff (Attorney Lee Byung-hun, Counsel for the plaintiff-appellant)

Director of the District Office

Seoul High Court Decision 96Gu10791 delivered on July 21, 1998

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

We examine the grounds of appeal.

1. According to the reasoning of the judgment below, the non-party 1 and the non-party 2's disposal of the above non-party 1 and the non-party 3 company's total assets on the ground that the non-party 1 and the non-party 3 company's disposal of the above non-party 1 and the non-party 6 company's disposal of the above non-party 1 and the non-party 1 and the non-party 3 company's disposal of the above non-party 1 and the non-party 6 company's disposal of the non-party 1 and the non-party 1 and the non-party 6 company's disposal of the non-party 1 and the non-party 1 and the non-party 4 company's disposal of the above non-party 1 and the non-party 6 company's disposal of the non-party 1 and the non-party 9 company's total assets on the ground that the non-party 2's disposal of the above non-party 9 and the non-party 2 company's disposal of the above 9.

2. In order to deny the validity of calculation of an act based on the principle of no taxation without the law, an individual and specific denial provision must be established under the law in light of the principle of no taxation without the law (see, e.g., Supreme Court Decision 91Nu13571, Sept. 2, 192). Article 55(1) of the former Income Tax Act provides, “In cases where a resident’s act or calculation of real estate income, business income, other income, transfer income, or forest income, as prescribed by the Presidential Decree, is deemed to unreasonably reduce the tax burden on the pertinent income due to a transaction with a person with a special relationship with the resident, the government may calculate the amount of income of the pertinent year without a relationship between the resident’s act or calculation.” Article 111(2) of the former Enforcement Decree of the Income Tax Act provides, “In cases where it is deemed that the tax burden on the pertinent income has been reduced unfairly, the government may calculate the amount of income of the pertinent year without the relationship between the resident’s act or calculation.”

Therefore, even if Article 111(2)5 of the former Enforcement Decree of the Income Tax Act provides that "if it is deemed that a tax burden has been reduced unreasonably in the calculation of gross income or necessary expenses for the year concerned through a transaction other than those under subparagraphs 1 through 4 with a special relationship, the requirements prescribed by the above provision should be strictly interpreted. Thus, if the act of unreasonably reducing the tax burden is recognized as a transaction with a related party and it does not meet all the requirements prescribed by the above provision, such as that it is caused by a transaction with a related party and it is related to the calculation of gross income or necessary expenses for the year concerned, it shall not be deemed that the act constitutes a wrongful calculation, which is subject to Article 55(1)

However, according to the facts found by the court below, since shareholders, such as the plaintiff, etc. lend a total amount of KRW 1,356,150,000 to the non-party company with a special relationship under Article 111 (1) 5 and 1 of the former Enforcement Decree of the Income Tax Act prior to the transfer of the shares, the ratio of land and building value to the total asset value of the non-party company as of the date of stock transfer is reduced from 74.5% to 46.3%, so the non-party company cannot impose capital gains tax on the transfer of the plaintiff's shares because it goes beyond the status of a real estate and multi-owned corporation under Article 4-2 (1) 1 (a) of the former Enforcement Decree of the Income Tax Act as of the date of stock transfer. However, it is clear that the lending of the plaintiff's money does not fall under any of the causes under Article 111 (2) 1 through 4 of the former Enforcement Decree of the Income Tax Act, and it does not constitute an act unreasonably reducing tax burden in calculating the total revenue amount or necessary expenses.

Nevertheless, the court below erred by misapprehending the legal principles as to the denial of wrongful act and thereby affecting the conclusion of the judgment, and the ground of appeal assigning this error is with merit. It is so decided as per Disposition by the assent of all participating Justices, including the plaintiff, etc., on the ground that the court below erred by misapprehending the legal principles as to the rejection of wrongful act and calculation.

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

Justices Jack-dam (Presiding Justice)