Whether a loss brought forward should be offset against a surplus in calculating the amount of liquidation income.

Whether it is legitimate to calculate the amount of capital surplus calculated by deducting the amount of capital from the amount of liquidation income when calculating the amount of liquidation income.

Article 79 of the former Corporate Tax Act shall be calculated as liquidation income amount due to dissolution

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The defendant's rejection disposition against the plaintiff on January 27, 2004 shall be revoked.

1. An outline of the case;

A. On November 23, 2001, the Plaintiff merged ○○ Co., Ltd. (hereinafter referred to as “instant company”) with another company (hereinafter referred to as “instant company”) and reported and paid corporate tax on the liquidation income of the instant company on February 22, 2002.

B. At the time, pursuant to Articles 80(3) and 79(4) of the former Corporate Tax Act (amended by Act No. 6558, Dec. 31, 2001; hereinafter the same), the Plaintiff reported and paid KRW 5,905,284,69, which was calculated by offsetting the undeductible 1,195,125,288 won out of the undeductible 1,980 as of the date the merger is registered pursuant to Articles 80(3) and 79(4) of the former Corporate Tax Act (amended by Act No. 6558, Dec. 31, 2001; hereinafter the same shall apply) by 15,08,684,376 won for the merger (the amount including the acquisition value of combined stocks under Article 80(2) of the Corporate Tax Act) by the amount of liquidation income of the instant company as of the merger.

C. After that, on December 9, 2003, in calculating the amount of liquidation income following the merger, the Plaintiff filed a claim for correction on the premise that, notwithstanding Articles 80(3) and 79(4) of the former Corporate Tax Act, the amount of carried-over losses should be offset only within the scope of earned surplus and should not be offset against the capital surplus. However, in calculating the amount of liquidation income following the merger, the Plaintiff calculated the amount of liquidation income of the instant company by deducting the amount of KRW 7,100,409,980 calculated without offsetting the said carried-over losses from the above amount of the said merger, and filed a claim for correction by adding the amount of liquidation income of the instant

D. However, on January 27, 2004, the Defendant rendered a disposition rejecting the above request for correction (hereinafter “instant disposition”).

2. Relevant provisions;

A. Article 79 and relevant provisions of the former Corporate Tax Act

○ Calculation of the amount of liquidation income due to dissolution under Article 79 of the former Corporate Tax Act

(1) Where a domestic corporation is dissolved (excluding dissolution by merger or division), the liquidation income (hereinafter referred to as "settlement income by dissolution") amount shall be the amount calculated by deducting the sum of the capital, investment and surplus funds as of the date of the date of the registration of the dissolution (hereinafter referred to as "total amount of equity capital") from the value of residual assets from dissolution of the corporation

(2) No. 3 omitted

(4) In the calculation of the liquidation income from dissolution of a domestic corporation, if any loss brought forward to the domestic corporation under the provisions of subparagraph 8 of Article 18 exists as of the date of the date of the registration of the dissolution, the loss brought forward shall be offset by the amount equivalent to the total amount of equity capital of the corporation as of the date of the date of the registration of the dissolution: Provided, That the amount of deficit brought forward to be offset shall not exceed

5. â…………§ omitted.

Article 18 of the Corporate Tax Act (Non-Inclusion of Evaluation Marginal Profit)

The following profits shall not be included in the gross income in calculating the income amount of a domestic corporation for each business year:

8. An amount appropriated to offset losses carried forward prescribed by Presidential Decree among the value of assets received without compensation and the amount of reduced liabilities due to exemption from or expiration of debts;

Article 18 (Deficiency Carried Forward) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18174, Dec. 30, 2003)

(1) The term " carried forward losses prescribed by Presidential Decree" in subparagraph 8 of Article 18 of the Act means those falling under any of the following subparagraphs:

1. Deficits under Article 14 (2) of the Act (excluding the deficits received by succession under the provisions of Article 45 of the Act) that are not deducted in calculation of the tax base for each business year thereafter pursuant to the provisions of subparagraph 1 of Article 13 of the Act; and

2. The amount of losses under Article 14 (2) of the Act among those that are not included in the tax base reported pursuant to Article 60 of the Act for each business year, but that is confirmed by a court (limited to the losses of a corporation whose reorganization plan has been approved pursuant to the Company Reorganization Act).

(2) The provisions of Article 10 (1) and (2) shall apply mutatis mutandis to the calculation of losses carried forward under paragraph (1).

○ Income for each business year under Article 14 of the Corporate Tax Act

(2) The amount of losses of a domestic corporation for each fiscal year shall be the total amount of earnings during the fiscal year deducted from the total amount of losses incurred during the fiscal year.

○ Article 13 of the Corporate Tax Act

The corporate tax base on the income of a domestic corporation for each business year shall be the amount calculated by deducting the amount under the following subparagraphs in sequential order from the income of a domestic corporation for each business year:

1. The amount of losses incurred during each business year within five years before the start date of the current business year which were not thereafter deducted in the calculation of the tax base;

(b) Article 80 and relevant provisions of the Corporate Tax Act

○ Calculation of the amount of liquidation income due to merger under Article 80 of the Corporate Tax Act

(1) Where a domestic corporation is dissolved due to a merger, the amount of the liquidation income (hereinafter “merger income”) shall be the total amount of the cost of merger received by the stockholders of an extinguished corporation from the merged corporation minus the total amount of equity capital of the extinguished corporation as of the date the merger is registered

(2) In the calculation of the total cost of merger under the provisions of paragraph (1), where the merged corporation acquires the stocks of the extinguished corporation (in case of a newly established merger or the merger of 3 or more corporations, including the stocks of another extinguished corporation acquired by the extinguished corporation; hereafter in this Article “combined stocks”) within 2 years prior to the date of the registration of the merger, and such combined stocks are not delivered to the merged corporation with respect to the stocks of the merged corporation, the total cost of the merger shall be the sum of the acquisition value of the concerned combined stocks. In this case, where stocks are delivered, the amount obtained by deducting the value of the transferred stocks from the acquisition value

(3) The provisions of Article 79 (3), (4) and (6) shall apply mutatis mutandis to the calculation of the liquidation income amount due to a merger.

(4) In applying the provisions of paragraphs (1) through (3), matters necessary for calculating the amount of liquidation income due to the merger, such as the total cost of merger, shall be prescribed by the Presidential Decree.

Article 122 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17457 of Dec. 31, 2001) shall be calculated for the calculation of the amount of liquidation income due to a merger.

(1) The total cost of merger under Article 80 (1) of the Act shall be the sum of the amounts in the following subparagraphs:

1. The total cost of merger under Article 16 (1) 5 of the Act;

2. The amount added up under Article 80 (2) of the Act; and

3. The sum of the amounts falling under any one of the following items paid by the merged corporation:

(a) The corporate tax imposed on liquidation income of an extinguished corporation and the national tax imposed on the corporate tax (including the abated tax amount); and

(b) Resident tax imposed by the corporation tax under the Local Tax Act;

(2) In the application of the latter part of Article 80 (2) of the Act, the value of stocks delivered shall be the value calculated under each subparagraph of Article 14 (1).

3. Summary of the plaintiff's assertion

A. Article 79(4) of the former Corporate Tax Act

The above provisions violate Articles 10, 11, 23(1), 59, and 119 of the Constitution for the following reasons:

(1) The corporate tax on liquidation income shall be imposed only when the value of residual assets does not exceed the paid-in capital. Article 79(4) of the former Corporate Tax Act provides that if there is a loss carried-over which has not been deducted in calculating the liquidation income amount, it shall be offset not only by the total amount of the equity capital but also by the capital surplus of the nature of the paid-in capital. Accordingly, the amount of liquidation income is different in the case of issuing capital at par with the issue of capital increase and the issue of premium increase, even though the economic substance is the same. In addition, the amount of liquidation income is calculated differently in the case where there is no income or

(2) Although the loss carried forward offset by the surplus must be reflected in the loss brought forward on the financial statements, Article 79(4) of the former Corporate Tax Act does not reflect the loss brought forward on the financial statements, the loss brought forward from the surplus in the calculation of the amount of the loss brought forward from the surplus in the calculation of the amount of the loss brought forward.

(3) In calculating the tax base on liquidation income, Article 79(4) of the former Corporate Tax Act (amended by Act No. 79(4) of the same Act) provides that a loss carried forward should be deducted, as in calculating the tax base on the income for each business year, thereby undermining the equitable taxation, resulting in the outcome of imposing taxes without any income.

(b) Article 80(2) of the Corporate Tax Act;

The above provisions violate Articles 19, 23(1), 37(2), 59, and 119 of the Constitution for the following reasons:

(1) Article 80(2) of the Corporate Tax Act provides that if a merged corporation acquires combined shares within two years prior to the date of registration of the merger, it would not include the acquisition value in the cost of the merger, it would prejudice the legal stability and predictability of economic activities by imposing the acquisition value on the merged corporation, including the cost of the merger without any condition.

(2) Even though Article 80(2) of the Corporate Tax Act does not stipulate a fair provision regarding dividend tax deduction, etc., unlike the case where the cost of merger received by the stockholders of the extinguished corporation is imposed as deemed dividend income, in cases where the acquisition price of the combined stocks is added to the price of merger, the total tax burden on the parties concerned is increased.

(3) Although there may be a change in the value of shares of the merged corporation after the acquisition of shares, Article 80(2) of the Corporate Tax Act does not consider it in calculating the amount of liquidation income, so the liquidation income may increase unfairly by calculating the amount of liquidation income according to the stock value of the extinguished corporation at the time of the merger according to the stock value different from that of the extinguished corporation at the time of the acquisition

(4) At the time of the merger, the shareholders of the merged corporation have been infringed upon property rights or the freedom of economic activities due to the income generated from the transfer of the combined stocks that are not attributed to themselves, resulting in the increase in the liquidation income tax attributable to them.

(5) Article 80(2) of the Corporate Tax Act provides that the acquisition value of the combined stocks acquired by the merged corporation through the offering of new stocks by the merged corporation shall not be distinguished from the merger cost paid to the stockholders of the merged corporation, but shall be added to all the acquisition value of the combined stocks to the merger cost. Thus, the liquidation income is calculated unreasonably.

(6) In the event that shares of the merged company are delivered to the shares of the merged company, the merger cost shall be calculated in a way that would be distorted due to the difference between the shares value of the merged corporation at the time of the merger and the shares value of the merged corporation

4. Determination

A. Whether Article 79(4) of the former Corporate Tax Act violates the Constitution

(1) A surplus in corporate accounting refers to the portion exceeding the capital in the equity capital (net assets) at a given point of time. A surplus consists of earned surplus and capital surplus. A surplus means a surplus arising from transactions involving profit and loss, i.e., transactions involving increase or decrease of expenses and earnings arising from the use of invested capital, and a surplus means a surplus arising from transactions involving increase or decrease of invested capital, such as capital transactions, i.e., issuance of stocks, increase or decrease of capital, and capital surplus means a surplus arising from transactions involving increase or decrease of invested capital. A surplus reserve is reserved in the form of earned surplus reserve (Article 458 of the Commercial Act), voluntary reserve, etc., and the capital surplus exists in the form of capital reserve (Article 459 of the Commercial Act requires the accumulation of excess of issued stocks, capital reduction marginal profits, merger marginal profits,

On the other hand, the tax-related Acts do not strictly distinguish surplus earnings from earned surplus. Except as otherwise provided for in capital or financing and other separate provisions, the Corporate Tax Act provides for taxable income by deeming the amount of proceeds generated from transactions which increase the net assets of the corporation as “gross income” (Article 15(1) of the Corporate Tax Act: Provided, That where the amount of excess of the face value of issuance of stocks, marginal profits from capital reduction, and marginal profits from mergers, specified cases among divided marginal profits are not included in gross income (Article 17 of the Corporate Tax Act). As can be seen, except as otherwise provided for in the Corporate Tax Act, the Corporate Tax Act provides for the increase of net assets of the corporation, regardless of whether it is a profit and loss transaction or capital transaction, the amount of profits generated from such transactions shall not be deemed as gains if capitalizing is carried out by the stockholders, etc., and the amount of stocks or investment acquired by transferring all or part of the surplus funds of the corporation shall be deemed as taxable income subject to taxation of corporate tax or income tax (Article 16(1)2 of the Corporate Tax Act and Article 17(2)2 of the Income Tax Act)2).

Inasmuch as corporate accounting aims to provide information to interested parties related to an enterprise by means of accounting for a certain period of time and management performance, the surplus is classified as capital surplus, which is not leaked as dividends, etc. among net income generated from business activities, and the increase in the amount of net assets generated in addition to the capital arising from capital transactions. According to the above position, in dealing with the tax policy issues, it may emphasize the difference depending on the nature of surplus funds. However, the purpose of tax law is to fairly and accurately calculate taxable income and the amount of tax for the financing of the State. However, in principle, income generated from transactions that increase the net assets of the corporation, except in certain cases, without distinguishing profit and capital transactions from earned surplus, shall be deemed as both taxable income and the capital transactions, earned surplus, and capital surplus from capital transactions, shall be deemed as fictitious dividend even in capitalizing surplus. Accordingly, how to determine which income should be taxable income or the scope of taxable income shall be subject to taxation on capital surplus shall not be permitted in any case in consideration of the nature of the tax and various policy purposes.

(2) In the event that a domestic corporation is dissolved or merged, the former Corporate Tax Act imposes corporate tax on the amount calculated by deducting the total amount of equity capital (the total amount of capital or investment and surplus funds) as of the date of the date of the registration of the dissolution or the date of the registration of the merger from the total amount of the merger cost received by stockholders, etc. of the merged corporation from the merged corporation (Article 77, 79(1) and 80(1) of the former Corporate Tax Act), which is subject to the assessment of corporate tax (Articles 77, 79(1) and 80(1) of the former Corporate Tax Act), and where there is any deficit carried forward which is not deducted from the amount of income for each business year in the relevant domestic corporation as of the date of the registration of the dissolution or the date of the registration of the merger, it shall be offset by the amount equivalent to the total amount of equity capital of the corporation as of the date of the date of the registration of the merger

Article 79(4) of the former Corporate Tax Act provides that any undeductible loss shall be offset not only by earned surplus but also by capital surplus in calculating the amount of liquidation income for the total amount of equity capital, and that such loss shall be offset by surplus in calculating the amount of liquidation income for the purpose of calculating the amount of liquidation income. However, in calculating the amount of liquidation income, it is not determined by the nature of surplus in corporate accounting but also by the method of offsetting the amount of liquidation income for the purpose of calculating the amount of liquidation income for the purpose of calculating the amount of liquidation income, it cannot be deemed that it infringes on the taxpayer's fundamental rights concerning property rights, etc. because it is not determined by the nature of surplus in corporate accounting, but also by the method of offsetting the amount of liquidation income for the purpose of calculating the amount of liquidation income for the purpose of calculating the amount of liquidation income for the purpose of calculating the amount of liquidation income for the purpose of calculating the amount of liquidation income for the purpose of Article 19(4) of the former Corporate Tax Act. It is also impossible to restrict the amount of liquidation income from the amount of liquidation income under Article 18(3) of corporate accounting income tax for the same year.

B. Whether Article 80(2) of the Corporate Tax Act violates the Constitution

(1) Where a domestic corporation is dissolved due to a merger, the amount of liquidation income shall be the total amount of the cost of the merger received by the stockholders, etc. of the extinguished corporation from the merged corporation minus the total amount of equity capital as of the date of the registration of the merger of the extinguished corporation (Article 80(1) of the Corporate Tax Act). In this case, the cost of the merger refers to the total amount of the value of stocks, etc., acquired by stockholders, etc. of the extinguished corporation from the merged corporation due to the merger from the merged corporation (Article 122(1)1 of the Enforcement Decree of the Corporate Tax Act and Article 16(1)5 of the Corporate Tax Act). However, where the merged corporation conducts a merger after acquiring the stocks (combined stocks) of the extinguished corporation prior to the merger, the price of the merger shall not be separately paid for the combined stocks, and as a result, the liquidation income of the extinguished corporation may be unreasonably reduced, it is necessary to prevent avoidance of corporate tax and maintain equity in taxation by calculating the

Accordingly, Article 117-2 (1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 15970 of Dec. 31, 198) provides that "If a domestic corporation has a stock or investment (hereinafter "combined stock") of a merged corporation that was acquired before the merger, if the liquidation income of the merged corporation is deemed to have been reduced unfairly due to the acquisition, the acquisition value of the combined stock shall be deemed to be the merger subsidy and the liquidation income shall be calculated." As to the time when the liquidation income of the extinguished corporation is deemed to have been reduced unfairly due to the acquisition of the combined stock under the above provision, the Supreme Court held that the acquisition of the combined stock does not necessarily require the purpose or intent to unreasonably reduce the liquidation income of the extinguished corporation as a subjective element, but it must be determined by considering the series of transactions from the merged corporation to the merger (see, e.g., Supreme Court Decision 91Nu8449, May 26, 1992).

(2) On the other hand, Article 80(2) of the Corporate Tax Act provides that the amount of liquidation income shall be calculated by adding the acquisition value of combined stocks to the total cost of merger where the merged corporation has acquired such combined stocks within two years prior to the date of the registration of the merger. Most of the mergers take place within a long-term preparation period, there is a lot of room to view that it would reduce liquidation income of the merged corporation in preparation for the merger where the corporation acquired combined stocks within a certain period of time. It is not easy to determine whether the liquidation income of the merged corporation would be unfairly reduced due to the acquisition of combined stocks by taking account of a series of transactions and processes from the acquisition of combined stocks to the merger of the merged corporation. Article 80(2) of the Corporate Tax Act limits the acquisition value of combined stocks within 2 years prior to the date of the registration of the merger, which is considerably probable that the acquisition value of combined stocks added to the price of the merger would be related to the merger to the acquisition value of the merged corporation at the time of the merger or the acquisition value of the merged stocks at the time of the merger.

5. Conclusion

Therefore, all of the above arguments by the plaintiff are dismissed. It is so decided as per Disposition.