[1] In case where a corporation’s capital transfer of revaluation reserve excluding an amount equivalent to the difference in revaluation of land is included in the stocks reduced by retirement, etc. in the course of division of the corporation, the method of calculating deemed dividend under Article 17(2)6 of the former Income Tax Act

[2] The case holding that in determining the constructive dividend income under the above provision, the face value of gratuitous share shall be excluded from the "amount required to acquire stocks reduced by retirement, etc." in determining the constructive dividend income, where a corporation issues gratuitous share by transferring revaluation reserve equivalent to the revaluation difference of land into capital before the incorporation of a comprehensive share in the capital, and where a corporation divides a corporation after the incorporation of a new provision in the overall share and retires the shares of a corporation established by division, and delivers the shares of a corporation established by division to shareholders after the establishment of a new provision in the overall share

[1] In a case where a corporation’s gratuitous share acquired by transferring revaluation reserve excluding an amount equivalent to the difference in revaluation of land into its capital is included in the shares reduced by retirement, etc. during the process of division of the corporation, the said gratuitous share constitutes the provisions of Article 17(2)6 of the former Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006), and thus, the said share owner is required to calculate the “amount required to acquire the shares reduced by retirement, etc.” by applying the formula as stipulated in Article 27(2) proviso (b) of the Enforcement Decree of the Income Tax Act.

[2] The case holding that in determining the constructive dividend income under Article 17 (2) 2 (b) of the former Income Tax Act, in case where the corporation issues free share by transferring the revaluation reserve equivalent to the revaluation spread of land into its capital before the establishment of a new part of the "the amount equivalent to the revaluation spread of land under the provisions of Article 13 (1) 1 of the Assets Revaluation Act" and then retires free share after dividing the corporation after the establishment of the overall provision, and delivers shares of the corporation established through division to the shareholders of the corporation, since the corporation is excluded from the object of constructive dividend at the time of acquisition, the face value of gratuitous share is excluded from the "amount required for acquiring stocks reduced by retirement, etc."

[1] Article 17 (2) 2 and 6 of the former Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006), Article 27 (2) of the Enforcement Decree of the Income Tax Act / [2] Article 17 (2) 2 of the former Income Tax Act (amended by Act No. 5580 of Dec. 28, 1998), Article 17 (2) 2 and 6 of the former Income Tax Act (amended by Act No. 8144 of Dec. 306)

[1] Supreme Court Decision 90Nu2154 delivered on February 28, 1992 (Gong1992, 1202) Supreme Court Decision 91Nu9893 delivered on May 25, 1993 (Gong1993Ha, 1916)

Plaintiff 1 and 12 others [Bae, Kim & Lee LLC, Attorneys Kim Tae-chul et al., Counsel for the plaintiff-appellant)

Head of Seocho Tax Office et al.

Seoul High Court Decision 2006Nu10780 decided May 3, 2007

All appeals are dismissed. The costs of appeal are assessed against the plaintiffs.

The grounds of appeal are examined.

1. As to the grounds of appeal Nos. 1, 2, and 3

The main text of Article 17(2)2 of the former Income Tax Act (amended by Act No. 8144, Dec. 30, 2006; hereinafter “the Act”) provides that “the value of stocks or investment acquired by transferring all or part of a corporation’s surplus funds to the amount of capital or investment shall be deemed the amount of fictitious dividend.” The proviso provides that “However, where the amount falling under any of the following items is transferred to capital, the amount equivalent to the revaluation reserve under the Assets Revaluation Act (excluding the amount equivalent to the revaluation reserve of land under the provisions of Article 13(1)1 of the same Act)” in Article 27(2) of the Enforcement Decree of the Act provides that “where stocks are acquired from a corporation under the provisions of the proviso of Article 17(2)2 of the Act, the book value of 1 share or 1 share shares of the newly established corporation shall be the amount of 1 share stocks or the book value of 1 share shares or the amount of 1 share shares divided to be acquired by the corporation (Article 17(1) of the former corporation, etc.

According to the above provisions, in a case where a corporation’s free share acquired by transferring revaluation reserve excluding an amount equivalent to the difference in revaluation of land into capital is included in the stocks reduced by retirement, etc. during the process of division of the corporation, the said free share constitutes the provision of Article 17(2)6 of the Act on the determination of deemed dividend pursuant to the proviso of Article 17(2)2 of the Act, and thus, the “amount required for acquiring stocks reduced by retirement, etc.” should be calculated by applying the formula prescribed in Article 27(2) of the Enforcement Decree of the Act (see, e.g., Supreme Court Decisions 90Nu2154, Feb. 28, 1992; 91Nu9893, May 25, 1993).

The court below acknowledged the facts as stated in its decision after comprehensively taking account of the adopted evidence, and held that the disposition of this case is legitimate, except for the amount required to acquire stocks reduced by retirement, etc." under Article 17 (2) 6 (b) of the Act, on the ground that the portion of "the amount equivalent to the difference of revaluation of land under Article 13 (1) 1 of the Assets Revaluation Act," in the proviso of Article 17 (2) 2 (b) of the Act, is acquired by transferring the revaluation reserve equivalent to the difference of revaluation of land into capital before the enforcement of the part of "the amount equivalent to the difference of revaluation of land under Article 13 (1) 1 of the Assets Revaluation Act," which is ultimately excluded from the object of constructive dividend at the time of acquisition, in determining the amount of constructive dividend under Article 17 (2) 6 of the Act, on the ground that it falls under Article 17 (2) 2 (b) of the Act. In light of the above provisions and related legal principles, the judgment of the court below is justified.

Cases cited as the grounds of appeal are inappropriate to be invoked in this case, unlike cases.

2. As to the fourth ground for appeal

Under the tax law, where a taxpayer violates various obligations, such as a return and tax payment, without justifiable grounds, in order to facilitate the exercise of the right to impose taxes and the realization of a tax claim, a taxpayer’s intentional or negligent act is not considered, and the site, error, etc. of statutes does not constitute justifiable grounds that do not constitute a violation of the duty (see Supreme Court Decisions 2002Du10780, Jun. 24, 2004; 2005Du10545, Apr. 26, 2007, etc.).

The court below held that although the rules of the National Tax Service, which the plaintiffs cited, provide capitalizing the revaluation reserve equivalent to the marginal profit from land revaluation as the object of the Corporate Tax Act, the plaintiffs can apply the above rules even in cases where capitalizing the revaluation reserve is not subject to constructive dividend, even though the misunderstanding was caused by the wrong advice of certified public accountant, there is no justifiable reason for not being able to cause a violation of tax liability. In light of the above legal principles, the above judgment of the court below is just and there is no error in the misapprehension of legal principles as to the justifiable reason for additional tax as otherwise alleged in the ground of appeal.

3. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Ahn Dai-hee (Presiding Justice)