[1] Purport of Article 26 (1) of the former Income Tax Act on constructive dividend

[2] The purport of the proviso of Article 26 (1) 2 of the former Income Tax Act

[3] The case holding that in a case where a stockholder of a corporation which is exceptionally extinguished is deemed to have income from fictitious dividend under Article 26 (1) 4 of the former Income Tax Act in light of the proviso of Article 26 (1) 2 of the former Income Tax Act, where a stockholder of a corporation which is exceptionally extinguished receives stocks from a corporation which survives or a corporation established after the merger in excess of the amount required for acquiring stocks of a corporation which is extinguished after the merger, the face value of gratuitous stock allocated by capitalizing revaluation reserve fund, etc. cannot be determined to include "amount required for acquiring stocks of a extinguished corporation" in the "amount required for acquiring stocks of a extinguished corporation", and the amount required shall be deemed to mean the amount actually paid for acquiring stocks of the extinguished corporation, on the ground that the acquisition value is received without compensation, which is actually included in the acquisition value of stocks of the previous corporation, the face value of gratuitous stock cannot be deemed to be "amount required

[1] Article 26 (1) of the former Income Tax Act (amended by Act No. 4281 of Dec. 31, 1990) / [2] Article 26 (1) 2 (proviso) of the former Income Tax Act (amended by Act No. 4281 of Dec. 31, 1990) / [3] Article 26 (1) 2 (proviso) and 4 of the former Income Tax Act (amended by Act No. 4281 of Dec. 31, 1990)

[1] Supreme Court Decision 91Da10565 delivered on September 10, 1991 (Gong1991, 2509) / [2] Supreme Court Decision 90Nu2554 delivered on February 28, 1992

Plaintiff (Attorney Han-soo et al., Counsel for the plaintiff-appellant)

The director of the tax office

Seoul High Court Decision 91Gu6582 delivered on September 4, 1991

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

We examine the grounds of appeal.

According to the reasoning of the judgment below, the court below, on September 30, 198, issued 560,00 shares of the plaintiff corporation (5,000 won per share) to 15 shareholders of the non-party company when the plaintiff corporation merged the non-party 1 corporation with the above 15 shareholders of the non-party company's 5,00 shares (5,000 won per share). However, on the premise that the non-party company's shares were owned by the above shareholders, 280,000 shares of the non-party company's 1,30,000,000 won and 1,00,000,000,000 won and 00,000 won and 1,00,000,000 won and 1,40,000,000 won and 1,000,000 won and 20,000 won per share were transferred without compensation to the above shareholders pursuant to the above 214.

However, the purpose of Article 26 (1) of the Income Tax Act is to make a constructive dividend in light of the principle of equity of taxation in cases where the profit reserved in the company is returned to the shareholders or investors due to the reasons stipulated in each subparagraph of the same Article of the same Act in the form of legal reserve, earned surplus reserve, other voluntary reserve, etc., not distributed out of the surplus which is the performance of corporate management, and the profit reserved in the company is reverted to the shareholders or investors, and such profit is an economic profit similar to cash dividend (see Supreme Court Decision 91Da10565 delivered on September 10, 1991).

In addition, when a corporation's surplus is transferred to capital, it shall maintain the company's property in accordance with the principle of capital adequacy as much as its capital has been increased due to the transfer of the surplus. Therefore, when it is more possible to reserve the company's property in the course of capitalizing the earned surplus reserve, it shall accumulate the earned surplus reserve again to a certain extent, and it is possible to reserve the company's property corresponding thereto as the earned surplus reserve has increased due to the increase in the amount of capital stock or revaluation reserve even when the capital has been capitalizing, so economic profit similar to the cash dividend belongs to the

Therefore, Article 26 (1) 2 of the Income Tax Act provides that "where all or part of a corporation's surplus is transferred to capital or financing, it shall be deemed that the capital gains shall not be deemed the fictitious dividend income at the time of capital transfer." However, the proviso of subparagraph 2 provides that "the capital reserve under Article 459 of the Commercial Act and the revaluation reserve under the Assets Revaluation Act shall not be included in capital transfer," thereby recognizing exceptions that are not deemed fictitious dividend in capital transfer of revaluation reserve and capital reserve shall not be deemed as non-taxation for the value of the stocks received by the stockholders, etc. in accordance with capital transfer, but shall be deemed as income from fictitious dividend in capital transfer in order to protect the company and promote capital transfer in order to promote the rationalization of corporate management by raising the company's credit rating, it shall not be deemed as the capital gains, and the amount of the capital reserve shall not be deemed as reserved income until the capital increase or the amount of the prescribed excess income has occurred (see Supreme Court Decision 2005Nu295489, Feb. 29, 2095).

Therefore, in the case of a merger of corporations with the above proviso, it cannot be concluded that the value of the stocks received by the stockholders of the corporation extinguished by the merger or the corporation established by the merger exceeds the amount required for acquiring the stocks of the corporation extinguished by the merger as stipulated in Article 26 (1) 4 of the Income Tax Act in determining whether there is an income from constructive dividend under the above Article 26 (1) 4 of the Income Tax Act. The amount required is the amount actually paid to acquire the stocks of the extinguished corporation, and the amount required is the amount actually paid to acquire the stocks of the extinguished corporation. Thus, since the acquisition value is actually included in the acquisition value of the stocks of the previous corporation without paying the stock price allocated by the capital transfer of revaluation reserve fund, it shall not be deemed as the amount required for acquiring the stocks of the extinguished corporation.

Nevertheless, the court below erred by misapprehending the legal principles as to constructive dividend at the time of the merger of corporations, since it is reasonable to see that the amount required to acquire the pertinent shares is the value of the total shares, including the above gratuitous shares, and that the revocation of the instant taxation disposition is an error of law, which points out this issue.

Therefore, the judgment below is reversed and the case is remanded to the Seoul High Court. It is so decided as per Disposition by the assent of all participating Justices.

Justices Park Jong-dong (Presiding Justice) Kim Sang-ho (Presiding Justice)