Examination Donation 2009-0093 (2010.02.09)

The disposition that denies stock transaction practices and calculates the market price by a supplementary evaluation method is legitimate;

The example of business example is one-time transaction between a person with a special relationship and a person with a special relationship, and it is merely 43.8% of the supplementary appraised value under the Inheritance Tax and Gift Tax Act, and it is difficult to view the complementary appraised value under the Inheritance Tax and Gift Tax Act as the market price.

The contents of the decision shall be the same as attached.

1. Red○○

2. Redly;

3. grandchildren △△△

Head of the District Tax Office

1. All of the plaintiffs' claims are dismissed.

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

The Defendant’s imposition of gift tax of KRW 227,66,920 on September 1, 2009 and KRW 399,046,270 on each of the following grounds: (a) the imposition of gift tax of KRW 48,685,780 on September 1, 2009 and KRW 154,717,650 on Plaintiff HongB; and (b) the imposition of gift tax of KRW 994,460 on September 10, 200 on Plaintiff HongB; and (c) the imposition of KRW 994,460 on each of the following grounds:

1. Basic facts

A. △△△ Group Co., Ltd. (hereinafter referred to as "non-party company") is an unlisted company established for the purpose of manufacturing and selling control parts, and △△△ Group Co., Ltd. (hereinafter referred to as "△△△△ Group"), which is a Japanese corporation, is a shareholder of the non-party company, and HongD is the representative director of the non-party company. The plaintiff HongA, HongB, is the children of HongD, and the plaintiff SokCC is the spouse of HongD.

(1) Transfer by △△△ (hereinafter referred to as “sale of this case”).

(A) Plaintiff HongA: (a) on December 27, 2007, on the part of △△△, the Plaintiff acquired KRW 826,875,000 (= KRW 2,205 note x 375,000) by transferring the shares of Nonparty Company (hereinafter “instant shares”) to KRW 375,00 per share.

(B) Plaintiff RedB: (a) on December 27, 2007, the Plaintiff HongB acquired 413,250,000 won per share of 1,102 shares from △△△△ on a total of KRW 375,000 per share (=1,102 shares KRW 375,000).

(2) Donation of HongD (hereinafter referred to as "the donation of this case")

(A) On December 27, 2007, the Plaintiff HongA donated KRW 525,00,000 in cash, and KRW 1,795 in the instant shares on December 28, 2007.

(B) On December 27, 2007, the Plaintiff HongB donated KRW 290,000,000 in cash, and on December 28, 2007, KRW 898 of the instant shares to the Plaintiff HongB.

(C) On March 27, 2008, the Plaintiff CC donated 600 shares of this case to the Plaintiff son.

C. As to the instant gift, the Plaintiffs reported gift tax each by evaluating the value of KRW 375,00 per share, as set forth in the instant trade, as a transaction example.

D. The Defendant: (a) deemed that the sale and purchase of the instant shares falls under the case where property is transferred or taken over between persons other than those in a special relationship under Article 35(2) of the Inheritance Tax and Gift Tax Act; (b) Article 26(5) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act; and (c) pursuant to the supplementary assessment method stipulated in Article 63(1)1(c) of the Inheritance Tax and Gift Tax Act; and Article 54 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, the Defendant assessed the value per share of the instant shares as 85,40 won at the time of the sale and purchase in accordance with the supplementary assessment method stipulated in Article 63(1)1(c) of the Inheritance Tax and Gift Tax Act; (c) Article 35(1) of the Inheritance Tax and Gift Tax Act; and (d) Article 26(3)2 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, by deeming the said Plaintiffs to have been donated to the △△ on September 1, 2009.

E. As to the instant donation, the Defendant assessed the value per share of the instant shares acquired by the Plaintiff HongA and HongB from HongD as KRW 855,40,00, and assessed the value per share of the instant shares acquired by the Plaintiff HongCC from HongD as KRW 1,014,642, and deemed that the amount equivalent to the difference between the said appraised value and the reported gift value was the value of donated property underreported return. On September 1, 2009, the Defendant decided and notified the Plaintiff HongA of KRW 399,046,270, and the gift tax of KRW 154,717,650 to the Plaintiff HongB and the Plaintiff HongB of KRW 154,717,650 on September 1, 209.

F. The Plaintiffs filed a request for review with the National Tax Service on December 11, 2009, but was dismissed on February 9, 2010.

[Ground of recognition] Facts without dispute, Gap 1 through 6, 9, 11, 12 evidence, Eul 1-1 and 2, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

(1) The value of KRW 375,00 per share at the time of the instant disposition falls under the market price that adequately reflects the objective exchange value at the time of the instant transaction in light of the following circumstances. Nevertheless, the Defendant applied the supplementary assessment method instead of applying the market price in the instant disposition.

○ The Plaintiff HongA and RedB did not have such special relationship as provided in the Inheritance Tax and Gift Tax Act with the △△ at the time of the instant transaction.

The value of KRW 375,00 per share is the value determined at the end of negotiations by △△ and the non-party company over about six months.

○ At the time of negotiations on the sales price of this case, △△△ was dependent on the decision-making of RedD or RedD did not exercise influence over the formation of the transaction value, and the sales price of this case is the value determined as a result of negotiations by the parties to the transaction in order to maximize their respective economic interests.

○○○○○○ had, due to the instant trade, realizing gains from the transfer of KRW 936,125,00 [the sales value of the instant case = KRW 1,240,125,00 ( KRW 375,000 per share) - initial acquisition value of ○○○△△△△△△△△△△ KRW 304,00,000 per share].

(2) Even if domestic affairs and the instant transaction constituted acquisition by transfer at a price significantly lower than the market price, there are justifiable grounds in light of the following circumstances in light of Article 35(2) of the Inheritance Tax and Gift Tax Act, where the instant transaction is not subject to gift tax.

○ The instant shares are non-listed shares, and they are not interchangeable extremely.

○ In the trend of the decline in the volume of transactions between Nonparty Company and △△, the instant transaction was conducted to liquidate a partnership relationship through the ownership of shares by △△△ as the relationship between the two companies becomes worse, such as opposing the overseas expansion of the Nonparty Company.

The representative director of the non-party company is the largest shareholder who already holds at least 83% of the total number of shares issued by the non-party company, and there was no need for △ to purchase shares held by the non-party company in addition, so only the plaintiff HongA and HongB made the non-party company acquire the shares of this case.

B. Relevant statutes

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

(c) Fact of recognition;

(1) Around 1984, △△△△△△△△△ Co., Ltd. (hereinafter “○○△△△△△△”) was established for the purpose of manufacturing and selling household-only parts. However, on June 1, 1994, the non-party company was merged into ○○△△△△△△△ according to the decision to authorize the corporate reorganization plan on June 1, 1994, and as a result, △△△△△△△ was issued 59,200 shares (16.54%) due to the merger by the non-party company.

(2) The status of changes in stocks from around 1994 to 2006 of the non-party company is as listed below.

(3) As of the business year 2007 where the instant transaction was conducted, sales revenue for the non-party company of △△△△ was 951,732,00 won, sales revenue for the non-party company of △△△△ KRW 708,717,000, and the purchase amount was 708,717,000 won, and the holding ratio of the non-party company’s shares was 83.46%, and 16.54% at 3,307 shares.

(4) Meanwhile, the instant shares were not traded after around 2000 before the instant trading. The net asset value per share is KRW 1,508,426, and the value per share based on the weighted average amount of net profit and loss for the last three years is KRW 420,049.

[Ground of recognition] Gap evidence Nos. 1-3, 17, Eul evidence No. 1-1, 2-2, the purport of the whole pleadings

D. Determination

(1) Whether the computation of market price of the instant shares is lawful

(A) Legal principles

Article 35(2) of the Inheritance Tax and Gift Tax Act provides that where property is transferred between persons other than a related party without justifiable reasons, the amount equivalent to the profits prescribed by the Presidential Decree shall be presumed to have been donated to the person who has obtained such profits as the value of donated property, and Article 26(5) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that "the value which is remarkably low" means the value of the transferred property less the price than 30/100 of the market value. Meanwhile, according to each of the provisions of Article 60(1), (2), and (3) of the Inheritance Tax and Gift Tax Act, the value of the property on which the gift tax is levied is calculated based on the market value as of the date of donation, and the market value is established if it is difficult to calculate the market value, it means an objective exchange value formed by a normal transaction, and if it is difficult to calculate the market value, it shall be determined by the method under Articles 61 through 65 of the Inheritance Tax and Gift Tax Act.

In the case of unlisted stocks not listed on the Korea Stock Exchange, if there is an example of the transaction that seems to properly reflect the objective exchange value, such price shall be deemed the market price. However, if there is no such example or it is difficult to calculate the market price by any other means, the value shall be assessed according to the supplementary evaluation methods under the Gift Tax Act. Here, the market price refers to the objective exchange price formed through normal transaction in principle. In order to constitute the market price at the time of donation, there must be circumstances to view that the transaction price objectively reflects the general and normal exchange value (see, e.g., Supreme Court Decision 9Du2505, Feb. 11, 2000).

(B) Determination

In full view of the following circumstances as to the instant case, the value of KRW 375,00 per share claimed by the Plaintiffs to be the market price on the appraisal base date of the instant shares cannot be deemed to properly reflect the objective exchange value at the time of the instant purchase and sale, and no objective exchange value recognized as ordinarily established in the instant transaction between many unspecified and unspecified persons within a certain period before and after the date of the instant purchase and sale or donation cannot be found. Therefore, it is difficult to compute the value of the instant shares by any method other than supplementary assessment method. Thus, it is lawful for the Defendant to assess the value of the instant shares by supplementary assessment method to lead to the instant disposition. The Plaintiffs’ assertion on this part is without merit.

The instant transaction was conducted between △△△ and the non-party company’s representative director and the minor children of HongD, who are the largest shareholder.

The consultation between the Plaintiff HongA and HongB on the purchase of the instant shares was conducted between the executive officers of the Nonparty Company and the △△△, and the △△ constitutes a fixed transaction entity with a special relationship of the Nonparty Company, and there were circumstances in which the shares held cannot be commercialized without the consent of HongD.

The acquisition of the shares in this case by ○○○○ was received in return for a merger around June 1, 1994, and the non-party company, as it is necessary to acquire the shares in this case in order to liquidate the partnership relationship with △△△△, made a first proposal for the sale of shares to the △△△△.

It is difficult to see that the transaction value of the single-time unlisted stocks that is transferred to the largest shareholder on the date for the purpose of settling a partnership relationship has a rationality and objectivity.

○ The instant shares did not have been traded even after the lapse of about 10 years since around 200.

The supplementary assessment value of the shares of this case calculated by the Defendant is adequately reflected in the net profit and loss and net asset value of the non-party company. It is merely 43.8% of the above supplementary assessment value ( = 375,000 won ± 855,400 won) or 36.9% of the above supplementary assessment value (=375,000 won ± 1,014,642 won) claimed by the plaintiffs to be the market value on the appraisal base date of the shares of this case.

On March 28, 2006, the value of KRW 375,00 per share of the non-party company is calculated by dividing the KRW 1,240,49,000 by the amount obtained by multiplying the shares held by the △△△△△△ prior to the capital reduction by the face value of KRW 5,000,000 after the capital reduction (the plaintiff voluntarily stated that 375,000,000, the price before the capital reduction was proposed in the course of holding consultations to sell the shares in this case by the △△△△△△△△). In other words, since the value of KRW 375,00 per share is based on the value of KRW 5,00 per share, it is difficult to view that the assets of the non-party company is a reasonable value reflected in the assets of the non-party company.

(2) Determination as to the instant transaction

(A) Whether the acquisition by transfer was made at a price significantly lower than the market price

The Plaintiff HongA and HongB acquired the instant shares at KRW 375,00 per share, but the market price of the instant shares calculated according to the supplementary evaluation method stipulated under the Inheritance Tax and Gift Tax Act is as seen earlier. As such, the market price of the instant shares is 85,400 per share and 375,000 per share of the said sale price is 256,620 won per share of the amount equivalent to 30/100 of the market price (=85,400 won x 30/100), which is more than 480,400 won per share (=85,400 won - 375,000 won per share) and thus, it is reasonable to deem that Plaintiff HongA and HongB acquired the instant shares at a price significantly lower than the market price.

(B) Whether there are justifiable grounds for trade practice

Whether it falls under the case of "a justifiable reason for the transaction practice" under Article 35 (2) of the Inheritance Tax and Gift Tax Act shall be determined by comprehensively considering the circumstances of the transaction concerned, the relationship between the parties to the transaction, and the transaction value

Comprehensively taking account of the aforementioned facts and the purport of the entire pleadings, it is difficult to acknowledge that the instant transaction constitutes a case where there are justifiable grounds for transaction practice. There is no evidence to acknowledge otherwise. The Plaintiffs’ assertion on this part is not acceptable.

Although Plaintiff HongA, HongB, and △△△ did not have a special relationship at the time of the instant trade, the said Plaintiffs are minor children of HongD, the largest shareholder of the non-party company, and this case’s donation to the above Plaintiffs was made immediately after the instant trade, the instant sales funds were donated by HongD, and HongD requested the instant sales. In light of the fact that HongD requested the instant sales, it is difficult to avoid the possibility that the instant sales were made as a means of an irregular donation.

○ When compared to KRW 855,400, the assessed value of the instant shares at the time of the instant purchase and sale, which was lawfully assessed by the Defendant according to the supplementary assessment methods, KRW 375,00 per share, which is the sales value of the instant shares, is too low.

As a result of the sale of this case, the shareholders of the non-party company were both the spouse and children of HongD. As the plaintiffs were the plaintiffs, they intended to liquidate the liquidation relationship between the non-party company and the minority shareholders of the non-party company.

○ The mere fact that the non-listed company is an unlisted corporation cannot be readily concluded that the instant shares are not interchangeable.

(C) Sub-decisions

Since the sale of this case constitutes a case where property is acquired at a price significantly lower than the market price without justifiable grounds in light of transaction practices, the defendant's disposition of this case based on such premise is legitimate.

(3) Determination as to the instant donation

The Plaintiffs evaluated KRW 375,00 per share of the instant gift as business example and declared gift tax on the gift of this case. However, the market value of the instant shares calculated in accordance with the complementary evaluation method stipulated under the Inheritance Tax and Gift Tax Act is KRW 85,400 per share in the case of the shares acquired by the Plaintiff HongA or HongB from HongD, and the Plaintiff’s DamageCC’s acquisition of shares from HongD, constitutes a case where the Plaintiff under-reported the value of donated property. Accordingly, the Plaintiff’s disposal of this case is lawful by deeming the difference between the appraised value and the declared value according to the supplementary evaluation method as the value of donated property.

3. Conclusion

The plaintiffs' claims are dismissed on the grounds of this case.