Early High Court Decision 2015Du5664-465 ( October 24, 2016)

If there is a justifiable reason that the trustee is unable to assume the responsibility for the transfer of ownership, the disposal of shares deemed donated is illegal.

The main text of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act is difficult for a title trustee to understand matters concerning the inheritor’s agreement on the division of inherited property, and where there is a justifiable reason that the title trustee cannot be held liable to transfer his/her property to the title trustee because shares are not included in the subject of

Article 45-2 (1) of the former Inheritance Tax and Gift Tax Act

2016Guhap6361 Revocation of Disposition of Imposition of Gift Tax

AA and 11 others

O Head of the tax office and six others

November 9, 2016

January 11, 2017

1. The Defendants listed in the separate sheet of disposition “Defendant (Disposition Office)” shall be subject to the imposition of each gift tax (including each additional tax) stated in the column of “the amount of notified taxes imposed on the Plaintiffs indicated in the column of “Plaintiff” as of each date indicated in the separate sheet of disposition.

The cancellation shall be revoked.

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

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

A. “The network BB held title trust with the Plaintiffs for 95,35 shares of CCC Co., Ltd. (hereinafter “instant shares”) prior to the death on October 20, 2010.” B, as the network BB died on October 20, 2010, the shares of this case were succeeded to DD, the spouse of the network BB, EE, their children, and FFF (hereinafter “heirs”) as of January 1, 2012.

C. The Plaintiffs did not change their rights to the shares of this case in the future.

D. In accordance with the main sentence of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2015; hereinafter “former Inheritance Tax and Gift Tax Act”), the Defendants determined and notified the Plaintiffs of the gift tax (including additional taxes) on January 1, 2012 as indicated in the separate disposition list, on the ground that the instant shares were not transferred to the successors until December 31, 201, which is the end of the year following the acquisition date, even if the successors acquired the instant shares on October 20, 2010.

[Ground of recognition] Facts without dispute, Gap evidence 2, Eul evidence 1 to 12 (including the relevant branch numbers), the purport of the whole pleadings

2. Whether each of the dispositions of this case is legitimate

A. Interpretation of the main sentence of Article 45-2 (1) of the former Inheritance Tax and Gift Tax Act

1) The main sentence of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act provides, “where the actual owner and the nominal owner are different from the property (excluding land and buildings; hereafter the same shall apply in this Article), the value of the property shall be deemed to have been donated by the actual owner on the date following the year in which the acquisition date of ownership falls, notwithstanding Article 14 of the Framework Act on National Taxes.”

2) Considering the following circumstances as revealed by the content of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act and the purport of the amendment, etc. of the relevant Acts and subordinate statutes, out of the second universal title (hereinafter “out of the instant universal title”) of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act shall be deemed as the date on which a title trust agreement exists, if a title trust agreement exists, the registration, etc. is deemed as the date of deemed donation; and in cases where a title trust agreement exists, the overall title (hereinafter “instant universal title”) fails to transfer the right or transfer the ownership of the property, i.e., the property necessary for the transfer or exercise of the right, but the transfer of ownership is not made accordingly, regardless of whether there exists a title trust agreement, it shall be deemed as a sanction for failure to transfer the right, which is an independent ground for disposition that is deemed as the date following the end of the year following

A) Article 41-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6301, Dec. 18, 2002; hereinafter “former Inheritance Tax and Gift Tax Act”) (amended by Act No. 6301, Dec. 18, 2002; hereinafter “former Inheritance Tax and Gift Tax Act”) provides that “where the actual owner and the nominal owner are different from any other person, the value of the property shall be deemed to have been donated to the actual owner on the date when the right is registered under the nominal owner, notwithstanding Article 14 of the Framework Act on National Taxes, on the date when the right is transferred or exercised (excluding land and buildings; hereinafter the same shall apply in this Article).” In addition, the legal fiction of title trust donation applies to the property that requires the transfer or exercise of the right by agreement or communication between the actual owner and the nominal owner, and thus, where a registration, etc. is unilaterally made under the nominal owner’s name regardless of the intent of the nominal owner, it may not apply (see Supreme Court Decision 207Du5787, Feb. 14, 2007.

B) Accordingly, upon the amendment of Article 41-2(1) of the previous Inheritance Tax and Gift Tax Act on December 18, 2002, the overall title of this case was newly established. According to the legislative review report and review report on the process of the amendment (see Evidence A-1, No. 4-2), where the title holder does not enter into a transfer of ownership despite having acquired stocks for the purpose of evading tax burden through disguised distribution of stocks, the amendment does not enter into a transfer of ownership by the end of the year following the year in which the date of acquisition of ownership falls in order to prevent the case where the transfer of ownership does not enter into a transfer of ownership by the end of the year following the year in which the date of acquisition of ownership belongs, the title holder is deemed to have received stocks as a donation of the relevant stocks, and the purport of the amendment as mentioned above is that where the transfer of ownership is not entered into a transfer of ownership, the tax authorities should not grasp the change of stocks if it does not enter into a transfer of ownership, and thus, it does not constitute a title trust agreement.

C) The main text of Article 45-2(2) of the former Inheritance Tax and Gift Tax Act states that the phrase “where property has been registered, etc. under the name of another person” and “where a transfer has not been made under the name of the actual owner,” the phrase “where a transfer has not been made under the name of another person

B. Whether the overall title of this case is applied

1) In principle, when multiple interpretations of a certain legal provision are possible, the authority to interpret and apply statutes, including the constitutional interpretation, shall not be judged as unconstitutional to the extent possible in light of the language and purpose of the relevant legal provision (see, e.g., Constitutional Court en banc Order 89Hun-Ma38, Jul. 21, 1989; Constitutional Court en banc Order 88Hun-Ga5, Jul. 14, 1989). The court that has the highest court where the Supreme Court is the highest court (see, e.g., Supreme Court Decisions 2006Da66272, Oct. 23, 2008; 2014Du43707, Feb. 18, 2016).

2) Taking account of the following circumstances based on the foregoing legal doctrine, the instant provision applies to cases where the existing title trustee acquired shares held in title trust by inheritance, but it shall not apply to cases where there are justifiable grounds, such as where the existing title trustee is unaware of the inheritance of shares, or is unaware of the actual owner due to joint inheritance, etc., that the existing title trustee is not liable for the failure of transfer to the existing title trustee.

A) The part of the instant case provides that “if the property shall be transferred, it refers to the day immediately following the end of the year following the year in which the date of acquisition of ownership falls, the cause of acquisition of ownership shall not be limited to commercial transfer such as sale, exchange, etc.

Even in accordance with the legislative review report and review report on the background of the amendment, "acquisition of ownership" in the overall title of this case is not limited to transfer for consideration.

B) Article 9 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780 of Dec. 18, 2002) provides that "the portion of ownership acquired before this Act enters into force and the transfer of ownership is not made under Article 41-2 (1) and (2) as of the enforcement date of this Act shall be deemed to have been acquired as of the enforcement date of this Act", and does not exclude three-party relations such as inheritance from the acquisition of ownership before this Act enters into force.

C) The legislative purport of the instant general title section is to “a matter that, in the event that a transfer of ownership is not made even after acquiring the right, the tax authorities cannot grasp the change in shares, and, in the event that a long-term transfer of ownership is not made, the substance is the same as that of the title trust, thereby strengthening taxation by deeming it as a title trust.”

D) The proviso of Article 45-2(2) of the former Inheritance Tax and Gift Tax Act, along with a report under Articles 105 and 110 of the Income Tax Act, requires the tax authority to prove the purpose of tax avoidance in exceptional cases where the transferor reports the change of ownership along with a report on capital gains under Article 105 and Article 110 of the Income Tax Act, not to estimate the purpose of tax avoidance. As such, even if the transferor reports certain matters, if the tax authority proves that the transferor has the purpose of tax avoidance, the gift is deemed as stipulated in the main sentence of the instant case. In addition, the existing title trustee has established the first title trust relationship at his/her own will. Accordingly, it is necessary to protect the transferor in that it does not apply to the case where the transferor acquired the shares already nominal trust based on the proviso of Article 45-

E) If it is interpreted that the overall title of this case, as alleged by the Plaintiffs, applies only to the case where the transferee acquires shares through the “transfer of shares” such as sale and purchase, etc., the gift tax may not be imposed in the event that the actual owner of shares holds the name of shares by donation, etc., but the transferee of shares fails to transfer shares for a long time.

F) However, even in cases where there are justifiable grounds for the existing title trustee to not be held liable for the failure of change of title to the existing title trustee, such as know of the inheritance of shares or who is the actual owner due to joint inheritance, etc., if the provision of the instant provision is applied, the former title trustee would be held liable for an act not expected from the date of death of the title trustee to the end of the year following the year in which the date falls, thereby going against the principle of self-responsibility that is derived from the freedom of general action guaranteed by the Constitution. Therefore, if the existing title trustee proves such justifiable grounds, it is interpreted that the application of the instant provision is excluded in accordance with the Constitution.

3) In the instant case:

A) Comprehensively taking account of the purport of Gap evidence Nos. 1 and 2 and the entire arguments, the inheritors agreed on the division of inherited property with respect to shares, real estate, movable property, securities, banks, installment savings, and cash owned by the deceased BB except for the shares of this case (hereinafter referred to as "the agreement on the division of inherited property of this case") and reported and paid inheritance tax based on such agreement. The inheritors agreed on the division of inherited property of this case where the inherited property which is not subject to the agreement on division of inherited property of this case is included in inherited property in relation to the payment of inherited property, they shall own the inherited property by dividing it by one third, respectively, but the specific method of division can be acknowledged that the inheritors agreed on the division of inherited property of this case.

B) Based on the above legal principles, the following circumstances revealed in the above facts of recognition including the overall purport of the pleading, namely, ① the plaintiffs could not know the contents of the agreement on the division of inherited property that was not publicly announced externally. ② Even if the plaintiffs knew of the contents of the agreement on the division of inherited property of this case, the shares of this case were omitted from the subject of the agreement on the division of inherited property of this case, and the heirs agreed to consult subsequently on the detailed method of division of inherited property that was not subject to the agreement on the division of inherited property of this case. The management of the shares of this case by December 31, 2011, which was the last day of the year following the year in which the date of acquisition of ownership of the shares of this case belongs, did not specify how the shares of this case should be owned by each person, so it is reasonable to view that each of the actual owners of the shares of this case is unlawful by applying the main sentence of subparagraph 4 of Article 5 of the former Inheritance Tax and Gift Tax Act to the plaintiffs.

C. Whether it conforms to the gift tax imposition system based on deemed donation of title trust

1) The proviso of Article 45-2(1)1 of the former Inheritance Tax and Gift Tax Act provides that the main provision shall not apply in cases where a transfer of ownership is not made under the name of the actual owner who acquired the ownership without any tax avoidance. The purpose of tax avoidance is to determine the actual owner who acquired the ownership under another person’s name as the subject of tax avoidance. Therefore, if the actual owner is not specified, it is difficult for the trustee to prove that the actual owner does not have any purpose of tax avoidance. In addition, Article 4(5) of the former Inheritance Tax and Gift Tax Act imposes a joint payment obligation on the donor in cases falling under Article 45-2 of the former Inheritance Tax and Gift Tax Act, and if the actual owner is not specified, the donor cannot be held liable to jointly pay taxes. In this case, the gift tax base and tax rate vary depending on the difference between the actual owner of each of the instant shares. Therefore, if the actual

Therefore, the imposition of gift tax by applying the main text of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act solely on the circumstance that the transfer of ownership was not made within the time limit prescribed in the instant overall title without specifying the actual owner of shares should be deemed unlawful since it is inconsistent with the imposition system of gift tax pursuant to

2) However, even though the identity of each of the actual owners of the instant shares was not specified as seen earlier, the Defendants’ respective dispositions of this case are unlawful in this respect on the sole basis that the inheritors did not transfer the ownership of the instant shares to the Plaintiffs, the title truster of the instant shares, by December 31, 201, from the end of the year following the year in which the heir acquired the ownership of the instant shares (the commencement date of inheritance) on October 20, 201, by December 31, 2011.

D. Sub-determination

Therefore, each of the dispositions of this case should be revoked as it is unlawful without examining whether the purpose of tax avoidance exists.

3. Conclusion

Since the plaintiffs' claims of this case are well-grounded, all of them are accepted, and the costs of lawsuit are assessed against the losing Defendants. It is so decided as per Disposition.