Whether gift tax may be levied on gratuitous shares allocated as a result of capital transfer of excess shares after a title trust of shares by applying the provision on deemed donation of title trust property under Article 41-2 of the former Inheritance Tax and Gift Tax Act, separate from the existing shares entrusted under the name (negative)

Article 41-2 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780 of Dec. 18, 2002) (current Deletion)

Supreme Court Decision 88Nu8548 Decided December 22, 1989 (Gong1990Sang, 378) Supreme Court Decision 2004Du11220 Decided September 22, 2006 (Gong2006Ha, 2016) (Gong2006Ha, 2016) Decided March 12, 2009

Plaintiff (Law Firm Jeongsung, Attorneys Yang Jong-tae et al., Counsel for the plaintiff-appellant)

Defendant

Seoul High Court Decision 2006Nu2994 delivered on November 17, 2006

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

In a case where capital reserve under the Commercial Act, such as an excess of the amount of issuance of stocks, and revaluation reserve fund under the Assets Revaluation Act, are issued free of charge in accordance with the capital increase as a result of the increase of capital due to the increase of the amount of stocks issued or the transfer of assets revaluation reserve fund, etc., which are reflected in the value of the assets of the existing stocks, the number of new stocks issued and allocated free of charge to the existing stockholders according to the number of stocks held by them. As such, although the company’s capital increase, there is no change in the net assets, and in principle, there is no difference in the ratio of the total amount of stocks held by them or the actual value of assets (see Supreme Court Decision 88Nu8548, Dec. 22, 1989).

According to the facts duly admitted by the court below, the shares Nos. 2 and 3 of the issuance of the non-party 1 corporation in the name of the plaintiff are allocated free of charge to the plaintiff, who is the title holder of the shares No. 1 of this case, as the non-party 2 transferred the shares of this case to the plaintiff after the non-party 1 corporation title trust the shares No. 1 of the issuance of the non-party 1 corporation to the plaintiff. In light of the above legal principles and related Acts and subordinate statutes, the shares No. 2 and 3 of this case in the name of the plaintiff were actually divided into the shares No. 1 of this case, which are the existing shares under the name of the non-party 2, and thus, it cannot be deemed that the plaintiff received a title trust separate from the existing shares under the name of the non-party 1. Accordingly, it is unlawful to impose gift tax by applying Article 41-2 (1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780 of Dec. 18, 2002) to the shares No. 1202.

Nevertheless, the court below determined that the shares of the plaintiff Nos. 2 and 3 of this case acquired through the above free capital increase constituted a title trust property separate from the shares initially held in the name of the plaintiff on the ground that the shares of the plaintiff Nos. 2 and 3 of this case constitute an independent property separate from the existing shares, although the shares are substantially divided merely a stock division, in legal and formal terms, constitutes an independent property separate from the shares originally held in title trust. The court below erred by misapprehending the legal principles on the subject of taxation under the provision on the constructive gift of title trust under Article 41

Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Young-ran (Presiding Justice)