DR & AJU persuaded the Supreme Court to overturn the appellate court’s decision in a case where Educational Corporation A (“Client”) sought the cancellation of gift tax imposition by the Commissioner of the NTS Jungbu District Office.

In the 1950s and 1996, Client purchased land in Seosomun-dong, Jung-gu, Seoul, and constructed a building, which was held as a revenue-generating endowment. Subsequently, Client sold the building for KRW 260.3 billion and allocated approximately KRW 162.8 billion of the sale proceeds for lending to its subsidiaries.

The tax authorities imposed a gift tax under  Article 48(2)4 of the former Inheritance Tax and Gift Tax Act, citing that Client used the proceeds from the sale of the contributed property for purposes other than the public interest. The authorities proportionally divided the sales proceeds into contributed and non-contributed amounts based on the source of the original acquisition cost. They then assessed a gift tax of approximately KRW 57.6 billion, using a tax base of KRW 124.9 billion, which excluded KRW 5 billion used for public purposes from the total contributed property of approximately KRW 129.9 billion. This calculation was made in accordance with the former Inheritance Gift Tax Act, which considers 90% of the sales proceeds from contributed property as the taxable amount for gift tax, if the proceeds were not used for public purposes. In response, Client filed a lawsuit to seek the cancellation of the disposition but lost in both the first instance and the appellate court.

DR & AJU represented the educational corporation before the Supreme Court and secured a ruling that it was unreasonable to impose a gift tax on the grounds that the corporation lent a portion of the sales proceeds from a building constructed on its own land to its subsidiaries.

The Supreme Court ruled that the phrase “proceeds from the sale of contributed property” in Article 48(2)4 of the Inheritance Tax and Gift Tax Act should be interpreted according to its ordinary meaning, rather than in a way that expands the scope of the tax conditions. This case is significant as it sets the first precedent defining the permissible scope and limits of gift taxation when corporations for public interests, such as educational corporations, use sales proceeds from contributed property for purposes other than the public interest.