Seoul Administrative Court 2008Guhap1344 (Law No. 13, 2007)

National High Court Decision 2007Du2841 ( October 17, 2007)

Disposition appraised the market price in a complementary method when applying the regulations on deemed gift transfer between persons with a special relationship;

In case of unlisted stocks not listed on the Stock Exchange, if there is no example to properly reflect the objective exchange values thereof, or if it is difficult to compute them by any other way, the value thereof shall be appraised in accordance with the supplementary assessment methods under the Inheritance Tax and Gift Tax Act.

Article 63 of the former Inheritance Tax and Gift Tax Act

1. The plaintiff's appeal is dismissed.

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

The judgment of the first instance shall be revoked.

The Defendant’s disposition of imposition of KRW 92,568,00 against the Plaintiff on March 16, 2007 shall be revoked.

The reasoning for the court's explanation on this case is the same as that for the judgment of the court of first instance, and thus, it is citing this as it is in accordance with Article 8 (2) of the Administrative Litigation Act and Article 420 of the

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and the judgment of the court of first instance is just, and the plaintiff's appeal is dismissed as it is without merit. It is so decided as per Disposition.

[Seoul Administrative Court 2008Guu1344, 13 June 2008]

1. The plaintiff's claim is dismissed.

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

The defendant shall revoke the disposition of imposition of KRW 92,568,00 (including additional tax; hereinafter the same shall apply) of the gift tax in 2001 against the plaintiff on March 16, 2007.

1. Details of the disposition;

A. On October 10, 2001, the Plaintiff transferred 740,000 non-listed shares of ○○○○○○○ Incorporated Company (hereinafter “Nonindicted Company”) (hereinafter “the instant shares”) to ○○○○○○○○○○○ (hereinafter “the instant shares”). In calculating the transfer price of the instant shares, the instant shares were non-listed shares, and the market price cannot be identified, and the amount of the instant shares were calculated by applying the supplementary evaluation method under the Inheritance Tax and Gift Tax Act (hereinafter “the Inheritance Tax Act”) by adding the assessed value of 20% increase per share for the shares of the largest shareholder, etc., to 3,452 won, calculated the price per share as 4,142 won, and the transfer price was 3,000,000 won, and paid transfer income tax accordingly.

B. The Defendant, through a tax investigation on the transfer of shares of this case, assessed the value of the shares of this case according to the supplementary evaluation method under the Inheritance Tax and Gift Tax Act on the premise that the market price cannot be known as non-listed shares through the tax investigation on the transfer of shares of this case. However, on the ground that the non-party company continued to operate within three years before the business year prior to the base date of appraisal of the shares of this case, and the 690 won of the transfer value of the shares of this case, which is 20% increased from the transfer value of the above 1 share, constitutes a deemed donation by high-priced transfer between related parties under Article 35 of the Inheritance Tax and Gift Tax Act, the Defendant imposed the gift tax of 92,568,000 won (including the 13,224,000 won for additional tax on negligent return and additional tax on default) on March 16, 207 (hereinafter referred to as the "disposition of this case").

C. Meanwhile, according to the report of the corporate tax of the non-party company, which was revealed in the integrated computer network of the National Tax Service, the non-party company reported that all three business years had deficits from April 1, 1998 to March 31, 2001. However, the non-party company reported that there was profit for the business years from April 1, 2001 to March 31, 202, to which the transfer date of the shares in this case belongs.

[Grounds for Recognition: Evidence No. 1, Evidence No. 2-2, Evidence No. 3, and the purport of the whole pleadings]

2. Whether the disposition is lawful;

A. The plaintiff's assertion

(1) The Plaintiff transferred the shares of this case to ○○○○ at the market price under Article 35 of the Inheritance Tax and Gift Tax Act. In light of the fact that ○○○ sold the shares of this case to a third party around April 2003 at KRW 8,200, the Plaintiff’s transfer price of KRW 4,142 shall be deemed to have been transferred at low price, but the disposition of this case, which was otherwise deemed unlawful

(2) The Plaintiff filed a transfer income tax return in accordance with the relevant laws and regulations by making every effort to request the accounting corporation to make the best decisions, etc., and did not think that the Plaintiff was donated to the Ma○○○○. Therefore, the Plaintiff’s failure to cause any error to the Plaintiff’s duty, and at least the penalty tax imposition portion should

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

(1) Determination as to the assertion of the above A.1

In the case of non-listed stocks not listed on the Korea Stock Exchange, the price of the stocks shall be deemed the market price if there seems to be an adequate example of the transaction. However, if there is no such example or it is difficult to calculate the market price by any other method, the value of the stocks shall be assessed according to the supplementary evaluation methods under the Inheritance Tax and Gift Tax Act. In this case, as the facts stated in the above 1., it is general that it is difficult for the Plaintiff to calculate the market price of the stocks as non-listed stocks, as the Plaintiff calculated the sale price of the stocks of this case, and the Defendant assessed the price according to the supplementary evaluation methods under the Inheritance Tax and Gift Tax Act, and there is no proof of the transaction room under the same premise that it would be deemed the market price. Since the value of the stocks of this case under the deemed donation under the Inheritance Tax and Gift Tax Act should be assessed as the market price on October 10, 201 as the value of the stocks of this case to a third party on April 1, 2003, the Plaintiff’s assertion that the stock price of this case should be assessed within 1.

2) Determination as to the assertion of the above A.2

Under the tax law, in order to facilitate the exercise of the right to impose taxes and the realization of tax claims, when a taxpayer violates various obligations, such as a return and tax payment, as prescribed by the individual tax law without justifiable grounds, the taxpayer's intention and negligence are not considered as administrative sanctions. On the other hand, it cannot be imposed only when there are justifiable grounds that it is unreasonable for the taxpayer to be unaware of his/her duty, or there is a reason that it is unreasonable for the taxpayer to expect the fulfillment of his/her duty. In this case, there is no justifiable reason that the Plaintiff trusted the method of appraisal of an accounting firm whose ordinary transactions have been conducted. Thus, the Plaintiff's assertion on this issue is without merit.

3. Conclusion

Thus, the plaintiff's claim of this case is dismissed as it is without merit.

Related Acts and subordinate statutes

○ former Inheritance Tax and Gift Tax Act (amended by Act No. 6780 of Dec. 18, 2002)

Article 35 (Presumption of Donation at Time of Transfer of Low Price or High Price)

(1) When the relevant property is transferred or acquired to a person who falls under any of the following subparagraphs, an amount equivalent to the difference between the price and the market price, which is determined by Presidential Decree, shall be deemed to have been donated:

2. In case where the property is transferred to a specially related person at a price above the market price, the transferor of such property;

(2) Persons having special relationships referred to in paragraph (1) 1 and 2, low-value and the scope of high-value shall be prescribed by Presidential Decree.

○ former Inheritance Tax and Gift Tax Act (amended by Act No. 6780 of Dec. 18, 2002)

Article 63 (Appraisal of Securities, etc.)

(1) The appraisal of securities, etc. shall be conducted by the following methods:

1. Appraisal of stocks and investment shares:

(c) Stocks and equity shares not listed on the Korea Stock Exchange other than those under item (b) shall be appraised according to the methods prescribed by Presidential Decree in consideration of corporation assets and profits;

(3) In applying the provisions of paragraphs (1) 1 and (2), 20/100 of the value appraised under the provisions of paragraphs (1) 1 and (2) of this Article shall be added to the value of stocks and equity shares (excluding stocks and equity shares of a corporation that has losses under the provisions of Article 14 (2) of the Corporate Tax Act continuously from a business year within three years before the business year in which the appraisal base date falls) of the largest shareholder, largest investor, and shareholders or investors in a special relationship with such largest shareholder (hereafter in this paragraph, the largest shareholder, etc.) as prescribed by the Presidential Decree, but where the largest shareholder, etc. holds in excess of 50/100 of the total number of stocks issued by the relevant corporation, 30/100 shall be added thereto. In this case,

○ former Inheritance Tax and Gift Tax Act (amended by Act No. 6780 of Dec. 18, 2002)

Article 78. Additional Tax, etc.

(1) When, with respect to inherited property or donated property, a report is not made within the report deadline under Article 67 or 68, or a report is made which falls short of the tax base to be reported, the head of a tax office, etc. shall add an amount equivalent to 20/100 of the amount calculated by multiplying the non-reported tax base or the ratio occupied by the insufficient amount (referring to the amount excluding the amount falling under any of the following subparagraphs) to the tax base to be reported pursuant to the provisions of Article 76 by the sum of the calculated tax amount of inheritance tax or gift tax and the amount added pursuant to the provisions of Article 27 or

1. An amount short of the tax base to be reported due to the difference of appraised values as prescribed by the Presidential Decree;

2. Amount falling short of the tax base to be reported due to the error in applying the deductions under Articles 18 through 24, and 53 (1).

(2) In case where the tax amount to be paid under the provisions of Article 70 is not paid by the due date for return, or is paid under the tax base determined under the provisions of Article 76, the head of tax office, etc. shall add to the calculated tax amount the total sum of the amounts in the following subparagraphs to the tax amount not paid or paid in kind (in case where an application for payment in annual installments or in kind is made under the provisions of Article 71 or 73, it shall include the tax amount not permitted for such payment in annual installments; hereafter in this paragraph, referred to as “unpaid tax amount”). In this case, the

1. Where there exists any unpaid tax amount during the period from the day following the due date of return to the date one year: An amount calculated by multiplying the unpaid tax amount by 10/100; and

2. Where any unpaid tax exists even after the expiration of the period under subparagraph 1: An amount calculated by multiplying the unpaid tax amount (where there exists any tax amount paid during the period under subparagraph 1, referring to the balance remaining after deducting it), by the rate as determined by the Presidential Decree, taking into consideration the period from the date of voluntary payment

○ Inheritance Tax and Gift Tax Act (wholly amended by Presidential Decree No. 17459, Dec. 31, 2001)

Article 26 (Scope of Low Price and High Price Transfer and Related Persons)

(2) The term "high price" in Article 35 (1) 2 of the Act means the price where the value obtained by subtracting the market price from the price of transferred property (excluding convertible bonds, etc. under Article 40 (1) of the Act) is 30/100 or more of the market price or where the difference is 100 million won or more.

(3) The term "gains prescribed by the Presidential Decree" in the main sentence of Article 35 (1) of the Act means the difference between a price calculated under paragraphs (1) and (2) and the market price minus the lesser of the following values:

1. Where the value obtained by subtracting the price from the market price is at least 30/100 of the market price or at least 30/100 of the market price, the value equivalent to 30/100 of the market price;

2. 10 million won.

(4) "Person in a special relationship" in Article 35 (1) 1 and 2 of the Act means a person in a relationship falling under any of the following subparagraphs with a transferor or transferee (hereafter referred to as a "transferr, etc." in this paragraph):

1. A person who falls under Article 19(2)1, 2, and 4 through 8. In such cases, a shareholder, etc. shall be deemed a transferor, etc.

○ Inheritance Tax and Gift Tax Act (wholly amended by Presidential Decree No. 17459, Dec. 31, 2001)

Article 54 Evaluation of Unlisted Stocks

(1) Stocks and investment shares that are not listed on the Korea Stock Exchange (hereafter in this Article, referred to as unlisted stocks) pursuant to Article 63 (1) 1 (c) of the Act shall be the value that is appraised by the following formula:

The value per share = The weighted average amount of net profits and losses for the latest three years per share ± the rate prescribed by the Ordinance of the Ministry of Finance and Economy in consideration of the average interest rate formed in the financial market (hereinafter referred to as the “net profit and loss value”).

(2) Where the value of unlisted stocks appraised under paragraph (1) falls short of the value appraised by the following formula, the value shall be the value appraised by the following formula:

The value per share = the net asset value of the corporation ± the net asset value of the corporation ± (hereinafter referred to as the “net asset value”).

○ Inheritance Tax and Gift Tax Act (wholly amended by Presidential Decree No. 17459, Dec. 31, 2001)

Article 80 (Additional Taxes, etc.)

(1) The term "Difference in appraised values prescribed by Presidential Decree" in Article 78 (1) 1 of the Act means the value of inherited or donated property reported within the deadline for filing the tax base of inheritance tax and the deadline for filing the tax base of gift tax prescribed in Article 67 or 68 of the Act, which is the value assessed under the provisions of Articles 60 (2) and (3), and 66 of the Act, according to the determination of