Methods of calculating profits to stockholders of a corporation in excess of liability when profits are deemed donated through transactions with a specific corporation.

Article 31(5) of the former Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 15971 of Dec. 31, 1998) provides that profits which shareholders, etc. of a specific corporation are deemed to have been donated pursuant to Article 41(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 5582 of Dec. 28, 1998) shall be calculated by multiplying the number of shares or equity shares increased due to the value of donated assets or the profits derived from exemption from debts, by the number of shares or equity shares increased. The "value of shares, etc. increased" in this context shall be calculated by comparing the value of shares, etc. before and after the transaction of gift, and thus, the value of shares, etc., on which gift tax is imposed, shall be calculated by simply comparing the value of shares, etc., such as the value of shares before and after the transaction of gift tax, but if it is difficult to calculate the market value, the value of shares shall not be calculated by adding the value of shares before and after the sale method.

Articles 41, 60(1), and 63(1)1(c) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 5582, Dec. 28, 1998); Article 31(5) of the former Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 15971, Dec. 31, 1998; see current Article 31(6))

Plaintiff 1 and four others (Donghwa Law Firm, Attorneys Hong-sik et al., Counsel for the plaintiff-appellant)

Daegu Tax Office et al.

Daegu High Court Decision 2002Nu2308 delivered on April 11, 2003

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

The grounds of appeal are examined.

1. The court below acknowledged that the non-party, who is a major shareholder of member engineering corporation (hereinafter referred to as "subsidiary engineering corporation"), which has losses as an unlisted corporation and its majority shareholder, has waived the claim of 3.4 billion won against members engineering and the claim of 2.5 billion won against members' precision on December 31, 1998 and exempted the amount of debt equivalent to the above amount. The court below rejected the non-party's assertion that the non-party, who is a special relationship with the plaintiffs, such as members engineering corporation (hereinafter referred to as "large Engineering corporation")'s disposal of shares, should not be deemed to have made a donation of the amount equivalent to the above profits by dividing the amount of debt exemption by the ratio of 1.4 billion won to the total amount of debt exemption by 3.5 billion won and the claim of 2.5 billion won against members' precision. The court below rejected the non-party's assertion that the non-party's disposal of shares by the method of debt exemption by the Presidential Decree No. 1582, Dec. 28, 1998.

2. Article 31(5) of the Enforcement Decree provides that profits which shareholders, etc. of a specific corporation are deemed to have been donated pursuant to Article 41(1) of the Act shall be calculated by multiplying the number of stocks or equity shares increased by "the value per share of stocks or equity shares increased by the value of the relevant controlling shareholders, etc." due to the value of property donated or the amount equivalent to profits derived from exemption from debts, etc. In this context, "the increased value per share of stocks, etc." should be calculated by comparing the value of stocks, etc. before and after the gift transaction. Thus, since the value of the property on which the gift tax is levied should be calculated by comparing the value of stocks, etc. before and after the gift transaction, the value of the property shall be compared in principle with the market value pursuant to Article 60(1)1(c) of the Act. If it is difficult to calculate the market value, the value of the shares before and after the gift tax is calculated by the supplementary method of calculating the value of the non-listed stocks under Article 54 of the Enforcement Decree.

Therefore, the judgment of the court below which judged otherwise is erroneous in the misunderstanding of legal principles as to the method of calculating the value of deemed donation under Article 31 (5) of the Enforcement Decree, and it has affected the conclusion of the judgment (However, in the case of plaintiff 2, the court below did not dispute the validity of the acquisition price of shares included in the tax base of the disposition of taxation as of April 1, 2001, and reported that it received a donation by itself and did not dispute the validity thereof. Therefore, the court below should consider the legitimate tax amount in light

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 Byun Jae-chul (Presiding Justice)