[1] The meaning of the market value of the transferred listed stocks when determining whether capital gains are subject to wrongful calculation

[2] The requirements for applying the unfair calculation panel rule under Article 101 of the former Income Tax Act

[3] The case holding that Article 101 of the former Income Tax Act applies because the transfer of shares constitutes a case where the tax burden has been unjustly reduced, in case where the largest shareholder, etc. transfers shares traded in the Korea Stock Exchange, which includes the value of management right or control, to a specially related person by means of a mass transaction outside time, and transfers them to a price

[1] Article 101 (4) of the former Income Tax Act (amended by Act No. 9897 of Dec. 31, 2009) (see current Article 101 (5)), Article 167 (4) and (5) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18173 of Dec. 30, 2003), Articles 60 (1) and 63 (1) 1 and (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780 of Dec. 18, 2002), Article 101 (2) of the former Income Tax Act (amended by Act No. 9897 of Dec. 31, 2009); Article 101 (3) of the former Enforcement Decree of the Income Tax Act (amended by Act No. 9897 of Dec. 31, 2009) / [3] Article 108 (1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 20130 (see current Article 107 (1) of the Act)

[2] Supreme Court Decision 2007Du7505 Decided September 24, 2009 (Gong2009Ha, 1788)

Plaintiff (Attorney Kim Dong-dong, Counsel for the plaintiff-appellant)

Head of the High Tax Office

Seoul High Court Decision 2009Nu15199 decided January 22, 2010

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

The grounds of appeal are examined.

1. As to the grounds of appeal Nos. 1, 3, and 4

Article 167 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18173, Dec. 30, 2003) (amended by Presidential Decree No. 18173, Dec. 31, 2009; hereinafter referred to as the “former Income Tax Act”) provides that “If it is deemed that the tax burden has been reduced unfairly by acquiring more than the market price or making those in a transaction with a person in a special relationship fall short of the market price, the acquisition price or transfer price thereof shall be calculated based on the market price” (Article 60 through 64 of the Inheritance Tax and Gift Tax Act; hereinafter referred to as “the market price in applying paragraph (4)”) shall be calculated on the basis of the provisions of Article 101(4) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18173, Dec. 30, 200); and Article 167 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 1860, Dec. 18, 20006, etc.) provides that “the market price” shall be calculated.

In light of the legislative intent of Article 60(1)1(a) of the Inheritance and Gift Tax Act (amended by Act No. 5193 of Dec. 30, 1996), which provides that the value assessed according to the supplementary evaluation methods as stipulated in Article 63(1)1(a) shall be considered as the market price in order to exclude arbitraryness and ensure objectivity in the evaluation, the market price of the transferred listed stocks shall be determined based on the latter part of Article 60(1) of the Inheritance and Gift Tax Act (amended by Act No. 5193 of Dec. 30, 1996), the structure of Articles 60 and 63 of the Inheritance and Gift Tax Act (amended by Act No. 5193 of Dec. 30, 199, the market price of the transferred listed stocks shall be determined as the market price where only the average daily market price of the Korea Stock Exchange calculated according to the evaluation methods as stipulated in Article 63(1)1(a) is to be determined as the market price of the above 3rd stocks.

In this regard, the court below is just in holding that the market price of the shares of this case transferred by the plaintiff is the amount calculated by adding the premium rate under Article 63 (3) of the Inheritance and Gift Tax Act to the price calculated according to the evaluation methods provided for in the latter part of Article 60 (1) of the Inheritance and Gift Tax Act and Article 63 (1) 1 (a) (the average market price of the Korea Stock Exchange every two months before and after the date of transfer), and there is no error in the misapprehension of legal principles as argued in the Grounds for Appeal Nos. 1, 3 and 4.

2. As to ground of appeal No. 2

In order to apply Article 101 of the former Income Tax Act, it is sufficient that a transaction between specially related persons cannot be deemed a normal transaction to be conducted by a reasonable economic person in light of social norms or transaction practices, and thus, it is deemed that the tax burden has been reduced unreasonably, and it does not necessarily have to be the purpose of tax avoidance or economic loss to the parties concerned (see Supreme Court Decision 2007Du7505, Sept. 24, 2009).

According to the evidence duly adopted by the court below and the first instance court, the non-party 1, who was a listed corporation, is the founder of Daesung Group, including the Daegu Urban Gas Co., Ltd. (hereinafter "Tgu Urban Gas"), Daegu Urban Gas Co., Ltd. (hereinafter "Seoul Urban Gas"), and the non-party 2, 3, 4, 5, and 6 (hereinafter "the plaintiff et al.") were children of the deceased non-party 1. The plaintiff et al. sold 7 shares to the non-party 2 who were the representative director of the above company at the time of the above company's management right of the Daegu Urban Gas Co., Ltd. and the non-party 1, the non-party 2, the non-party 7, the majority of the shares were the non-party 1, and the non-party 2, the non-party 7, the non-party 1, the majority shareholder at the time of the above company's sale of the shares, and the non-party 1, the non-party 2, the non-party 7, the majority company's.

In light of the above circumstances, the Plaintiff transferred the instant shares to Nonparty 2 and 3, who are specially related parties, including the value of management right or control right for the large industry and Daegu Urban Gas by means of a large-time transaction, at a remarkably lower price than the market price. As such, the Plaintiff’s transfer of the instant shares constitutes a case where the tax burden has been reduced unfairly since it cannot be deemed that a reasonable economic person will take a normal transaction. Although there is no lack in the reasoning of the lower judgment, it is justifiable to conclude that the Plaintiff’s rejection of the Plaintiff’s claim of this case on the ground that Article 101 of the former Income Tax Act applies to the transfer of the instant shares, and thus, it is not erroneous in the misapprehension of the decision or the omission of the decision

3. As to the fifth ground for appeal

Article 52 of the Corporate Tax Act applies only to cases where, from the viewpoint of an economic person, a person with a special relationship is deemed to have neglected economic rationality by calculating an unnatural or unreasonable act (see Supreme Court Decision 2005Du14257, Dec. 13, 2007). Therefore, on a different premise, if an individual transfers shares to a corporation with a special relationship at an amount calculated by adding the premium rate pursuant to Article 63(3) of the Inheritance and Gift Tax Act, the provisions of Article 52 of the Corporate Tax Act shall be applied to the corporation with a high-priced purchase whenever it is possible to apply to the company with a special relationship.

4. Conclusion

Therefore, the appeal is 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.

Justices Shin Young-chul (Presiding Justice)