[Judgment of the court below]

Head of Seocho Tax Office

June 15, 2016

Seoul Administrative Court Decision 2015Guhap1014 decided August 28, 2015

1. Revocation of a judgment of the first instance;

2. The Defendant’s disposition of imposing KRW 46,845,290 (including additional tax) on the Plaintiff on November 7, 2013 shall be revoked.

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

The same shall apply to the order.

1. Details of the disposition;

A. From September 6, 2012 to December 4, 2012, the director of the Seoul Regional Tax Office conducted a consolidated corporate tax investigation on a dialogue precise chemical company (hereinafter “instant company”) and confirmed the fact that Nonparty 1 owned 1,009 shares of the instant company (hereinafter “instant shares”) under title trust to the Plaintiff on December 31, 2004, and notified the Defendant of the taxation data.

B. Accordingly, on November 7, 2013, the Defendant decided and notified the Plaintiff of the gift tax amounting to 46,845,290 (including additional tax) that reverts to the year 2004 pursuant to the provision on deemed donation of title trust property under Article 45-2 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax Act”) (hereinafter “instant disposition”).

C. The Plaintiff appealed and filed an appeal with the Tax Tribunal on January 29, 2014, and the Tax Tribunal dismissed the Plaintiff’s appeal on October 20, 2014.

[Ground of recognition] Facts without dispute, Gap evidence 3, Gap evidence 5 through 7, Eul evidence 1 to 3, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) The title trust of the company’s shares was made by Nonparty 1 to the Plaintiff, etc. on or before October 1996 for the purpose of satisfying the requirements for promoters under the Commercial Act, and thereafter, the title transfer income tax and securities transaction tax have been changed customarily when the employee who is a nominal shareholder has retired or died. Since the establishment of the instant company, the instant company faithfully paid all taxes until now. Nonparty 1 owned approximately 76.3% of the total issued shares on the register of shareholders as of December 31, 2013, and was registered as an oligopolistic shareholder who already bears secondary liability for tax payment. Since the establishment of the instant company, there was no amount of tax evasion due to the difference in global income tax rate due to the lack of dividends paid up to the date, and the title transfer income tax and securities transaction tax have been reported and paid faithfully. Accordingly, since the title trust of the instant shares falls under the grounds for exception under the provisions on trust property under the former Inheritance Tax Act, the instant disposition on deemed donation should be revoked due to the lack of the purpose of tax avoidance.

2) Although a tax investigation, which served as the basis of the instant disposition, was conducted in the way of Nonparty 2’s failure to select a tax investigation subject to Article 81-6(2) and (3) of the former Framework Act on National Taxes (amended by Act No. 11604, Jan. 1, 2013) to receive KRW 1.2 billion from Nonparty 3 who had a land-related dispute relationship with Nonparty 1, and pressure Nonparty 1 by the tax investigation, etc. to return the ownership of the disputed land, the tax investigation was conducted in order to cause Nonparty 1 to return the ownership of the disputed land. Thus, it is unlawful that Nonparty 1 and this case’s company were selected as a tax investigation subject and collected the tax assessment data by abusing its authority, and the instant disposition was conducted based on the taxation data collected through such unlawful tax investigation and

B. Relevant statutes

It is as shown in the attached Form.

C. Determination on whether the principle of due process has been violated

First, we examine whether the disposition of this case is illegal as it is based on an illegal tax investigation.

1) Relevant legal principles

A) Article 81-4(1) of the former Framework Act on National Taxes (amended by Act No. 11604, Jan. 1, 2013; hereinafter the same) provides that “tax officials shall conduct a tax investigation to the minimum extent necessary to realize proper and fair taxation, and shall not abuse the right to investigate for any other purpose.” Article 81-3 provides that “tax officials shall presume that the taxpayer is sincere and the return, etc. submitted by the taxpayer is true.” Article 81-6 of the same Act provides for the grounds for excluding the presumption of good faith and the commencement of a tax investigation.” Paragraph (2) of the same Article provides that “Where a taxpayer may conduct a tax investigation to the extent that it is possible to conduct a tax investigation other than a periodic selection under paragraph (1), a taxpayer may submit a certificate of good faith, or a tax invoice, or where the taxpayer’s tax investigation is not prepared, issued, submitted, or provided with information about a taxpayer’s tax base and tax evasion, a taxpayer’s specific tax evasion or tax evasion duty may be determined through a false transaction.”

B) The principle of due process stipulated in Article 12(1) of the Constitution is not limited to criminal proceedings, but applies to all state actions (see, e.g., Constitutional Court Order 92Hun-Ga8, Dec. 24, 1992; Constitutional Court Order 96Hun-Ba4, May 28, 1998). A tax investigation is a kind of administrative investigation for realizing the State’s right to impose taxes, as it is unnecessary to verify the accuracy of the collection of taxation data or the details of the report, and ultimately, to prevent tax evasion and to secure taxpayers’ faithful returns. The principle of due process should be observed in the exercise of the tax official’s right to audit.

Article 81-3(1) of the Framework Act on National Taxes (amended by Act No. 5189, Dec. 30, 1996; Article 81-3); Article 81-3(1) of the Framework Act on National Taxes (amended by Act No. 815, Dec. 18, 2002; Article 81-5; Article 81-2 of the same Act provides for the prohibition of duplicate investigation (Article 81-3); and Article 81-5 of the same Act (amended by Act No. 6782, Dec. 18, 2002) for the first time to ensure fairness and objectivity of a tax investigation; Article 81-3(1) of the same Act provides for the following: “Where a taxpayer is found to have no specific provision relating to a tax investigation, it shall be conducted within the minimum scope necessary to realize a fair and fair taxation; where a taxpayer is found to have no specific duty to make and submit a tax investigation report; and where a taxpayer is found to have no other duty to make and submit a tax investigation report.

C) In full view of the relevant provisions of the former Framework Act on National Taxes and the background and purport of the introduction of Article 81-6 of the former Framework Act on National Taxes concerning the criteria for and method of selecting the persons subject to tax investigation, the act of collecting taxation data by selecting them subject to tax investigation while there is no reason to select them subject to tax investigation under Article 81-6 of the former Framework Act on National Taxes is in violation of the due process principle and Articles 81-4 and 81-6 of the former Framework Act on National Taxes, and thus, the said taxation disposition is unlawful, barring any special circumstance (see Supreme Court Decision 2012Du911, Jun. 26,

In addition, when a tax investigation is conducted in light of the taxpayer's property rights or business impact, various side effects that may arise when the tax authority conducts a tax investigation without permission, the tax investigation may commence only when it falls under the above-mentioned grounds prescribed by the law, and whether it falls under the grounds for commencement of the tax investigation should be strictly interpreted. In principle, the defendant bears the burden of proving that the tax disposition is lawful with respect to the facts that meet the tax requirements, such as the tax grounds and the tax base amount. Thus, the defendant must prove that the tax

(ii) the facts of recognition

The following facts may be acknowledged in full view of the contents of evidence No. 10-1, 3, 7, 9, 11, 22, 30, 44, 45, 47, 49, 51 through 58, and evidence No. 10-1, 3, 7, 9, 11, 22, 30, 44, 47, 49, 51 through

① From August 24, 2009 to December 2012, Nonparty 2 worked as a leader and library in the National Tax Service’s property tax transaction management division. From October to November 1, 201, Nonparty 3 requested Nonparty 1 to settle the land transaction-related dispute between Nonparty 1 and Nonparty 3 and pressure through tax investigation to return the ownership of the land, Nonparty 1 directly prepared a report on real estate tax evasion with Nonparty 1 and Nonparty 4 as of January 20, 201, and then, Nonparty 5 sent it to Nonparty 5, the spouse of his de facto marriage, to receive the said report from the National Tax Service on January 30, 2012 (hereinafter “instant report on tax evasion”).

② The content of the instant report on tax evasion is as follows. The said report was accompanied by a real estate sales contract and a seller’s written statement, etc., stating that “Nonindicted 1, around May 201, from Nonparty 3 and Nonparty 7, he/she purchased all of the land and things on the land and things on the land and things on the land of 30 parcels, other than the Seo-gu, Seo-gu, Seoul Special Metropolitan City ( Address 1 omitted) and the right shares thereto, at KRW 2.0 billion.”

The tax base title contained in the main sentence: The actual tax evasion report on Nonparty 1, who acquired real estate at a low price by fraud or other improper means: The actual tax evasion report on Nonparty 1 and Nonparty 4: The tax evasion tax due to acquisition by transfer at a price considerably lower than the market price by purchasing all of the land and the real property on the land and the real property on the land other than Seo-gu ( Address 1 omitted), Seo-gu, and at a price considerably lower than the market price: KRW 12.1 billion. The actual tax evasion tax amount due to the acquisition by transfer at a low price. The actual tax evasion tax amount is assessed against the purchaser under the Punishment of Tax Evaders Act, punishment under the Punishment of Tax Evaders Act, aggravated punishment under the Act on the Aggravated Punishment, etc. of Specific Punishment, etc. of Tax Evaders, etc.

③ On January 31, 2012, the office in charge of receipt of the instant report on tax evasion was in charge of the National Tax Service’s real estate transaction management by the National Tax Service that Nonparty 2 had served as the property tax office in the real estate transaction management and the fourth-class national tax investigator, Nonparty 8, who served as the public official, proposed an instruction to process the instant report on tax evasion to transfer it to the Seoul Regional Tax Office’s investigation and management of investigation by the Seoul Regional Tax Office, which is the Seoul Regional Tax Office having jurisdiction over Nonparty 4’s domicile on the resident registration, and to the Daegu Regional Tax Office, the Daegu Regional Tax Office having jurisdiction over Nonparty 1’s domicile on the resident registration, which is the regional tax office having jurisdiction over Nonparty 4’s domicile on the resident registration, as an intermediary. Accordingly, the instant report on tax evasion was transferred to

④ After the Seoul Regional Tax Office’s investigation management and analysis team, the report on tax evasion in this case was transferred to the third party investigation and management team in early 2012, and the investigation was conducted. During that process, the Seoul Regional Tax Office used the integrated national tax computer network system to inquire about the corporate accounts, etc. of the companies related to Nonparty 1 including the instant company.

⑤ On August 2012, Nonparty 2 called that Nonparty 1’s actual domicile of Nonparty 1 was under the jurisdiction of the Seoul Regional Tax Office in which Nonparty 9 was a public official who was working as the head of the investigation and analysis team of the Seoul Regional Tax Office, and asked Nonparty 9 for the progress of the process of handling the instant report on tax evasion, and that Nonparty 1’s resident registration address was in the Seoul Regional Tax Office, so Nonparty 2 heard that Nonparty 1 did not have the jurisdiction over the tax investigation with respect to Nonparty 1, and that Nonparty 1’s actual domicile was “Seoul Gangnam-gu (hereinafter address 2 omitted).” Nonparty 9 filed an application for competent conciliation with Nonparty 2 as an addressee on August 2012, the Commissioner of the National Tax Service (the head of the real estate transaction and management division) and the head of the Seoul Regional Tax Office with the approval of Nonparty 5 and Article 11 of the Regulations on the Investigation Affairs, and applied for the first planning and analysis of information on tax evasion at the Seoul Regional Tax Office for efficiency.” Nonparty 2 approved on December 24, 2012.

6) The Seoul Regional Tax Office’s investigation management and analysis team designated Nonparty 2’s actual place of residence as Seoul with the above Nonparty 2’s statement, and applied for the conciliation of tax investigation with the Seoul Central Tax Office’s investigation management and analysis team, and did not undergo the procedure to verify whether Nonparty 1 actually resides in the above address

7) After the Seoul regional tax office’s investigation and management, the Seoul regional tax office selected companies related to Nonparty 1, including Nonparty 1 and the instant company, as tax investigation subjects based on the report on the instant tax evasion. On August 31, 2012, the Seoul regional tax office established a tax investigation plan on Nonparty 1’s suspicion of tax evasion of gift tax and corporate tax integration investigation on the instant company, and organized the Seoul regional tax office’s investigation third and fourth team (the team leader: Nonparty 6).

④ Accordingly, the Seoul Regional Tax Office’s investigation 3 and 4 team investigators, including Nonparty 6, began to enter the office of the instant company located in Ulsan on September 6, 2012, and seize relevant documents, details of passbook, etc., and thereafter, used the company’s second floor office for three months thereafter, and conducted a tax investigation on Nonparty 1 and the company of this case (hereinafter “instant tax investigation”).

9) The notice of tax investigation in the instant tax investigation contains the following: (a) the taxpayer’s detailed tax investigation; (b) the consolidated investigation into the corporation; and (c) the taxable period subject to the investigation: (a) the period from January 1, 2007 to December 31, 201; and (d) the period of investigation: (b) the details of the report on the corporate tax, etc. of the returned corporation: (a) the assessment is conducted on September 6, 2012 to November 4, 2012; and (b) the assessment is conducted on the premise that there are omissions and errors in the report; (c) the assessment is deemed necessary to verify the appropriateness of the report; and (d) the assessment is selected as the object of the investigation.

(10) On November 2012, when the instant tax investigation was underway, Nonparty 2 called Nonparty 6 to Nonparty 6 and asked Nonparty 6 for the process of handling the instant report on tax evasion. Nonparty 6 told Nonparty 6 to the effect that, “The transaction details indicated in the instant report on tax evasion cannot be deemed as the acquisition of real estate, so it is necessary to determine whether to take over the said transaction at a low price after taking over the said real estate,” and that, when applying the long-term installment transaction theory, it can be deemed that real estate was taken over. Therefore, Nonparty 1’s real estate low price can be acknowledged as a suspicion of evading gift tax due to taking over

1) In the course of conducting the instant tax investigation, Nonparty 6 told Nonparty 1 and the employees of the instant company to the effect that “If Nonparty 3 agreed smoothly with Nonparty 3 on the land outside Seo-gu ( Address 1 omitted) and 30 parcels of land, it would have not undergone such comprehensive tax investigation.”

(12) On November 24, 2015, Nonparty 2, Nonparty 10, Nonparty 5, and Nonparty 3 consulted with Nonparty 10 to distribute the said land and the above method to Nonparty 3 for compensation, and upon Nonparty 1’s instruction, Nonparty 2 conspired with Nonparty 10 and Nonparty 5’s signature on the charge of violation of the Act on the Aggravated Punishment, etc. of Specific Crimes (hereinafter “the charges of violation of the Act”), including the authority of attorney-at-law’s authority of attorney-law and the charge of violation of the Act on the Aggravated Punishment, etc. of Specific Crimes, upon Nonparty 10 and Nonparty 5’s request from Nonparty 3 for the above real estate from Nonparty 10 and Nonparty 120 million won.

Of them, on May 19, 2016, Nonparty 2, etc. was rendered a judgment of not guilty on the ground that “it is difficult to deem that the evidence submitted by the prosecutor alone proves that Nonparty 3 would deliver KRW 1.2 billion to Nonparty 2, and that Nonparty 2 and Nonparty 3 would finally agree with the power of representation and a written statement of payment to Nonparty 2, thereby giving and receiving a bribe.”

(13) During the investigation process of the above criminal case, Nonparty 9 appeared in an investigative agency and investigated Nonparty 1-related companies in order to verify the source of the real estate purchase price paid by Nonparty 1 to Nonparty 3, who was doubtful as a result of the investigation, and Nonparty 1, etc. was selected as a person subject to investigation because of the circumstance suspected of the above company’s stock title trust. Since there was a large amount of deposit among the relevant companies, Nonparty 1 had the said companies investigate the suspicion of corporate tax evasion, and the said companies had the shareholders change frequently, so that the actual owner of the shares should also examine the gift tax portion arising from stock title trust as well as the gift tax portion arising from stock trust.

4) Nonparty 6 also conducted a tax investigation based on the notice of commencement of tax investigation to be distributed by Nonparty 1, the actual owner of the pertinent real estate, and the Seoul Regional Tax Office’s investigation. The notice of commencement of the tax investigation was written on suspicion of acquisition of real estate value by Nonparty 1, Nonparty 1, and the company related to Nonparty 1 (the fact that Nonparty 1 paid interest on KRW 18 billion to Nonparty 4). The notice of tax investigation was written on suspicion of acquisition by transfer of real estate at the same time, and on suspicion of transfer of real estate (the fact that Nonparty 1 paid interest on KRW 18 billion to Nonparty 4) by Nonparty 1, which was written on suspicion of acquisition by transfer of real estate at the same time. Nonparty 1 did not appear to have been aware of the fact that acquisition by transfer of real estate at the same time in order to resolve the instant case on the report of tax evasion, and it was necessary to determine whether acquisition by transfer of real estate at the same time, which was written on the basis of the fact that acquisition by transfer of real estate was not made.

(15) In addition, Nonparty 9 and Nonparty 6 stated at an investigative agency that “the actual place of residence was assigned to the Seoul Regional Tax Office on the ground that it was Seoul and did not have been subject to the instant tax investigation.” Nonparty 1 stated that, at the time of the call with the investigative agency, the investigative agency had resided 25 years before the Seoul, Gangnam-gu ( Address 2 omitted), but thereafter, he did not reside in the building on the ground, but did not reside thereafter.

3) Determination

Comprehensively taking account of the following circumstances revealed in light of the aforementioned legal principles, it is reasonable to deem that the instant tax investigation was conducted by abusing the authority to conduct tax investigation even though it does not fall under the grounds for appointment of persons subject to tax investigation under the former Framework Act on National Taxes, and that the instant disposition was made based on the taxation data collected through the illegal tax investigation, and thus, is unlawful. Therefore, the instant disposition should be revoked illegally without considering the remaining issues, and the Plaintiff’s above assertion on the same premise is reasonable.

① When the Seoul Regional Tax Office initiates the instant tax investigation, the reason behind the investigation is stipulated in Article 81-6(2) of the former Framework Act on National Taxes and the Defendant also claims the above reasons in the trial. Of the reasons for the selection of persons subject to the tax investigation under each subparagraph of the above Article, the first and second grounds for the selection of persons subject to the tax investigation are not applicable to this case, and only whether they fall under subparagraphs 3 and 4

② The Seoul regional tax office’s investigation and management division selected Nonparty 1 and this case’s company as a taxpayer on the basis of the instant report on tax evasion. The instant report on tax evasion included only the details on Nonparty 1’s suspicion of tax evasion due to Nonparty 1’s acquisition of real estate at low price, and did not contain any details on Nonparty 1’s other suspicion of tax evasion and the instant company’s suspicion of tax evasion of corporate tax evasion. It appears to have concluded that the details of transactions indicated immediately after the commencement of the investigation on the instant report on tax evasion are not the acquisition of real estate, and thus, it cannot be acknowledged that Nonparty 1’s suspicion of tax evasion due to acquisition of real estate at low price does not constitute “the case where there was specific information on taxpayers’ tax evasion” under Article 81-6(2)3 of the former Framework Act on National Taxes.

(3) Article 81-6 (2) 4 of the former Framework Act on National Taxes (amended by Presidential Decree No. 20358, Apr. 2, 2011) provides that “Where there are evident data to prove a suspected omission or error in the details of a return” shall be construed as “where the possibility of confirmation of

However, it is difficult to view that the report on tax evasion in this case is an obvious material to verify the existence of tax omissions or errors in the details of Nonparty 1 or the company’s return by Nonparty 1, and the notice of commencement of tax investigation or the written tax investigation plan distributed from the investigation management department of the Seoul Regional Tax Office is merely an internal document prepared with a wide range of the scope of the tax investigation based on the report on the tax evasion in this case, and thus, it is difficult to view that it is an objective material to confirm the possibility of tax omissions or errors, and thus, it cannot be deemed that it constitutes “the case where there is evident material to prove the existence of omissions or errors in the details of the report,” under Article 81-6(2)4 of the former Framework Act on National Taxes

④ In light of the accounts settlement, etc. of the companies related to Nonparty 1, including the instant company identified through the National Tax Integration Network System, the director of the Seoul Regional Tax Office determined that there was a suspicion of tax evasion by Nonparty 1 or the instant company due to frequent shareholder changes. Unlike Nonparty 1 or the instant company’s report itself, there was no clear evidence to acknowledge the omission or error in the report itself, and Nonparty 1 was also based on a vague trend, not based on clear evidence on the suspicion that Nonparty 1 held the title trust of the instant shares to the Plaintiff.

Therefore, the tax investigation of this case was conducted by Nonparty 1 and the company of this case by unfairly selecting the subject of the tax investigation under Article 81-6(2) of the former Framework Act on National Taxes, even though there is no ground for selection

⑤ The Seoul regional tax office’s investigation and management division concluded that Nonparty 1 could not be found a suspicion of evading gift tax due to the acquisition by transfer of real estate at a low price after the commencement of the investigation on the instant report on the tax evasion report, but confirmed the source of Nonparty 1’s real estate purchase price. As a result, Nonparty 1’s settlement of accounts, etc. of the instant company without relation to the contents of the written report on the instant tax evasion report, and on the ground that Nonparty 1’s transfer of real estate at a large amount and the change of shareholders of the said company frequent, it extended the scope of the investigation by a comprehensive corporate investigation on the instant company. This exceeded the minimum scope necessary to realize appropriate and fair taxation, and constitutes a violation of Article 81-4(1) of the former Framework Act on National Taxes.

(6) Article 5(1) of the former Regulations on the Management of Investigations (amended by National Tax Service Directive No. 2105, Jun. 30, 2015; hereinafter the same shall apply) provides that "tax investigation affairs shall be conducted by the head of a tax office or the director of a regional tax office having jurisdiction over the place where the relevant items of taxation are liable to pay taxes: Provided, That he/she may perform tax investigation affairs deemed important by the Commissioner of the National Tax Service, but the director of a regional tax office (the Commissioner of the National Tax Service, in cases where the director of a regional tax office differs) may adjust the jurisdiction of investigation in consideration of the taxpayer's main office or place of business, the location of the place of business, and other actual business, or the necessity of strict tax investigation, the type of business and the scale of business, the amount of duties by tax office, and the number of investigation personnel by tax office, etc."

In accordance with Article 5 (1) of the former Regulations on the Management of Investigations, although the jurisdiction over the tax investigation of Nonparty 1 and the company of this case was the resident registration address of Nonparty 1 or the regional tax office (Tgu and Busan) having jurisdiction over the head office of the company of this case, the Seoul regional tax office's investigation management division appears to have adjusted the jurisdiction over the tax investigation of Nonparty 1 and the company of this case as the Seoul regional tax office without taking the confirmation procedure only on the basis of Nonparty 2's statement of Seoul, i.e., Seoul., the Seoul regional tax office. This cannot be deemed to fall under the grounds for adjustment of the jurisdiction over the tax investigation as provided in Article 5 (2) of the above Regulations. Thus, the tax investigation of this case is beyond the jurisdiction over

7) The initial tax investigation of this case started by Nonparty 2, who is a public official of the National Tax Service, to pressure Nonparty 3 to get the ownership of the disputed land returned to Nonparty 1, and, even during the process of the tax investigation, Nonparty 2 participated and conducted the tax investigation at the Seoul Regional Tax Office without jurisdiction over the tax investigation. The details indicated in the report on tax evasion, even though being aware that there was no suspicion of tax evasion, were known that the tax official conducted the tax investigation for a long time by unfairly expanding the scope of the tax investigation and conducted the tax investigation for a long time, and expressed that Nonparty 1 et al. would end up an agreement with Nonparty 3, etc., the instant tax investigation of this case may be deemed to have been abused for personal interest of Nonparty 3 or Nonparty 2.

3. Conclusion

Therefore, the plaintiff's claim shall be accepted with due reasons, and the judgment of the court of first instance is unfair with different conclusions, so it is so decided as per Disposition by accepting the plaintiff's appeal and cancelling the judgment of the court of first instance and accepting the plaintiff's claim.

[Attachment]

Judges Sung Pung-tae (Presiding Judge)