[1] Location of the burden of proving and proving the market price, which is the standard for applying the avoidance of wrongful calculation under Article 52(2) of the former Corporate Tax Act (=tax authorities)

[2] Whether an unlisted company, which is a complete parent company, succeeds to all assets and liabilities due to liquidation of the subsidiary and succession to all assets and liabilities, is included in the grounds for exclusion of net profit and loss value per share under Article 17-3(1)3 of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (affirmative in principle

[1] The burden of proving and proving the market price, which is the standard for the application of the avoidance of wrongful calculation, under Article 52 (2) of the former Corporate Tax Act (amended by Act No. 7908 of March 24, 2006), shall be borne by the tax authority.

[2] Article 17-3(1)3 of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Government Administration and Home Affairs No. 342 of December 31, 2003; hereinafter “former Enforcement Rule of the Inheritance Tax and Gift Tax Act”) provides that, in principle, the market price of stocks shall not be assessed based on the net value per share in the case where the unlisted company, which is a wholly owning parent company, succeeds to all assets and liabilities through the liquidation of its subsidiaries, if it has been liquidated within the last three years from the evaluation base date, it is similar to the case where the subsidiaries are actually merged. Thus, if the unlisted company, which is a wholly owning parent company, succeeds to all assets and liabilities within the last three years from the evaluation base date, it is unreasonable to predict future expected profits based on the past performance of the unlisted company, and there is no difference in the case where the unlisted company merges with the subsidiaries, and thus, it is also included in the case where the unlisted company succeeds to the wholly owning company’s assets and liabilities, barring special circumstances.

[1] Article 52(2) and (4) of the former Corporate Tax Act (Amended by Act No. 7908, Mar. 24, 2006); Article 89(2)2 of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 18174, Dec. 30, 2003); / [2] Articles 60 and 63(1)1(c) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 8828, Dec. 31, 2007); Articles 54 and 56(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 18177, Dec. 30, 2003); Article 37(1)3 of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 18174, Dec. 31, 2003)

[1] Supreme Court Decision 2013Du10335 Decided September 27, 2013 (Gong2013Ha, 2006) Supreme Court Decision 2014Du40517 Decided December 11, 2014

Seoul High Court Decision 200Na14488 decided May 1, 200

Head of Yongsan Tax Office

Seoul High Court Decision 2012Nu15465 decided October 16, 2014

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. A. Article 52(2) of the former Corporate Tax Act (amended by Act No. 7908, Mar. 24, 2006; hereinafter the same) provides that the market price shall be the standard for applying the unfair act and calculation denial provision. Article 89(2)2 of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 18174, Dec. 30, 2003) delegated by Article 52(2) of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 18174, Dec. 30, 200) provides that where the market price is unclear in applying Article 52(2) of the Act to the stocks, the value assessed by applying mutatis mutandis the provisions of Articles 38 through 39-2 and 61 through 64

The tax authority is liable to assert and prove the market price, which is the standard for the application of the denial of wrongful calculation (see Supreme Court Decision 2013Du10335 decided September 27, 2013, etc.).

B. Articles 60 and 63(1)1(c) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007); Article 54 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18177, Dec. 30, 2003; hereinafter “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”) provides that the value per share of unlisted stocks shall be calculated at the market price as of the base date of appraisal; where it is difficult to calculate the market price, the net value per share (i.e., the interest rate determined and publicly announced by the Commissioner of the National Tax Service in consideration of the weighted average value of net assets of the relevant corporation ± the total value of shares issued by the relevant corporation ± the average value of shares issued by the relevant corporation 3 years prior to the date of merger or increase in net value per share by 3 years before the base date of appraisal; and (ii) where it is difficult to calculate the market price, it shall be calculated by 13 years or unreasonable.

It is desirable to estimate the future profit and loss of unlisted stocks by the method of assessing the current value after estimating the future profit and loss of the stocks. However, Articles 54(1) and 56(1)1 of the former Enforcement Decree of the Inheritance and Gift Tax Act provide that the net profit and loss per share shall be calculated based on the weighted average amount of net profit and loss for the last three years per share, which is the past performance, in principle. As such, substitution of future profit and loss with the past performance is premised on the fact that past performance will continue in the future. If there was a merger within the last three years from the evaluation date, it is reasonable to view that it is unreasonable to estimate the future profit and loss of the company after the merger based on the past performance of the company before the merger as unreasonable, and that, in principle, it is reasonable to view that Article 17-3(1)3 of the former Enforcement Rule of the Inheritance and Gift Tax Act does not include a net profit and loss per share when a wholly owning parent company, which is a wholly owning parent company, succeeds to the future profit and loss in light of the market price per share.

2. The record reveals the following facts.

A. From July 19, 195 to June 1, 1999, the Plaintiff acquired 100% of the shares of Vivien International Inc. (hereinafter “VI”) located in the territory of the United States of Netherlands from July 19, 1995. After that, the South Young Industrial Co., Ltd. (hereinafter “Nam Young Industrial”), the Plaintiff’s specially related party under the Corporate Tax Act, participated in the VI’s capital increase and owned 11.76% of the shares.

B. Around July 3, 2003, V did not seem to have a clear business result after acquiring the Plaintiff, and the Plaintiff determined to recover the investment amount from V. As the Plaintiff decided to do so, V reduced only 131,040 shares out of 150,040 shares owned by the Plaintiff (hereinafter “instant paid reduction”).

C. On the other hand, V held 100% of the shares of Concetos, Co., Ltd., Ltd. (hereinafter “CT”). However, as the capital shortage of CT deepens, I opened a board of directors on June 16, 2003, immediately before the instant capital reduction for consideration, and decided to complete the merger with VI by holding the board of directors on June 16, 2003, which is the day before the instant capital reduction for consideration. ① CT is completely dissolved upon the merger with VI; ② transfer of CT assets and liabilities to VI; ③ after the merger, V succeeds to all assets and liabilities of CT; ④ the merger is completed by June 30, 204.

D. VI and C have entered into an agreement with VI to approve and permit the voluntary dissolution and liquidation of CT and to consent thereto, as soon as possible, at the same time, to transfer and distribute all assets, liabilities, rights and obligations to VI at the same time as the complete retirement of the shares. However, the merger reporting procedure, which is a requirement for the merger under Article 253 of the U.S. Deteawa State Company Act, was not implemented.

E. According to such an agreement, V entered that it was merged with CT as of June 18, 2003 in the financial statements, and excluded the CT shares from the investment shares by increasing its assets as the assets of CT were increased and excluded from the CT shares. Meanwhile, the FI’s loan to CT and the loan to CTI was accounted for by offsetting it. The U.S. National Tax Service reported tax return to the same purport, thereby obtaining the depreciation costs of the assets acquired from CT as its deductible expenses.

F. The Defendant issued the instant disposition to determine and notify the Plaintiff on June 1, 2009, by applying the provision on the denial of wrongful calculation under the former Corporate Tax Act, of KRW 1,179,368,610 per share by adding up the net profit and loss value of the Plaintiff’s stocks in calculating the value of the stocks at the time of the instant capital reduction, even though the value of the stocks at the time of the instant capital reduction was assessed to USD 83.51 per share solely based on the net profit and loss value of VI, on the ground that the Defendant did not engage in legal mergers between V and V, and that the Plaintiff granted profits to the remaining industry and reduced tax burden by unfairly reducing the tax burden.

3. Examining these facts in light of the legal principles as seen earlier, insofar as VI, a de facto sole creditor, was liquidateded immediately before the capital reduction of the instant case and succeeded to its assets and liabilities, the value of stocks at the time of the capital reduction of the instant case cannot be assessed as net profit and loss. Thus, the instant disposition issued by the Defendant on the ground that the provision on the denial of wrongful calculation can be applied based on the assessment of the value of stocks at the time of the instant capital reduction of the instant case as USD 83.51 per share, the net profit and loss value. Furthermore, in the case of stocks of an unlisted company located in a foreign country, the burden of proving that the provision on the denial of wrongful calculation can be applied only if it is not appropriate to apply the supplementary assessment method under Article 54 of the Enforcement Decree of the former Inheritance Tax and Gift Tax Act, and it is inappropriate to apply the supplementary assessment method (see Supreme Court Decision 2007Du5646, Jan. 14, 2010).

Although the reasoning of the judgment of the court below is somewhat inappropriate, the conclusion that the disposition of this case was unlawful is just, and contrary to the allegations in the grounds of appeal, there is no error of law that affected the conclusion of the judgment by misapprehending the legal principles as to the requirements of merger under the U.S. corporation law, merger under tax law, and tax avoidance purpose in the unfair calculation

4. 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 on the bench.

Justices Jo Hee-de (Presiding Justice)