Whether Article 47(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; Act No. 9916, Jan. 1, 2010; Act No. 9916, Feb. 1, 2010; Act No. 9916, Jan. 1, 201) applies to the case where a second title trust of the same person is deemed as a donation

Article 47(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003; hereinafter “former Inheritance Tax Act”) provides that “the taxable amount of gift taxes shall be the total amount of the donated property under the provisions of Articles 31 through 45 of the same Act as of the date of donation minus the amount taken over by the donee as debts secured by the donated property concerned,” but Article 47(2) of the same Act provides that where the total amount of the donated property received from the same person within 10 million won prior to the date of donation exceeds the taxable amount of gift taxes, the value of the donated property shall be added to the taxable amount of gift taxes, and Article 55(1) of the same Act provides that “the tax base of the gift tax shall be the amount calculated by subtracting the amount of the donated property under Article 53 of the same Act and the amount of the deduction of disaster loss under Article 54 of the same Act from the taxable amount of gift taxes under the provisions of Article

Meanwhile, Article 47(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; Act No. 9916, Jan. 1, 2010; hereinafter “amended Inheritance Tax Act”) provides that the taxable amount of gift taxes shall be the total amount of donated property under the provisions of the same Act as of the date of donation [excluding the value of donated property under the provisions of Articles 40(1)2, 41-3, 41-5, and 42(4) (hereinafter “ donated property excluded from aggregate”) less the amount acquired by the donee as debts secured with the donated property. Article 47(2) of the former Inheritance Tax and Gift Tax Act provides that the taxable amount of gift taxes shall be added to the taxable amount of gift taxes for 10 years, and Article 47(1) of the same Act provides that the taxable amount of gift taxes shall be excluded from aggregate of donated property under the provisions of Article 45(1)5 of the same Act (in case of the same Act, the same provision shall not apply.

As such, the purport of Article 47(2) of the amended Inheritance and Gift Tax Act, which provides for aggregate taxation with respect to the previous donated property within 10 years, is to prevent the act of donation by dividing the amount of real estate, etc., which may be damaged by cumulative taxation, without making a single donation, if there are multiple donations different in time because the original donation constitutes separate taxation requirements for each individual donation act.

Considering the legislative intent, system, and history of amendment of the provision on the addition of re-donations within 10 years, it is reasonable to interpret that Article 47(2) of the amended Inheritance and Gift Tax Act, which is the additional provision on re-donations, applies even in cases where the next person’s title trust within 10 years is deemed a donation.

Articles 23, 41-2 (see current Article 45-2), 47 (1) and (2), 53, 54, and 55 (1) (see current Article 55 (1) 4) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 7010, Dec. 30, 2003); Articles 23, 45-2, 47 (1) and (2), 53, 54, and 55 (1) 1 and 2 (see current Article 55 (1) 3), 3 (see current Article 55 (1) 4, 45 (2), and 47 (2), and 47 (1) and (2), and 47 (2), and 55-2, and 47 (2) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 9916, Jan. 1, 2010);

Plaintiff (Law Firm Dara, Attorneys Min Byung-il et al., Counsel for the plaintiff-appellant)

Samsung Head of Samsung Tax Office (Law Firm KEL, Attorneys Lee Dong-soo et al., Counsel for defendant-appellant)

Seoul High Court Decision 2016Nu33027 decided August 16, 2016

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Case summary

A. On December 31, 1998, Nonparty 1 entered into an agreement on the title trust of 18,000 non-listed shares issued by Cocouria Co., Ltd. (hereinafter “Couria”), which he held, to the Plaintiff. Accordingly, the Plaintiff completed the transfer of ownership in its own name on the same day.

B. On December 31, 200, the Plaintiff completed the transfer of ownership of Nonparty 1’s cocon share 5,000 shares, and on December 31, 2001, Nonparty 3, Nonparty 4, Nonparty 5, Nonparty 6, and Nonparty 7’s cocon share 110,00 shares, the transfer of ownership of which was changed in the name of Nonparty 1’s cocon share 110,00 shares.

C. On December 31, 2003, the Plaintiff completed the transfer of title to Nonparty 7, Nonparty 6, Nonparty 8, and Nonparty 9’s copins shares 118,000 shares, which were confirmed by title trust and fraudulent use of name at the time of tax investigation. On December 31, 2004, the Plaintiff completed the transfer of title to Nonparty 1’s copis shares 51,392 shares, respectively, on December 31, 2004, which were transferred to Nonparty 1 in the future in the name of Nonparty 1, Nonparty 10, Nonparty 11 and Nonparty 12.

D. On January 11, 2012, the director of the Seoul Regional Tax Office, while conducting a tax investigation with respect to the Plaintiff, did not give prior notice to the Plaintiff pursuant to the proviso of Article 81-7(1) of the former Framework Act on National Taxes (amended by Act No. 1520, Dec. 19, 2017; the same shall apply hereinafter). On the date of the said tax investigation, the Seoul Regional Tax Office notified the Plaintiff of the tax items to be investigated, the period of investigation, the period of investigation, “from January 1, 2003 to December 31, 2004,” the period of investigation, “from January 11, 2012 to February 20, 2012,” and “I were selected as a person to be subject to investigation to verify the suspected receipt of your asset donation funds.” In addition, the director of the Seoul Regional Tax Office extended the scope of the tax investigation with respect to the Plaintiff on February 2, 2012, “the extended period of the tax items to be” from 196.

E. On October 12, 2012, the Defendant deemed that the Plaintiff was holding a title trust with respect to Cococos shares. On October 12, 2012, the Defendant determined and notified each of the following: (a) gift tax in 1998, including each additional tax; (b) gift tax in 2000; (c) gift tax in 2001; (d) gift tax in 2004; and (e) gift tax in 2004; and (e) gift tax (including additional tax) gift tax in 1998, excluding the imposition of gift tax in 200, 200, 201, 203, and 204; and (e) each of the instant dispositions imposing penalty taxes, including the principal tax on gift in 1998; and (e) each of the instant dispositions imposing penalty taxes.

2. Judgment on the grounds of appeal

A. As to the assertion that there is an error in the tax investigation procedure

In light of the contents of each provision of Article 81-7(1) of the former Framework Act on National Taxes and Article 63-6 of the former Enforcement Decree of the Framework Act on National Taxes (amended by Presidential Decree No. 28644, Feb. 13, 2018) and the circumstances as stated in the lower court’s holding, the lower court determined that the Defendant’s failure to comply with the procedure of prior notice or to notify the Plaintiff of the tax items subject to investigation, when giving prior notice to the Plaintiff, constitutes destruction of evidence, etc.

Examining the reasoning of the lower judgment in light of the relevant legal principles and the record, the lower court’s aforementioned determination is justifiable, and contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal doctrine on

B. As to the assertion that no agreement on title trust was reached

In light of the circumstances stated in its reasoning, the lower court determined that there existed an implied agreement on the title trust of the Copis shares at least around 200, 2000, 2001, 2003, and 2004 between Nonparty 1 and the Plaintiff.

The allegation in the grounds of appeal that there was no implied agreement as above is nothing more than dispute over the selection of evidence and fact-finding which belong to the exclusive jurisdiction of the lower court, which is a fact-finding court, and it is difficult to view it as legitimate grounds of appeal. Furthermore, even if examining the judgment of the lower court in light of the records, it did not err by misapprehending the principle of logic and experience and exceeding the bounds of

C. As to the assertion regarding the purpose of tax avoidance

1) Article 41-2(1) main text of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780, Dec. 18, 2002; Act No. 7010, Dec. 30, 2003; hereinafter “Inheritance Tax and Gift Tax Act”) and Article 45-2(1) main text of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “Inheritance Tax and Gift Tax Act”) provide that “where the actual owner and the title holder are different from those who are in need of transfer or exercise of the right, the value of the property shall be deemed to have been donated to the actual owner, notwithstanding Article 14 of the Framework Act on National Taxes, on the date on which the actual owner and the title holder registered as the title holder had been donated, this shall not apply to cases where the property is registered in the name of another person without any purpose of evading taxes.” Meanwhile, the main text of Article 41-2(2) of the former Inheritance Tax Act provides for the purpose of tax evasion of Article 198(3).

2) The court below rejected the Plaintiff’s assertion on the premise that, in the instant case where the transferor reports the details of ownership change along with a report on the tax base of transfer income under the Income Tax Act, it shall not be presumed to have the object of tax avoidance, and that the proviso of Article 41-2(2) of the former Inheritance and Gift Tax Act (amended by Act No. 6780, Dec. 18, 2002; the proviso of Article 45-2(2) of the former Inheritance and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter the same provision) applies to the case where the transferor of stocks imposes gift tax on the transferor due to the constructive gift of title trust due to the failure to complete the transfer for a long period of time. The Plaintiff’s assertion that the Plaintiff had the burden of proving that there was no purpose of tax avoidance in each of each of the instant new title trust, which constitutes a new title trust, was not related to the tax avoidance, or there was no proof as to the said title trust or future tax avoidance.

3) Examining the records in light of the aforementioned provisions and related legal principles, the lower court’s determination is justifiable. In so doing, contrary to what is alleged in the grounds of appeal, it did not err by misapprehending the legal doctrine on the presumption of title trust donation or the purpose of tax evasion.

D. As to the assertion that there was no duty to report on the presumption of title trust donation or constructive agenda

1) According to the main text of Article 68(1) and the main text of Article 4(1) of the former Inheritance and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007), a donee liable to pay a gift tax shall report the taxable value and tax base of the gift to the head of the competent tax office within three months from the date of donation [the same shall apply to Article 68(1) of the former Inheritance and Gift Tax Act (amended by Act No. 6048 of Dec. 28, 199)].

2) The court below held that not only the person who received the gift by agreement between the parties but also the person who is deemed to have received the gift by law or who is presumed to have received the gift by the law should be deemed to have the duty to report the gift tax (see Supreme Court Decision 2002Du2826, Oct. 10, 2003). The court below rejected the Plaintiff’s assertion on the different premise on the ground that the imposition of the duty to report is lawful in imposing the duty to report the freedom of conscience or property rights under the Constitution of the title trustee. Since the Plaintiff and the title trustee of the same shares bear the duty to report the taxable value and tax base of the gift tax, insofar as the Plaintiff did not submit the gift tax return, the exclusion period for imposition of the gift tax for each gift in 198, 200 and 201 should be 15 years, and the imposition of the penalty tax

3) Examining the records in light of the above provisions and related legal principles, such determination by the court below is just, and contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal principles on the presumption of title trust donation or legal fiction.

E. As to the double taxation claim related to the donation in 2003

The lower court determined that the imposition of gift tax in 2003 on the ground that Nonparty 1, in relation to the imposition of the gift tax in 2003, held that in relation to the disposition imposing the gift tax in 2003, the gift tax imposed by the Plaintiff on Nonparty 1 did not constitute double taxation, on the ground that Nonparty 1 held the title trust to the Plaintiff around 2003.

Examining the reasoning of the lower judgment in light of the relevant legal principles and records, the lower court’s determination is justifiable, and contrary to what is alleged in the grounds of appeal, did not err by misapprehending

F. As to the assertion on the base date for calculation of tax base

The lower court determined that: (a) Article 41-2(1)2 of the former Inheritance and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003) that applies to the imposition of gift tax on gift in 203 (where the property is a property requiring a transfer of a title, referring to the day following the end of the year following the year in which the date of acquisition of ownership falls) and Article 45-2(1)2 of the former Inheritance and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007) that applies to the imposition of gift tax on gift in 203; (b) where the transfer of shares is imposed on the transferor of shares due to the gift under title trust due to the failure of the transferee to complete a long-term transfer of title; and (c) where the Plaintiff is the same as the Plaintiff who completed a transfer of title after obtaining a transfer of shares under title trust, the lower court determined that the Defendant’s transfer of shares should be based on 3130 days from the date.

Examining the reasoning of the lower judgment in light of the relevant legal principles and records, such determination by the lower court is justifiable, and contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on the base date of calculation of tax base

G. As to the allegation of illegality in the method of appraisal of cocopia stocks

In light of the circumstances as indicated in its reasoning admitted by the adopted evidence, the lower court determined that it was lawful for the Defendant to calculate the value of the shares held in title trust to the Plaintiff according to the supplementary assessment method, on the grounds that the amount of the public sale claimed by the Plaintiff cannot be deemed the market price of the shares held in title trust to the Plaintiff in around 1998, 200, 201, 2003, and 2004.

Examining the record in light of the relevant provisions and legal principles, the fact-finding and determination by the lower court is justifiable, and contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on the application of the market price of unlisted stocks or the supplementary method of assessment thereof.

H. As to the assertion of illegality of re-donation of gift tax

1) Article 47(1) of the former Inheritance and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; hereinafter “former Inheritance and Gift Tax Act”) provides that “the taxable amount of gift taxes shall be the amount calculated by subtracting the amount acquired by a donee from the total amount of the donated property under the provisions of Articles 31 through 45 of the same Act as of the date of donation, which is secured by the donated property concerned, as debts secured by the donated property.” However, Article 47(2) of the same Act provides that where the total amount of the donated property received from the same person within 10,000 won, within 10 years prior to the relevant donation date, the value of the donated property shall be added to the taxable amount of gift taxes, and Article 55(1) of the same Act provides that “the tax base of the gift tax shall be the amount calculated by subtracting the amount of the donated property deduction under Article 53 of the same Act from the taxable amount of gift taxes under the provisions of Article 47

Meanwhile, Article 47(1) of the former Inheritance and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; Act No. 9916, Jan. 1, 2010; hereinafter “amended Inheritance and Gift Tax Act”) provides that the taxable amount of gift taxes shall be the total amount of donated property under the provisions of the same Act as of the date of donation [excluding the value of donated property under the provisions of Articles 40(1)2, 41-3, 41-5, and 42(4) [excluding the value of donated property under the provisions of Articles 40(1)2, 41-5, and 42(4)] minus the amount acquired by the donee as debts secured with the donated property. The main sentence of Article 47(2) of the former Inheritance and Gift Tax Act (amended by Act No. 9916, Jan. 1, 2010; hereinafter “the amended Inheritance and Gift Tax Act”) provides that the taxable amount of gift taxes shall be deducted from title trust property.

As such, the purport of Article 47(2) of the amended Inheritance and Gift Tax Act, which provides for aggregate taxation with respect to the previous donated property within 10 years, is to prevent the act of donation by dividing the amount of real estate, etc., which may be damaged by cumulative taxation, without making a single donation, if there are multiple donations different in time, since the original gift tax constitutes separate taxation requirements for each individual gift act. However, it is to prevent the act of donation by dividing the amount of real estate, etc., which is damaged by cumulative taxation.

2) Considering the legislative intent, structure, and history of the amendment of the provision on the addition of re-donations within 10 years, it is reasonable to interpret that Article 47(2) of the amended Inheritance Tax and Gift Tax Act, which is the additional provision on re-donations, applies even in cases where the title trust of the same person is deemed as a donation within 10 years. The reasons are as follows.

A) Article 47(2) of the amended Inheritance and Gift Tax Act, which is an additional provision on re-donation, does not explicitly stipulate that the former Inheritance and Gift Tax Act does not include the same provision as Article 47(2) of the former Inheritance and Gift Tax Act except for the addition of the provisions on donated property excluded from adding, and Article 47(1) of the amended Inheritance and Gift Tax Act does not stipulate that the title trust property value deemed as a gift constitutes donated property excluded from adding.

B) Article 55(1) of the amended Inheritance and Gift Tax Act provides that the tax base of gift tax shall be the amount calculated by subtracting the fees for appraisal and assessment of donated property from the amount falling under any of the following subparagraphs. The subparagraph 2 provides that “in the case of donated property excluded from summing up, the amount obtained by deducting 30 million won from the relevant donated property.” Meanwhile, subparagraph 1 provides that “in the case of deemed donation of trusted property under the provisions of Article 45-2, the amount of the relevant trusted property shall be the amount of the relevant trusted property,” which is separate from the donated property

C) Article 55(1) of the amended Inheritance and Gift Tax Act does not have any provision separately stating whether the provision on the addition of re-donation is excluded, and rather, comparing the following provisions, it appears that the provision only stipulates how to deduct each donated property under the provisions of Article 47(1) of the same Act in calculating the tax base (Article 47(1)1 of the same Act does not include any provision on deduction in title trust property; subparagraph 2 of the same Article concerning donated property excluding any summing-up; subparagraph 3,00 won in cases concerning donated property 3,00 won in cases concerning donated property excluding summing-up and subparagraph 3 of the other donated property; and Article 55(1) of the same Act regarding donated property and disaster loss deduction in cases concerning donated property under Articles 53 and 54 of the same Act. In light of the above legal text, it is reasonable to view that Article 55(1) of the same Act does not recognize any deduction of donated property under the name of trust

D) The legislative purpose of imposing gift tax by deeming title trust as a gift is to effectively prevent tax avoidance and to recognize exceptions to the principle of substantial taxation in order to realize tax justice (see, e.g., Supreme Court Decision 2007Du17175, Sept. 8, 2011). Therefore, the failure to prescribe a mutual aid system for donated property, etc. differently from other donated property when calculating gift tax on the title trust property deemed as a gift is to give disadvantages to the title trustee compared to the donee in order to achieve the legislative purpose to effectively prevent the act of tax avoidance. From this perspective, in the case of a title trust deemed as a gift under the amended Inheritance Tax and Gift Tax Act, unlike the previous Inheritance Tax and Gift Tax Act, the legislators cannot be deemed to have excluded the system of adding gift in the case of a title trust, thereby enabling the title trustee to evade the progressive tax rate.

E) Meanwhile, the current Inheritance and Gift Tax Act, amended by Act No. 16102, Dec. 31, 2018, stipulates that, in cases of a deemed donation of title trust pursuant to Article 45-2, a person liable to pay the gift tax is changing from the nominal owner to the actual owner (Article 4-2(2)), and that, in cases of a deemed donation of title trust pursuant to Article 45-2, a title trust property under Article 45-2 is a donated property excluded from the gift tax amount of the donee’s gift tax amount (Article 47(1)). However, this cannot be considered in the interpretation of the amended Inheritance and Gift Tax Act, which constitutes a creative provision following the change of a person liable to pay the gift tax on

3) Examining the reasoning of the lower judgment in light of the aforementioned legal principles and records, the lower court is justifiable to have rejected the Plaintiff’s assertion that, among each of the instant dispositions, the imposition of gift tax in 2004 and the imposition of additional tax on the gift tax in 204 was erroneous, and contrary to what is alleged in the grounds of appeal, the lower court did not err

3. 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 on the bench.

Justices Kim Jong-hee (Presiding Justice)