Plaintiff 1 and one other (Law Firm LLC et al., Counsel for the plaintiff-appellant)

Jinju Director of the District Tax Office (Law Firm LLC, Attorneys Jinju-jun et al., Counsel for the plaintiff-appellant)

January 17, 2017

1. Of the disposition of gift tax imposed by the Defendant against the Plaintiffs on November 1, 2013, the disposition of imposition of penalty tax of KRW 26,948,113,710 (i.e., KRW 10,632,516,753 + Additional Tax on Unauthorized Reporting + KRW 16,315,596,957) is revoked.

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

The same shall apply to the order.

1. Details of the disposition;

A. On March 29, 2008, Plaintiff 2 reported KRW 32,982,029,274 (36,867 per share x 894,622) of the gift tax base for the year 2007, KRW 14,427,913,173 to the Defendant on the ground of the donation of KRW 894,62 of the shares issued by the Non-Party (hereinafter “Non-Party”) on December 29, 2007 (hereinafter “instant shares”) to the Defendant on the ground of the donation of KRW 32,982,029,274 of the gift tax base for the year 207 (36,867 per share x 894,622 shares), the tax amount paid to the Defendant on July 7, 2008 upon the Defendant’s permission to pay in kind (hereinafter “the instant gift tax”).

B. On May 25, 2009, the Defendant assessed the value per share of the instant shares to Plaintiff 2 as KRW 36,867,051, not KRW 40,051, not KRW 231,137,619, not KRW 231,137,619, as gift tax attributed to year 2007 (hereinafter “instant first disposition”).

C. On November 1, 2013, the Defendant revoked the first disposition and returned 391,351 shares paid in kind by Plaintiff 2 to Plaintiff 1. On the same day, the Defendant: (a) deemed Plaintiff 1 as a donor; and (b) deemed Plaintiff 2 as a donee; (c) determined the tax base as KRW 54,082,583,753 x 894,62 x 892 x 894,62 x 894,62 ; and (d) determined the gift tax (this tax) as KRW 26,581,291,83 ; (b) KRW 10,632,516,753 ; and (c) KRW 16,315,49,565,975,530; and (e) determined the penalty tax imposition as KRW 5636,565,975,975,9750; and (e) imposed as additional tax (i) KRW 1636,5,56365,65,7565.

D. On January 17, 2014, the Plaintiffs sought revocation of the instant disposition imposing additional tax to the Tax Tribunal, but received a decision of dismissal on October 2, 2015.

[Ground of recognition] Facts without dispute, Gap evidence 1, 2, Eul evidence 1, 2, Eul evidence 1 and 2 (including numbers; hereinafter the same shall apply), the purport of the whole pleadings

2. The plaintiff's assertion

(a) Additional tax for an unfair non-declaration;

1) Whether the report constitutes a non-declaration

It is true that Plaintiff 2 reported differently from the fact that he was donated to the Nonparty even after the Plaintiff 1 re-titled the instant shares by the Nonparty. However, as long as the donee, donated property, appraised value, etc. were faithfully stated in a gift tax base return, the validity of the report cannot be denied solely on the ground that Plaintiff 2 entered the donor differently from the fact. In addition, it was difficult to expect that Plaintiff 1 will be recorded as a donor due to the nature of the title trust not related to the report, since the total amount of tax payable has not been reduced due to the Plaintiff 2’s initial filing act.

Therefore, the plaintiff 2's initial report cannot be evaluated as a non-report.

2) Whether the report was not filed by improper means

Plaintiff 2, at the time of the initial return of this case, did not conceal or disguise the facts that served as the basis for calculating the tax base and the amount of tax on the stocks of this case.

Therefore, it cannot be deemed that Plaintiff 2 did not report “unfair methods”.

(b) Additional tax for insincere payment;

The Defendant imposed penalty tax on the Plaintiffs on Plaintiff 2 by deeming that Plaintiff 2’s initial report of this case was invalid, and thus, the validity of payment was extinguished. However, as seen earlier, the first gift tax return of Plaintiff 2 and payment therefrom are valid. Therefore, the Defendant’s imposition of penalty tax in bad faith was erroneous.

In addition, since the Defendant received dividends as a shareholder of the shares that were paid in kind prior to the instant disposition, the Plaintiffs did not have any possibility of expectation for the payment of gift tax because it was extremely unlikely to expect that the previous return would be made in an unlawful manner, and thus, there was no possibility of expectation for the payment of gift tax. Furthermore, since the remainder of the portion except the portion of the first voluntarily paid gift tax was caused by the difference in the appraisal of donated property, there is a justifiable reason for the failure to pay the amount. On the other hand, the Defendant did not give any particular notice, while 4 years and 5 months from the date of the first disposition of imposition of gift tax, etc.

Finally, even if the defendant revokes payment in kind, since the fact that the plaintiff 2 paid in kind is retroactively extinguished, it cannot be deemed that the plaintiff 2 did not pay it from the beginning.

Therefore, it is illegal for the Defendant to impose penalty tax against the Plaintiffs in bad faith.

(c) Any other assertion.

The Defendant’s revocation of the instant first disposition and the permission for payment in kind against Plaintiff 2 constitutes the withdrawal of an administrative act by ex post facto extinction of any administrative act that entirely takes effect upon meeting the lawful requirements to the future. However, in order to recognize the withdrawal of an administrative act, changes in circumstances that have become unnecessary to continue the original disposition, or need for important public interest arises. In this case, such circumstances are not recognized.

Therefore, the Defendant’s revocation of the first disposition and the permission for payment in kind in the instant case is unlawful as it is not recognized as the grounds for such disposition, and thus, the instant disposition imposing penalty tax on the premise thereof is also unlawful.

3. Relevant statutes;

It is as shown in the attached Form.

4. Facts of recognition;

A. The Plaintiff 1’s stock title trust

1) The Plaintiff 1 acquired the total sum of 3,159,320 shares from around 1985 to December 199, and title trust was held in the name of the Nonparty, who is a sales agent.

2) Around 2007, the Nonparty requested Plaintiff 1 to adjust the name of the said shares. Accordingly, on December 29, 2007, Plaintiff 1 changed the name of the shares in the form of donation made by the Nonparty to Plaintiff 1 in the form of donation made by the Nonparty for KRW 2,264,698 of the said secondary shares of KRW 3,159,320 on December 29, 2007.

3) On March 26, 2008, Plaintiff 1 received shares from the Nonparty, and paid KRW 36,543,153,720 on gift tax. On September 28, 2009, Plaintiff 1 claimed that the said shares were not donated from the Nonparty, but were returned to Plaintiff 1’s name after the termination of title trust, and filed a claim for correction of the tax already paid.

4) Plaintiff 1 filed a lawsuit seeking revocation of the above rejection disposition by the Director of the Yongsan-si Tax Office. The first instance court dismissed Plaintiff 1’s claim on the grounds that it is difficult to recognize that Plaintiff 1 trusted the above stocks to the Nonparty, but the appellate court accepted Plaintiff 1’s claim by recognizing the title trust of the above stocks, but the appellate court appealed the appeal by the Director of the Yongsan-si Tax Office, but the judgment of dismissal was pronounced final and conclusive on June 14, 2012 (Seoul Administrative Court Decisions 2011Nu14661 decided June 14, 2012; 2012Nu1939 decided February 6, 2013; 2013Du6329 decided July 26, 2013; hereinafter collectively referred to as “instant final and conclusive judgment”).

B. Plaintiff 2’s request for correction of the first disposition of this case

1) On March 28, 2011, Plaintiff 2 filed a claim for correction with the Defendant for revocation of the first disposition of this case on the ground that “the instant shares were held in title trust by Plaintiff 1, but in the process of conversion into Plaintiff 1’s name, the Nonparty reported to Plaintiff 2 differently from the fact that it was donated to Plaintiff 2 during the process of conversion into Plaintiff 1’s name.” The Defendant rejected the claim for correction on May 17, 201.

2) Plaintiff 2 filed an administrative appeal with the Tax Tribunal, which was dismissed on August 30, 2012, and filed a lawsuit seeking revocation of the rejection disposition of the request for correction with this court (Seoul District Court Decision 2012Guhap4043, hereinafter “relevant lawsuit”).

3) Meanwhile, as the final and conclusive judgment of this case was rendered while the pertinent lawsuit was pending, it was revealed that Plaintiff 1 initially owned Plaintiff 1’s shares, including the instant shares, and that Plaintiff 1 again held a title trust with Nonparty 2, but again re-title trust with Plaintiff 2.

4) Accordingly, the Defendant revoked the first disposition of this case, and returned 391,351 shares of which Plaintiff 2 paid in kind to Plaintiff 1. Thereafter, Plaintiff 2 withdrawn the relevant lawsuit.

[Ground of recognition] Facts without dispute, entry of Eul's evidence Nos. 2 through 6, purport of the whole pleadings

5. Determination

(a) Additional tax for an unfair non-declaration;

1) Whether a report can be assessed without filing a report

A) Article 47-2(1) of the former Framework Act on National Taxes (amended by Act No. 9263, Dec. 26, 2008; hereinafter the same) provides that “where a taxpayer fails to file a tax base return under the tax-related Acts within the statutory due date of return, an amount equivalent to 20/100 of the calculated tax amount under the tax-related Acts shall be added to the payable tax amount or deducted from the refundable tax amount.” Such additional tax is an administrative sanction imposed, as prescribed by the Act, in cases where a taxpayer violates various duties, such as a return and tax payment, as prescribed by the Act without justifiable grounds, in order to facilitate the exercise of the taxation right and the realization of the tax claim (see Supreme Court Decision 2005Du10545, Apr. 26, 2007

B) Furthermore, Article 68(1) main text of the former Inheritance Tax and Gift Tax Act provides that a person liable to pay gift tax shall file a return on the taxable value and tax base of donated property with the head of the district tax office having jurisdiction over the place of tax payment within three months from the last day of the month to which the date of donation belongs, as prescribed by Presidential Decree. Article 68(2) of the former Inheritance Tax and Gift Tax Act provides that such return shall be accompanied by documents that can prove the type, quantity, appraised value, various deductions, etc. of donated property necessary for the calculation of the tax base of gift tax, and that Article 65(2)1, Article 64(2)1, and 2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 22042, Feb. 18, 2010; hereinafter the same) stipulates that the tax base and tax amount shall be determined upon the premise that the taxpayer or the taxpayer has any omission or error in the return even if a taxpayer has filed a return or error.

C) The legislative intent of the former Framework Act on National Taxes, the former Inheritance and Gift Tax Act, and the Enforcement Decree of the same Act, and the additional tax system is the same. The gift tax is merely a duty to cooperate in providing one reference material and information when the tax authority imposes a gift tax (see, e.g., Supreme Court Decision 86Nu566, Mar. 10, 1987). In full view of the fact that a taxpayer does not report “the value of the gift tax and the calculation of the tax base, essential and important matters” of the gift tax, thereby hindering the exercise of the taxation authority and the realization of the tax claim, if the taxpayer brings about a result that impedes the exercise of the taxation authority and the realization of the tax claim, the effect of the report shall be denied and the additional tax may be imposed. However, if it does not reach such a degree, it is reasonable to deem that the tax authority can correct the omission or error of the initial return and the disposition through a revised disposition, etc.

D) In light of such legal principles, whether a person liable to pay gift tax otherwise filed a separate report on the taxable value and tax base of gift tax constitutes a case where “the taxpayer files a different return on the taxable value and calculation of the tax base.”

E) In a case where a person liable to pay gift tax reports a “ donor” differently from the fact, the tax authority may have certain difficulties in understanding the legitimate tax base and amount of gift tax, due to the impact on the aggregate of donated property by donor (see Article 47(2) of the former Inheritance Tax and Gift Tax Act), donated property deduction (see Article 53(1) of the former Inheritance Tax and Gift Tax Act). However, in a case where a taxpayer faithfully reported matters other than a donor, such as the kind, quantity, appraised value, etc. of donated property which is the core for imposing gift tax, the tax authority may determine the amount of gift tax by means of tax investigation, etc.

F) Furthermore, in light of the legal doctrine that even if the tax authority recognized the title truster as the donor at the time when the initial disposition of gift tax was imposed, even if the tax authority recognized the title truster as the donor and made a decision of correction, it does not change the basic fact of taxation as within the scope of the same tax cause, and thus, the taxation disposition recognized as the donor was not unlawful (see, e.g., Supreme Court Decision 93Nu14059, Dec. 21, 1993). In a case where the donee reported the taxable value and tax base of gift tax by designating the “title trustee” as the donor, it is difficult to view that it is null and void as the return of gift tax that

G) In addition, when a tax authority finds a mistake or error in part of the facts recognized at the time of the initial taxation, it may immediately be imposed through a correction disposition to the extent that does not harm the identity of the disposition, and in such a case, no penalty tax may be imposed by deeming that there was no initial report. As such, even if the tax authority could terminate the taxation by the correction disposition through the change of the reason for disposition, if it is deemed that there was no initial report and deemed that there was no initial report and thus, a new taxation disposition involving additional tax can be conducted, it would result in the tax authority’s choice on whether to impose tax on the same reason for taxation, thereby impairing the predictability or legal stability

H) Therefore, it is difficult to deem that a person liable to pay gift tax did not properly report “the essential and important matters concerning the assessment of the value of taxation and the assessment of the tax base” solely on the ground that the person liable to pay gift tax simply stated matters on the donor differently from the facts.

I) In the instant case, on March 29, 2008, the deadline for filing a gift tax return, Plaintiff 2 reported the taxable value and tax base of the instant shares to the Defendant on March 29, 2008, and entered the donor as the Nonparty, not the Plaintiff 1, differently from the facts. However, in full view of the facts acknowledged earlier, it is recognized that Plaintiff 2 entered the remainder of the shares other than the donor, i.e., the kind, quantity, appraised value, etc. of the instant shares. Furthermore, even if Plaintiff 2 did not receive donated property within 10 years from Plaintiff 1, the donor did not have any possibility of causing any difference in the taxable value or tax base, thereby undermining the exercise of the right to taxation or the realization

(j) Therefore, it cannot be deemed that Plaintiff 2’s initial report of this case did not properly report “the essential and important matters concerning the assessment of taxation and tax base,” and thus, it cannot be deemed as a non-declaration subject to additional tax imposition.

2) Whether an improper method can be recognized

A) Article 47-2(2)1 of the former Framework Act on National Taxes provides, “If there is a tax base without filing a return in an unjust manner, an amount equivalent to 40/100 of the amount calculated by multiplying the calculated tax amount by the ratio of the amount equivalent to the unreported tax base to the tax base without filing a return in an unjust manner shall be added to the payable tax amount or deducted from the refundable tax amount.”

B) However, in the instant case, there is no need to further determine whether Plaintiff 2’s report on the instant first gift tax cannot be evaluated as a non-report, as seen earlier.

3) Sub-decisions

Therefore, the imposition of penalty tax without filing a report in the instant disposition is illegal. Therefore, this part of the plaintiffs' assertion is justified.

(b) Additional tax for insincere payment;

1) If a taxpayer fails to pay a national tax within the due date for payment under tax-related Acts or the paid tax amount is short of the payable tax amount, the amount calculated by adding the unpaid tax amount or the underpaid tax amount by the period from the day following the due date for payment to the date of voluntary payment or payment notice, and by the interest rate determined by Presidential Decree, or deducting the refundable tax amount

2) However, in the instant case, Plaintiff 2 cannot deny the validity of the initial return made by Plaintiff 2 to the Defendant, as seen earlier, and accordingly, the validity of the payment of the gift tax made by Plaintiff 2 remains intact. Therefore, it cannot be deemed that Plaintiff 2 did not pay the gift tax or paid it below the amount to be paid.

3) Therefore, the imposition of penalty tax in bad faith among the imposition of penalty tax in this case is unlawful, and the plaintiffs' assertion on this part is also justified.

6. Conclusion

Therefore, the plaintiffs' claim of this case is reasonable, and it is so decided as per Disposition.

[Attachment]

Judges Kim Jong-soo (Presiding Judge)

1) Meanwhile, the Defendant asserts that: (a) Plaintiff 2 reported a donor differently from the fact that the gift tax should have been imposed on the Nonparty; (b) there was no gift tax imposed on the Nonparty; (c) there was a problem of avoiding income tax arising from stock dividends in the future depending on who is the actual owner of the shares; and (d) Plaintiff 1’s children were exempted from the inheritance tax liability in the future; and (b) there was a result of tax avoidance, such as: (a) however, it is difficult to accept this part of the Defendant’s assertion in light of the following: (a) the imposition of the gift tax that the Plaintiff 1 should have been imposed by the title trust to the Nonparty is limited to the imposition of the exclusion period for imposition; (b) there was no direct relation to the retitle trust between the Plaintiffs; and (c) it is difficult to conclude that the income tax and the inheritance tax

2) On the other hand, in a lawsuit seeking revocation of a tax disposition, whether the disposition is lawful or not is determined depending on whether it exceeds a legitimate amount of tax. The parties can submit objective tax bases and materials supporting the tax amount until the closing of argument in the fact-finding court. However, in the event that a legitimate amount of tax to be imposed is calculated based on such materials, only the portion exceeding the legitimate amount of tax should be revoked, and in such case, the entire amount of the tax assessment should not be revoked. In such a case, the court should actively find a reasonable and reasonable calculation method and do not have the duty to calculate a legitimate amount of tax by its authority (see, e.g., Supreme Court Decision 94Nu13527, Apr. 28, 1995). In this case, even if the Defendant’s imposition of an unfair non-reported penalty tax against the Plaintiffs is illegal, so long as the first return of this case by Plaintiff 2 is recognized as effective, it may only be subject to imposition of additional tax for underreporting under Article 47-3(1) of the Framework Act. However, there is no clear reason to impose additional tax for under reporting under Article 27(c) of the former Enforcement Decree.