Open Decision Ledger · Tax & international taxation
Article 42(1)(iii) as a valuation rule independent of Article 40(1)
Supreme Court, Nov. 12, 2020, 2018Du65538 (judgment)
Case name: 증여세부과처분취소
Official text on the National Law Information Center
Question
Can a gain from the conversion of convertible bonds into shares be taxed as gift property under Article 42(1)(iii) of the former Inheritance and Gift Tax Act even where the requirements of Article 40(1) are not met, and does Article 42(3) apply where a special relationship existed at the time of conversion?
Holding
It can. The Court read Article 42(1)(iii) of the former Act, like Article 40(1), as one of the valuation rules for the gifts comprehensively defined in Article 2(3), so tax may be levied under Article 42(1)(iii) alone. And because a conversion made while a special relationship existed is not a transaction between persons not in a special relationship, Article 42(3) does not reach it. The removal of that item by Act No. 13557 of 15 December 2015, which added Article 31 on the general principle of valuation, does not change the result in a case governed by the former Act.
Summary of the holding, verbatim
구 상증세법 제40조 제1항의 과세요건을 충족하지 않더라도 구 상증세법 제42조 제1항 제3호의 과세요건을 충족하면 구 상증세법 제42조 제1항 제3호에 의하여 증여재산가액을 산정하여 증여세를 과세할 수 있다.
Unofficial English translation
Even if the requirements for taxation under Article 40(1) of the former Inheritance Tax and Gift Tax Act are not satisfied, if the requirements for taxation under Article 42(1) subparagraph 3 of the former Inheritance Tax and Gift Tax Act are satisfied, gift tax may be imposed by calculating the value of the gifted property pursuant to Article 42(1) subparagraph 3 of the former Inheritance Tax and Gift Tax Act.
Disposition
Dismissed Stated in the decision
상고를 기각한다. 상고비용은 원고가 부담한다.
Unofficial English translation
The appeal is dismissed. The costs of the final appeal shall be borne by the plaintiff.
Form of the test
Elements stated Stated in the decision
구 상증세법 제42조 제1항 제3호는 구 상증세법 제40조 제1항과 마찬가지로 구 상증세법 제2조 제3항에서 증여세 과세대상으로 포괄적으로 정의한 증여에 관한 가액산정규정 중 하나이고
Unofficial English translation
Article 42(1) subparagraph 3 of the former Inheritance Tax and Gift Tax Act is, in the same way as Article 40(1) of the former Inheritance Tax and Gift Tax Act, one of the rules on the calculation of the value of gifts as defined comprehensively as subject to gift tax in Article 2(3) of the former Inheritance Tax and Gift Tax Act, and
Factors
- 구 상증세법 제42조 제1항 제3호는 구 상증세법 제40조 제1항과 마찬가지로 구 상증세법 제2조 제3항에서 증여세 과세대상으로 포괄적으로 정의한 증여에 관한 가액산정규정 중 하나이고
- 구 상증세법 제40조 제1항의 과세요건을 충족하지 않더라도 구 상증세법 제42조 제1항 제3호의 과세요건을 충족하면 구 상증세법 제42조 제1항 제3호에 의하여 증여재산가액을 산정하여 증여세를 과세할 수 있다
- 전환사채를 주식으로 전환할 당시 특수관계가 있는 경우는 ‘특수관계인이 아닌 자 간의 거래’에 해당하지 않으므로, 구 상증세법 제42조 제3항의 적용 대상이 아니다.
Unofficial English translation
• Article 42(1) subparagraph 3 of the former Inheritance Tax and Gift Tax Act is, in the same way as Article 40(1) of the former Inheritance Tax and Gift Tax Act, one of the rules on the calculation of the value of gifts as defined comprehensively as subject to gift tax in Article 2(3) of the former Inheritance Tax and Gift Tax Act, and
• Even if the requirements for taxation under Article 40(1) of the former Inheritance Tax and Gift Tax Act are not satisfied, if the requirements for taxation under Article 42(1) subparagraph 3 of the former Inheritance Tax and Gift Tax Act are satisfied, gift tax may be imposed by calculating the value of the gifted property pursuant to Article 42(1) subparagraph 3 of the former Inheritance Tax and Gift Tax Act
• A case in which a special relationship exists at the time of conversion of convertible bonds into shares does not constitute a 'transaction between persons who are not specially related persons,' and therefore does not fall within the scope of application of Article 42(3) of the former Inheritance Tax and Gift Tax Act.
Relation to precedent
States a new standard Read from the decision
구 상증세법 제42조 제1항 제3호는 구 상증세법 제40조 제1항과 마찬가지로 구 상증세법 제2조 제3항에서 증여세 과세대상으로 포괄적으로 정의한 증여에 관한 가액산정규정 중 하나이고
Unofficial English translation
Article 42(1) subparagraph 3 of the former Inheritance Tax and Gift Tax Act is, in the same way as Article 40(1) of the former Inheritance Tax and Gift Tax Act, one of the rules on the calculation of the value of gifts as defined comprehensively as subject to gift tax in Article 2(3) of the former Inheritance Tax and Gift Tax Act, and
Decisions referred to
해당 본문 참조
Burden of proof
Not addressed Not in the decision
Open question and revisit condition
What counts as a legitimate reason under trade practice under Article 42(3) for a conversion between persons with no special relationship?
Any later decision construing Article 42-2(2) of the current Inheritance and Gift Tax Act, the successor to Article 42(3) of the former Act, on what constitutes a legitimate reason under trade practice would require this entry to be read again. So would an amendment to the threshold in the Presidential Decree or to Article 42-2 as a whole.
Cross-family AI independent reading & axis check
7 of 8 axes matched GPT-6 Astra (OpenAI, codex CLI) · 2026-10-25
A reader from another model family (GPT-6 Astra), given the official text but not the primary reading, agreed on 7 of the 8 axes; the readings differed on axis 6 (relation to precedent).
Axis 6 (Relation to precedent): Primary “States a new standard” vs Independent “Cannot be determined”
The primary reading treats the interpretation as a new standard, while the independent reading finds no verifiable precedent. The text given does not cite earlier decisions on Article 42(1)(3) or (3), so whether the holding is new depends on prior case law not shown in the input.
구 상증세법 제42조 제1항 제3호는 구 상증세법 제40조 제1항과 마찬가지로 구 상증세법 제2조 제3항에서 증여세 과세대상으로 포괄적으로 정의한 증여에 관한 가액산정규정 중 하나이고Raw responses and comparison record: Protocol · Blind readings (JSONL) · Axis comparison (JSONL) · SHA-256 (JSON)
Lower-court contrast & scope of application
Lower-court reading vs. Supreme Court holding
Lower-court context: The Seoul High Court, in its judgment of 16 November 2018 (2018Nu52688), held that the gain the plaintiff obtained on 13 February 2013 by converting the convertible bonds at KRW 779 per share when the shares stood at KRW 1,190 fell within Article 42(1)(iii) of the former Act, and rejected the plaintiff's argument that no gift tax could be levied under that item. It also found that the plaintiff was Kosen's largest shareholder and representative director at the time of conversion and exercised de facto influence over its management, so a special relationship existed and Article 42(3) could not apply.
Supreme Court standard: The Supreme Court found no error. It held that the former Act's Article 42(1)(iii), by its wording, content and legislative purpose, targets gains beyond those covered by Article 40(1) and is aimed at curbing disguised gifts and fairness in taxation, so the conversion gain was taxable on its own terms. It also held that the court below was right to exclude Article 42(3), which by its wording applies only to transactions between persons not in a special relationship, and distinguished the Supreme Court decisions the plaintiff invoked as cases differing in circumstances. The Justices unanimously dismissed the appeal.
Distinguishing conditions
- A conversion made while no special relationship existed, where trade practice supplies a legitimate reason, since Article 42(3) then removes Article 42(1) from application.
- A gain below the threshold set by Presidential Decree, since Article 42(1) covers only gains of that standard or above.
- A case governed by the Inheritance and Gift Tax Act as amended by Act No. 13557 of 15 December 2015, in which Article 42(1)(iii) no longer exists and Article 31 governs valuation.
Record verification notes
Fix the version of the Inheritance and Gift Tax Act in force on the conversion date, since the Court applied the former Act and noted the deletion of the item in the amendment. Then match the acquisition date against the conversion date on the special relationship, as the plaintiff acquired the bonds on 9 February 2012 without one and became a related person only afterwards. Finally check the size of the gain against the threshold set by Presidential Decree and the per-share figures used in the calculation.
From the official text
Points at issue
[1] 구 상속세 및 증여세법 제40조 제1항의 과세요건을 충족하지 않더라도 같은 법 제42조 제1항 제3호의 과세요건을 충족하면 그에 따라 증여재산가액을 산정하여 증여세를 과세할 수 있는지 여부(적극) 및 2015. 12. 15. 법률 제13557호로 개정된 상속세 및 증여세법에서 증여재산가액 계산의 일반원칙에 관한 규정을 신설하면서 위 제42조 제1항 제3호에 규정되었던 내용을 삭제하였더라도 구 상속세 및 증여세법이 적용되는 사안에서는 마찬가지인지 여부(적극) [2] 구 상속세 및 증여세법 제42조 제1항 제3호에서 증여세 과세대상으로 정한 전환사채 등에 의한 주식의 전환 등과 관련하여 전환사채를 주식으로 전환할 당시 특수관계가 있는 경우, 구 상속세 및 증여세법 제42조 제3항의 적용 대상이 되는지 여부(소극)
Unofficial English translation
[1] Whether, even if the requirements for taxation under Article 40(1) of the former Inheritance Tax and Gift Tax Act are not satisfied, gift tax may be imposed by calculating the value of the gifted property pursuant to Article 42(1) subparagraph 3 of the same Act if the requirements for taxation under Article 42(1) subparagraph 3 are satisfied (affirmative) and, even though the Inheritance Tax and Gift Tax Act as amended by Act No. 13557 on December 15, 2015 deleted the content formerly provided in Article 42(1) subparagraph 3 upon newly establishing a provision concerning the general principle for calculating the value of gifted property, whether the same applies in cases to which the former Inheritance Tax and Gift Tax Act is applied (affirmative) [2] Whether, where a special relationship exists at the time of conversion of convertible bonds, etc. into shares in relation to the conversion of shares by convertible bonds, etc. as prescribed to be subject to gift tax in Article 42(1) subparagraph 3 of the former Inheritance Tax and Gift Tax Act, such a case falls within the scope of application of Article 42(3) of the former Inheritance Tax and Gift Tax Act (negative)
Summary of the holding
[1] 구 상속세 및 증여세법(2015. 12. 15. 법률 제13557호로 개정되기 전의 것, 이하 ‘구 상증세법’이라 한다) 제2조 제3항, 제40조 제1항 제1호, 제2호, 제42조 제1항 제3호의 규정 내용과 문언, 입법 취지 등을 고려하면, 구 상증세법 제42조 제1항 제3호는 구 상증세법 제40조 제1항과 마찬가지로 구 상증세법 제2조 제3항에서 증여세 과세대상으로 포괄적으로 정의한 증여에 관한 가액산정규정 중 하나이고, 구 상증세법 제40조 제1항의 과세요건을 충족하지 않더라도 구 상증세법 제42조 제1항 제3호의 과세요건을 충족하면 구 상증세법 제42조 제1항 제3호에 의하여 증여재산가액을 산정하여 증여세를 과세할 수 있다. 비록 2015. 12. 15. 법률 제13557호로 개정된 상속세 및 증여세법에서 제31조로 증여재산가액 계산의 일반원칙에 관한 규정을 신설하면서 구 상증세법 제42조 제1항 제3호에 규정되었던 내용을 삭제하였다고 하더라도, 구 상증세법이 적용되는 사안에서는 이와 달리 볼 수 없다. [2] 구 상속세 및 증여세법(2015. 12. 15. 법률 제13557호로 개정되기 전의 것, 이하 ‘구 상증세법’이라 한다) 제42조는 제1항 제3호에서 전환사채 등에 의한 주식의 전환 등으로 법인의 자본을 증가시키거나 감소시키는 거래로 얻은 이익을 증여세 과세대상으로 정하면서, 제3항에서 ‘특수관계인이 아닌 자 간의 거래로서 거래의 관행상 정당한 사유가 있다고 인정되는 경우에는 제1항을 적용하지 아니한다’라고 정하고 있다. 이러한 구 상증세법의 규정 내용과 문언, 입법 취지 등을 고려하면, 전환사채를 주식으로 전환할 당시 특수관계가 있는 경우는 ‘특수관계인이 아닌 자 간의 거래’에 해당하지 않으므로, 구 상증세법 제42조 제3항의 적용 대상이 아니다.
Order
상고를 기각한다. 상고비용은 원고가 부담한다.
Unofficial English translation
The appeal is dismissed. The costs of the final appeal shall be borne by the plaintiff.
Provisions referred to
[1] 구 상속세 및 증여세법(2015. 12. 15. 법률 제13557호로 개정되기 전의 것) 제2조 제3항(현행 제2조 제6호 참조), 제40조 제1항 제1호, 제2호, 제42조 제1항 제3호(현행 제42조의2 제1항 참조) [2] 구 상속세 및 증여세법(2015. 12. 15. 법률 제13557호로 개정되기 전의 것) 제42조 제1항 제3호(현행 제42조의2 제1항 참조), 제3항(현행 제42조의2 제2항 참조)
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