Cho High Court Decision 2010Da1579 ( December 06, 2010)

The transfer at a lower price than the value appraised by the supplementary assessment method is an unfair act where the market price is unclear;

As non-listed stocks fall under the case where the market price is unclear, transferring at a lower price than the value appraised by the supplementary evaluation methods to the related corporation constitutes an unfair act, and constitutes an abnormal transaction lacking economic rationality.

2011Revocation of disposition of revocation of imposition of corporate tax

XX Stock Company

Head of Changwon Tax Office

November 24, 2011

February 9, 2012

1. The plaintiff's claim is dismissed.

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

The Defendant’s disposition of imposition of KRW 389,89,710 for the business year 2006 against the Plaintiff on February 1, 2010 shall be revoked.

1. Details of the disposition;

가. 원고(2006. 2. 28. QQQQ 주식회사에서 XX시스템스 주식회사로 상호를 변경하였다)는 1986. 7. 16. 자동차 부품의 제조 및 판매를 목적으로 설립된 회사 인바, 비상장법인인 ◇◇기계공업 주식회사(이하 '◇◇기계공업'이라 한다)가 발행한 비상장주식 100,000주(이하 '이 사건 주식'이라 한다)를 보유하고 있었다.

B. On February 24, 2006, the Plaintiff transferred the instant shares to the OO industry Co., Ltd. (hereinafter “OO industry”) at KRW 4,420 per share. At that time, the Plaintiff was holding 100% of the Plaintiff’s shares and 62.5% of the stocks of the O industry, and the Plaintiff and the O industry were all affiliated companies with the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22951, Jun. 3, 201).

C. Under Article 63 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter referred to as the "former Inheritance Tax and Gift Tax Act"), the Defendant calculated the amount of KRW 4,704,00,00 for 00 for the valuation of non-listed stocks under Article 54 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 19899, Feb. 28, 2007; hereinafter referred to as the "former Enforcement Decree of the Inheritance Tax and Gift Tax Act"), the transfer value of KRW 1,66,00 for 0 for 00,00 for 30,000 for 40,000 for 20,000 for 40,000 for 30,000 for 40,000 for 04,000 for 304,000 for 40,000 for shares issued stocks.

D. The Plaintiff, who was dissatisfied with the instant disposition, filed an appeal with the Director of the Tax Tribunal on April 29, 2010, but the said appeal was dismissed on December 6, 2010.

[Ground of recognition] Facts without dispute, Gap 1, 2, 4 evidence, Eul 1 evidence, the purport of the whole pleadings

2. Whether the disposition is lawful;

A. The plaintiff's assertion

(1) The market price of unlisted stocks shall be the market price if there is an example of transactions deemed that the objective exchange value was properly reflected, or if there is no such example, it can be deemed that the pertinent transaction properly reflects the objective exchange value at the time of the pertinent transaction, and the transfer price of the instant stocks shall be determined according to the accounting office of △△△△ (hereinafter “△△△△”). On April 1, 2010, there is also a case where the post office assistance and assistance sold KRW 2,700 per share of the instant stocks to △△△△D Co., Ltd. (hereinafter “△△△△D”), the transfer price of the instant stocks constitutes the market price.

(2) Even if the transfer of the instant shares by home constitutes a low-price transfer subject to the avoidance of wrongful calculation under the Corporate Tax Act, if the Plaintiff and the OO industry determined the transfer price of the instant shares, it cannot be deemed that the instant shares are transferred to KRW 4,420 per share, disregarding the economic rationality, and thus, it does not constitute a transaction subject to the avoidance of wrongful calculation.

(3) Article 54(4)3 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, which provides that a cumulative cumulative grandchild for three years shall not weighted average of net value and net asset value, evaluates the value of unlisted stocks according to the liquidation value which is not the value of the stocks itself, not the value of the stocks itself; in accordance with the method prescribed by the above Enforcement Decree, losses have occurred for two years; and in accordance with the method prescribed by the above Enforcement Decree, losses for three years have occurred for a corporation where cumulative losses have occurred for three years, more than the appraised value per share of the stocks of the corporation where a black partner occurred, the above Enforcement Decree is unlawful, and thus, the above provision is unlawful in violation of the Act on the Market Price, and thus, the disposition of this case is also unlawful.

B. Relevant statutes

It is as shown in the attached Form.

(c) Fact of recognition;

(1) On December 23, 2005, △△△, a manufacturer of automobile equipment, concluded a stock purchase agreement with 13.4 billion won (hereinafter “instant agreement”) to purchase 5,00 billion won out of the Plaintiff’s shares, 50% of the Plaintiff’s shares, 50,000 won, among the Plaintiff’s shares, 50% of the Plaintiff’s shares, in order to design, manufacture, and sell an engine coolant, and to expand the business into the air conditioner and system sector for automobiles and ordinary vehicles.

(2) The instant contract included the content that prior to the final date stipulated in the instant contract, the Plaintiff transferred each of its shares to a third party in the Seoul Special Self-Governing City, △△, △△ Machinery, Y Automobile Co., Ltd., and that the Plaintiff did not hold each of the above shares except the shares of SS Co., Ltd. (SS Co. Ltd).

(3) On February 24, 2006, the Plaintiff entered into a share purchase contract with the O industry to transfer the instant shares to the O industry. The Plaintiff determined the value per share of the instant shares as KRW 4,420,000, the total acquisition amount of KRW 442,000,000,000, which was determined by △△△△ by the accounting room for the △ machine industry.

(4) On April 1, 2010, insurance cooperation entered into a “stock and management acquisition agreement to transfer all of the shares of the O industry 800,000 and the management right amounting to KRW 666,00,000,000,000,000,000, and the shares of this case held by the OO industry at the time were assessed as KRW 2,700 per share and included in the “stock and management right acquisition agreement” subject to the said “stock and management acquisition agreement.

[Ground of recognition] Facts without dispute, entry of Gap 2-13 evidence, purport of the whole pleadings

D. Determination

(1) Whether the market price of the instant shares and the Plaintiff transferred the instant shares at lower price than the market price

(A) Article 52(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that where a domestic corporation’s act or the calculation of its income amount is deemed to have unjustly reduced the tax burden on the corporation’s income due to transactions with a person in a special relationship prescribed by the Presidential Decree, the calculation of the corporation’s income amount for each business year may be made regardless of the corporation’s act or the calculation of its income amount (hereinafter “unfair calculation”). Paragraph (2) provides that the determination of wrongful calculation shall be based on sound common sense and common practice and the prices applied or deemed as applicable to ordinary transactions between persons who are not a person with a special relationship (hereinafter “market price”). Paragraph (4) provides that matters necessary for the type of wrongful calculation and the calculation of its market price shall be delegated to the Presidential Decree.

According to delegation, Article 88(1)3 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19815, Dec. 30, 2006; hereinafter the same) provides that "where assets are transferred without compensation or in kind at a price below the market price or at a price below the market price" as one of the wrongful calculation types, Article 88(1)3 of the former Enforcement Decree of the Corporate Tax Act provides that the scope of the market price which is the basis for the avoidance of wrongful calculation is set and Article 89(1) provides that in similar circumstances to the transaction concerned, the relevant corporation shall be deemed as the market price of the prices continuously traded with many and unspecified persons other than persons with a special relationship or the prices generally traded between third parties who are not persons with a special relationship, and Article 89(2)2

(B) The shares of this case are non-listed shares. Around February 24, 2006, when the plaintiff transferred the shares of this case to the O industry, the plaintiff could not find any data that can identify the price of the shares of this case continuously traded with many and unspecified persons other than the specially related persons or the price of the transaction for a third party who is not a specially related person. Even if the shares are not listed on the Korea Stock Exchange, if there are circumstances that can be seen to properly reflect the objective exchange value at the time of the transaction since the transaction was conducted in a general and normal manner (see, e.g., Supreme Court Decision 86Nu408, May 26, 1987). However, as seen in paragraph (d)(2) of the same Article, the transfer price of the shares of this case can not be deemed to properly reflect the objective exchange value of the shares of this case, and there is no evidence to find otherwise.

(C) Therefore, the instant shares constitute a case where the market price is unclear. As such, the Defendant’s transfer of the instant shares to KRW 442,00,000 at a lower price than the market price is an unfair act due to a transfer at a lower price under Article 88(1)3 of the former Enforcement Decree of the Corporate Tax Act, since the market price of the instant shares assessed by the Defendant pursuant to the supplementary assessment method under Article 63 of the Inheritance Tax and Gift Tax Act and Article 54 of the Enforcement Decree of the former Inheritance Tax and Gift Tax Act is as seen earlier.

(2) Economic rationality

(A) "Calculation of wrongful acts" means the calculation of an act to reduce or exclude the tax burden incurred when a taxpayer takes a round-out, multi-stage or other abnormal transaction form without a reasonable transaction form of a normal economic person. The purport of Article 52 (1) of the former Corporate Tax Act, which provides for the denial of wrongful calculation, is that a transaction with a corporation and a person specially related to a corporation has neglected economic rationality by abusing all the forms of transactions under each subparagraph of Article 88 (1) of the former Enforcement Decree of Corporate Tax Act, and thus, it is deemed unfair from a legal point of view that the person with the authority to impose tax deems that there was an income objectively reasonable in terms of tax law, thereby ensuring fairness in taxation and preventing tax avoidance. Determination of whether an economic rationality exists shall be made based on whether the transaction lacks economic rationality in light of sound social norms or commercial practices (see, e.g., Supreme Court Decisions 2003Du13267, Jan. 13, 2006; 207Nu19857, Aug. 19, 2097).

(B) The following circumstances are acknowledged based on the overall purport of statement and pleading of evidence Nos. 3 through 12, i.e., △△△ 204 fiscal year of the 2004 business, the audit report of the Plaintiff’s investment shares applied to the Plaintiff (as of December 31, 2005), etc., and the total value of the instant shares is 442,951,022 won (the amount on the balance sheet of 2004), which was divided by 100,000 shares and calculated by deducting the fraction. The determination of the transfer value of the instant shares based on the book No. 4,420 won is difficult to view that the Plaintiff’s transfer value was sufficiently reflected in the objective exchange value of the instant shares, and the Plaintiff could not be viewed as having sold the instant shares to the 400-day business entity after the acquisition of the instant shares from the 40-year business entity without any reasonable ground for the Plaintiff’s transfer of shares to the 300-year business entity.

(3) Whether Article 54(4)3 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act is unlawful

Article 54(4)3 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that a corporation whose total amount of losses which falls or comes to fall within each business year under the Corporate Tax Act shall be assessed according to the net asset value under Article 54(2) in the case of stocks of a corporation with losses exceeding the total amount of earnings which falls or comes to fall within that business year from the business year preceding the business year in which the base date of appraisal falls. Since it is difficult to find the general and ordinary transactions in the market as well as minority shareholders, it is not easy to find an evaluation method capable of securing objectivity while reflecting the appropriate value of unlisted stocks. Since stocks of a corporation with losses for three years or more have a high net asset value in the transaction reality, liquidation cannot be assessed mainly by taking into account the net asset value of the relevant corporation's stock price. Considering this point, the above provision of the Enforcement Decree seems to have been prepared for the assessment of unlisted stocks, this part of the Enforcement Decree cannot be seen as unlawful even if there is any unreasonable ground for the plaintiff's assertion.

3. Conclusion

Thus, the plaintiff's claim is dismissed as it is without merit.