Seoul Administrative Court Decision 2011Guhap146 (Law No. 06, 03)

Cho High Court Decision 2010Du3502 ( December 22, 2010)

The appraisal value of unlisted stocks shall not be deemed the market price and shall be transferred at a higher price.

(1) The appraisal value of the unlisted stocks cannot be deemed the market value unless there are special circumstances, and the price adopted in a criminal trial to calculate the amount of breach of trust in a criminal trial does not correspond to the market value. Therefore, the disposition imposed on the stocks by deeming that the market value of the stocks is calculated by supplementary evaluation methods and the profits are distributed by transferring them to an unrelated party at a higher

2012Nu17324 Revocation of Disposition of Imposing gift tax

Republic of Korea, Republic of Korea and 3 others

Head of the tax office of distribution and three others

Seoul Administrative Court Decision 2011Guhap146 decided June 3, 2011

Seoul High Court Decision 2011Nu21623 Decided January 11, 2012

Supreme Court Decision 2012Du3200 Decided June 14, 2012

August 24, 2012

September 28, 2012

1. All appeals filed by the plaintiffs are dismissed.

2. The plaintiffs are responsible for total costs of the lawsuit after the filing of the appeal.

The judgment of the first instance court shall be revoked. Each defendant listed in the attached disposition list shall revoke all the imposition of each gift tax (including additional tax) stated in the "tax amount of imposition notice" column for the plaintiff listed in the same list on July 1, 2010.

1. Details of the disposition;

A. The Plaintiffs, as shareholders of the company running the “insurance agency business” (hereinafter referred to as “ XX”), established on June 8, 2004, transferred their shares held by the Plaintiffs to the OO (N: N: hereinafter referred to as “O”) that is a KOSDAQ-listed corporation on March 13, 2006, KRW 150 per share value (150 won per share).

B. From January 29, 2010 to March 15, 2010, the director of the Seoul Regional Tax Office conducted a tax investigation on the suspicion that the plaintiffs transferred the shares of this case to O with the high-value transfer of shares, and then deemed that the plaintiffs received profits from OO due to the high-value transfer of shares. As to whether the value of the shares of this case and whether the legitimate grounds for the transaction practice are recognized, the profits received by the large shareholders with O such as KimA shall be calculated as KRW 00 per share (in the case of non-major shareholders, KRW 00 per share) according to the supplementary assessment method under the Inheritance Tax and Gift Tax Act (the Inheritance Tax and Gift Tax Act) after consulting with the advisory committee for determination of taxation, and then, the profits received by the large shareholders who have special relationship with O suchO as KimA included the amount equivalent to the difference between the price and the market price in the gross income under Article 52 of the Corporate Tax Act, and then disposed of the same amount as bonus to the purchaser. The profits received by theO and the Plaintiffs shall be notified the difference between the market price under Article 35 subparagraph 1.

C. Accordingly, on July 1, 2010, the Defendants determined the gift tax on the donation of March 13, 2006 to the Plaintiffs as follows, and imposed and notified each of the gift tax (including additional tax) for 2006 in the separate disposition list as indicated in the “tax amount imposed” column (hereinafter “each of the instant dispositions”).

Details of taxation of gift tax.

(2) The following details are omitted:

D. The Plaintiffs appealed and filed an appeal with the Tax Tribunal on September 28, 2010, but all of the appeals were dismissed on December 22, 2010.

[Ground of recognition] Gap evidence Nos. 1, 2, and 7 1 to 5, Eul evidence Nos. 3-1 to 5, the purport of the whole pleadings

2. Whether each of the dispositions of this case is legitimate

A. The plaintiffs' assertion

Each disposition of this case is unlawful on the following grounds.

1) The Plaintiffs andO have no special relationship and are in an equal relationship pursuing maximizes their respective economic interests, and are engaged in free trade under their respective judgments. Accordingly, even if the price per share, which is the price at which the Plaintiffs transferred the instant shares, and at least KRW 000 per share, which is the price assessed as appropriate in the criminal judgment, falls under the market price as legitimate in light of transaction practices, the Defendants erred by assessing the price of the instant shares in accordance with the supplementary assessment method under the Inheritance Tax and Gift Tax Act (hereinafter referred to as the “first assertion”).

2) Article 2(2) of the Inheritance Tax and Gift Tax Act declares the principle of income tax priority by prescribing that gift tax shall not be imposed in cases where income tax is levied on the donee for donated property. Thus, even if the plaintiffs transferred their shares at a higher price, if income derived from such transfer is subject to capital gains tax, it shall be subject to capital gains tax, and shall not be subject to capital gains tax (hereinafter referred to as "second assertion").

(b) Related statutes;

Attached Form 2 shall be as listed in attached Table 2.

(c) Fact of recognition;

1) The process of changing XX shares

A) On June 8, 2004, KimA established XX (00 won capital). Of the shares 10,000 shares (the face value per share of 000 won), KimB, the representative director of the KimB, 334 shares, ParkCC 1,000 shares, 333 shares, and 3,000 shares, respectively.

B) After that, KimB acquired on December 26, 2005 the total of 666 shares owned by it (total of 1,000 shares) from DaD and west, and the total of 1,00 shares owned by it (total of 1,00 shares) from GaCC on December 26, 2005, and KimB acquired the total of 2,700 shares among the shares owned by it from GaB and YG from January 9, 2006 to 2,700 shares among the shares owned by it (GB acquired 500 shares from YB, 2,200 shares from YG and 200 shares among them, at the time of reporting the transfer of each of the above shares to Ga on January 9, 2006 and the transfer value at the time of reporting the transfer value and 00 shares as the transfer value at the time of reporting the transfer value and 00 shares to YB at the time of reporting the transfer value to Y at the time of each of the transfer value.

C) XX increased the capital of KRW 000 on January 13, 2006, and among the 10,000 shares issued with capital increase, the representative director KimJ received 2,000 shares issued with capital increase, 5,000 shares by Kim JJ, 2,000 shares by Plaintiff KK, and 1,000 shares by Plaintiff LL, respectively.

D) The shareholders, including the Plaintiffs, of XX, transferred the entire amount of their shares held to O on March 13, 2006 to O, thereby realizing profit margins similar to 150 times the face value.

2) The KimB purchased 7.54% of the O’s shares from January 18, 2006 to March 7, 2006 through Y, a corporation run by KimJ, a de facto related party, as the largest shareholder, and acquired management rights as the representative director of the OB on March 7, 2006.

3) Around January 2006, at the time of purchase of O’s shares, KimA already planned to accept XX through O as a major shareholder and representative director. After securing management rights of O, on March 9, 2006, 2006, KimA requested MaM to a certified public accountant affiliated with BB accounting corporation for the purchase of XX shares.

4) From March 9, 2006 to March 12, 2006, Periodical assessed the value of shares in XX based on the accounting data and its business plan received from KimB. At the time of evaluating the value of shares in XX, it did not intend to seek opinions from the companies of the same industry or those engaged in the same industry in the same same industry as the other industry, other than XX, or to receive data from the employees, or to talk with the employees in detail about the business and financial status, business plan, etc. In addition, on March 12, 2006, after completing the stock assessment in XX, it did not consider only the cost-based increase in the sales value and the other party’s sales value as the basis of the sales value per share, but also did not consider only the cost-based increase in the sales value per share, but also the cost-based increase in the sales value and the other party’s sales value (which did not consider only the cost-based increase in the sales value per share below the average sales value agreed upon by the parties).

5) The KimA set the purchase price of KRW 000 per share that was determined on the basis of the above calculation basis, and during that process, the O did not review the necessity to take over the shares or the appropriateness of the above evaluation value from the O’s perspective, and there was no discussion between the board of directors or the executives on the purchase agenda.

6) The shares acquired by the O in 000 won are treated as losses in the volume of approximately KRW 000 per 8 months in the French and the shares were assessed as KRW 0 per year and disposed of as full loss.

7) The prosecutor judged that the act of KimA's act of having the O purchase of shares at a high price constitutes occupational breach of trust, and prosecuted KimA as a violation of the Act on the Aggravated Punishment, etc. of Specific Economic Crimes (Misappropriation of Trust). The Seoul Central District Court (2008Dahap1413, etc.) declared on June 4, 2009 that on the basis of the transfer of the price of shares at 000 won per share of the price of the shares at KRW 8,000 per share (GaA was assessed on January 11, 2006 to pay 00 won to KimJ, but this transaction is not found in the specification of changes in stocks, etc.) KimA sustained property damage equivalent to at least 00 won per share of the shares to O.

8) On December 11, 2009, the appellate court (Seoul High Court 2009No1531) rendered a judgment that the price of the shares is less than 000 won calculated by the method of appraisal in accordance with the securities provision by reflecting the prosecutor’s prior notice of permission to amend the bill of amendment on November 18, 2009, and rendered a judgment that KimA incurred property damage equivalent to at least 000 won to theO. On May 27, 2010, the appellate court dismissed the appeal by Supreme Court (Supreme Court 2010Do369).

9) In the event that the instant shares are assessed in accordance with the supplementary assessment method under Article 63(1)1(c) of the Inheritance Tax and Gift Tax Act, they are corporations under the period of less than three years after the commencement of business as of the evaluation base date, which are subject to the assessment of the net asset value under the Inheritance Tax and Gift Tax Act, without permission. Accordingly, the per share price calculated as of February 28, 2006 nearest the date on which the Plaintiffs actually transferred the instant shares to the Seoul Central District Public Prosecutor’s Office (a investigation report prepared by the Seoul Central Public Prosecutor’s Office is about 000 per share price calculated in accordance with the Net Property Value Act, but this is the amount assessed as of December 31, 2005, before the amount of capital increase at a cost of KRW 00 on January 13, 2006).

[Ground of recognition] Items 3 through 6, 8, Eul evidence 1, 2, Eul evidence 5-l to 3, the purport of the whole pleadings

D. Determination

1) Determination on the first argument

A) Relevant legal principles

Article 35(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8139, Dec. 30, 2006; hereinafter the same) provides that in case where property is transferred between unrelated parties, the amount equivalent to the profits prescribed by the Presidential Decree shall be presumed to be donated to the person who has acquired such profits by presumed the amount equivalent to the difference between the price and the market price in light of the transactional practice, only if the property is transferred at a significantly higher price without any justifiable reason. Article 26(6) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 1989, Feb. 28, 2007) provides that the amount of money equivalent to the profits prescribed by the Presidential Decree shall be deemed to be the value of donated property of the person who has acquired such profits. Article 35(2) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Act No. 1989, Feb. 28, 2007) provides that the market price (referring to the amount assessed under Articles 60

Meanwhile, Article 60 (1) of the Inheritance Tax and Gift Tax Act provides that "the value of the property on which gift tax is levied shall be based on the market price as of the date of donation, and Article 60 (2) provides that "the market price under the provision of paragraph (1) shall be the value which is generally accepted in the event of free transaction between many and unspecified persons, and shall include the amount which is recognized as the market price under the conditions as prescribed by the Presidential Decree, such as the expropriation, public sale price, appraisal price, etc." In applying the provision of paragraph (1), if it is difficult to calculate the market price, the value which is assessed by the method as provided in Articles 61

In full view of the contents, legislative purport, and Article 60(2) of the Inheritance Tax and Gift Tax Act, there is no other provision on the definition of the market price under the Inheritance Tax and Gift Tax Act, Article 60(3) of the Inheritance Tax and Gift Tax Act provides as an alternative to the case where it is difficult to calculate the market price under Article 61 through 65 of the Inheritance Tax and Gift Tax Act, and Articles 61 through 65 of the Inheritance Tax and Gift Tax Act provide for the method of reasonably estimating the market price, it is reasonable to deem that the value assessed by the methods under Articles 61 through 65 of the Inheritance Tax and Gift Tax Act as well as the company that serves as the basis for calculating the value of the property on which the gift tax is levied pursuant to Article 60(3) of the Inheritance Tax and Gift Tax Act.

B) Whether a per share assessed by supplementary evaluation methods under the Inheritance Tax and Gift Tax Act can be deemed as the market price of the instant shares

Examining the following circumstances in light of the aforementioned legal principles, since the shares of this case are difficult to calculate the market price, it is reasonable to deem that KRW 000 per share assessed by the supplementary assessment method under the Inheritance Tax and Gift Tax Act becomes the market price of the shares.

(1) Under the provision of Article 60 of the Inheritance Tax and Gift Tax Act, the calculation of the value of donated property by the supplementary method of assessment as stipulated in Articles 61 through 65 of the same Act is limited to cases where it is difficult to calculate the market price as of the date of donation of donated property, and where it is difficult to calculate the market price, the Defendants, who are the taxation authorities, bear the burden of proof. According to Article 60(2) of the Inheritance Tax and Gift Tax Act, the market price refers to the value that is generally established when a transaction is freely conducted between many and unspecified persons, i.e., an objective exchange price formed through a normal transaction. Thus, even if there is a transaction example, it cannot be deemed that the transaction price is formed by a normal transaction that properly reflects the objective exchange value of donated property, and if the subject of donation is non-listed stocks, the market price is difficult to be calculated (see Supreme Court Decision 2004Du22

As to the instant case, since the instant shares are non-listed shares, they cannot be deemed free trade between many and unspecified persons, barring any special circumstance. The following circumstances acknowledged by the facts and the purport of the entire pleadings are as follows: (i) KimA, which has been in control of both x and O, intended to acquire shares at a high-priced level of one’s own idea after taking over management rights of O; (ii) otherwise, it did not make efforts to evaluate the appropriate value of x through accurate and objective accounting data to a reliable accounting firm or to determine a legitimate purchase price through substantial price negotiations with the shareholders of x; (iii) it appears that the instant shares transaction was made in a situation where it is difficult to expect the parties to trade by reflecting the objective exchange value in an equal relationship pursuing economic maximize with the shareholders of x; and (iv) it appears that the accounting firm’s shares are formally requested to trade 00 won per share in advance; and (iv) it appears that the market price of the instant shares is 00G shares that are less than the market price of 00GB per share.

(2) Article 49(1)2 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act explicitly excludes the appraisal value of non-listed stocks from the value recognized as a company under the latter part of Article 60(2) of the Inheritance Tax and Gift Tax Act. The purport of the appraisal method is to unify the supplementary assessment method stipulated under the Enforcement Decree of the Inheritance Tax and Gift Tax Act in order to prevent the occurrence of a result contrary to the principle of tax equity by calculating various appraisal values according to the different appraisal method for non-listed stocks. In the case of non-listed stocks, the ordinary transaction between many and unspecified persons is not conducted, and thus, it is difficult to derive the market price under the former part of Article 60(2) of the Inheritance Tax and Gift Tax Act, barring any special circumstance, the appraisal value of non-listed stocks cannot be deemed as the market price under Article 60(2) of the Inheritance Tax and Gift Tax Act (see Supreme Court Decision 2008

With respect to the instant case, the Seoul High Court rendered a ruling that the price of the shares is less than 000 won in a criminal trial against Kim Jong-A, and that KimA sustained property damage equivalent to at least 000 won to theO. However, the following circumstances acknowledged by the entire purport of the pleading are found guilty of occupational breach of trust in a criminal trial against Kim Jong-A, namely, the following circumstances: (a) even if the value of the shares is calculated based on the method or standard of appraisal, it is necessary to review and determine the most reasonable method or standard in detail, even if the value of the shares is calculated in accordance with the method or standard of appraisal; (b) the price calculated in accordance with the actual transaction case with Kim J-J and Cho-H; and (c) the price calculated in accordance with the method of appraisal under the Securities and Exchange Act, which is calculated in accordance with the provision of the Securities and Exchange Act; and (d) the price calculated in accordance with the provision of the Securities and Exchange Act, which is the maximum increase in the value of the shares to be assessed by the average sales rate and the sales rate for industrial breach of trust.

C) Whether the transfer of the instant shares constitutes a high-priced transfer

Since it is clear in the calculation that the value calculated by subtracting 000 won per share, which is the market value of the instant shares, from the transfer value of the instant shares, is the remaining difference by at least 30/100 of the market value, it is reasonable to view that the Plaintiffs’ transfer the instant shares to O without justifiable grounds in light of transactional practices. Accordingly, the Plaintiff’s first assertion on a different premise is without merit.

2) Determination on the second argument

A) Relevant legal principles

In a case where the tax authority imposes gift tax on a donee according to different requirements for establishment of tax liability, timing, and taxpayers, it is not possible to impose gift tax unless there are any special provisions excluding double application. Article 2(2) of the Inheritance Tax and Gift Tax Act provides that gift tax shall not be imposed on a donee when income tax is imposed on the donated property provided for in paragraph (1) of this Article. In light of the following: (a) where gift tax is imposed on a donee, it does not fall under a special provision excluding double application of capital gains tax and provision on gift tax (see, e.g., Supreme Court Decisions 98Du11830, Sept. 21, 199; 2003Du11575, Dec. 10, 2004; 2003Du1575, Sept. 21, 2004).

B) Whether the principle of priority in income taxation is violated

Examining the following circumstances recognized in light of the aforementioned facts and the overall purport of the evidence and pleadings, each of the instant dispositions and the disposition imposing capital gains tax cannot be deemed double taxation on the grounds that the subject of taxation differs, and thus, the instant disposition cannot be deemed as violating the principle of priority in income taxation under Article 2(2) of the Inheritance Tax and Gift Tax Act. Therefore, the Plaintiff’s second assertion on a different premise is without merit.

(1) With respect to the transfer of the shares of this case to O, the Defendants made each of the instant dispositions imposing gift tax on the difference between the actual transfer value of the shares and the appraised value according to the method of Article 63(1)1(c) of the Inheritance Tax and Gift Tax Act. On the other hand, the Defendants issued transfer income tax on the portion of the difference between the appraised value of the shares and the appraised value pursuant to the method of Article 63(1)1(c) of the Inheritance Tax and Gift Tax Act. However, the assessment of transfer income tax on the Plaintiffs was imposed by designating the appraised value of the shares of this case as the transfer value and the assessment value of the actual transfer value of the shares of this case as the transfer value. However, the assessment of transfer income tax on the Plaintiffs is imposed by designating the appraised value of the shares of this case as the transfer value and the difference between the market value of each

(2) Although the transaction of the instant stocks takes the form of the transfer of stocks and receives the price as the consideration, the payment of the portion corresponding to the difference between the actual transfer value and the market value is deemed to have been made by OO to the Plaintiffs in substance. Therefore, it accords with the substance over form principle, such as Article 14 of the Framework Act on National Taxes, imposing tax on the portion exceeding the market value on the Plaintiffs’ share purchase price by separating it as the transfer value of transfer income tax and the market value as the object of gift tax. In addition, if the transaction price at the time of transfer is deemed to be the actual transaction value and deemed to be the object of transfer income tax, it would result in an unreasonable outcome that opens a way to avoid the high tax rate by pretending the actual portion corresponding to the donation as the transfer value of

(3) Article 163(10) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 19463, Apr. 28, 2006) provides that in calculating the acquisition value of assets among the necessary expenses to be deducted from the transfer value, where a deemed donation is made pursuant to the provisions of Article 35 of the Inheritance Tax and Gift Tax Act, etc., the application of the gift tax and the transfer income tax shall be excluded by adjusting the transfer income tax by adding or deducting the relevant donated property or the relevant increase

(4) Articles 35 subparag. 2 and 106(1)3(b) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19422 of Mar. 29, 2006) are expected to impose gift tax on an OO by disposing of assets at a price higher than the normal price as non-designated donation by purchasing assets from persons other than a person with a special relationship without justifiable grounds, and 106(1)3(b) of the same Enforcement Decree as a non-designated donation. In fact, the Defendants imposed gift tax of this case on the Plaintiffs by treating the difference between the market price of the stocks of this case and the actual transfer value of the stocks of this case as non-designated donation.

(5) According to Article 106(1)1 of the former Enforcement Decree of the Corporate Tax Act, the tax authority: (a) deeming that theO’s purchase of listed shares at a higher price to the KimA and KimJ, a person with a special relationship, constitutes the subject of wrongful calculation under the Corporate Tax Act; and (b) imposed income tax on the KimA and KimJ pursuant to Article 106(1)1 of the former Enforcement Decree of the Corporate Tax Act; and (c) compared to the above, the Plaintiffs were subject to the imposition of a higher tax rate of gift tax, and the circumstances that are somewhat inconsistent with the equity between KimA, etc.; (b) however, the failure to impose gift tax on KimA, etc. does not constitute a violation of the corporate tax law, etc., and thus,

3. Conclusion

Therefore, the plaintiffs' claims are dismissed in its entirety due to the lack of reason. Of the judgment of the court of first instance, the part of the plaintiffs is justifiable. The plaintiffs' appeal is dismissed in its entirety due to the lack of reason.