Taxpayer Who Withdrawn Appeal by Adjustment Recommendation, Court Rules "Reassessment Not Allowed After 5-Year Filing Deadline"

Following the court's mediation recommendation, a taxpayer who withdrew a gift tax objection lawsuit won a lawsuit after raising objections to the recalculated and imposed capital gains tax. The court ruled that the tax authority's imposition of capital gains tax was illegal because it was made more than five years after the filing deadline.

Seoul Administrative Court, Seocho-gu, Seoul. / Photo by Hyunmin Kim kimhyun81@

According to the legal community on the 20th, the Seoul Administrative Court Administrative Division 4 (Presiding Judge Kim Jeong-jung) recently ruled in favor of the plaintiff in the first trial of a capital gains tax imposition cancellation lawsuit filed by Jeong Mo, the founder of cell therapy developer company A, against the Yongsan Tax Office.

Previously, A, which was experiencing financial difficulties, issued convertible bonds with warrants (BW) with a face value of 8 billion KRW in December 2009. On the day of issuance, all BWs were sold to a financial company, and the next day, the financial company separated warrants with a face value of 4 billion KRW and sold them to a securities company. On the same day, Jeong purchased all the warrants from the securities company for 160 million KRW. These events occurred within two days of the BW issuance.

In March 2012, A's stock price fell from 1,116 KRW to 733 KRW amid concerns about delisting. In October of that year, Jeong exercised the warrants and acquired 5,174,640 shares of A. He sold all these shares on the KOSDAQ market by the end of that year.

Jeong reported that a gift gain of 18.597 billion KRW occurred during his acquisition of the shares and voluntarily paid 7.941 billion KRW in gift tax. The tax authorities also deemed there was no issue. However, Jeong filed an administrative lawsuit the following year, claiming that he had only purchased the warrants and had not received them as a gift.

The first and second trials of the gift tax objection lawsuit ruled against Jeong, stating that "Jeong acquired the warrants through a roundabout transaction to unjustly avoid gift tax." Since the warrant transactions occurred within a short period, it was believed that Jeong, who was well-informed about A's internal information, was involved in the warrant purchase process.

The Supreme Court ordered a retrial and judgment of the case. It stated, "Jeong's acquisition of the warrants was the result of voluntary transactions between the financial company and the securities company according to their business purposes," and "there is no evidence that Jeong intended to transfer wealth gratuitously or evade taxes." In the retrial, following a mediation recommendation, the tax authorities canceled the gift tax imposition, and Jeong withdrew the lawsuit, ending the case.

In January 2020, the Yongsan Tax Office recalculated and imposed capital gains tax of approximately 1.936 billion KRW on Jeong. Jeong objected to this disposition and filed another lawsuit.

The first trial of this capital gains tax objection lawsuit ruled in favor of Jeong. The court stated, "(According to the preceding trial) profits from stock sales should be included in capital gains tax," but also pointed out, "However, under the former Framework Act on National Taxes, national taxes for which tax amounts are reported cannot be imposed after five years from the day following the deadline for submitting the tax return."

Jeong's deadline for final capital gains tax filing was May 31, 2013, so the capital gains tax imposition in this case should have been made within five years from June 1, 2013, the day after the deadline.

The tax authorities argued that "since the preceding trial confirmed that gift tax could not be imposed, the 'statute of limitations' (the legal period to exercise rights) should also be extended accordingly," but this was not accepted.

The court explained, "Since Jeong withdrew the lawsuit following the mediation recommendation made during the retrial after the Supreme Court's remand decision, there is no final judgment regarding the gift tax imposition." The tax authorities appealed the first trial ruling.

This content was produced with the assistance of AI translation services.