Plaintiff (Law Firm Woo, Attorney Lee Jae-soo, Counsel for plaintiff-appellant)

Director of the tax office

January 29, 2016

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The Defendant’s disposition of refusal to correct the gift tax amounting to KRW 416,216,40 on March 19, 2014, exceeding KRW 48,163,849, shall be revoked.

1. Details of the disposition;

A. On September 1, 200, the Plaintiff was appointed as the representative director of ○○○○○○ Co., Ltd. (hereinafter “instant company”) established for the purpose of developing and supplying software, manufacturing and selling smart cards. As of December 31, 2010, the Plaintiff, as the largest shareholder of the instant company, held 1,096,972 shares (20.01% shares) out of the total number of outstanding shares, as the largest shareholder of the instant company as of December 31, 2010.

B. On June 28, 201, the instant company issued bonds with non-exclusive private placement (hereinafter “instant bonds with warrants”) with the total face value of KRW 10 billion in the face value. Among them, the instant company acquired bonds with warrants of KRW 5 billion in the total face value of the zone, the bonds with warrants of KRW 3 billion in the total face value of the agricultural heart Capital Co., Ltd. (hereinafter “agricultural heart Capital”) with warrants of KRW 3 billion in the total face value of the zone, and new capital Capital Capital Co., Ltd. (hereinafter “new Capital Capital”) with warrants of KRW 3 billion in the total face value of the zone, and the bonds with warrants of KRW 2 billion in the total face value of the zone.

C. The Plaintiff acquired, respectively, the preemptive rights equivalent to KRW 4 billion from among the bonds with warrants acquired by Gag Capital (hereinafter “instant first preemptive rights”) at KRW 180,000,000, and KRW 1 billion from among the bonds with warrants acquired by Gag Capital (hereinafter “second preemptive rights of this case”) at KRW 45,000,000 among the bonds with warrants, respectively.

C. On September 30, 201, the Plaintiff reported and paid KRW 48,163,849 of the gift tax on June 28, 201 by applying Article 35 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 201; hereinafter “former Inheritance Tax Act”) to the transaction for which the first preemptive right was acquired on September 30, 201. The Plaintiff reported and paid KRW 465,185,756 of the gift tax by filing a revised return, and reported and paid KRW 41,316,331 of the additional gift tax by applying Article 40(1)1 of the same Act (hereinafter “the instant report on the acquisition of the first preemptive right”).

D. Meanwhile, on September 5, 2012, the Plaintiff exercised the instant preemptive right at KRW 17,465 per share, and converted 286,284 to stocks. As to this, the Plaintiff reported and paid KRW 1,307,60,610 as the value of donated property on September 5, 2012, by applying Article 40(1)2 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11609, Jan. 1, 2013; hereinafter “Inheritance Tax Act”) on September 30, 2012 (hereinafter “instant report”).

E. On August 6, 2013, the Plaintiff filed a request for rectification to refund KRW 416,216,400 in the aggregate of the gift taxes pursuant to the First Declaration and the Second Declaration on the ground that Article 40 of the Inheritance Tax and Gift Tax Act was not applicable to the acquisition and exercise of the instant preemptive right, on the ground that the Plaintiff declared and paid gift tax by mistake, but the Plaintiff subsequently rejected the request on March 9, 2014 (hereinafter “instant disposition”).

[Ground of recognition] Facts without dispute, entry of Gap evidence 1 through 10 (including branch numbers for those with additional numbers; hereinafter the same shall apply) and the purport of whole pleadings

2. Related statutes;

It is as shown in the attached Table related statutes.

3. Whether the instant disposition is lawful

(a) Facts of recognition;

1) On June 24, 2011, the instant company decided to issue the instant bonds with warrants at the board of directors, and announced to the Korea Exchange on the same day. The details of the disclosure are indicated as follows: (a) there is a plan to sell warrant certificates under the title “matters concerning preemptive rights”; (b) the scheduled date of sale is “8,000,000”; (c) the total face value of the warrant certificates is “8,000,000”; (d) the total amount of the sale of the warrant certificates is “360,000,000”; and (e) the other party to the sale is “large shareholder and specially related persons”; and (e) the Plaintiff was the representative director of the instant company and the shareholder holding 20.01%

2) On July 5, 201, the instant company issued the instant bonds with warrants, and subsequently, on July 5, 2011, published a public announcement that the patent right (hereinafter “instant patent right”) in the name of “the method and device for recording the actual location of the division,” relating to “a technology that could easily be found through Device, in which the GPS was loaded, if the subject of the instant bonds with warrants or children, etc. deviates from a certain scope.” On June 7, 2011, the company’s share price, which was KRW 17,650, which was the 17,650 as of June 7, 201, began to increase thereafter.

3) On Nov. 25, 2011, the instant company acquired the instant company at KRW 27 billion, and thereafter, the instant company’s share price increased further. The Plaintiff’s share price on Sept. 30, 2012, on September 28, 2012, on which the Plaintiff exercised the instant preemptive right, was KRW 29,900 (the closing price on September 28, 2012).

[Ground of Recognition] Facts without dispute, evidence as seen earlier, Gap evidence Nos. 12 through 22, Eul evidence No. 1 to 4, the purport of the whole pleadings

B. As to whether it is a alternate transaction

1) Article 2(4) of the Inheritance Tax and Gift Tax Act provides that “In cases where it is deemed that the inheritance tax or gift tax has been reduced unreasonably by indirect methods via a third party, or through two or more acts or transactions, it shall be deemed that direct transactions have been made by the parties concerned, or that such acts or transactions have been made consecutively one act or transaction, and that such donation shall be deemed to have been made.” In other words, Article 40(1) of the Inheritance Tax and Gift Tax Act provides that “In cases where any of the following profits is acquired by acquiring stocks pursuant to bonds with warrant (referring to warrant certificates where warrant certificates are separated) (hereinafter in this Article “convertible bonds, etc.”), the profits acquired by converting or exchanging convertible bonds, etc. from a person in a special relationship into the market price (referring to the value appraised pursuant to Articles 60 and 63), and Article 40(1)1 of the former Inheritance Tax and Gift Tax Act provides that “the profits acquired by converting or exchanging convertible bonds, etc. into the market price of the stocks, etc. from a person with special relationship” (hereafter in this Article 40(1).).

2) In light of the following circumstances revealed by adding the aforementioned facts and the purport of the entire pleadings, it is reasonable to deem that the Plaintiff engaged in a round-over transaction without having obtained directly from the instant company having a special relationship with which the instant preemptive right to new shares was located. Accordingly, the profits accrued from the acquisition of preemptive right to new shares and the conversion of shares constitute subject to gift tax under Article 40(1)1 (a) of the former Inheritance and Gift Tax Act and Article 40(1)2 (a) of the former Inheritance and Gift Tax Act.

① On the date the instant bonds with warrants were issued and acquired by the instant capital company, the Plaintiff acquired the instant preemptive right separately from the Capital Capital and New Capital Capital. Before the issuance of the instant bonds with warrants, the sales plan was publicly announced to the Korea Exchange prior to the issuance of the said bonds with warrants as the largest shareholder and the specially related person. As such, the Plaintiff planned to purchase the instant bonds with warrants and issued the instant bonds with warrants.

② The instant bonds with warrants were issued through private placement, and the issuance was decided by the resolution of the board of directors on June 24, 201 of the instant company. Among the various methods that the instant company may choose to issue the instant bonds with warrants to raise funds, among the various methods, the instant companies were selected to choose the method of issuing the instant bonds with warrants, and failed to execute a plan to sell the instant bonds with warrants to the Plaintiff, and the Plaintiff participated in the process of such selection and decision.

③ The Plaintiff purchased only a part of the preemptive rights from the Capital Capital Capital and the Capital Capital from among the instant capital companies. There is no basis for the Plaintiff to understand the other preemptive rights on the circumstances that the Plaintiff did not acquire. It is difficult to view that the acquisition of the preemptive rights was inevitable in light of business practices.

④ At the time of the purchase of the instant preemptive right, the Plaintiff was the representative director and the largest shareholder of the instant company. As such, the Plaintiff was in a position to know in detail the internal information, such as the management status of the instant company, the progress of the development of the instant patent, and the plan for acquiring the instant patent company. The Plaintiff exercised the instant preemptive right after the instant company’s share price increase due to the registration of the instant patent right, the acquisition of the instant patent company, etc., followed the acquisition of the instant preemptive right. Even if the Plaintiff continued to decline at the time of the acquisition of the instant preemptive right, the Plaintiff’s share price at the time of the acquisition does not interfere with the acquisition of the preemptive right.

⑤ Even if the Plaintiff paid KRW 225,00,000 to the acquisition value of the instant company at the time of the acquisition of the instant preemptive right, the acquisition value of the instant preemptive right after the purchase of existing shares and the issuance of bonds with warrants is different in terms of the size of the company’s financing. In order to raise funds necessary for the acquisition of the instant stock company, the issuance of bonds was required, and as such, the instant company’s share price has increased. As seen earlier, the acquisition value and the exercise amount of the instant preemptive right and the share price at the time of the acquisition of the instant preemptive right cannot be compared simply by absolute value.

6. After the publication of the patent of this case, the company of this case did not disclose the 12 patent rights after the acquisition of the 12 patent rights, but may have a significant impact on each patent and share price.

7) Even if the Plaintiff did not sell the shares acquired by the exercise of the instant preemptive right until the date of acquisition of the instant preemptive right, the Plaintiff acquired the shares by exercising the instant preemptive right at the time of increase in the stock price, thereby gaining profits equivalent to the difference. Whether the shares were sold or held after the increase in the stock price is a separate circumstance selected by the Plaintiff according to the individual needs.

C. On a different premise, the Defendant’s assertion cannot be accepted. As to whether the Defendant’s assertion constitutes an underwriter of Capital Capital and Capital Capital, and whether Article 42 of the Inheritance and Gift Tax Act is applied.

4. Conclusion

The plaintiff's claim is dismissed on the ground that it is without merit.

[Attachment]

Judges Kim Jong-hwan (Presiding Judge) Kim Young-young