Plaintiff (Attorney Lee In-bok et al., Counsel for the plaintiff-appellant)

The Director of Gangnam District Office

July 2, 2008

Seoul Administrative Court Decision 2007Guhap24517 decided Nov. 28, 2007

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 shall revoke all the imposition of each gift tax (total amount of tax assessed KRW 1,913, 195, 921) recorded in the [Attachment 1] attached to the plaintiff on June 15, 2006.

1. Details of the disposition;

A. The Samyang Food Co., Ltd. (hereinafter “Seoyang Food Co., Ltd.”) is a listed corporation and applied for composition to the Seoul District Court on February 14, 1998 and obtained the authorization of composition on September 2, 199.

B. On November 29, 2002, a new bank, the National Agricultural Cooperatives Federation, the NAFF, the Korea Exchange Bank, the Korea Exchange Bank, the Han Bank, and the creditor financial institutions consultative council of creditor financial institutions (the supervising bank), composed of Korean banks, shall convert claims 40 billion won against the non-party company into one share per claim amount of KRW 7,500 per 7,500. However, as a means of encouraging the existing major shareholders to make efforts to normalize their management, the shares held by the creditor financial institution through a debt-equity swap shall be prohibited from selling until December 31, 2004, and the previous major shareholders and third parties designated by the existing major shareholders shall be granted the right to request the creditor financial institutions to sell their shares (hereinafter “the priority right of purchase in this case”) on the following terms:

(1) Amount of exercise of claim: 35% of stocks converted into investment.

(2) Claim price: 5,000 won shall be considered as the expected share price at the end of 2004, in consideration of the service report for the debt adjustment of Sam-si KRG FAS.

(3) The stocks subject to exercise of a claim shall be limited to the stocks held by an institution which wishes to exercise a claim among the institutions acquired through conversion of investment, and where the desired amount exceeds the amount “(i)”, they shall be divided in proportion

4. If a claim is not exercised by the above deadline, the claims agency shall promote the sale by a third party, and the existing major shareholders shall not raise any objection thereto.

C. On June 9, 2003, the new bank, the principal bank of creditor financial institutions, entered into an enterprise improvement agreement (hereinafter “instant corporate improvement agreement”) with the non-party company, non-party 1 (the non-party to the judgment of the Supreme Court), the principal representative director of the non-party company, and its related parties (hereinafter “major shareholders”). The parties agreed in the instant corporate improvement agreement to faithfully implement the resolution of the creditor financial institutions council on November 29, 2002. The major shareholders of the non-party company did not exercise their preferential right of purchase of the stocks converted into investment by the creditor financial institutions by December 31, 2004, if they did not exercise their preferential right of purchase until December 31, 2004, the creditor financial institutions council and its related parties did not raise any objection against the decision of the new bank.

D. Under the instant corporate improvement agreement, creditor financial institutions, including the new bank, etc., acquired 4,816,940 shares (76.96% of the total shares after conversion of investment) by converting 36,127,050 won against the non-party company’s bonds into 7,500 won per share on June 24, 2003, and accordingly, the ratio of Non-party company’s share holding by the major shareholders was reduced from 51.1% existing to 11.77%.

E. The Plaintiff, one of the major shareholders of the non-party company (at that time, holding 50 shares of the non-party company) purchased 90,550 shares (hereinafter “the shares of this case”) from the above company by exercising the right of preferential purchase pursuant to the corporate improvement agreement against the creditor financial institutions, and by concluding a share sales contract with Han Bank, Han Han Bank, and New Capital, as indicated in the following table, and then sell 37,550 shares to Hyundai Industrial Development Co., Ltd. (hereinafter “Modern Industrial Development”) on the date of acquisition. As to 313,00 shares, 313,00 shares were transferred at the price calculated by adding 1,00 won to the acquisition value after one year from the date of acquisition after entering into a promise for the development and sale of modern industrial development and after one year from the date of acquisition. The remaining 300,000 shares are still still held.

본문내 포함된 표 일련번호 매매일자 매도인 주식수(주) 주당가액(원) 총 매매대금(원) 1 2005. 1. 10. 하나은행 32,760 5,000 163,800,000 2 2005. 1. 11. 신한은행 545,455 5,000 2,727,275,000 3 2005. 1. 11. 신한캐피탈 412,335 5,000 2,061,675,000 합계 ？ ？ 990,550 ？ 4,952,750,000

F. On January 5, 2005, the Plaintiff purchased the shares of the non-party company 984,060 per share at the price of KRW 6,50,70 per share, KRW 500 per share, KRW 500 to KRW 7,500 per share, KRW 500 per share, KRW 500 per share, KRW 500 to KRW 5,500 per share from Han Bank on January 10, 2005, KRW 764,40 from the foreign exchange bank, and KRW 107,550 from Nonghyup on January 11, 2005.

G. On January 10, 2005, the closing price was KRW 7,420 as of January 10, 2005, and KRW 7,890 as of January 11, 2005, but since January 10, 2005, the closing price was KRW 25,850 as of March 10, 2005. As of January 10, 2005, the closing price was KRW 25,850 as of March 10, 200, and the average closing price for each two months before and after the transfer is calculated as of January 10, 2005, it is KRW 10,110, and KRW 10,360 if the average closing price for each two months before and after the transfer is calculated as of January 11, 2005.

H. The Defendant: (a) deemed that the instant shares acquired by the Plaintiff as above were purchased upon gift from 10 persons, such as Nonparty 1, etc. indicated in the donor column; and (b) on June 15, 2006, pursuant to Article 63(1)1(a) of the Inheritance Tax and Gift Tax Act (hereinafter “Act”), the date of appraisal on January 10, 2005 and on January 11, 2005 as the average of the closing price of the instant shares during the two months before and after the assessment; and (c) on the difference between KRW 5,26,157,98 per share of the purchase price of the instant shares and KRW 5,00 per share of KRW 5,00,00,000, which is the tax base for deduction of lineal ascendants and descendants and other relatives; and (d) notified the Plaintiff of gift tax calculated based on KRW 1,913,371,610 (the amount calculated based on 13,1931,3716).

A. On August 11, 2006, the Director of the National Tax Tribunal rendered a decision on August 16, 2007 that “The Plaintiff included the Plaintiff among the above disposition, including the former major shareholders, to correct the tax base and tax amount and dismiss the remainder of the claim.”

(j) Accordingly, the Defendant: (a) excluded the amount equivalent to the share ratio of 50 shares of the non-party company that the Plaintiff had previously owned (403,505 won) from the gift value; and (b) reduced the total of 175,730 won from the gift tax amount of the gift tax imposed on the non-party 10, including the non-party 1, etc. among the gift tax already imposed (hereinafter referred to as “the gift tax imposition disposition of this case”); and (c) imposed and notified the Plaintiff by reducing the total of 175,730 won from the gift tax amount of the gift tax imposed on the non-party 1.

【Ground of recognition】 The facts without dispute, Gap evidence 1 through 11, Eul evidence 1 through 4 (including evidence with a serial number), non-party 2’s testimony and the purport of the whole pleadings

2. Whether the instant disposition is lawful

(a) Related Acts and subordinate statutes;

[Attachment 2] The entry of relevant Acts and subordinate statutes shall be as follows.

B. Determination

(1) Whether the right of preferential purchase of this case constitutes property subject to gift tax

㈎ 원고의 주장

In the instant corporate improvement agreement, “the preferential right to purchase” granted to major shareholders is not the right to form (the right to complete the pre-sale) but the right to make a sale of shares to creditor financial institutions and the right to make a sale contract only by failing to comply with the creditor financial institutions’ consent. Therefore, the Defendant’s preferential right to purchase was unlawful in the instant disposition that deemed as subject to gift tax by misunderstanding the

㈏ 판단

According to Article 2(3) of the Act, “donation” means a gratuitous transfer (including transfer at a remarkably low price) of tangible or intangible property (including transfer at a remarkably low price) to a third party, either directly or indirectly, in which economic value can be calculated, regardless of the name, form, purpose, etc. of the act or transaction, or an increase in the value of another person’s property by contribution. In addition, donated property under Article 2(1) of the Act includes all things belonging to the donee and all de facto or de facto rights having economic value that can be realized in money, as property belonging to the donee.

According to the above facts, the preferential purchase right of this case is to hold shares acquired by the creditor financial institution through conversion of investment until December 31, 2004 for the purpose of promoting the management normalization of the non-party company's major shareholders. The existing major shareholders and the third parties designated by the existing major shareholders are entitled to request the creditor financial institutions to preferentially sell the shares at the price of 5,00 won until December 31, 2004. Therefore, the preferential purchase right of this case cannot be exercised by the general public, and the third parties designated by the non-party company cannot be seen as a special right or position to exercise the preferential purchase right of the non-party company. ② The price of the claim granted only to the non-party company is set at 5,00 won, regardless of the price of shares at the time of the exercise of the right to demand purchase by the creditor financial institutions and the market price of the non-party company can be determined as 100 won if the market price of the above preferential purchase right can be determined as 5,000 won or more.

Therefore, the plaintiff's above assertion is without merit.

See The ratio of attribution and gift of the right to preferential purchase of this case

㈎ 원고의 주장

In the resolution of the creditor financial council on November 29, 2002, granting a preferential right to purchase to the existing large shareholder shall be deemed not to have a preferential right to purchase stocks corresponding to the ratio of stocks held by the large shareholder among the amount equivalent to 35% of the stocks converted into investment, but to the effect that anyone of the large shareholders recognizes a preferential right to purchase within the limit of 35% of the stocks converted into investment. Therefore, the plaintiff is not a donation

㈏ 판단

As seen earlier, the instant preferential purchase right is entitled to claim the preferential purchase of 35% of the shares converted into investment by a major shareholder or a third party designated by the major shareholder of the non-party company until December 31, 2004, with the claim price of 5,000 won from creditor financial institutions, and where creditor financial institutions make efforts to normalize the management of the non-party company if all major shareholders make efforts to recover the right of management of the non-party company, one of the major shareholders grants the preferential purchase right of this case to all of the major shareholders so it is unreasonable to exercise the preferential purchase right of this case without the consent of the other major shareholders because it does not conform to the purport of granting the preferential purchase right of the non-party company. In light of the fact that one of the major shareholders' internal relationships is unreasonable to exercise the preferential purchase right of this case without the consent or transfer of the other major shareholders, it is reasonable to interpret that the preferential purchase right of this case can not be exercised in excess of their own share ratio without the consent or transfer of the same (in the inside of the major shareholders, it can be abused between the special parties concerned).

Therefore, it would be reasonable to allow the Plaintiff to exercise the preferential purchase right for the shares in this case beyond the Plaintiff’s own share ratio by giving up the preferential purchase right corresponding to the Plaintiff’s share ratio or transferring the preferential purchase right for the shares in this case, which is beyond the Plaintiff’s share ratio, to the extent that it exceeds the Plaintiff’s share ratio, the preferential purchase right is to gratuitously transfer or increase the Plaintiff’s property value by gratuitously transferring or contributing to the difference between the market price of the shares in this case and the claim price of 5,000

The plaintiff's above assertion is without merit.

ally, who is the purchaser of the shares of this case

㈎ 원고의 주장

The major shareholders of the non-party company, by exercising the preferential right to purchase stocks, decided to enter into the development of the modern industry as an friendly investor because of the lack of funds to purchase stocks from the creditor financial institutions. Since the development of the modern industry is difficult to move into the direct purchaser, the plaintiff borrowed funds from the development of the modern industry and purchased the stocks of this case from the creditor financial institutions, and then promptly sell the remaining stocks to the modern industrial development except for the 300,000 shares purchased from the funds of the major shareholders. Thus, the development of the modern industry in fact shall be deemed to have been directly purchased from the creditor financial institutions with respect to the remaining stocks except for 300,000 shares held by the plaintiff among the shares of this case. The plaintiff did not gain any benefit in relation to the preferential right to purchase.

㈏ 판단

On the other hand, the buyer of the instant stock sales contract is the Plaintiff at the same time with the creditor financial institutions, which are the seller of the said stocks (the creditor financial institutions that sold the instant stocks, did not recognize that modern industrial development is the parties to the contract). Even if the Plaintiff and Hyundai Industrial Development agreed to lend the purchase fund of the instant stocks to the Plaintiff and immediately sell the stocks purchased by the Plaintiff to the Hyundai Industrial Development, as alleged by the Plaintiff, the agreement is merely an internal re-sale agreement between the Plaintiff and the Hyundai Industrial Development, and the legal effect arising from the instant stock sales contract is all attributed to the Plaintiff. (If the period of possession was too short as soon as the date of the purchase was immediately short of the period of possession).

The plaintiff's above assertion is without merit.

m. Method of calculating the gift value of the preferential purchase claim

㈎ 원고의 주장

Since the gift property of this case is not a priority right, it shall not be used to calculate the gift value, and the method prescribed in Article 58-2 (2) 2 (d) of the Enforcement Decree of the Act should be applied mutatis mutandis to the method of calculating the price by an objective and reasonable method separately, or the method prescribed in Article 58-2 (2) 2 (d) of the Act to acquire the shares of this case (excluding the balance of 300,000 shares) and sell or pre-sale the shares immediately to the modern industrial development on that day. In addition, it is not appropriate to calculate the market price of this case by the average closing price of two months before and after the base date of appraisal as stipulated in Article 63 (1) 1 (a) of the Act.

In calculating the preferential purchase value of the instant claim on the above premise, the amount calculated by subtracting KRW 0 or KRW 7,420 per share from KRW 7,890 or KRW 5,000 per share. On the other hand, the instant disposition that calculated the gift tax by regarding the amount calculated by subtracting the value of the instant preferential purchase right from KRW 10,110, KRW 10, KRW 10, KRW 10, and KRW 360, the average of the closing price of February before and after the date of the sale of the instant shares, as the gift tax is unlawful.

㈏ 판단

1) Relevant provisions in the calculation method of value of donated property

Article 60 of the Act provides that the value of donated property shall be based on the market price as of the date of donation (paragraph (1)) and that the market price shall be deemed to be normal if a free transaction is made between many and unspecified persons (paragraph (2)). If it is difficult to compute the market price, considering the type, size, transaction conditions, etc. of the relevant property, the value assessed by the methods stipulated in Articles 61 through 65 of the Act (paragraph (3) shall be based on the said method. Article 65 (2) of the Act provides that the assessment of property, the method of which is not provided for separately, shall be assessed by applying mutatis mutandis the method of appraisal stipulated in Articles 65 (1) and 60 through 64 of the Act. Accordingly, Articles 60 through 64, 65 (1) of the Act and Articles 50 through 63 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act (hereinafter “Enforcement Decree”).

2) Determination of the method of calculating the value of the instant preferential purchase claim

In this case, the preferential right of purchase, which is the right to claim the sale of the shares of the non-party company, which is a listed corporation held by the creditor financial institution, was seen earlier. The above preferential right of purchase is difficult to calculate the market price and the supplementary method of appraisal under the Act and the Enforcement Decree is not separately prescribed. Thus, the above preferential right of purchase should be calculated by applying mutatis mutandis the appropriate method of appraisal among the supplementary method of appraisal under the Act and the Enforcement Decree pursuant to Article 65(2) of the Act.

However, the right to underwrite new shares of a listed corporation, i.e., the right to subscribe to new shares of the listed corporation, i.e., the difference between whether the shares that can be acquired or acquired are new shares or existing shares issued by the exercise of the right to subscribe to new shares, and the right to subscribe to and acquire shares, which is very similar to the right to preferential purchase of this case. Under the Enforcement Decree, the amount calculated by subtracting the dividend difference and the acquisition price of new shares from the value of the stock that can be acquired as the relevant warrant certificates (Article 58-2 (2) 2 (c)), and the value calculated by subtracting the dividend difference and the acquisition price of new shares from the value of the stock that can be acquired as the relevant warrant certificates (Article 58-2 (2) 2 (c)) from the value of the stock that can be acquired as the relevant preemptive right to new shares (Article 58-2)

However, in the case of acquiring the stocks already issued, such as the instant preferential purchase right, there is no difference in dividend or ex-right, and thus, the value of the instant preferential purchase right is reasonable and appropriate to calculate the “expenses incurred in acquiring stocks” from the “value of stocks acquired” by exercising the said preferential purchase right.

3) The meaning of “acquisition value” in calculating the value of the preferential purchase claim

A) In calculating the price of the instant preferential purchase right by the aforementioned method, it is clear that the “expenses incurred in acquiring stocks” is KRW 5,000 per share, which is the purchase cost of the instant stocks, but there is a dispute over the criteria for calculating the “value of the acquired stocks”, and this is examined as to this point.

First, Article 63(1)1(a) of the Act provides that where a listed corporation’s stocks themselves are donated property, the value of the stocks shall be “the average closing price for each two months before and after the base date of appraisal.” In light of the fact that, unlike other property, the stock price of the listed corporation’s stocks can not only change through trading in the public stock market every day, but also the change in the market price during a short period of time, the value of the stocks should be calculated on the basis of only the stock price on the day before the base date of appraisal, deeming that the value of the stocks cannot be fairly assessed, and that the purpose of calculating the value of the stocks is to reflect the change in market price during a certain period in the assessment

Furthermore, even in cases where it is necessary to calculate the “value of stocks” acquired and acquired by exercising a preemptive right or a preferential right claim to purchase stocks, rather than the stocks themselves, in order to calculate the value of the preemptive right or preferential right to purchase, the purport of Article 63(1)1(a) of the Act is necessary to realize the above provision, and there is no special reason to apply the method of calculating the value different from the case of donation of stocks itself, and therefore, it is reasonable to regard the value of the instant preferential right to purchase stocks to be calculated first as the average value of the closing price of two months before and after the base date of appraisal.

B) As to this, the Plaintiff again sold the remaining shares, excluding 300,000 shares, to Hyundai Industrial Development on the date of acquisition, as it is, or made a pre-sale promise by adding only 1,000 won per share to the acquisition value. The Plaintiff asserts to the effect that taking into account the price of the shares of this case for two months, which have been rapidly increased since the date of acquisition, is inappropriate because it did not reflect the substance of the transaction, in calculating the price of the shares of this case for the two-month period since the date of acquisition.

However, the transfer of shares by a donee before two months after the evaluation base date or the increase in the price of shares during the above period is likely to occur even when the donation of shares itself is made. In light of the purport of Article 63(1)1(a) of the above Act, it is not appropriate to consider the average closing price for two months after the evaluation base date in the calculation of the price of the shares in this case, on the ground that there are the above circumstances asserted by the plaintiff, in light of the purport of Article 63(1)1(a) of the above Act.

C) The Plaintiff: (a) sold the instant shares to the Hyundai Industrial Development, thereby creating an opportunity for the conclusion of composition by entering the said shares into a favorable investor for the development of modern industry; (b) accordingly, the share price of the non-party company began to increase rapidly since the date of acquisition of the instant shares; (c) the time following the occurrence of such special circumstance should be excluded from the period for calculating the closing average amount in accordance with Article 63(1)1(a) of the Act and Article 52-2(2) of the Enforcement Decree of the Act.

In calculating the average of the closing prices publicly announced for two months before and after the evaluation base date, in cases where it is inappropriate to follow the average amount due to the occurrence of causes such as capital increase or merger during the period of two months before and after the evaluation base date, in the calculation of the average amount of the closing prices publicly announced for two months before and after the evaluation base date, the average amount of the period calculated as prescribed by Presidential Decree during the two months before and after the evaluation base date shall be determined based on the average amount during the period of two months before and after the evaluation base date. However, the above reasons alleged by the Plaintiff cannot be deemed to constitute cases where it is inappropriate to follow the average amount of the closing prices for two months before and after the evaluation base date, as in the case of capital increase or merger, etc.

4) Sub-determination

Ultimately, the value of the instant shares is KRW 10,110, or KRW 10,360, the average of the closing price of two months before and after the date of acquisition, and the Plaintiff purchased the instant shares at KRW 5,000 per share lower than that, the Plaintiff’s preferential purchase right or the Plaintiff’s gift income derived from KRW 10,110, or KRW 10,360 per share, shall be the amount calculated by subtracting the Plaintiff’s gift tax from KRW 10,110 per share, and the instant disposition imposing gift tax on the Plaintiff is legitimate on the above premise, and otherwise, the instant disposition imposing gift tax on the Plaintiff is legitimate, and the Plaintiff’s assertion that the value of the instant preferential purchase right is the difference between KRW 0 or KRW 7,420,7,890, and KRW 5,000, which is the acquisition cost.

3. Conclusion

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

[Attachment]

Judges Cho Yong-ho (Presiding Judge)