In a case where a doctor Gap established a medical corporation Eul, comprehensively transferred assets and liabilities such as real estate held by him/her in connection with the operation of a private hospital to Eul, and then applied for a carryover taxation of capital gains tax under Article 32 of the former Restriction of Special Taxation Act on the said real estate, but the tax authority imposed capital gains tax on Gap, the case affirming the judgment below holding that the transfer of the said real estate cannot be subject to a carryover taxation on the ground that it is different from the “investment” under the above provision.

In a case where a doctor Gap established a medical corporation Eul by contributing property to Eul, comprehensively transferred assets and liabilities, including real estate, held in relation to the operation of a private hospital Gap to Eul, and then applied for a carried-over taxation of capital gains tax under Article 32 of the former Restriction of Special Taxation Act (amended by Act No. 9671 of May 21, 2009; hereinafter "the former Special Taxation Act"), but the tax authority imposed capital gains tax on Gap, the case affirming the judgment below that the "investment" under Article 32 of the former Special Taxation Act and Article 29 of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 21545 of June 19, 2009) has the right to share capital expenses to the corporation and thus has the right to share profits of the corporation, and the founder of the foundation constitutes the assets of the foundation as property losses, and the concept of "contribution" that does not have any profits can not be applied under Article 32 of the former Special Taxation Act.

Article 32(1) and (2) of the former Restriction of Special Taxation Act (amended by Act No. 9671 of May 21, 2009); Article 29(2) and (4) of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 21545 of June 19, 2009) (see current Article 29(5))

Plaintiff (Law Firm LLC, Attorneys So-young et al., Counsel for the plaintiff-appellant)

Head of Ansan Tax Office

Seoul High Court Decision 2011Nu21302 decided May 2, 2012

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

The grounds of appeal are examined.

1. Article 32(1) of the former Restriction of Special Taxation Act (amended by Act No. 9671 of May 21, 2009; hereinafter “former Act”) provides that “where a resident converts fixed assets for business to a corporation (excluding a corporation operating consumptive service business) by December 31, 2009 as prescribed by the Presidential Decree by investing in kind such fixed assets for business or transferring such assets to a corporation, the said fixed assets for business may be subject to carry-over taxation.” Paragraph (2) of the same Article provides that “The provisions of paragraph (1) shall apply only where the capital of the newly established corporation is above the amount determined by the Presidential Decree” and Article 29(2) of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 21545 of Jun. 19, 2009; hereinafter “former Enforcement Decree of the Special Act”) provides that “the amount of net assets of the newly established corporation is converted from the amount of net assets under Article 29(2) of the former Enforcement Decree of the Special Act by comprehensively investing at least the amount of the corporation’s.

2. After finding the facts as stated in its holding, the court below rejected the Plaintiff’s view that the transfer of the real estate in this case cannot be subject to a carryover taxation under Article 32 of the former Act on Special Assistance and Article 29 of the Enforcement Decree of the former Enforcement Decree of the Act on Special Assistance, on the ground that the “investment” in this case refers to the case where the members of the corporation make an expenditure with capital value to the corporation and thereby has the right to share the profits of the corporation. Thus, on the premise that the founder of the incorporated corporation is in essence different concepts from the “contribution” which does not form the foundation’s property loss for property loss, and does not take any profits therefrom, and even if the Plaintiff established the medical corporation to which the provisions on the incorporated foundation apply mutatis mutandis through the Plaintiff’s contribution of the property and comprehensively transferred the assets and liabilities related to the operation of the ○○○○ Hospital, a private business chain, etc. to the medical corporation in this case, the transfer of the real estate in this case cannot be subject to a carryover taxation under Article 32 of the former Act.

In light of the above provisions and relevant legal principles and records, such determination by the court below is acceptable. In so doing, it did not err by misapprehending the legal principles on carryover taxation, the principle of protection of trust, and the grounds for exemption from penalty tax.

3. 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 Park Poe-young (Presiding Justice)