Seoul Administrative Court 2009Guhap54208 ( October 15, 2010)

Cho High Court Decision 2009west2101 (Law No. 9.17, 2009)

disposition imposing gift tax by deeming that stocks have been acquired at a low price is illegal;

Comprehensively taking account of the rapid aggravation of the business environment of the company, it is reasonable to regard the face value at the time of issuing new shares as the market price reflecting the objective exchange values of the company's shares at that time. Therefore, the disposition imposed on the premise of acquisition at a low price is unlawful.

2010Nu26218. Revocation, etc. of imposition of gift tax

○ Kim

○ Head of tax office

Seoul Administrative Court Decision 2009Guhap54208 decided July 15, 2010

1. Revocation of a judgment of the first instance;

2. The Defendant’s disposition imposing gift tax amounting to KRW 2,099,150,280 on the Plaintiff on January 2, 2009 shall be revoked.

3. All costs of the lawsuit shall be borne by the defendant.

The judgment of the first instance court shall be revoked. In the first instance court, the disposition of imposition of KRW 2,09,150,280 against the Plaintiff on January 2, 2009 shall be revoked. In the first instance, the disposition of refusal against payment in kind made by the Defendant to the Plaintiff on February 23, 2009 shall be revoked.

1. Details of disposition;

A. From August 3, 2001, the Plaintiff is working as a representative director for an emergency heading corporation, etc. (hereinafter “company”) who conducts the business of manufacturing, selling, and leasing scrap games from August 3, 201.

B. On September 4, 2005, the Plaintiff acquired a total of 3,750 shares, including 1,250 shares of the company from 2,50 shares of the company from 2,50 shares of the company from 2,50 shares of the company from 2,50 shares of the company from 1,250 shares of the company from 2,00 shares of the company from 2,00 shares of the company from 2,00 shares of the company from 2,00 shares of the company from 2,0

C. The Seoul Regional Tax Office conducted during the period from September 19, 2008 to October 29 of the same year, and investigated the situation of changes in the company’s shares during the period from September 19, 2008, and determined that as of September 4, 2005, the Plaintiff acquired the shares of this case, the appraised value per share was KRW 1,288,534, and that the Plaintiff acquired the shares of this case at a low price of KRW 5,00,000 per share, and notified the Defendant of this fact.

D. In view of the Plaintiff’s acquisition of the shares at a low price from a person having no special relationship, the Defendant calculated the sales value of the shares of this case as a supplementary evaluation method and the 4,813,252,500 won (==4,832,02,502, 500 won -18,7500 won - 600 million won under Article 26(7) of the Enforcement Decree of the Act by subtracting 600,000 won from the sales value of the shares of this case (i.e., 4,813,252,500-60,0000-60,0000,000 won) as a gift property, and determined on January 2, 2009 to be subject to a gift tax of this case (i.e., 4,813,252,000,000 won).

E. On January 28, 2009, the Plaintiff filed an application with the Defendant for payment of shares to implement the instant taxation disposition with the instant shares. On February 23, 2009, the Defendant rejected the permission for payment of shares on the ground that the instant shares are inappropriate for management and disposition, and that the price per share as of January 28, 2009 is zero won.

[Ground for Recognition: Facts without dispute, Gap evidence 1, Gap evidence 2-1, 2, Gap evidence 3, 4, 14, Eul evidence 1-1, 2, Eul evidence 2, 3-2, and 3]

2. Whether the instant taxation disposition is legitimate

A. The plaintiff's assertion

1) In light of the fact that since the mid-205 year after the announcement of the standard for handling premiums at a game providing establishments (the Ministry of Culture and Tourism’s announcement No. 2004-14, hereinafter “Announcement”) was enforced on December 31, 2004, the management conditions have deteriorated rapidly due to the rapid decline in the company’s sales, and that the Plaintiff paid 5,000 won per share of September 7, 2005 to 130,000 shares of a company, etc., the Plaintiff’s acquisition price of the instant shares constitutes an objective exchange value formed through a normal transaction at the time of capital increase by capital increase. The Defendant’s calculation of the market price of the instant shares by supplementary evaluation is unlawful.

2) Since March 2005, the management status of the company has deteriorated. New AA and B, an existing shareholder, requested the Plaintiff to accept the instant shares in the face value for the purpose of recovering the investment principal, and the Plaintiff could not refuse the request. The Plaintiff acquired the instant shares from NewA and B. There are justifiable grounds for the Plaintiff to acquire the instant shares in the face value.

3) Even if the market price of the instant shares is calculated based on supplementary valuation methods, there are errors in the following. ① Around the time of the Plaintiff’s acquisition of the instant shares, the management status has deteriorated due to a sudden decrease in the company’s sales at the time of the Plaintiff’s acquisition of the instant shares, and the 1,419 price of the game assets, which were inventory at the end of the business year 2004, was not significantly contributed to the creation of company’s profits, and its price has decreased below the manufacturing cost. In light of the fact that there was no value of the instant game at the time of the acquisition of the instant shares at the time of the acquisition of the shares, or its price has decreased below the manufacturing cost, the Defendant assessed the value of the instant shares at least 4,393,2363 won per game asset at the time of the acquisition of the instant shares at the time of the instant shares at the time of the acquisition of the shares, without considering the normal sales price at the time of the instant 30-year market price at the time of the acquisition of the shares.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

(c) Fact of recognition;

1) Operational status of the Company

A) On January 16, 2004, the company opened a set of Esnet Escoco (hereinafter “instant game machine”). The instant game machine was rated for at least 18 years of age, and it was able to offer free gifts, such as paying a maximum of 5,000 won for prize money to users of the game machine at the time.

On November 2004, the Ministry of Culture and Tourism reported to the press the problem of promoting speculation, and on December 31, 2004, the Ministry of Culture and Tourism enacted a public announcement on December 31, 2004 (The Ministry of Culture and Tourism stated that the public announcement should be amended to resolve the problem caused by the encouragement of speculation, such as screen, etc.). In the public announcement, the total user-use game is within KRW 10,000,000, the total user-use game is within KRW 20,000,000, the game is deemed to be prohibited from providing free gifts (subparagraph 3), the game deemed to be speculative game is deemed to have exceeded KRW 90,00,00 per hour, and the period of public announcement is deemed to have been implemented from the date when 60 days have elapsed since the public announcement was made with respect to the previous game products. The above period is the period given to the program for the promotion of speculation.

As a result of the entry into force of the public notice, the game of this case, the total amount of use per hour, approximately KRW 227,00, was classified as a game product deemed to have a speculative nature, making it impossible to give free gifts to users of the game, and accordingly, the product sales price was reduced accordingly. The company modified the game of this case and applied for a rating to the Korea Media Rating Board on April 29, 2005, but did not receive a rating on May 18, 2005.

(b) Sales, income, and net income trend (unit: 00 won);

(ii)tax investigation and partnership;

From June 21, 2005 to August 16, 2005, the Seoul Regional Tax Office conducted a tax investigation on the company. The Seoul Regional Tax Office confirmed that the company omitted the value of 1,419 inventory assets in the game machine 4,393,223,363 won from the inventory assets as of the end of the business year 2004, adjusted the amount of income by including the inventory value in the gross income for the business year 2004, and adjusted the amount of income by making a reservation disposition, and imposed and notified corporate tax of 1,523,610,943 won on the company on October 1, 2005. The company paid all corporate tax around that time.

On July 5, 2005, the head of the Geumcheon Tax Office seized estimated tax items in relation to the company account at KRW 2,174,000,000 and value-added tax at KRW 870,00,000,00. On February 27, 2006, after the payment and appropriation of corporate tax, the head of the tax office released the attachment on February 27, 2006 (Article 24(2) of the National Tax Collection Act provides that when the head of the tax office deems that the taxpayer cannot collect national taxes after the determination of national taxes due to certain reasons, he/she may seize the taxpayer’s property to the extent

3) Subscription to shares and subscription to new shares

As a result of tax investigation conducted by the Seoul Regional Tax Office until August 16, 2005, the company sought a loan from a financial institution, but it was difficult to obtain a loan from the financial institution. In order to raise the cost of corporate tax payment, the company intended to provide capital increase with a total amount of KRW 6.50 million for KRW 130,000 for KRW 130,000. The total number of shares issued by the company prior to the issuance of capital increase was 10,000 for capital increase.

Of the existing shareholders of the company, only the Plaintiff (existing 4,00 shares owned) and thisCC (existing 2,500 shares owned by the existing 2,500 shares), and the remaining 56,000 shares did not have been acquired by NewA and HaB. The Company requested the existing 56,00 shares to participate in capital increase with consideration to employees, etc. other than the existing shareholders. The Company wished to participate in capital increase with consideration to the remaining 56,00 shares from among D, KimE and 60 employees, who were not existing shareholders or employees, and wished to participate in capital increase and F, Kim GG only in the current 60 employees, and the Company allocated shares to 4 members, such as D, in the following table, at KRW 5,00 per share.

New AA, HH, Kim II, and Audit and Inspection HaB, who did not participate in capital increase with consideration, resigned on September 4, 2005, and thisCC, NAD, and KimE, respectively, have taken office as a director and appointed as an auditor.

4) Valuation of assets, etc.

A) In order to impose the instant taxation, the Defendant calculated the net profit and loss amount for the last three years of the Plaintiff’s acquisition of the instant shares as indicated below. Based on this, on September 4, 2005, the Plaintiff assessed the net profit and loss amount per share of the Company’s shares as of September 4, 2005 (=343,816X3 + 19,237X2-2,713)/6).

B) The Defendant calculated the net asset value of the company at the time of the Plaintiff’s acquisition of the instant shares based on the balance sheet at the end of the business year 2004, and based on this, assessed the net asset value per stock of the company on September 4, 2005, as KRW 553,316 (=5,533,160,365/100) on the basis of the date of the Plaintiff’s acquisition of the instant shares (=5,533,165/100).

C) The Company reported and paid corporate tax for the business year from 2005 to 2007, while evaluating the sales and disposal of the game in the pertinent business year among the 1,419 games as inventory assets omitted from the National Tax Service as about KRW 3,09,000 per 1 unit, and made a reservation for inclusion in deductible expenses and as listed below.

【Ground for Recognition: Facts without dispute; Gap evidence 5 through 14; Gap evidence 16, 18, 19, 20; Eul evidence 3 through 10 (including each number); the whole purport of the pleadings

D. Determination

1) Whether the acquisition value can be considered as the market price

A) Article 35(1) and (2) of the Inheritance Tax and Gift Tax Act (amended by Act No. 8139, Dec. 30, 2006; hereinafter “the Act”) stipulates that only where a person other than a related party takes over or transfers an asset at a price significantly lower than the market price or at a price higher than the market price without justifiable grounds in light of transaction practices, the amount of the property subject to gift tax shall be calculated based on the market price as of the date of donation (Article 60) and the market price shall be determined according to the supplementary method if it is difficult to calculate the market price (Article 2(2)). Meanwhile, where a large volume transaction, such as listed stocks, is conducted daily, the market price may be deemed as the market price, but where it is recognized that an objective exchange value has been reflected in the unlisted stocks with respect to which the market price is smaller than the market price, it is reasonable to view the market price as the market price (see, e.g., Supreme Court Decision 2005Nu8584, Apr. 28, 1986).

B) It is reasonable to regard KRW 5,000 as the market price reflecting the objective exchange value of the company’s shares at the time of issuing new shares. The reasons are as follows.

① As of September 4, 2005, the Defendant calculated the net profit and loss value per share based on the net loss value between three years as of September 4, 2005 as KRW 1,778,680, calculated the net asset value per share based on the balance sheet as of the end of the business year 2004 as KRW 553,316, and calculated the market value on September 4, 2005 according to the weighted average supplementary assessment method in accordance with Article 54 of the Enforcement Decree of the former Act.

The game machine of this case, which occupies most of the company sales and profits, was classified as a game product deemed to be a speculative game according to the notification, and the company's business environment has rapidly deteriorated due to the refusal of the application for the rating of game products on May 18, 2005.

On January 16, 2004, the sales amount of the game of this case had been KRW 542,727,00 in 203, KRW 9,493,495,00 in 204, KRW 17,655,812,00 in 2005, KRW 5,256,90,00 in 206, KRW 124,337,00 in 208, KRW 1327,200 in 208, KRW 138,387,00 in 200, KRW 716,634,00 in 204, KRW 200 in 205, KRW 17,000 in 208, KRW 2008, KRW 2008, KRW 716,000 in 208, KRW 716,000 in 207

After the running of the game of this case, sales in 2004 and 2005 increased and net profits increase, but the game machine was classified as a speculative game product with the entry into force of the public notice, and sales have decreased considerably in 2006 and 2007 since May 18, 2005 when the application for the classification of game products was rejected, and net profits have returned from black in 2005 to 2006 and 2007. In 2008, sales did not amount to 13,227,000 won and the Defendant calculated shares as of January 28, 2009.

(The year in which the company left the game machine of this case with net income obtained is only 2004, where the effect of the notice came into existence, and 205, where the effect of the notice came into existence. In full view of Gap's statement Nos. 15 and 19, witness KimGG testimony, and the overall purport of the pleading, the reason why the sales and net profit came to be temporarily recorded in 2005 is that the sales and net profit came into existence until the date of entry into force of the notice, and 1,230 out of 1,419 out of 1,419 out of the game machine installed and leased in 2,096,33 won which was similar to those of 3,096,77,78 won through 3,3333 won from January 13, 2005 to December 31, 2005, it is a net increase due to the sales and tax adjustment by making them out on condition that they receive profits in the future).

② At the time of the acquisition of the instant shares, the Company was unable to discover new sources of income due to the aggravation of the business environment due to the entry into force of the notice, and the Plaintiff was actually unable to do so. In practice, 2006, 2007, and 5,000 won in face value. In such a situation, the Company took over 74,000 shares by participating in the Plaintiff’s and thisCC’s subscription to capital increase, and NewA and HaBB, which were the existing shareholders, did not participate in capital increase because the value of the shares per share falls short of the face value of the shares or the future prospects of the Company. NewA and HaBB requested the recovery of the investment principal, the Plaintiff acquired shares held by NewA and HaB at the time of the request for the redemption of the investment principal, and the Do and HaB were a third party who did not have any special relationship with the Company, but did not have any shares acquired by newA and HaBB, Do and HaE and some employees.

In light of the above process of acquiring shares and offering new shares, a large number of shareholders, executives, and employees who did not participate in the issue of new shares did not participate in the issue of new shares because they decided that the value of the shares in this case falls short of the face value due to public notice, and they did not participate in the issue of new shares because they were attached to the company account. The shareholders and employees who participated in the issue of new shares are deemed to have participated in the issue of new shares as being 1,288,534 won per share calculated by the supplementary one evaluation method (if there were 1,284 won per share calculated by the supplementary one evaluation method, there was no previous shareholders and employees who did not participate in the issue of new reasons).

Ultimately, the Plaintiff, executives, and employees at the time of the acquisition of shares and capital increase with consideration, deeming that the value of the company’s shares falls short of or lower than the face value based on each party’s judgment, was transferred or participated in capital increase with consideration. It appears that the acquisition of shares and capital increase with consideration was simultaneously made on the same ground, and that objective

③ The total amount of the stock value of the company after capital increase was 70 million won based on the face value, and the total amount of the paid-in capital increase was 50 million won. If the market value at the time of the acquisition of the shares of this case fell under 1,288,534 won per share, the company was granted a loan by offering stocks as security instead of offering capital increase to the face value. In light of the fact that the head of the Goldcheon Tax Office attached the company’s account before the determination of national tax on May 7, 2005 and could not collect the company after the determination of national tax, it is determined that the value of capital increase and acquisition of capital increase is close to

2) Whether the acquisition by transfer was at a price substantially lower than the market price without justifiable grounds

Even if the face value of the instant shares cannot be seen as the market price, it does not constitute a case where the Plaintiff acquired the instant shares at a price significantly lower than the market price for the following reasons.

① As seen earlier, inasmuch as the company’s business environment has deteriorated, each of the existing shareholders, each of the directors, auditors, and HyB, deemed the company’s future prospects and requested recovery of the existing investment principal without participating in capital increase increase, and the Plaintiff acquired the said shares at par value, such as the price for capital increase.

② The shares that existing shareholders did not have accepted during capital increase with consideration became 56,000 shares or more.

In a case where the Plaintiff intended to increase the share holding ratio in the process of issuing new shares, 56,00 shares that were not accepted were additionally acquired, or shares that were only 3,500 shares were not acquired from newA and HaB. In light of the fact that newA and HaB were only directors and auditors at the same time as the shares were transferred, it is reasonable to view the Plaintiff to have acquired shares as the acquisition price that they want to recover the investment principal in a situation where the Plaintiff requested the redemption of the investment principal.

③ Even if the market price per share at the time of acquiring the instant shares is lower than KRW 5,00,00, the National Tax Service cannot be deemed to have acquired the instant shares at a price significantly lower than the market price without justifiable grounds, in light of the following: (a) the National Tax Service was unable to collect the relevant national tax after the determination of national tax; (b) it was difficult to expect the company to seize the company’s account; (c) the shares were acquired in response to the request of the existing shareholders in the process of capital increase for consideration to raise the payment cost of corporate tax; and (d) the share acquisition price is the amount of

3) The instant taxation disposition is unlawful.

2. Conclusion

The judgment of the first instance shall be revoked. The disposition of this case shall be revoked.