Plaintiff 1 and one other (Attorneys Jeong Byung-chul et al., Counsel for the plaintiff-appellant)

Gangwon Tax Office et al. 1

on March 4, 2009

1. The imposition of each gift tax stated in paragraph (1) of the attached Table No. 1 against the plaintiff 1 and the imposition of each gift tax stated in paragraph (2) of the attached Table No. 2 against the plaintiff 2 by the head of Gangnam-gu Tax Office shall be revoked.

2. The costs of lawsuit are assessed against the Defendants.

The same shall apply to the order.

1. Details of the disposition;

A. On September 29, 200, Plaintiff 1 was under title trust of Nonparty 1 (Non-party to the judgment of the Supreme Court), 2, 3, and 4 (hereinafter collectively referred to as “beneficial shareholders,”) with a registered common share of KRW 5,000 in face value of KRW 5,000 issued by gold Development Co., Ltd. (hereinafter referred to as “Nonindicted Company”) (hereinafter referred to as “Nonindicted Company”).

B. Since then, some of the shares issued by the non-party company was changed in the name of beneficial shareholders. Some of the shares were changed by the title trustee under the name of Plaintiff 2, and the shares held in title by the beneficial shareholders are as follows.

Plaintiff 14,500 45% 22,50,000 21,500 21,500 22,500 % of the total face value of the number of voting shareholders included in the main text ( Note 1) 15% 7,50,000

Note 1) 1,500 Shares

C. Meanwhile, as a result of the Seoul Regional Tax Office’s tax investigation in 2006, the title trust relationship between the Plaintiffs and beneficial shareholders was revealed. The tax authorities, including the Defendants, imposed gift tax pursuant to the provision on deemed donation of title trust property under Article 45-2 of the Inheritance Tax and Gift Tax Act (amended by Act No. 8435, May 17, 2007; hereinafter “the Inheritance Tax and Gift Tax Act”) on the first and second shares of this case, and the Plaintiffs paid in full.

D. However, upon the transfer of earned surplus into capital on February 14, 2005, the non-party company issued new shares and distributed three shares per existing shareholders free of charge. Accordingly, the plaintiff 1 was allocated 13,50 shares (=4,500 shares x 3; hereinafter "the non-party 3 shares") and the plaintiff 2 were allocated 4,500 shares (=1,500 shares x 3; hereinafter "the non-party 4 shares") respectively.

E. The Defendants issued a gift tax disposition, such as the text entry, on the third and fourth shares of this case (hereinafter collectively referred to as “each of the instant dispositions”) to the Plaintiffs on the ground that the beneficial shareholder should be deemed to have newly held a title trust to the shareholders in the name of the beneficial shareholder when shares have been distributed without compensation to the shareholders in the name according to the capitalization of earned surplus in the capital.

F. On January 29, 2008, the Plaintiffs were dissatisfied with each of the dispositions of this case and filed an appeal with the Tax Tribunal on January 29, 2008, but received a decision to dismiss each appeal on June 30, 2008.

[Ground for Recognition: Facts without dispute, Gap evidence 1-1 through 8, 2, 3, Eul evidence 1-1 through 4, 2-1 through 4, 3-1 through 3, and the purport of whole pleadings]

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

A. Summary of the parties' arguments

1) The Plaintiffs asserted that: (a) the Plaintiffs received the allocation of the instant shares Nos. 3 and 4 without compensation, based on the fact that the instant shares were trusted under the names of the Plaintiffs; (b) there is no separate title trust agreement between the Plaintiffs and the beneficial owners; and (c) the distribution of shares by free holders is merely a substantial division of existing title trust shares, and thus cannot be deemed as the title trust of separate property; (c) the Plaintiffs did not have any tax avoidance purpose in acquiring the instant shares Nos. 3 and 4; and (d) therefore, imposing gift tax even in such a case violates the constitutional limit under the principle of substantial taxation, and thus, it is unlawful.

2) On this basis, the Defendants asserted that capitalizing earned surplus under the Income Tax Act is deemed deemed as fictitious dividend and income tax is imposed, and since the beneficial shareholders are substantially the same as the nominal holders acquired stocks after receiving cash dividends, the provisions on deemed donation of nominal trust property under Article 45-2(1) of the Inheritance and Gift Tax Act cannot be applied in light of the same as capitalizing revaluation reserve under the Assets Revaluation Act.

(b) Related statutes;

The entry in the attached Form is as specified in the relevant statutes.

C. Determination

Therefore, the issue of this case is whether gift tax can be imposed on the shares (free shares) allocated based on the existing shares held in title by capitalizing earned surplus after title trust after the transfer of stocks, by applying the provision on constructive gift of title trust property separately from the existing shares.

1) First of all, even if the provision on constructive gift of title trust property under Article 45-2(1) of the Inheritance and Gift Tax Act is an exception to the substance over form principle to prevent the act of tax avoidance, insofar as the actual owner is a taxation requirement for the act of title trust of the property to the nominal owner, the existence of a title trust agreement between the title truster and the trustee should be presumed. In the capitalization of earned surplus, the company issues free share to the existing shareholders in proportion to the number of stocks it holds. In this case, the existing shareholders are allocated shares free of charge according to their own shares ratio without any separate new shares acquisition procedure. Thus, it is difficult to deem that a title trust agreement for free

2) In addition, the capital transfer of earned surplus is merely a substitution of the account on the account book (replacement of the account on the account book from the surplus which is the same item of capital), and there is no increase or decrease in the net assets of the company. Thus, although the number of individual shareholders increases, it is merely merely a division of existing shares and distribution of the shares to the existing shareholders according to the ratio of shares, and there is no change in the economic value of the total shares held by the shareholders. In other words, it is merely a change in the economic value of the shares held by the existing shareholders, and it is merely a change in the form of new shares, so it is only the previous change in the shares gratuitously allocated without compensation. Therefore, it cannot be deemed that the distribution of shares by

Meanwhile, Article 17 (2) 2 of the Income Tax Act (amended by Act No. 8825, Dec. 31, 2007; hereinafter the same) provides for the value of stocks acquired by transferring all or part of the corporation’s surplus funds to the amount of capital or investment as one of the fictitious dividends, while the proviso excludes the capital reserve under Article 459 (1) 1 of the Commercial Act and the revaluation reserve under the Assets Revaluation Act, as alleged by the defendant. However, in capitalizing revaluation reserve and the capital reserve in this case, the purpose of recognizing exceptions that are not considered as fictitious dividends is not to exempt the value of stocks issued by the shareholders, etc. according to capital transfer, not to protect the creditors through capital transfer and promote capital transfer in order to promote the rationalization of corporate management, and thus, it is difficult to view that there is no difference between the amount of capital stock acquired by the title truster and the amount of net assets subject to taxation under the title trust agreement and the amount of net assets subject to taxation under Article 17 (2) 1, 3, 4 and 5 of the Income Tax Act.

3) Furthermore, even if a title trustee acquired a free share additionally, it cannot be deemed that there is a change in the real value of the shares he/she owns in comparison with the previous case (in practice, the difference is not only the effect of issuing new shares, but also the reflection of the revaluation of shares by the market) but also the designation, etc. of a secondary taxpayer due to the acquisition of free shares, since it does not cause a change in the stock holding ratio, it does not result in any new effect in the acquisition of dividend income or secondary taxpayer. Therefore, the acquisition of free shares does not lead to a possibility of additional tax avoidance other than the possibility of actual and potential tax avoidance arising from the initial title trust.

3. Conclusion

Therefore, each of the dispositions of this case based on the premise that there was a new title trust with respect to the shares Nos. 3 and 4 of this case is unlawful without any need to examine the remaining arguments of the plaintiffs. Thus, all of the plaintiffs' claims against the defendants against the defendants are justified, and it is so decided as per Disposition.

[Attachment]

Judges Tae Tae-tae (Presiding Judge)

1) hereinafter referred to as “second-class shares”.