Seoul High Court 2010Nu25642 (Law No. 25, 2011)

Cho High Court Decision 2009west1805 (O. 23, 2009)

It is illegal to evaluate the weighted average amount of net profit and loss during the last three years even if it fails to meet the requirements for calculating the average amount of estimated profit.

As long as it is deemed unreasonable to evaluate the value of net profit and loss as the weighted average amount of net profit and loss for the last three years due to a sudden increase in the amount of net profit and loss during the last three years due to a temporary contingency case, it is illegal to evaluate the value of net profit and loss as the weighted average amount of net profit and loss for the last three years

2011Du23306 Revocation of Disposition of Levying Inheritance Tax

Republic of Korea, Republic of Korea and 3 others

Head of Guro Tax Office

Seoul High Court Decision 2010Nu25642 Decided August 25, 2011

June 14, 2012

All appeals are dismissed.

The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

Articles 60 and 63(1)1(c) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter the same) and Article 54 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 20621, Feb. 22, 2008; hereinafter referred to as the "Enforcement Decree of the Inheritance Tax and Gift Tax Act") provide that the value per stock of unlisted stocks shall be the market value as of the date of commencing the inheritance or donation as of the date of commencing the inheritance as of the date of inheritance or the date of donation, and, in principle, where it is difficult to calculate the market value, the net value per share (the interest rate determined and publicly announced by the Commissioner of the National Tax Service taking into account the rate of return on distribution of the company bonds with the maturity of three years each week guaranteed by the financial institution) and net asset value per share (the net asset value of the relevant corporation ± total number of stocks issued).

In addition, Article 56(1) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that "the weighted average amount of net profit and loss per share for the preceding three years" shall be the value under subparagraph 1 thereof, i.e., "(x3) per share of the business year before the base date of appraisal x2) + (x2) the net profit and loss per share of the business year before the base date of appraisal 2 years before the base date of appraisal x (x1) of the net profit and loss per share of the business year before the base date of appraisal 3 years before the base date of appraisal /

Article 17-3 (1) of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 20 of Apr. 30, 2008; hereinafter referred to as the "Enforcement Rule of the Inheritance Tax and Gift Tax Act") provides that the value under subparagraph 2 shall be the average value of the presumed profit per share calculated by at least two specialized institutions or accounting corporations (where a report is filed within the inheritance tax or gift tax, the date on which the date of calculating the estimated profit per share and the date of preparing the evaluation statement falls within the one year, and the same year shall fall within the same year) and Article 17-3 (1) of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Finance and Economy No. 20 of Apr. 30, 2008; hereinafter referred to as the "Enforcement Rule of the Inheritance Tax and Gift Tax Act") based on delegation is unreasonable to evaluate the net profit and loss per share for the last three years years, which is the value under subparagraph 1 of the above subparagraph 2.

Each subparagraph of Article 17-3(1) of the Enforcement Rule of the Inheritance Tax and Gift Tax Act provides that the amount of net profit and loss for the preceding three years cannot be calculated, or that it would be unreasonable to calculate the amount of net profit and loss for each share based on the fact that the amount of net profit and loss for the preceding three years is abnormal, and thus, barring any special circumstance, the value of net profit and loss per share based on the "amount of average net profit and loss for the preceding three years" under Article 56(1)1 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, shall not be calculated unless there are special circumstances (see Supreme Court Decision 2006Du16434, Dec. 11, 2008). This legal principle applies to cases where the "amount of average profit and loss per share, which is the value under Article 56(1)2 of the Inheritance Tax and Gift Tax Act, is not calculated, or it is unreasonable to calculate the amount under subparagraph 2 based on the value under subparagraph 1, even if it is not possible to calculate the value per share.

If the value per share of unlisted stocks cannot be evaluated as an weighted average amount of net profit and loss value and net asset value based on the value under Article 56(1)1 or 2 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, Article 65(2) of the Inheritance Tax and Gift Tax Act provides that the evaluation method under Articles 65(1) and 60 through 64 of the Inheritance Tax and Gift Tax Act shall apply mutatis mutandis to the evaluation method under Articles 65(2) of the Inheritance Tax and Gift Tax Act, and, even in cases of the supplementary evaluation method under the Inheritance Tax and Gift Tax Act, if the value cannot be assessed in an objective and reasonable manner, it shall be assessed by applying the objective and reasonable method among the supplementary evaluation methods under Article 54(4) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, which are to be assessed by only net asset value (see Supreme Court Decision 2010Du26988, Apr. 26, 2012).

In the same purport, the court below recognized the fact that the weighted average amount of income on disposal of securities and tangible assets under corporate accounting standards as of the evaluation base date exceeds 50 percent of the weighted average amount of income on the profits and losses before deducting corporate tax for the last three years, and held that the plaintiffs did not declare the average amount of income on the presumption per share under Article 56 (1) 2 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act within the inheritance tax, as long as it is deemed unreasonable to calculate the weighted average amount of income on the value under Article 56 (1) 1 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act because it falls under Article 17-3 (1) 6 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act and it cannot calculate the "average average amount of net income on the last three years" on the ground that Article 56 (1) 1 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act cannot be calculated on the basis of the value of each inheritance tax of this case calculated on the basis of the value of inherited property.

2. Regarding ground of appeal No. 2

The lower court determined that the imposition of each of the instant inheritance taxes was unlawful by applying the value under Article 56(1)1 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act and calculating the value of inherited property on the basis thereof, and that there was no determination as to whether Article 56(1)2 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act can be applied to the case where the average value of presumed profits is not reported within one’s relocation right and one’s relocation right, and therefore, the lower court did not err by misapprehending the legal doctrine on interpretation of Article 56(1)2

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.