Cho High Court Decision 2016 Deputy 3832 ( October 29, 2017)

The transfer value of treasury stocks acquired by merger constitutes gross income, and the marginal profits of the book value at the time of transfer amount and acquisition shall constitute gross income.

It cannot be readily concluded that a merger constitutes capital transaction only in the case of a merger by distinguishing the acquisition of treasury stocks from the acquisition of an entire business, etc. and the acquisition of treasury stocks by disposing of treasury stocks after acquiring them as assets, from the perspective of the acquisition of an entire business, etc.

Article 15 (Scope of Gross Income)

2017Guhap22085 Revocation of Disposition of Refusal to Request Corporate Tax Correction

AAAAA corporation (trade name before change: AAA corporation.

BB Director of the Tax Office

January 11, 2018

February 1, 2018

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The Defendant’s rejection of correction of KRW 1,018,434,402 for the business year 2014 against the Plaintiff on September 28, 2016 shall be revoked.

1. Details of the disposition;

A. On December 1, 2017, the Plaintiff (the trade name before and after the change was referred to as “AAA corporation,” which was engaged in the manufacture, sale, etc. of heat machinery and appliances, was merged on November 30, 2012 with the CCC Co., Ltd. (hereinafter referred to as “CCC”).

B. Following the merger, the Plaintiff acquired 165,085 shares of the Plaintiff, which were owned by CCC, as its own shares, and was 1,650,850 shares through par split on March 24, 2014. On August 6, 2014, 45,346 shares among them (hereinafter “instant shares”) were transferred to KRW 4,692,404,080, and thereafter, when filing a corporate tax return for 2,888,463,089 shares (i.e., transfer value of KRW 4,692,40,080-book value of KRW 1,803,940-book value of KRW 91).

C. On August 29, 2016, the Plaintiff filed an application for rectification with the Defendant for refund of KRW 1,588,463,089 and KRW 1,592,389,389,121, totaling KRW 4,480,852,210, which was added to gross income as of June 2, 2015 and as of the revised return as of June 2, 2015, the Plaintiff filed an application for rectification with the Defendant for refund of KRW 1,018,434,402, which shall be excluded from gross income for the calculation of the income amount of 2014 business year. However, on September 28, 2016, the Defendant rejected the Plaintiff’s application for rectification on the ground that it should be included in gross income pursuant to Article 11 subparag. 2-2 of the Enforcement Decree of the Corporate Tax Act.

D. The Plaintiff appealed and filed an appeal with the Tax Tribunal on October 24, 2016, but was dismissed on March 29, 2017.

[Ground of recognition] Facts without dispute, Gap evidence 1, 2, Eul evidence 1 to 6, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

(1) Main argument

In the meantime, the Supreme Court has decided that the disposal profits should be included in the calculation of earnings when the merged corporation acquires the stocks of the merged corporation held by the merged corporation as a result of the merger, deeming the disposal profits as falling under the merger marginal profit prescribed by the Corporate Tax Act. The amendment of the Enforcement Decree of the Corporate Tax Act on February 4, 2009 stipulated that the amount of treasury stocks transferred through consultation should be included in the calculation of earnings (Article 11 subparagraph 2-2 of the Enforcement Decree of the Corporate Tax Act; hereinafter referred to as "the Enforcement Decree of the Corporate Tax Act"). However, such disposal profits constitute excess of the amount of merger marginal profit or the amount of stocks issued by the merged corporation under Article 17 (1) 5 or 1 of the former Corporate Tax Act (amended by Act No. 13555, Dec. 15, 2015; hereinafter referred to as "the Corporate Tax Act"). Therefore, the Enforcement Decree of the instant case is invalid because it exceeded the scope of delegation of the Corporate Tax Act, or its disposition based thereon is unlawful.

(2) Preliminary assertion

Even if the enforcement decree of this case is valid, the shares of this case held by CCC were not the Plaintiff’s own shares prior to the date of merger registration, and the difference between the initial acquisition value of the shares of this case and the market price at the time of merger constitutes a merger marginal profit subject to exclusion from gross income, and thus, the amount included in gross income should be limited to the difference between the transfer value of the shares and the market

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Determination

(1) Relevant legal principles

In a case where a subordinate statute delegates a certain matter to a subordinate statute, determination of whether the subordinate statute complies with the limits of delegation should be made by comprehensively examining the legislative purpose and content of the pertinent provision, structure of the provision, and relationship with other provisions. In a case where the delegation provision itself clearly states the limits of delegation by using terms with which the meaning can be accurately known, whether the delegation provision exceeds the limits of its literal meaning, or whether a new legislation was made beyond the bounds of its literal meaning by expanding or reducing the scope of the terms used in the delegation provision beyond the meaning of the terms used in the delegation provision (see, e.g., Supreme Court Decision 2009Du17797, Apr. 29, 2010).

(2) As to the primary argument

In light of the above legal principles, the following circumstances acknowledged by comprehensively considering the evidence and the purport of the entire pleadings cannot be deemed null and void, and thus, the plaintiff's primary assertion based on such premise shall not be accepted.

(A) Article 15(1) of the Corporate Tax Act provides that profits generated from transactions which increase the net assets of a corporation shall be included in the calculation of earnings, except as otherwise provided for in capital or financing and this Act. Article 15(3) of the same Act delegates matters necessary for the scope and distinction of profits to be prescribed by Presidential Decree. Article 11(2)-2 of the Enforcement Decree of the Corporate Tax Act, enacted upon delegation of the same Act, provides that the amount of transfer of treasury stocks, including where a merged corporation acquires stocks of a merged corporation held by a merged corporation following

(B) However, such a consultation’s own stocks are assets of a merged corporation, which constitute an element of calculating the merger marginal profit as stipulated in Article 17(1)5 of the Corporate Tax Act. However, the disposal of treasury stocks after the merger is separate from the merger transaction, and the disposal profit of treasury stocks that are acquired by succession after the merger includes not only the subsequent transaction, but also the increase in the value arising from the merger’s business activities after the merger. As such, it is difficult to view that such a merger marginal profit is included in the scope of the merger marginal profit defined as the difference between the net assets transferred by the merged corporation and the amount of the surviving corporation’s capital increase

(C) Considering the circumstances where the shares in the agreement were inevitably acquired due to the comprehensive succession of the assets through a merger rather than the shares held by the merged corporation, the profits earned by disposing of the shares in the agreement are different from the profits from disposal of the shares or assets of other corporations. However, as to the shares acquired through a merger, the profits earned by disposing of the shares in the agreement are not different from the profits from disposal of the shares or assets of the other corporations. However, from the standpoint of the merged corporation, the acquisition and disposal of the shares in the agreement is not in essence different from the acquisition and disposal of the shares in the manner of acquiring and disposing of the shares in the business, and the circumstances where the company acquired shares inevitably due to the acquisition of the shares in the agreement through a merger are the same as to the acquisition of the shares in the company, and it is difficult to conclude that the disposal transaction constitutes a pure capital transaction by distinguishing the acquisition of shares in the agreement from the acquisition of shares in the merger and the acquisition of shares

(D) In light of such circumstances, even if the disposal gains of the consulting treasury stocks were determined to be included in the calculation of earnings in the instant provision, they cannot be deemed to fall under the payment of capital or investment excluded from the gross income under Article 15(1) of the Corporate Tax Act, or a merger marginal profit under Article 17(1)5 of the same Act. Therefore, the enforcement decree of the instant case cannot be deemed to have exceeded the delegation scope of the said statutory provisions as the mother corporation, or to have been null and void against the

(E) Supreme Court Decision 2004Du3755 Decided the Plaintiff is in accordance with the provision structure and purport of Article 17 subparag. 3 of the former Corporate Tax Act (amended by Act No. 7838 of Dec. 31, 2005) and Article 11 subparag. 2 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302 of Feb. 4, 2009), unless otherwise expressly provided for in Article 17 subparag. 3 of the former Corporate Tax Act and Article 11 subparag. 2 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302 of Feb. 4, 2009), so long as the enforcement Decree of the instant case was enacted under lawful delegation of the mother Act

(F) The Plaintiff asserts that the difference between the merger date and the transfer date of the instant shares constitutes an excess of the face value of the issuance of shares under Article 17(1)1 of the Corporate Tax Act. However, the excess of the face value of the issuance of shares refers to the amount exceeding the face value if shares are issued above the face value, and thus, it cannot be deemed that the disposal gains of treasury shares already issued are the excess of the face value of the issuance of shares.

(3) As to the conjunctive assertion

In light of the following circumstances, among the transfer margin of the shares in this case, the difference between the transfer margin and the market price at the time of the merger cannot be deemed to be subject to exclusion from gross income, and thus, the Plaintiff’s assertion on this part is rejected.

(A) According to Articles 44 and 44-3 of the Corporate Tax Act and Article 80-4(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 27828, Feb. 3, 2017), the so-called gains from the acquisition or transfer of a merger shall be imposed, but if the requirements for deferment of taxation such as qualified mergers are met, the merged corporation shall be deemed to transfer the assets to the merged corporation at the net asset value and shall be deemed to have no gains from the transfer. The merged corporation shall be deemed to have received the assets at the book value, and in the case of the asset adjustment account established in the assets other than depreciable assets at the time of the transfer

(B) Pursuant to the above qualified merger and taxation deferment provisions, the CCC reported that the transfer value at the time of the merger was nonexistent as the net asset book value and received it by the Plaintiff. The Plaintiff transferred the instant shares to another person after succession, and the Plaintiff did not confirm the transfer of shares to the asset adjustment account as a result of adjusting the difference between the book value and the market value of the instant shares to the asset adjustment account. Accordingly, in accordance with the corporate tax law and the corporate tax law as seen earlier, the transfer amount of the instant shares including the deferred portion, and the book value at the time of succession, namely, the total transfer margin of the instant shares, should be included in the gross income.

(C) The Plaintiff asserts that the taxation deferment and inclusion in the calculation of earnings under the corporate tax law are merely an issue of the taxation timing that the transfer margin should be taxed at any time on the premise of the transfer margin corresponding to gross income, and that the nature of the transfer margin not falling under gross income cannot be changed to that of gross income depending on whether the requirement for qualified mergers is met. However, as seen earlier, as seen earlier, the profit of disposing of the treasury stocks of the agreement shall be deemed as gross income under the corporate tax law

(D) In addition, the Plaintiff asserts that the difference between the initial acquisition price and the market price at the time of the merger cannot be taxed because the instant shares cannot be deemed the Plaintiff’s own stocks before the merger date, or that the relevant part constitutes a merger marginal profit. However, the difference between the transfer price and the book value of the instant shares is attributable to the Plaintiff’s succession to the book value at the time of the acquisition of the instant shares, and cannot be deemed as taxation of stocks other than treasury stocks or taxation on the merger marginal profit (if the Plaintiff succeeded to the instant shares at the time of the merger, the difference between the market price and the book value at the time of the merger shall be deemed as the gross income for the business year to which the date of the registration of the merger belongs, and the remaining disposal profits excluding the said inclusion in the gross income at the time of the merger after the merger shall be deemed as the gross income for the business year to which

3. Conclusion

Therefore, the claim of this case is dismissed as it is without merit. It is so decided as per Disposition.