Cho High Court Decision 2010Du3729 ( December 23, 2010)

Other benefits in the listing of stocks shall not be regarded as earned income or other income.

It is difficult to see that capital increase and listed marginal profits constitute earned income in a quid pro quo relationship with the provision of labor, and it cannot be viewed that there are no special circumstances to allocate stocks from the company to the meaning of a case in connection with the performance of separate business affairs or the provision of services, etc.

2011Guhap9737 Revocation of Disposition of Imposing Gift Tax

Kim XX et al.

O Head of tax office

August 16, 2011

September 22, 2011

1. All of the plaintiffs' claims are dismissed.

2. The costs of lawsuit are assessed against the plaintiffs.

The Defendant imposed a gift tax of KRW 77,004,690 on Plaintiff KimA on July 7, 2010 and imposed a gift tax of KRW 84,427,360 on Plaintiff UB on July 1, 2010, respectively.

1. Details of the disposition;

A. PSia Co., Ltd. (hereinafter referred to as “non-party company”) is a corporation established on April 4, 200 for the purpose of designing, manufacturing, and selling semiconductors and products relating to telecommunications.

B. On September 15, 2003, Plaintiff KimA donated 26,000 shares of the non-party company (the face value of KRW 500) to the non-party company as the spouse and the representative director of the non-party company, who is the largest shareholder.

C. On September 25, 2003, the Plaintiff UB, who worked as the head of the business division of the non-party company, acquired 60,000 new shares of the non-party company (hereinafter “the shares of this case”) at a price below the market price (1,549 won per share based on supplementary evaluation method) on the ground that the shares of this case were acquired at a price below the market price (500 won per share) after participating in the capital increase by the non-party company’s third party allotment method conducted by the non-party company. On November 2003, the Plaintiff UB made a voluntary declaration to the defendant pursuant to Article 39 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8139 of Dec. 30, 2006; hereinafter “former Inheritance Tax and Gift Tax Act”) on the grounds that the shares of this case were acquired at a price below the market price (1,549 won per share).

D. The director of Busan Regional Tax Office conducted an investigation of stock change with respect to the non-party company from April 21, 2008 to May 27, 2008, and notified the defendant of the non-party company of the non-party property return of the non-party Kim Jong-A's gift tax return and the non-party property return amounting to KRW 6,700 per share at the time of the above subscription for capital increase. Accordingly, on July 7, 2008, the defendant decided and notified the defendant of the non-party property return amounting to KRW 34,776,00 and KRW 58,112,860, respectively.

E. Meanwhile, from January 25, 2010 to February 12, 2010, the Board of Audit and Inspection conducted an audit of the organization of Busan regional tax office to require the Plaintiffs to levy taxes on the profits earned from the listing on the KOSDAQ market of their shares. Accordingly, the Defendant issued a revised disposition of KRW 31-6 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 19357, Feb. 9, 2006; Presidential Decree No. 20067, Jul. 1, 2010; Presidential Decree No. 20075, Jul. 24, 2007; Presidential Decree No. 20075, Jul. 27, 2007).

F. The Plaintiffs were dissatisfied with each of the instant dispositions and filed an administrative appeal with the Tax Tribunal on October 4, 2010, but was dismissed on December 23, 2010.

[Ground of recognition] Facts without dispute, Gap evidence 1, Eul evidence 8-1, 2, Eul evidence 1-2, Eul evidence 2-1, 2-2, Eul evidence 2-1, 2, and 3, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

1) The assertion that Article 41-3 of the former Inheritance Tax and Gift Tax Act, which is the basis for each disposition of the instant case, is unconstitutional (Plaintiffs)

Article 41-3 of the former Inheritance Tax and Gift Tax Act provides that the gift tax shall be levied on the profits accruing from the increase of capital, as in the instant case, even if the same is listed after the return and payment of the gift tax under Article 39 of the former Inheritance Tax and Gift Tax Act. However, in light of the fact that the gains accruing from listing on the KOSDAQ at the time of the return and payment of the gift tax under Article 39 of the former Inheritance Tax and Gift Tax Act are calculated by fully reflecting all the profits that may arise from the listing on the KOSDAQ, there is no provision imposing the gift tax on the increase of market price after the date of donation, and that Article 41-3(3) of the former Inheritance Tax and Gift Tax Act limits the amount of tax payable only for the difference above the standard prescribed in Article 31-6(3) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, among the amount of the gift tax payable, the provisions of Article 41-3 of the former Inheritance Tax

2) Plaintiff UB’s assertion on the disposition of imposition against the Plaintiff UB

The plaintiff UB entered into a stock option contract with the non-party company in around 2002 and entered the non-party company in the next year, and recognized that the non-party company was able to exercise overall control over its business and marketing affairs, and the non-party company participated in capital increase with the non-party company's third party allotment method and received a subsidy for the purchase price of new shares as bonus from the non-party company at a lower price than the market price. Thus, the profits accrued from the listing of the stocks listed on the KOSDAQ market of this case (hereinafter referred to as the "listed profits of this case") constitute " earned income under Article 20 (1) 1 of the Income Tax Act", and even if it is not so, it constitutes "compensation" under Article 21 (1) 17 of the Income Tax Act as the profits accrued from the waiver of the stock option already granted to the non-party company or the profits accrued as a reward for contribution to the non-party company. Therefore, the disposition of imposition against the plaintiff's profits under Article 41-3 of the former Inheritance Tax and Gift Tax Act is unlawful.

B. Relevant statutes

Attached Form 1 is as shown in the relevant statutes.

C. Determination on whether the provisions of Article 41-3 of the former Inheritance Tax and Gift Tax Act are unconstitutional

Article 41-3 of the former Inheritance Tax and Gift Tax Act provides that, where a person having a special relationship with the largest shareholder, etc., who is deemed to be in a position to use undisclosed information on the management, etc. of an enterprise, receives a donation of stocks or investment shares (hereinafter referred to as "stocks, etc.") of the relevant corporation from the largest shareholder, etc. or acquires them for compensation, the value of the relevant stocks, etc. increased as the stocks, etc. are listed on the Korea Stock Exchange (referring to those listed on the securities market or the KOSDAQ) or registered with the Korea Securities Dealers Association under the Securities and Exchange Act within five years from the date of donation or acquisition, if the person who received a donation or acquisition of the relevant stocks

As above, the provisions of Article 41-3 of the former Inheritance Tax and Gift Tax Act provides that "in cases where the amount equivalent to the relevant gains exceeds the original taxable amount of gift or acquisition value of stocks, etc." among "in cases where the amount of profits exceeds the original taxable amount of gift or acquisition value of stocks, etc., the amount equivalent to the relevant gains shall be deemed the value of property donated to the person who has acquired such profits." The above provision does not include "the taxable amount of gift or acquisition value of the original taxable amount of gift". Further, in cases where the largest shareholder, etc. donated stocks to a specially related person before the listing or transfer them for the purpose of obtaining large profits from the listing of stocks, etc. by using internal information, etc., or where the largest shareholder, etc. makes a donation or transfer of stocks to a specially related person for the purpose of controlling the affiliate without any abnormal taxation or tax burden, the size of profits increased due to the listing or transfer of stocks, etc. can not be evaluated at the time of the donation or transfer, and it can be viewed that the evaluation gains are calculated based on a certain point after the listing or transfer of stocks, etc.

Meanwhile, the proviso of Article 41-3 (3) of the former Inheritance Tax and Gift Tax Act provides for a system of refunding the difference in accordance with the balance with an increase in the value thereof even when the value thereof falls due to the listing of stocks. According to Article 31-6 (3), (4) and (5) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, the former Inheritance Tax and Gift Tax Act provides the same standard for calculating the "profit above the standard prescribed by the Presidential Decree" which is subject to the gift tax under Article 41-3 (1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, and "a difference above the standard prescribed by the Presidential Decree" which is subject to the refund of gift tax under the proviso of Article 41-3 (3) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, and Article 41-3 (2) of the former Inheritance Tax and Gift Tax Act provides that the benefit from the substantial increase in corporate value shall be deducted in calculating the listing gains under

Therefore, the plaintiffs' above assertion is without merit.

D. Determination as to whether the disposition of imposition against Plaintiff UB was unlawful

1) Facts of recognition

A) On Apr. 4, 200, the non-party company was established for the purpose of designing, manufacturing, and selling semiconductors and communications-related products. On Nov. 13, 200, the non-party company held a board of directors and a provisional general meeting of shareholders on Nov. 13, 200 and entered into a stock option agreement with the non-party company to grant the non-party company a stock option to acquire the non-party company's total common shares 28,893 new shares within five years after the lapse of three years from the date of grant of 5,00 won per share, in order to encourage the non-party company's employees' desire to work, and to encourage the non-party company's employees. The non-party company granted the stock option agreement between the non-party company and the non-party company.

B) On September 15, 2003, KimCC et al. renounced all the stock options granted as above to the non-party company, and prepared and submitted a certificate to participate in the non-party company's capital increase with new stocks instead of it, and the non-party company held the board of directors on the same day and approved the cancellation of the contract for granting the stock options such as KimCC et al. and the participation in capital increase with new stocks.

C) On September 25, 2003, the non-party company held a board of directors and issued 682,513 shares of registered ordinary shares at KRW 500 per share. However, according to Article 418(2) of the Commercial Act and the articles of incorporation of the non-party company, the non-party company decided to hold shares issued by the non-party company with a view to excluding the pre-existing shareholders' preemptive right to new shares and allocating all new shares to the third party including the plaintiff UB and KimCC (hereinafter referred to as the "the capital increase of this case"). The plaintiff UB acquired the shares of this case from the non-party company on the same day.

D) Meanwhile, the contents of the stock option agreement (Evidence A2-3) entered into between the non-party company that the Plaintiff UB submitted in the instant lawsuit and the non-party company that submitted the instant lawsuit are as follows.

(Contents of the following Contract)

E) On March 18, 2002, Plaintiff UB had been paid KRW 36,950,00 in total in 2002 (income + KRW 5,000,00 in bonuses + KRW 47,600,00 in total) 112,773,765 in 203 (income + KRW 65,173,765 in bonus + KRW 65,000 in total), and KRW 107,00,700 in 204 (income + KRW 57,000,700 in bonuses + KRW 50,000 in bonuses).

[Reasons for Recognition] Facts without dispute, Gap evidence 2-1, 2, 3, Gap evidence 3-6, Gap evidence 7-1, 2-2, Eul evidence 2-1, 2, 3, and Eul evidence 3, the purport of the whole pleadings

2) Whether the listed marginal profit of this case constitutes earned income

Article 20 (1) 1 of the former Income Tax Act (amended by Act No. 9897 of Dec. 31, 2009; hereinafter referred to as the "former Income Tax Act") provides that "the salary, salary, remuneration, tax, wage, bonus, allowance, and other benefits of a similar nature that are received from the provision of labor as one of Class A earned income. Such earned income includes not only all economic benefits which are related to the provision of labor in nature, regardless of the form or name of payment, but also benefits which form a working condition closely related to the provision of labor on the premise of labor (see, e.g., Supreme Court Decision 2006Du4967, Dec. 24, 2008). Meanwhile, Article 38 (1) of the Enforcement Decree of the Income Tax Act provides that "an officer or an employee of a corporation who is included in the earned income under Article 20 of the Income Tax Act as one of the wages of a corporation or a corporation that is actually granted the option of stock option from the relevant corporation, etc.

In this case, the following circumstances are revealed through the facts acknowledged as above, namely, ① Plaintiff B did not have been granted stock options by the resolution of the board of directors and temporary shareholders’ meeting held on November 13, 200, and there was no separate stock options from the board of directors and non-party B’s resolution. According to the contents of the contract for granting stock options between Plaintiff BB and non-party company, the date of granting stock options and the period of employment, which is one of the reasons for cancellation of appraisal rights, are not specified, as well as the date of preparation of the above contract. Thus, it is difficult to view Plaintiff B’s testimony of the above contract (No. 2) as being difficult to find that Plaintiff B had concluded the above contract for granting stock options with the non-party B’s non-party 1’s non-party 2’s non-party 3’s non-party 2’s non-party 2’s non-party 2’s non-party 3’s non-party 2’s non-party 3’s non-party 2’s non-party 2’s non-party 3’s non-party 3’s shares.

3) Whether the listed marginal profit of this case constitutes other income

Article 21 (1) 17 of the former Income Tax Act provides "a honorarium" as one of other income, and the above "a honorarium" refers to money and valuables paid as a means of case in connection with administrative affairs or provision of services, and whether it constitutes such money and valuables should be determined by comprehensively considering the motive and purpose of receiving the relevant money and valuables, relationship with the other party, amount, etc. (see, e.g., Supreme Court Decision 97Nu20304, Jan. 15, 1999).

As to this case, even according to the Plaintiff UB’s assertion, the Plaintiff UB, who is an employee of the Nonparty Company, cannot find out any special circumstance that the Plaintiff UB, as an employee of the Plaintiff UB, could receive the allocation of the instant shares from the Nonparty Company in addition to his/her own business affairs or the provision of services. Moreover, there is no specific assertion or proof as to this, and thus, the Plaintiff UB cannot be deemed that the Plaintiff UB’s increased capital and listed profits derived from the acquisition of the instant shares constitute a “compensation” under Article 21(1)17 of the former Income Tax Act. Accordingly, the Plaintiff UB’s assertion on this premise is without merit.

3. Conclusion

The plaintiffs' claims are dismissed in entirety because they are without merit.