Cho High Court Decision 2007No4150 (Law No. 9.15, 2009)

Appropriateness of the assertion that the largest shareholder is not subject to verification;

In applying Article 100-2 of the Restriction of Special Taxation Act to the provisions of Article 63 of the same Act, in case where the stocks of the largest shareholder and those of the shareholders specially related to the largest shareholder are inherited or donated before December 31, 2006, Article 63(3) of the same Act provides that the certificate of the largest shareholder shall not be assessed notwithstanding Article 63(3) of the Gift Tax Act

The contents of the decision shall be the same as attached.

1. On June 4, 2007, the part of the Defendant’s imposition of gift tax of KRW 1,276,981,710 against the Plaintiff for the year 2005, which exceeds KRW 1,042,939,540, shall be revoked.

2. The plaintiff's remaining claims are dismissed.

3. Of the litigation costs, 80% shall be borne by the Plaintiff, and 20% shall be borne by the Defendant.

The Defendant’s disposition of imposition of KRW 1,276,981,710 on June 4, 2007 against the Plaintiff was revoked.

1. Circumstances of the disposition;

A. △ Institute Co., Ltd. (hereinafter referred to as “△ Institute”) is an unlisted company established on May 29, 1997 for the purpose of teaching institutes business.

B. On October 26, 2005, the Plaintiff acquired 20,000 shares (hereinafter “instant common sense”) from the KimA in total at KRW 260,00,000 per share of KRW 13,000 per share (hereinafter “instant common sense”).

C. According to Articles 60(1) and (3), 63(1)1(c) and (3), and 54(1) and (2) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “Gift Tax Act”) on the assessment of non-listed stocks, the head of ○○○ Director of the Regional Tax Office notified the Plaintiff of taxation data on the assessment of the non-listed stocks of KRW 3,329,520,00 (16,476 won per week); the Defendant, on June 4, 2007, issued a decision that the Plaintiff acquired the shares of this case from the KimA having a special relationship provided for in Article 35(2) of the Gift Tax Act; the assessment value of the shares of this case after deducting KRW 3,329,520,300,360,300,3605,205,3605,2005.

[Ground for Recognition: Facts without dispute, Gap evidence 1, Gap evidence 2, Gap evidence 3, Gap evidence 4, Eul evidence 1, Eul evidence 2, Eul evidence 3-1 and 3, the purport of the whole pleadings]

2. Whether the dispositions of the instant case are legal.

A. The plaintiff's principal

Because of the following reasons, the disposition of a dual case is illegal, it should be revoked.

1) The Plaintiff and KimA did not have any special relationship under Article 35(2) of the Inheritance Tax and Gift Tax Act at the time of the instant sales, Article 26(4)1, and Article 19(2)1 and 2 of the Enforcement Decree of the same Act.

2) The shares of △△ Institute were traded at a price of KRW 5,00 per share for capital increase and KRW 10,000 per share for a commercial transfer, and KRW 13,00 per share for a commercial transfer. Moreover, △△ Institute was a small-scale company that has not been established, and there was no particular change in the business performance and financial situation at the time KimB acquired 15,000 shares out of the shares of this case from KimB to the Plaintiff and the Plaintiff at the time of transfer of the shares. In light of the foregoing, the value of KRW 13,00 per share is traded by a general and normal method, and it constitutes the market price that appropriately reflects the objective exchange value at the time of the transaction. Nevertheless, the Defendant applied the supplementary evaluation method instead of applying the market price in the instant disposition.

3) Even if the value of the instant shares is assessed according to the supplementary assessment method, the instant transaction is not only a transaction date between parties other than the parties having special relationship, but also a transaction date between the largest shareholder, etc., and Article 100-2 of the Restriction of Special Taxation Act provides that the largest shareholder shall not be assessed by applying the latter part of the main sentence of Article 63(3) of the Inheritance Tax and Gift Tax Act. Therefore, the value per share shall not be deemed 166,476 won, which is the appraised value before the premium increase, and shall not be deemed 14,762 won.

4) Even if the value of the instant shares should be calculated by the Net Profit and Loss Calculation Act, which is a supplementary assessment method, the Defendant erroneously calculated the net profit and loss amount in excess due to the following circumstances:

A) From January 1, 2001 to December 31, 2005, △ Institute opened and managed a non-financial account in the name of KimCC in relation to teaching materials and mother tests, and deposited money such as teaching materials sold to students into such non-financial account and withdrawn money from the non-financial account and paid the price for teaching materials supplied to customers such as the publishing company.

B) At the time of filing a revised return of corporate tax on May 2, 2006, 19: (a) 287,635,470 won (i.e., 239,696,225x 1.2) was included in the sales revenue as teaching material expenses by reflecting 239,69,696,225 won as expenses for teaching material expenses received tax invoices at the time of filing a revised return of corporate tax for the business year of 2002; and (b) 287,635,470 won as expenses for teaching material expenses received at the time of filing a revised return of corporate tax for the business year of 202; and (c) 309,004,000 won as expenses for teaching material expenses received at the time of filing a revised return of corporate tax for the business year of 202; and (d) was not reflected in the sales revenue amount of 2002,635,4700 won as the total sales revenue amount initially deposited in the corporate tax account.

(b) Related statutes;

It is as shown in the attached Table related statutes.

(c) Fact of recognition;

(1) Details on the issuance of shares, transfer of shares, and subscription to new shares, etc.

“(A) The △ Institute is operated as an individual entrepreneur, and its capital was established as a stock company with 150,000,000 won on May 29, 1997. At the time of its establishment, KimD, KimE, KimF, KimF, KimGG, and HH acquired shares as stated in the column of “establishment-2001” of the list on the stock holding status by each shareholder under the following conditions.” (B) On December 2, 2002, KimB acquired 10,500 shares at a price of 10,000 won per share from KimD, and on March 26, 2003, acquired 24,500 shares at a price of 5,000 won per share at the time of capital increase.

(C) The J and KimA acquired the shares of the △ Institute from KimB on January 9, 2004 and from HaH as follows.

(D) On October 26, 2005, after the acquisition of the instant shares, the J transferred the instant shares to KimK at the price of KRW 13,000 per share. The KimA transferred on October 26, 2005 20,000 per share (15,000 shares from GB, and 5,000 shares from HH) of the shares it acquired to the Plaintiff on October 26, 2005.

(e) If the status of stockholding by shareholders is adjusted accordingly, the following table is as follows:

(2) The current status of executive officers of △ Institute

The current status of executive officers of △△ Institute shall be as follows:

[Ground for Recognition: Facts without dispute, Gap evidence 1, Gap evidence 2, Gap evidence 3, Gap evidence 4, Eul evidence 1, Eul evidence 2, Eul evidence 3-1 through 10, the purport of the whole pleadings

D. Determination

(1) As to the allegation that the instant transaction was not a transaction between related parties

(A) The meaning of "transferr or transferee" under Article 26 (4) of the Enforcement Decree of the Gift Tax Act refers to a transferee and a transferee in cases where a lower price under Article 35 (1) 1 of the Gift Tax Act is taken over; in cases where a high price is transferred under Article 35 (1) 2 of the Gift Tax Act, it refers to a transferor and a transferee in cases where a high price is transferred under Article 35 (1) 2 of the Gift Tax Act; and in cases where a transferor or transferee in cases of a high price transfer under Article 35 (1) 2 of the Gift Tax Act is a transaction between the largest shareholder and the related party. Therefore, in order to become a related party, each subparagraph of Article

In addition, Article 19(2)2 of the Enforcement Decree of the Gift Tax Act includes "executive officers of a corporation controlled by investment" to employees under Article 19(2)2 of the Enforcement Decree, and Article 19(2) of the Enforcement Decree of the same Act provides that "the largest shareholder or largest investor" means the shareholder, etc. in the case where the total number of shares held by one shareholder or one investor and a person with a relationship falling under any of the following subparagraphs is the largest shareholder, etc., and the transferor or transferee shall be the shareholder or the investor

(B) However, according to the facts acknowledged above, since the plaintiff was the largest shareholder of the △ Institute at the time of acquiring the shares of this case from KimA, and was not the shareholder or investor of the △ Institute, the plaintiff cannot be deemed to have controlled the △ Institute by "investment" solely on the ground that he was the relative of the largest shareholder. Thus, even if KimA was the director or auditor of the △ Institute, he cannot be deemed to be an employee of the juristic person controlled by the plaintiff's investment, and the plaintiff cannot be deemed to be an employee of the juristic person. On the contrary, this part of the plaintiff's assertion that KimA was a relative of the plaintiff, and KimA was an employee, or the plaintiff was a relative of the plaintiff, KimA was an employee, or the plaintiff maintained his livelihood with the plaintiff's property, there is no evidence to prove that the plaintiff was an employee of KimA at the time of the sale of this case, or the plaintiff maintained his livelihood with the plaintiff's property. Thus, KimA did not have a special relationship with the plaintiff at the time of the sale of this case.

However, Article 35(2) of the Inheritance Tax Act provides that, even if the transferor and transferee are not in a special relationship, if the transferee take over the property at a price considerably lower than the market price without any justifiable reason, due to the transactional practice, the amount equivalent to the difference between the price and the market price shall be presumed to have been donated. Accordingly, the tax base for the shares of this case calculated according to Article 35(1) of the same Act is the same as the tax base calculated pursuant to Article 35(1) of the same Act, and 13,000 won per share, which is the market price of the shares of this case, shall be 43,428 won (14,762 wonx 30/100, but less than the market price, 131,762 won (14,762 won - 13,00 won) which is the amount equivalent to 30/100 of the market price of the shares of this case, the plaintiff shall not be deemed to have any special relationship with the plaintiff.

(ii) the determination of the market price in a supplementary assessment method is unlawful;

As seen earlier, the Plaintiff and KimA did not have a special relationship at the time of the instant transaction, but the Plaintiff is the wife of KimD, who is the largest shareholder, and KimA had worked as a director or auditor of the △ Institute, and the transaction between KimB and KimB, HaJ, and HaJ and KimA had a considerable gap from the instant transaction. In light of the fact that all of the above parties were officers or substantial controlling shareholders, or substantial controlling shareholders, and only officers and employees of the △ Institute were participating in capital increase, it is difficult to view that the value of the shares at the time of the instant transaction was properly reflected in the objective exchange value at the time of the instant transaction, and it is impossible to find that the value of the shares at issue is recognized as an ordinary transaction that is freely established between many and unspecified persons within a certain period after the date of the instant transaction. Accordingly, it is legitimate to assess the value of the instant shares by means other than a supplementary evaluation method, and thus, the Plaintiff’s assertion is justifiable.

(3) As to the assertion that the largest shareholder is not subject to evaluation of evidence

The issue of whether the market price of the instant shares is subject to an increase in the valuation of the market price according to the supplementary valuation method under the Inheritance Tax and Gift Tax Act is determined depending on whether the relevant shares are shares held by the largest shareholder, etc. (see Supreme Court Decision 2005Du7228, Dec. 7, 2006). As seen earlier, as seen earlier, 30,000 shares by the largest shareholder of the △ Institute at the time of the instant purchase and sale, Kim F, KimF and KimG, who are directors of the △ Institute managed by KimD through investments, are 7,500 shares by each of 7,500 shares by the △ Institute, 20,00 shares by the directors, YJ and Kim Jong-A, who are directors, and 15,00 shares by the auditor KimE held all of 15,00 shares issued by the △ Institute, and the shares are subject to increase in the number exceeding 50/100 shares by the largest shareholder, etc. under Article 63(3) of the Inheritance Act.

On the other hand, Article 100-2 of the Restriction of Special Taxation Act (amended by Act No. 8146 of Dec. 30, 2006; hereinafter the same) provides that in applying Article 63 of the same Act, where the largest shareholder under Article 63 (3) of the same Act and the shareholder's stocks related to the largest shareholder are inherited or donated before December 31, 2006, the value of shares shall be calculated by supplementary assessment methods, notwithstanding Article 63 (3) of the same Act, the largest shareholder shall not be assessed by supplementary assessment methods. Article 2 (1) of the Restriction of Special Taxation Act provides that "donation" under Article 2 (3) of the same Act means "donation" under the same Act, regardless of the name, form, purpose, etc. of such act or transaction, if the transfer of the tangible or intangible property is made without consideration, it shall not be deemed that the transfer of shares is made without consideration under Article 30 of the Restriction of Special Taxation Act if the transfer of shares is made without consideration.

In the instant case, the Defendant assessed the value of the instant shares by adding 15/100 to the value recognized under Article 60(1) of the Inheritance Tax and Gift Tax Act, deeming that △ Institute constitutes a small and medium enterprise under Article 63(3) of the Inheritance Tax and Gift Tax Act. As seen earlier, △ Institute is a small and medium enterprise under Article 63(3) of the Inheritance Tax and Gift Tax Act, and the Defendant issued the instant disposition by applying Article 63 of the Inheritance Tax and Gift Tax Act with respect to the instant sales, as seen earlier. Accordingly, the sales and purchase of the instant shares is not subject to the appraisal by the largest shareholder under Article 63(3) of the Inheritance Tax and Gift Tax Act. Accordingly, the sales and purchase of the instant shares shall be deemed 14,762 won, the appraised value before the largest shareholder is assessed. Therefore, the Plaintiff’s above assertion

(4) As to the assertion that the "net profit and loss" was calculated excessively in calculating the market price according to the supplementary evaluation method by double calculation of the sales amount in 2002

The plaintiff's assertion on this part is based on the premise that the revenue of the teaching materials expenses, etc. acquired by the △ Institute in the business year 2002 was deposited and managed into the non-financial account in the name of KimCC, and it is insufficient to recognize that the △ Institute deposited the amount of the teaching materials expenses in the business year 2002 into the above non-financial account, and there is no other evidence to support this. Thus, the plaintiff's assertion on this part is without merit without need to further examine.

(5) Sub-performance theory (Calculation of tax amount)

The facts are as seen earlier, that the appraised value of the instant shares calculated according to the supplementary assessment method stipulated in Article 63(1) of the Inheritance Tax and Gift Tax Act, without the evaluation of the largest shareholder, are 14,762. As such, when calculating the amount of gift tax reverted to the Plaintiff in 2005 due to the acquisition of the instant shares based on the acquisition of the shares, the amount of gift tax belonging to the Plaintiff in the year of 2005 shall be calculated as follows: (a) as stated in the “total Determination Tax Amount” column, the portion in excess of the disposition in the instant case shall be revoked.

3. Conclusion

Therefore, the plaintiff's claim of this case is justified within the scope of the above recognition, and the plaintiff's claim of this case is dismissed as it is without merit. It is so decided as per Disposition.