Plaintiff 1 and six others (Law Firm Han-ro, Attorneys Lee Dong-soo et al., Counsel for the plaintiff-appellant)

The Head of Gangnam District Tax Office et al.

December 7, 2016

Seoul Administrative Court Decision 2015Guhap62453 decided April 1, 2016

1. Of the judgment of the first instance court, the part against the Defendants in excess of the order to revoke is revoked, and the plaintiffs' claims corresponding to the revoked part are dismissed.

Of each disposition of imposition listed in the attached Table 1 that the Defendants rendered against the Plaintiffs, the part in excess of the amount indicated in the “total final tax amount” column of the annexed Table 6 for calculation of the amount of justifiable tax shall

2. All remaining appeals by the Defendants are dismissed.

3. Of the total litigation costs, 60% is borne by the Plaintiffs, and 40% is borne by the Defendants, respectively.

1. Purport of claim

Each disposition taken by the Defendants against the Plaintiffs listed in the separate sheet No. 1 shall be revoked.

2. Purport of appeal

The judgment of the first instance is revoked. All of the plaintiffs' claims are dismissed.

1. Details of the disposition;

A. On June 1, 1998, the co-Plaintiffs non-party 1 (hereinafter referred to as "non-party 1") of the first instance trial established SPP Co., Ltd. (hereinafter referred to as "the company of this case") for the purpose of manufacturing and selling clothes in Gwangjin-gu, Seoul ( Address omitted).

B. From March 13, 2014 to May 16, 2014, the head of the Seoul Regional Tax Office: (a) conducted an integrated investigation into the instant company and an investigation into the change of shares; (b) conducted the title trust of the shares issued by the instant company to Nonparty 1 or to Nonparty 2, etc. at the time of its establishment in 198; (c) conducted the title trust of the shares in the name of 19 executives, employees, etc. while undergoing the purchase and sale process and the capital increase for new shares; (d) on December 2006, the title trust of the instant company shares (hereinafter “instant shares”) with each of the Plaintiffs totaling KRW 7,000, and (e) during the period from 2010 to 2012, confirmed that the instant shares were transferred to Nonparty 1’s joint Plaintiff 3 (hereinafter “Nonindicted 30,000”).

C. Accordingly, the Defendants imposed gift tax 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”) on the Plaintiffs, as shown in the attached list 1.

D. The Plaintiffs appealed and filed a request for examination with the Commissioner of the National Tax Service on November 3, 2014. However, the Commissioner of the National Tax Service dismissed all the Plaintiffs’ claims on February 10, 2015.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 11, Eul evidence Nos. 1 and 2 (including each number), the purport of the whole pleadings

2. The plaintiffs' assertion

around December 2006, the plaintiffs acquired the shares of this case for the purpose of gaining profits from the listing of the KOSDAQ market after the recommendation of Nonparty 1, the representative director, and thereafter, since the listing of the company of this case is difficult, the plaintiffs' acquisition of shares does not constitute a title trust since they were sold to Nonparty 3, upon the request of Nonparty 1, from 2010 to 2012. In addition, even if the plaintiffs' acquisition of shares is a title trust, it does not constitute a title trust, and there is no purpose of tax avoidance, and there is an error in the assessment method of the value of the shares of the defendants. Thus

3. Relevant statutes;

Attached Form 3 shall be as listed in attached Table 3.

4. Determination

(a) Facts of recognition;

1) From the time of incorporation of the instant company to 2012, the details of changes in the nominal owner of the instant company are as shown in attached Table 2.

2) During the period from December 21, 2006 to December 27, 2006, 68,000 shares in Nonparty 4 were transferred to the Plaintiffs (each of 7,000 shares), Nonparty 5 (7,00 shares), Nonparty 6 (7,00 shares), and Nonparty 7 (5,00 shares) per share to KRW 5,000 per share. The Defendants, applying Article 45-2 of the former Inheritance and Gift Tax Act and Article 60(3) of the same Act to this, assessed and imposed gift tax for KRW 30,394 [based on the net assets and net profit and loss value of the immediately preceding 3 business years (203 to 2005)]; and

[Ground of recognition] Facts without dispute, entry of evidence Nos. 5, 20, and 21 in the evidence No. 7-5, and the purport of the whole pleadings

B. Whether the title trust constitutes a title trust and whether the purpose of tax avoidance is recognized

1) First of all, as to whether the plaintiffs' acquisition of the shares of this case around December 2006 constitutes a title trust, in light of the following circumstances that are acknowledged by comprehensively considering the overall purport of the pleadings as to whether the plaintiffs' acquisition of the shares of this case constitutes a title trust, Eul evidence Nos. 3 through 5, Eul evidence Nos. 7-1, 2, 5, 6, 7, and Eul evidence Nos. 8-1 and 2, it is reasonable to deem that the non-party 1 trusted 49,00 shares of the company of this case, which were trusted from around 2002 to the non-party 4, around December 2006, in the form of transfer to the plaintiffs, non-party 5, 6, and non-party 7, 400 shares out of the above shares.

① Around February 2002, according to the written answer prepared by the investigator of the Seoul Regional Tax Office against the non-party 4, who acquired 68,000 shares of the company of this case and transferred all of them to the plaintiffs around December 2, 2006, the non-party 4 stated that the non-party 4 lent his name at the request of the non-party 1 at the time of acquiring the shares above, and therefore, it was not aware of detailed matters, such as acquisition price and payment method. At the time of transferring the shares above, at the Industrial Bank of Korea on December 206, 2006, the bank was created in its name and opened to the non-party 1, and all the subscription and withdrawal amount of the transfer price was confirmed and processed by the non

② On December 206, 2006, Nonparty 5 and Nonparty 6, who acquired 7,000 shares of the company of this case under the above Nonparty 4’s name, purchased 7,00 shares each of the above Nonparty 5 and Nonparty 6, as of December 2006, the Seoul Regional Tax Office’s investigator, stated that Nonparty 5, who was an employee of the company of this case, was also an employee of the company of this case at the time of December 2006, and deposited 35 million won from Nonparty 1’s corporate bank’s corporate bank account for its acquisition price. Accordingly, at the time of Nonparty 5’s request, Nonparty 6 and Nonparty 1 were deemed to have borrowed 0 shares of this case under the name of Nonparty 5, which were an oligopolistic shareholder at the time of Nonparty 6’s request, and it was thought that Nonparty 6 and Nonparty 2 were also an employee of the company of this case’s transfer price for 20 years after Nonparty 2’s statement.

③ Based on the legal brief dated June 26, 2015, the Plaintiffs asserted that “Nonindicted 1 and the Plaintiffs purchased the shares of the company of this case and paid the transfer price to Nonparty 4 on or around December 2006 after acquiring the shares of the company of this case, and thereafter, Nonparty 1 requested the Plaintiffs to re-transfer the said shares to Nonparty 3, and that the Plaintiffs did not pay the shares acquired at par value at Nonparty 1’s request, on the ground that they did not pay the shares acquired under their names, since they did not pay the said shares.” Plaintiff 2 asserted that “The Party’s personal newspaper was made in the first instance court that the funds for acquiring the shares were directly leased from Nonparty 1 to the account of Nonparty 4, but this appears to be inconsistent with the allegations of the above Plaintiffs, and that Plaintiff 2 did not conclude a loan agreement with Nonparty 1 or set the interest rate, interest rate, etc. separately with respect to the funds for acquiring the shares.”

④ In addition, there is no evidence to deem that the nominal owner of the instant company, as indicated in the separate sheet No. 2, constitutes an executive officer or employee of the instant company or a trader of relationship with Nonparty 1, or constitutes an employee or a trader of the instant company, and that he received dividends as a shareholder or exercised substantive rights as a shareholder. In addition, Nonparty 1 filed a lawsuit seeking confirmation of ownership by asserting that Nonparty 2 and Nonparty 9 held title trust of 80,000 shares of the instant company and filed a lawsuit seeking confirmation of ownership. Nonparty 1 received 56,00 shares of the instant company in 202 and transferred 56,00 shares of the instant company to Nonparty 10 in 203, and transferred 56,00 shares of the instant company to Nonparty 3 in its name at the request of Nonparty 1, and it appears that Nonparty 1 did not actually have made a statement to Nonparty 1 as a shareholder of the instant company, including the purchase price, in light of the fact that Nonparty 2 and Nonparty 9 actually paid shares to Nonparty 1.

2) Next, the legislative purport of Article 45-2(1) of the former Inheritance and Gift Tax Act is to recognize exceptions to the substance over form principle to the effect that the act of tax avoidance using the title trust system is effectively prevented, thereby realizing the tax justice. Thus, the proviso of the same Article is applicable only where the purpose of tax avoidance is not included in the purpose of the title trust, and the tax prescribed in the proviso cannot be limited to the gift tax, and the burden of proving that there was no purpose of the tax avoidance in the title trust (see Supreme Court Decision 2003Du4300, Jan. 27, 2005, etc.). Therefore, with respect to the fact that there was no purpose of the tax avoidance, it may be proved by the method of proving that there was a purpose of the tax avoidance other than the purpose of the tax avoidance (see Supreme Court Decision 2004Du733, May 12, 2006; Supreme Court Decision 200Du3964, May 25, 2006, etc.).

In this case, the above facts and the evidence revealed as follows. ① Nonparty 1’s second liability to pay taxes on oligopolistic shareholders under the former Framework Act on National Taxes (amended by Act No. 8139 of Dec. 30, 2006) was determined based on the shareholder’s shareholding ratio, i.e., Nonparty 4, 10, 8, and 9 by title trust of the company’s shares, which became 41% of the shares of Nonparty 1 and their specially related persons (the minority shareholder Nonparty 2), and it did not constitute oligopolistic shareholders by again title trust of the company’s shares to the Plaintiffs on December 206, 206; ② The purpose of this case’s second liability to pay taxes on oligopolistic shareholders was to determine the amount to be borne by the Plaintiffs according to the shareholder’s shareholding ratio, and even if Nonparty 1’s shares were to have been transferred due to partial change in the name after the date of title trust, it was impossible to recognize that the Plaintiff’s shares were transferred to Nonparty 1 as the nominal shareholder’s dividend income amount.

3) Therefore, the plaintiffs' acquisition of the shares of this case around December 2006 constitutes a title trust under an agreement with the non-party 1, and it cannot be deemed that there was no purpose of tax avoidance. Thus, the title trust to the plaintiffs is deemed as a gift pursuant to Article 45-2 of the former Inheritance Tax and Gift Tax Act and thus, it is subject to the imposition of gift tax.

C. Whether evaluation method of stock value is illegal

1) Article 63(1)1 (c) of the former Inheritance Tax and Gift Tax Act, Article 54(1) and (2) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 25195, Feb. 21, 2014; hereinafter “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”) provides that the value of non-listed stocks per share of the net profit and loss per share (the weighted average amount of net profit and loss per share for the last three years ± the interest rate determined and publicly announced by the Minister of Strategy and Finance taking into account the yield of distribution of three-year corporate bonds guaranteed by financial institutions) and net asset value (the total net asset value of the relevant corporation ± total number of issued stocks) shall be appraised by 3 and 2 weighted average rate per share. Article 55(1) of the former Enforcement Decree of the same Act provides that “The net asset value of the relevant corporation” shall be calculated by subtracting liabilities from the appraised value per share as of the base date of appraisal 】 (the weighted average amount per share in the preceding three years 】 (3 years) net value per share) years 】

2) Therefore, as a premise for assessing the value per stock of the instant company’s stocks, the health team first asserts that “the date of appraisal (the date of deemed donation)” should be the standard date of appraisal on March 31, 2007 when the statement of changes in stocks, etc. of the instant company submitted by Nonparty 4 on February 7, 2007, while the Defendant asserts that the report on the tax base of transfer income submitted by Nonparty 4 on February 7, 2007 should be the standard date of appraisal on December 27, 2006 as the date of appraisal.

3) There is no dispute between the parties that the list of shareholders was not prepared in the instant company, and according to each of the evidence Nos. 17 and Nos. 15 and 16 (including each number), the instant company submitted to the head of the competent tax office on March 31, 2007 a detailed statement of changes in stocks, etc., stating the details of the Plaintiffs’ acquisition of stocks, when submitting a corporate tax base return to the head of the competent tax office on March 31, 2007. Nonparty 4 submitted to the head of Gangnam District Tax Office on February 7, 2007 a tax base return on the transfer income statement stating the transfer of 68,00 shares of the instant company, and it is recognized that the date of transfer was stated on December 27, 2006.

Meanwhile, Article 45-2 of the former Inheritance and Gift Tax Act provides that in the case of stocks under paragraph (1), the value of the assets shall be deemed to have been donated to a title truster on the date when the title trustee enters the transfer of title, and Paragraph (4) of the same Article provides that "in the application of Paragraph (1), if the list of stockholders or the list of members has not been prepared in accordance with Articles 109(1) and 119 of the Corporate Tax Act, the transfer of title shall be determined based on the documents related to the stockholders, etc. submitted to the head of

(4) In light of the purport that the transfer date of shares is 0 days before the date of acquisition of the shares, it is reasonable to conclude that the transfer date of the shares is 0 days before the date of acquisition of the shares, and that the transfer date is 0 days before the date of acquisition of the shares, and that the transfer date is 0 days before the date of acquisition of the shares, and that the transfer date is 0 days before the date of acquisition of the shares, the transfer date is 0 days before the date of acquisition of the shares, and that the transfer date is 0 days after the date of acquisition of the shares, and that the transfer date is 0 days after the date of acquisition of the shares, and that the transfer date is 0 days after the date of acquisition of the shares, and that the transfer date is 0 days after the date of acquisition of the shares, which is 6 days before the date of acquisition of the shares, is 0 days before the date of acquisition of the shares, it can be viewed that the actual owner and title holder are different from the transfer date of the shares.

4) Thus, when assessing the value per share of the company’s shares held in title by the plaintiffs, it shall be calculated on March 31, 2007 based on the net asset value of the company of this case as of March 31, 2007 as of March 31, 2007 and the net profit and loss value of the previous three business years (2004 to 2006) as of December 27, 2006 as of December 27, 2006, when assessing the value per share of the company’s shares held in title by the plaintiffs, it shall be calculated on the basis of the net asset value of the company of this case as of December 31, 2007 and the net profit and loss value of the previous three business years (200 to 205). Therefore, in imposing gift tax on the plaintiffs, it cannot be said that the calculation of the value per share based on the net asset value and net value of the previous three business years (2003 to 205).

On the other hand, the issue of whether a disposition is lawful in a lawsuit seeking revocation of taxation is determined depending on whether it exceeds a legitimate amount of tax, and the parties can submit arguments and materials supporting the objective amount of tax liability until the closing of arguments in the fact-finding court. When computing a legitimate amount of tax to be imposed lawfully based on such materials, only the portion exceeding the legitimate amount of tax shall be revoked, and all of them shall not be revoked (see Supreme Court Decision 99Du8930, Jun. 12, 2001). Furthermore, we examine the legitimate amount of tax to be paid by the

(d) Calculation of the amount of political party tax;

1) As of March 31, 2007, the base date of appraisal (the date of donation) is as of March 31, 2007, the net value per share of the shares of the instant company is 30,030 as indicated in the “net Value per share” column of the “net Profit and Loss Calculation Table” of the attached Table 4 net profit and loss. The net value of the instant company is 3,685,156,857 as indicated in the “net Asset Value” column of the attached Table 5, and there is no dispute between the parties as to the point that the total number of shares of the instant company is 40,000.

2) Based on the above circumstances, the net asset value per stock of the instant company as of the evaluation base date is KRW 9,212 (=3,685,156,857 (net asset value) ¡À400,000 (total number of stocks), and the value per stock of the instant company under Article 54(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (Article 54(1) of the same Enforcement Decree of the same Act: 21,702 won (=30,030 x 30 x 9,212 x 2) ± 5). Accordingly, on this basis, the portion exceeding the above amount in the instant disposition is unlawful, since it is identical to the amount indicated in the column of "total final tax amount" in the annexed Table 6.

5. Conclusion

Therefore, the plaintiffs' claim of this case is justified within the above recognized scope, and the remaining claims are dismissed without merit. Since the judgment of the court of first instance has some different conclusions, the part against the defendants exceeding the above recognized scope in the judgment of the court of first instance is revoked and the plaintiffs' claim corresponding to the revoked part is dismissed. The defendants' remaining appeal is dismissed as it is without merit. It is so decided as per Disposition.

[Attachment]

Judges Cho Jong-tae (Presiding Judge)