Whether it is included in “where the normal sales period is less than three years in a major type of business,” which is a reason prescribed in Article 17-3(1)7 of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act, where the normal sales period has not been three years since the major type of business of an unlisted corporation was changed (affirmative in principle)

It is desirable to calculate the net value of unlisted stocks by the method of assessing the current value after estimating the future expected profit of the stocks. However, it is very difficult to accurately predict the future expected profit. Articles 54(1) and 56(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18627, Dec. 31, 2004) provide that, in principle, the net value per share of net profit and loss per share, which is the past performance, shall be calculated at a discount based on the rate reflecting the rate of profit and loss in circulation of corporate bonds with three-year maturity. As such, substitution of future expected profit and loss with the past performance is premised on the fact that the past performance continues to be in the future, and if the main type of business is not in three years after the change, the weighted average amount of profit and loss for the preceding three years shall be deemed as lump sum profit and loss, or if there is a high possibility of future profit and loss in the event that it is less than 30 years old or less than 30 years old (amended by Ordinance of the Inheritance Tax Act).

Articles 60 and 63(1)1(c) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007); Articles 54 and 56(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18627 of Dec. 31, 2004); Article 17-3(1) of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Strategy and Finance of Apr. 20, 208)

Plaintiff 1 and three others (Bae, Kim & Lee LLC, Attorneys Kim Tae-chul et al., Counsel for the plaintiff-appellant)

Head of Sungnam Tax Office et al.

Seoul High Court Decision 2010Nu20951 decided April 5, 2011

All appeals are dismissed. The costs of appeal are assessed against the Defendants.

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

A. Articles 60 and 63(1)1(c) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter the same shall apply) and Article 54 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18627, Dec. 31, 2004; hereinafter “Enforcement Decree of the Inheritance Tax and Gift Tax Act”) provide for net value per share (the interest rate determined and publicly announced by the Commissioner of the National Tax Service in consideration of the weighted average amount of net profit and loss per share for the last three years) and net asset value per share (the net asset value of the relevant corporation ± total issued value of the relevant corporation ± net asset value per share, and where it is difficult to calculate the market value due to a business owner’s death or a corporation’s net asset value within the period of appraisal, etc., the net asset value per share shall be calculated based on liquidation procedures.

In addition, Article 56 (1) of the Enforcement Decree of the Inheritance and Gift Tax Act provides that "the weighted average amount of net profit and loss per share for the preceding three years" shall be the value under subparagraph 1, namely, [3] + (the net profit and loss per share for the business year that has become two years before the base date of appraisal x (2) + (1%) + (1/6 per net profit and loss per share for the business year that has become three years before the base date of appraisal x (1)] 】 It shall be the value calculated by the formula of 1/6; where the relevant corporation under Article 56 (1) of the Enforcement Decree of the Inheritance and Gift Tax Act provides that it is unreasonable to follow the value of subparagraph 1 for the latest three years after the commencement of business or the net profit and loss per share for the latest three years due to a temporary event, the value of subparagraph 2, i.e., the average amount of profit and loss per share calculated by a specialized credit rating institution or accounting corporation before the base date of appraisal ; where it is deemed 3 years or less than 4 days per share, the average value per share.

It is desirable to calculate the net value of unlisted stocks by the method of assessing the current value after estimating the future expected profits of the stocks. However, Articles 54(1) and 56(1)1 of the Enforcement Decree of the Inheritance and Gift Tax Act, which, in principle, stipulate that the weighted average amount of net profits and losses for the last three years per share, “the average amount of net profits and losses for the last three years per share,” which is the past performance, shall be calculated at the interest rate reflecting the rate of distribution of corporate bonds with three years maturity. As such, substitution of future expected profits and losses with the past performance, is premised on the fact that the past performance will continue to continue in the future. If the main business is not less than three years after the change in the main business, the weighted average amount of net profits and losses for the last three years, which was based on the change in the main business, is difficult to predict accurately, and thus, it is inappropriate to substitute the future expected profits and losses for the main business type under Article 17(1)7 of the Enforcement Rule of the Inheritance and Gift Tax Act.

B. According to the reasoning of the judgment below, the court below comprehensively found the following facts: ① the plaintiffs acquired 2,500 shares of non-listed non-listed company 2,500 won per share from non-listed corporation on October 4, 2004 to 3,500 won per share; ② the defendants, applying Article 35(1)1 of the Inheritance and Gift Tax Act, acquired property from non-listed company 2,000 shares from non-listed company 3,50 won per share; ② the defendants acquired 72,00 shares from their wife 2,50 shares by transfer of property at a price lower than their market price to others; ② the defendants acknowledged 9 of the main financial business purpose 20 of the Inheritance and Gift Tax Act 10 of 10 of 204, 54(1) and 56(1)1 of the Enforcement Decree of the Inheritance and Gift Tax Act to be changed from 97 of the company's main business purpose to 14,495 won, and then changed the sales purpose of non-party 197 of the company.

Furthermore, the lower court, on the premise that, in cases where major types of business are changed, etc., it is reasonable to deem that the period of normal sales during the subsequent business period is less than three years, it constitutes grounds under Article 17-3(1)7 of the Enforcement Rule of the Inheritance and Gift Tax Act. Based on the foregoing factual basis, the lower court determined that, based on the foregoing factual basis, Nonparty 1 constitutes grounds under Article 17-3(1)7 of the Enforcement Rule of the Inheritance and Gift Tax Act, since the period of normal sales was less than three

The judgment below is just and acceptable as it is in accordance with the above legal principles, and there is no error in the misapprehension of legal principles as to Article 17-3 (1) 7 of the Enforcement Rule of the Inheritance and Gift Tax Act as otherwise alleged in the ground of appeal.

2. Regarding ground of appeal No. 2

Article 17-3(1) of the Enforcement Decree of the Inheritance and Gift Tax Act provides for the reasons that it would be unreasonable to calculate the net profit and loss per share based on the fact that the net profit and loss per share for the preceding three years is unable to be calculated or that the net profit and loss per share for the preceding three years is abnormal. Thus, barring any special circumstance, the net profit and loss per share based on the value under Article 56(1)1 of the Enforcement Decree of the Inheritance and Gift Tax Act, which is the value of the latest three years, cannot be calculated (see Supreme Court Decision 2006Du16434, Dec. 11, 2008). This legal doctrine provides for the method of calculating the net profit and loss per share based on the value of net asset under Article 56(1)2 of the Inheritance and Gift Tax Act, which is the value of net asset under Article 56(1)2 of the Enforcement Decree of the Inheritance and Gift Tax Act, which is an objective and reasonable method of calculating the net asset value per share, even if it does not meet the value of net profit and loss per share.

In the same purport, even if the plaintiffs did not report the average value of presumed profits per share under Article 56 (1) 2 of the Enforcement Decree of the Inheritance and Gift Tax Act within the gift tax, as long as it is deemed unreasonable to follow the value under Article 56 (1) 1 of the Enforcement Decree of the Inheritance and Gift Tax Act because they fall under the reasons under Article 17-3 (1) 7 of the Enforcement Decree of the Inheritance and Gift Tax Act, the court below held that each disposition imposing gift tax of this case, which is calculated on the basis of the value under Article 56 (1) 1 of the Enforcement Decree of the Inheritance and Gift Tax Act, is unlawful, on the ground that the "the average amount of net profits and losses per share for the last three years" cannot be calculated. There is no error of misapprehending the legal principles as to Article 56 (1) of the Enforcement Decree of the Inheritance and Gift

3. As to the third ground for appeal

The lower court determined that the imposition of each gift tax of this case was unlawful by applying the value of Article 56(1)1 of the Enforcement Decree of the Inheritance and Gift Tax Act and calculating the value of donated property based on this, and that the imposition of each gift tax of this case was unlawful, and that there was no decision on whether the value of Article 56(1)2 of the Enforcement Decree of the Inheritance and Gift Tax Act can be applied to the case where the average value of presumed profits is not reported within one association member's relocation right and one's relocation right, and therefore, the lower court did not err by misapprehending the legal principles as to the interpretation of Article 56

4. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Lee In-bok (Presiding Justice)