[Defendant-Appellant] Plaintiff (Attorney Choi Young-chul, Counsel for defendant-appellant)

Head of Mapo Tax Office

October 6, 2011

Seoul Administrative Court Decision 2010Guhap32952 Decided February 25, 2011

1. The plaintiff's appeal is dismissed.

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

The judgment of the first instance shall be revoked. The defendant's disposition of imposition of KRW 306,263,310 against the plaintiff on March 5, 2010 shall be revoked.

1. Details of the disposition;

A. A. On December 21, 1998, a world culture corporation (hereinafter “instant company”) was incorporated with capital of KRW 50 million for the purpose of printing and manufacturing business, etc. on December 21, 1998 (total issued shares 10,000 x 5,000 won per share). Since then May 10, 2005, capital was 20 million won for capital increase with capital of KRW 150,000 per share (new shares x 5,000 won per share) and 40,000 won for total issued shares.

B. On December 10, 2005, the Nonparty, who was a shareholder of the instant company, transferred 12,000 shares of the instant company (hereinafter “instant shares”) to the Plaintiff at KRW 10,000 per share.

C. The Defendant deemed the above transfer of shares as the donation of profits from the transfer at low price under Article 35(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax and Gift Tax Act”), and calculated the price per stock of the instant company by using the appraisal method of unlisted stocks as stipulated in Articles 54 through 56 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 20621, Feb. 22, 2008; hereinafter “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”). The specific contents are as follows.

The weighted average amount of net profit or loss for the latest three years = [30 won per share of the business year which becomes one year before the base date of appraisal 】 (3) 】 (net profit or loss per share of the business year which becomes two years before the base date of appraisal 】 2) ± (1) ± (1) ± 60 net profit or loss per share of the business year which becomes three years before the base date of appraisal ± (1) ± 3) ± 60 net value per share of the interest rate determined and publicly announced by the Commissioner of the National Tax Service in consideration of the weighted average amount of profit or loss for the latest three years ± 3 years ± (1) 40 net asset value per share of the corporation ± 000 net asset value per share of the corporation ± 3000 net asset value per share of the total net asset value of the corporation ± 20 years 30 years ± 40 net asset value per share of the corporation 】 20 years ± 204 net value per share of the net asset value per week 】 20 years 】

D. On March 5, 2010, the Defendant calculated gift gains on the premise of the price per share as indicated in the preceding paragraph, and imposed on the Plaintiff the gift tax of KRW 306,263,310 (including additional tax on negligent tax returns of KRW 37,674,240 and KRW 80,217,876) in March 5, 201 (hereinafter “instant disposition”).

E. On May 17, 2010, the Plaintiff filed a petition for review with the Commissioner of the National Tax Service against the instant disposition, but was dismissed on July 19, 2010.

【Fact-finding without dispute over the ground for recognition】 - Evidence Nos. 1 and 2, evidence Nos. 1, 2, Eul evidence Nos. 1, 2-1 through 5, Eul evidence No. 3, and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The instant disposition should be revoked on the grounds that it is unlawful for the following reasons.

1) 10,00 won per share, the price for which the Plaintiff purchased the instant shares, was assessed according to the supplementary assessment methods, even if it falls under the market price in light of transaction practices.

In addition, Article 56 (1) 2 of the former Enforcement Decree of the Inheritance and Gift Tax Act provides that, in calculating the net profit and loss per share of unlisted stocks in the case of voluntary declaration, the value per share based on the evaluation by a credit assessment institution or an accounting corporation under the Certified Public Accountant Act shall be deemed as its value in the calculation of the net profit and loss per share of unlisted stocks for the last three years. Although the Plaintiff had been given an opportunity to file a voluntary declaration, it is erroneous for an evaluation of the price by

2) In order to calculate the price of the instant shares, the Defendant calculated the net profit and loss per share for the last three years by applying Article 56(1)1 of the former Enforcement Decree of the Inheritance and Gift Tax Act (hereinafter “Enforcement Decree of the instant case”). According to the foregoing, the Defendant calculated the amount of net profit and loss per share for the last three years by dividing the annual net profit and loss per annum by the number of shares per year during the pertinent three years. As such, the stock price dilution caused by capital increase is not reflected since the increase in the number of shares due to capital increase in the pertinent year when the purchase and sale of shares was made is not considered.

In addition, when comparing the provisions of Article 20-2 subparagraph 1 (b) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Finance and Economy No. 505, Apr. 25, 2006; hereinafter “former Enforcement Rule of the Inheritance Tax and Gift Tax Act”) with the provisions of Article 17-3 (5) of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Finance and Economy No. 505, Apr. 25, 2006; hereinafter “former Enforcement Rule of the Inheritance Tax and Gift Tax Act”) that the dilution of stock value due to the increase of capital is based on the assessment value per share after the increase of capital in the case

3) The Plaintiff determined that the pertinent shares were purchased at a reasonable price at the time and reported in good faith, and that there was no purpose of tax evasion. Therefore, the Plaintiff’s failure to perform its duty is deemed justifiable and thus, the Plaintiff’s imposition of penalty taxes for failure to file a report and penalty taxes for failure in payment

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Whether the Plaintiff’s purchase price of the instant shares can be recognized as the market price

A) According to Article 60(2) of the former Inheritance and Gift Tax Act and Article 49(1) of the former Enforcement Decree of the former Enforcement Decree of the Inheritance and Gift Tax Act, the market value is ordinarily established when transactions are freely conducted between many and unspecified persons. This includes the value of sale, appraisal, expropriation, auction or public sale during the period of not more than six months before and after the base date of appraisal (in the case of donated property, three months), which satisfies the requirements under the above Enforcement Decree.

In light of the overall purport of the oral argument, the non-party, who is the transferor of the instant shares, was in office as a director or auditor of the instant company, and the plaintiff was in office as a person operating the 1/2 shares in the company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's company's new company's company's company's company's company's company's company's company's company's company's company's company's company.

B) In addition, according to Article 56(1)2 of the former Enforcement Decree of the Inheritance and Gift Tax Act and Article 17-3(1) of the former Enforcement Rule of the former Enforcement Rule of the Inheritance and Gift Tax Act, in calculating the net profit and loss per share, there are reasons, such as the weighted average amount of special profit and loss under corporate accounting standards for the last three years in the last three years of the ordinary average amount of profit and loss for the last three years of the ordinary profit and loss, and where the requirements such as the case is reported within the deadline for filing a gift tax base return, etc., if the company satisfies the requirements, it shall be the net profit and loss per share under the evaluation by a credit assessment institution or an accounting corporation under the Certified Public Accountant Act for the last three years. As stipulated in the above provision, in the case where the company of this case exceeds 50% of the weighted average amount of special profit and loss under corporate accounting standards for the last three years, or where there is no evidence that the plaintiff reported the gift tax by the acquisition price of the shares of this case within the deadline for filing.

C) The Plaintiff’s assertion on this part is without merit.

2) Whether the provisions of the Enforcement Decree of the instant case are invalid

A) According to Article 63(1)1(c) of the former Inheritance and Gift Tax Act, Articles 54, 55, 56, and 17-3(5) of the former Enforcement Decree of the same Act, in assessing the value of unlisted stocks, the net value of the corporation’s net assets and net value of the profit and loss shall be weighted average, but the net value of the profit and loss shall be weighted average for the last three years per share. In this case, unlike where there is a capital increase, there is no separate provision for assessing the net value per share by converting the number of shares before the capital increase into the number of shares when the capital increase is made. In this case, according to this formula, the net value per share after the capital increase is assessed the same as the net value per share after the capital increase, which is premised on the increase in the ratio of the capital increase, and thus, it cannot be readily concluded that the net value of the capital increase has increased unfairly, and thus, there is a concern for calculating the profit and loss to the taxpayer.

B) However, separate provisions regarding the conversion of the total number of shares to the calculation of net profit per share of 17-3(5) of the former Enforcement Decree of the Inheritance and Gift Tax Act is not to be made with respect to capital increase without compensation, and the increased value of shares is dilution as a result of increase in the number of shares (which would result in the division of par value per share before and after the free increase). In the case of capital increase, the net profit and loss per share due to such dilution should be considered: ① actual paid-in capital; ② Value of the shares should be considered as well as value of future profit and loss; ② Value of the shares should be calculated based on the value of the shares before and after the issuance of new shares; ③ Value of the shares should be calculated on the basis of the estimated profit and loss value per share based on the previous past information, the net profit and loss value per share of which is not determined; ③ Value of the shares should be calculated on the basis of the net profit and loss per share before the issuance of new shares; and ④ Value of the shares can be calculated on the basis of the net profit and loss per share increase.

C) Furthermore, the Plaintiff revised Article 56(5) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act on July 25, 201, and revised the method of evaluating the dilution or change in the value of net profit and loss per share as well as the capital increase without compensation. Thus, according to the above revised Enforcement Decree, the average amount of net profit and loss per share of the instant shares is KRW 34,103,000. However, in administrative litigation, whether the administrative disposition is illegal or not should be determined based on the relevant statutes and factual state at the time of administrative disposition, and it shall not be affected by the amendment, amendment, or change in the factual state (see, e.g., Supreme Court Decision 2001Du10684, Jul. 25, 201). Thus, the amended Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 23040, Jul. 25, 2011) cannot be deemed unlawful due to the amendment of the previous Act.

D) The Plaintiff’s assertion on this part is without merit.

3) Additional tax portion

Under the tax law, in order to facilitate the exercise of the right to impose taxes and the realization of a tax claim, if a taxpayer violates various obligations, such as a return and tax payment, without justifiable grounds, the taxpayer's intentional or negligent acts are not considered as administrative sanctions imposed as prescribed by the law, and the site, error, etc. of the law does not constitute justifiable grounds that are not attributable to the breach of his/her duty (see Supreme Court Decision 2002Du10780, Jun. 24, 2004). The circumstances asserted by the Plaintiff are all the land and error of the law of the Plaintiff. Thus, the Plaintiff's assertion that the penalty tax part of the disposition of this case is unlawful is without merit.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and the judgment of the court of first instance is just, and the plaintiff's appeal is dismissed as it is without merit. It is so decided as per Disposition.

[Attachment Form 5]

On the same day as judge Lee Jong-dae (Presiding Judge)