Cho Jae-2016-Gu-337 ( November 28, 2016)

Unlisted stocks whose issuance of stock certificates is impossible due to the progress of a lawsuit on ownership is inappropriate for management and disposition falling under the grounds for refusal of payment in kind.

Unlisted stocks in which issuance of stock certificates is impossible because of the progress of a lawsuit on the lack of ownership between shareholders, are deemed inappropriate for management and disposition and thus a disposition rejecting an application for payment in kind is justifiable.

Article 71 of the Enforcement Decree of Inheritance Tax and Gift Tax Act

Article 19-4 of the Enforcement Rule of Inheritance Tax and Gift Tax Act

2017Guhap20486 Revocation of Disposition of Imposition of Value-Added Tax

○○ and two others

○ Head of tax office

November 29, 2017

December 22, 2017

1. All of the plaintiffs' claims are dismissed.

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

Cheong-gu Office

The defendant's refusal to pay in kind to the plaintiffs on May 27, 2016 shall be revoked.

1. Details of the disposition;

(a) Relationship between the Parties

1) Plaintiff 1 and Plaintiff 2 are grandchildren of ○○○ (hereinafter referred to as “the deceased”) who died on March 23, 2015, and Plaintiff 3 is the representative director of ○○○○, a corporation established and operated before the death of the deceased.

2) As the deceased’s inheritor, the deceased’s spouse’s heir ○○○, YO, YO, YO in South, YO, YO, YO, YO, and YO. The Plaintiff YO is the children of YO○○, YO, YOO, and YOO, and the children of YOO. The Plaintiff YO are children of YO.

B. Dispute on shares of ○○○○ Company and disposition on imposition of inheritance tax

1) On March 31, 2013, 2013, the Plaintiff, who operated and managed the golf course facility, was indicated as a company managing the golf course facility, and on March 31, 2013, the register of shareholders was indicated as holding 100% of the shares of Botory Development as follows.

- Yellow ○12,625 Jeju 14.03%

- Yellow ○43,750 Jeju 48.61%

- Yellow ○15,625 Jeju 17.36%

- Yellow ○9,000 note 10%

- Yellow ○9,000 note 10%

- Total90,000 note 100 %

2) On August 29, 2013, the Deceased filed a lawsuit claiming the change of shareholder’s name, claiming that 43,750 shares in the name of Yellow ○○○ was the shares trusted to Yellow ○○○. On February 6, 2015, the court of the first instance accepted the deceased’s claim on March 5, 2015, recognizing that the deceased was the actual owner of Bob○○○ shares 90,000 shares, and the above 43,750 shares were nominal in trust to Yellow ○○○ ( Daegu District Court Branch Branch 2013Ga1358, hereinafter referred to as the “instant lawsuit”). Yellow ○ appealed appealed appealed on March 5, 2015.

3) On the other hand, on July 25, 2014, the Deceased prepared a testamentary document stating that 90,000 shares under title trust will be bequeathed to the Plaintiffs as follows, and died on March 23, 2015 (hereinafter “the Plaintiffs’ shares bequeathed”).

Contents of testamentary evidence omitted.

4) On May 2, 2016, the Defendant imposed an inheritance tax of KRW 53,653,381,690 (including additional tax) on the Plaintiffs on the ground that the Plaintiffs received legacy of the instant shares from the Deceased.

(c) Disposition of refusal of payment in kind;

1) On May 25, 2016, the Plaintiffs filed an application with the Defendant for the imposition of inheritance tax on the instant shares in kind as follows. On May 25, 2016, the Plaintiffs attached a written statement of reasons for non-issuance of share certificates to the effect that “I confirm that I cannot issue a share certificate and deliver it to a specific person on the grounds that I cannot identify the owner as of May 2016, since the shares of the ○○○○○ prepared by the ○○○○ is pending in a lawsuit on ownership between shareholders (Seoul High Court 2

2) On May 27, 2016, the Defendant rendered a disposition to deny payment in kind to the Plaintiffs on the following grounds (hereinafter “instant disposition”).

- The shares of this case applied for payment in kind fall under non-listed shares falling under Article 74 (2) 4 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act (the scope of property that can be appropriated for payment in kind), but the shares of this case applied for payment in kind as of the date of application for payment in kind are in progress for ownership lawsuit among shareholders, so it is impossible to issue share certificates. This falls under Article 19-4 of the Enforcement Rule of the Inheritance Tax and Gift Tax Act (the scope of property inappropriate for the management disposition in kind) and thus, it is rejected pursuant to Article 71 (1)

(d) Procedures of the previous trial; and

The Plaintiffs sought revocation of the instant disposition to the Tax Tribunal on August 24, 2016, but was dismissed on November 28, 2016.

E. Lawsuit on the confirmation of ownership against the plaintiff Yul○ and Yul○

On September 30, 2016, the Seoul Central District Court rendered a favorable judgment on September 30, 2016 (Seoul Central District Court 2016dan5120864). At present, the appellate court is continuing to have rendered a final judgment on this issue (Seoul Central District Court 2016Na70705).

F. The confirmation of the instant lawsuit and a summary of the shareholder’s name

1) After taking over the appeal of the instant lawsuit, the executor ○○ of the deceased’s executor sought confirmation as to whether the shares of Bolmun Development had ownership on the deceased’s property, depending on the shares in statutory inheritance on the deceased’s property. The appellate court rendered a judgment in favor of the Plaintiff on May 17, 2017 (Seoul High Court 2015Na886). The appeal against this was dismissed on September 14, 2017, and the above judgment became final and conclusive on September 18, 2017 (Supreme Court Decision 2017Da19968).

2) Accordingly, the name of shareholder is opened. As of September 18, 2017, the Plaintiffs indicated that they hold 100% of the shares of Bob○○ as follows.

- Plaintiffs 1, ○○45,900 Jeju 51%

- Plaintiffs 2 ○○35,100 Jeju 39%

- Plaintiff 3 Lee ○9,000 note 10%

- Total90,000 note 100 %

Facts that there is no dispute for recognition, Gap evidence 1 through 8, Eul evidence 1 (including each number)

The purport of all entries and arguments

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

In full view of the relevant laws and regulations, the proviso of Article 73(1) of the Inheritance Tax and Gift Tax Act (hereinafter referred to as the "Act") where the management and disposal of the property on which an application for payment in kind of inheritance tax is made is inappropriate shall not be decided at will by the tax authorities, but shall be limited to the cases prescribed in Article 73(2) of the Act, Article 71(1) of the Enforcement Decree of the Act, and Article 19-

The Defendant’s disposition of this case on the ground that the instant lawsuit on the ownership of the instant shares continues, and that it is impossible to issue the share certificates due to this falls under Article 19-4 subparag. 4 of the Enforcement Rule of the Act, but this is merely a temporary obstacle to the management and disposition of the instant shares, and thus, it cannot be deemed as a similar circumstance to Article 19-4 subparag. 1 through 3 of the Enforcement Rule of the Act, and there is no recognition by the Commissioner of the National Tax Service as “property inappropriate for the management and disposition of the instant shares.” Therefore, the disposition of this case which rejected the application for payment in kind, even though the instant shares are not deemed inappropriate for management and disposition, is unlawful.

B. Relevant statutes

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

C. Determination

1) Relevant statutes and legal principles

A) Article 73 of the Act provides that "where it is deemed inappropriate to manage and dispose of the property which has been applied for payment in kind" under the proviso to paragraph (1), it may not be permitted to pay in kind. Paragraph (2) provides that "other matters necessary for the procedures for payment in kind" shall be prescribed by Presidential Decree. Article 71 of the former Enforcement Decree of the Act (amended by Presidential Decree No. 27835, Feb. 7, 2017; hereinafter referred to as "Enforcement Decree of the Act") provides that "the head of a tax office shall pay in kind the property which is inappropriate to manage and dispose of in kind" under the title of "the payment in kind in kind" (Article 73 (1) of the Act, "where property is established, such as superficies, easements, mortgages, etc. (Article 73 (1) of the Act), where the owner of the land which has been applied for payment in kind and the building is different (Article 3 (1) 4) and (4) of the Enforcement Rule of the Act, and where it is inappropriate to manage and dispose of the property in kind (Article 14).

B) The system of payment in kind is a large amount of tax, and the principle of cash payment in inheritance tax or gift tax with respect to property where a considerable period of time is required for disposal such as real estate, and as a result, if the principle of payment in kind is advanced without exception, it would be a big difficulty for taxpayers. Therefore, at the same time, it is prepared to secure tax collection. However, the procedure of receipt is complicated compared to the payment in cash, and the State has a lot of collection expenses due to the management and disposition of the property in kind. As seen earlier, the payment in kind is in principle a cash payment principle, and the payment in kind needs to be taken into account the equity with the taxpayer in cash and to be faithful to tax collection (see Constitutional Court Decisions 2006Hun-Ba49, May 31, 2007; 2010Du19942, April 11, 2013).

C) Stocks of an unlisted corporation shall also be included in a property subject to payment in kind; however, where it is deemed inappropriate to manage and dispose of the stocks of the unlisted corporation due to specific circumstances, such as where the stocks become the object of a security right, dispute over the ownership or the attribution of ownership, etc., or there is no prospect for sale, etc., payment in kind may be denied (see Supreme Court Decision 94Nu15820, Jul. 28, 1995).

2) Determination

A) The Plaintiffs dispute the illegality of the instant disposition on the premise that the reasons under Article 71(1) of the Enforcement Decree of the Act and each subparagraph of Article 19-4 of the Enforcement Rule of the Act are listed in accordance with delegation of Article 73(2) of the Act. However, as seen earlier, the system of payment in kind, as an exception to cash payment, allows taxpayers to pay the tax amount with a relaxation of the burden on cash payment, and where it is deemed inappropriate to manage and dispose of the property for which payment in kind has been applied in accordance with the proviso of Article 73(1) of the Act, it may not be permitted to grant permission for payment in kind. After specifying it in the delegation provision, it has been specified in Article 19-4 subparag. 4 of the Enforcement Rule of the Act, which provides that the Commissioner of the National Tax Service recognizes as similar to subparagraphs 1 through 3 of Article 19-4 of the Enforcement Rule of the Act, so it is reasonable to view the grounds under each subparagraph of the delegation statute as an inappropriate example of the above. Whether it is inappropriate to manage and dispose of the property for payment in kind should be determined individually in consideration of the relevant case.

B) Comprehensively taking account of the following circumstances revealed by the above facts, the circumstance that the appellate court of the instant lawsuit regarding the instant shares continues to exist and that the issuance of share certificates is not possible constitutes “a case where the management and disposition of the property for which payment in kind is applied is deemed inappropriate” under Article 73(1) of the Act. Therefore, the instant disposition is lawful, and the Plaintiffs’ assertion on a different premise is without merit.

(1) The instant shares were opened in the name of Yellow ○, Yellow ○, Yellow ○, Yellow ○, Yellow ○, Yellow ○○, and Yellow ○○○. Among them, the Deceased filed a lawsuit claiming the change of shareholder’s name on the ground that the relevant shares were held in title trust, and subsequently died after winning the first instance trial, the instant shares were bequeathed to the Plaintiffs. As at the time of the instant disposition, as the instant lawsuit on the ownership ownership was pending, ○○ could not issue and deliver a share certificate thereof.

(2) The payment of share certificates in kind is a payment of share certificates in lieu of the payment of inheritance tax in cash, and thus, the taxpayer is exempted from the inheritance tax liability. It can be deemed that the transfer of share certificates constitutes a payment transfer with the character of payment in kind under public law. Since the transfer of share certificates is effective requirements (Article 336(1) of the Commercial Act). As such, the defendant cannot take over the shares of this case as valid since the issuance of share certificates at the time of the disposition of this case is not possible. Further, even if the defendant takes over the shares of this case, it cannot be set up against the company because it is impossible to open the register of shareholders (Article 337(1) of the Commercial Act). If it is not possible for the defendant to take over the shares of this case, the shares of this case can not have the opposing power for such transfer and acquisition, and it constitutes an inappropriate property because it is substantially difficult to acquire, operate, or sell them.

(3) According to Article 70 of the Enforcement Decree of the Act, in principle, the period of permission for payment in kind shall not exceed 14 days from the date of receipt of the application, but may be extended only once up to 30 days, and the tax authority shall designate the date of receipt of the property paid in kind within the extent of 30 days from the date of permission, but if the property paid in kind is not received by the date of receipt, the permission for payment in kind shall lose its effect. In this case, in light of the dispute surrounding the ownership of the shares in this case, the receipt of the property paid in kind shall not be deemed lawful within the said period,

(4) Article 34(3) of the Regulations on the Collection of National Taxes provides that the receipt of the property paid in kind shall be deemed completed when the transfer of the property appropriated for the payment in kind, the registration of transfer of ownership, or the registration of transfer of ownership, or other requirements that can be asserted against a third party under the statutes have been met. As long as the issuance of share certificates on the shares in this case cannot be made, the defendant is

(5) Whether the disposition is unlawful shall be determined at the time of the disposition, and it shall be determined at the time of the disposition based on the law and fact-finding (see, e.g., Supreme Court Decision 88Nu12257, Mar. 28, 1989). Accordingly, the judgment becomes final and conclusive only with the purport that all the shares, including the shares of this case, were held in title as shares owned by the deceased, and accordingly, the disposition of this case is not unlawful retroactively solely on the ground that the plaintiffs completed the transfer of title to the shares of this case.

3. Conclusion

Since the plaintiffs' claims are without merit, all of them are dismissed. It is so decided as per Disposition.