Where a shareholder acquires stocks through a merger, whether the expenses incurred in the acquisition are included in the acquisition value (affirmative in principle)

Article 41(1)1 and 2 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter “former Corporate Tax Act”) provides that, in cases of assets purchased from others or assets acquired through manufacturing, production, construction, or any other similar method in order to appropriately calculate profits and losses for a period in accordance with the principle of profit-sharing cost, the expenses incurred in acquiring such assets shall be included in the acquisition value. It is difficult to find a reasonable ground to determine the scope of acquisition value according to other methods. Furthermore, the proviso to Article 72(1)4 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328, Feb. 9, 2006; hereinafter “former Enforcement Decree”) includes the amount of acquisition value of stocks purchased from others (the dividend income amount) and the amount of stocks acquired by a person with special interest under Article 11 subparag. 5 of the former Enforcement Decree of the Corporate Tax Act (the “former Enforcement Decree”) in addition to the acquisition value of the former Corporate Tax Act, the acquisition value cannot be included in calculating profits for the business year.

Articles 16(1)5, 41(1)1, 2, and 41(2) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 11 subparag. 9, and 72(1)4 (see current Article 72(2)5) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 19328, Feb. 9, 2006);

Hyundai Heavy Industries Co., Ltd. (Law Firm LLC, Attorneys So-young et al., Counsel for the plaintiff-appellant)

U.S. Head of Dongsan District Tax Office (Attorney Cho Young-gu, Counsel for the defendant-appellant)

Busan High Court Decision 2009Nu7189 decided December 15, 2010

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

A. Article 41(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that “The acquisition value of assets acquired by a domestic corporation through purchase, production, exchange, gift, etc. shall be the amount falling under each of the following subparagraphs,” subparagraph 1 provides that “The assets acquired by a third party shall be the amount added to the purchase value, in case of assets purchased from a third party," subparagraph 2 provides that “the assets acquired through the manufacturing, production, construction, or any other similar method shall be the amount added to the production cost, and the assets acquired by the third party, other than those under subparagraphs 1 and 2, shall be the amount as prescribed by the Presidential Decree at the time of acquisition” in subparagraph 3 provides that “The necessary matters concerning the calculation of the acquisition value of assets, such as the scope of the purchase value and incidental expenses under the provisions of paragraph (1) shall be prescribed by the Presidential Decree.” Article 41(1) proviso of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328, Feb. 1, 20, 2001) shall be prescribed by the same.

Article 41(1)1 and 2 of the former Corporate Tax Act provides that, in cases of assets purchased from others in order to appropriately calculate profits and losses for a period in accordance with the principle of profit-sharing expenses, or assets acquired by a person himself/herself through manufacturing, production, construction, or any other similar method, the expenses incurred in acquiring such assets shall be included in the acquisition value. It is difficult to find a reasonable ground to determine the scope of acquisition value according to other standards. Furthermore, in cases of the amount under Article 16(1)5 of the former Corporate Tax Act and Article 11 subparag. 9 of the former Enforcement Decree of the Corporate Tax Act (where there are profits received in the course of a merger with a related party, such profits), the acquisition value shall be calculated by adding each amount to the previous book value in order to prevent double taxation in consideration of the fact that the corporate tax was imposed after being included in the gross income for the business year to which the date of merger registration belongs, and it cannot be deemed that a shareholder has determined an exception to the principle of profit-sharing expenses. In light of these, it is reasonable to deem that the acquisition value of stocks acquired due to such merger.

B. Based on evidence, the lower court found that the Plaintiff’s initial acquisition of shares of 1,46,70 shares of Hyundai Bank 2, which were the major shareholders of Hyundai Bank 10,000, and that the Hanwon Bank 2, which held 21,470 shares of the said Company (hereinafter “Gwon Bank”) was issued 115,563,560 shares of Hanwon Bank as price for merger upon merger (hereinafter “the first merger”) and that the Plaintiff would be jointly and severally liable to pay the special rural development tax of 10,000,000,000,000,000,000,000 were 10,000,000,000,0000,000,000,000,000,000,000,000,000,000,000,000,00,000,00.

C. Upon examining the records in light of the above legal principles, the above judgment of the court below is just and acceptable. Contrary to the allegations in the grounds of appeal, there are no errors in the misapprehension of legal principles as to the "acquisition value of stocks acquired through a merger".

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

The ground of appeal on this part argues that the court below determined that the contribution to the special rural development tax of this case constitutes acquisition value of the stocks of this case, and that even if not, the contribution to the special rural development tax of this case must be included in the deductible expenses of 2004 business year for which the payment obligation has become final and conclusive, since it satisfies the requirements for deductible expenses of Article 19(2) of the former Corporate Tax Act.

However, as seen earlier, insofar as the contribution to the special rural development tax of this case is deemed to be included in the acquisition value of the shares of the Choung Bank, the propriety of the aforementioned assumptive and additional determination cannot affect the conclusion of the judgment. Ultimately, the allegation in the grounds of appeal on this part cannot be accepted without the need to further examine.

3. Conclusion

Therefore, the appeal is 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.

Justices Kim Chang-suk (Presiding Justice)