Background
An investment company transferred all of the shares it held in an unlisted subsidiary to a related party "at exactly the price it had paid." Treating this as a below-market transfer to a related party, the tax authority applied the denial of wrongful calculation rule (Corporate Income Tax Act art. 52), valued the shares at dozens of times the acquisition cost, and assessed a large amount of corporate income tax and other charges. Changchun represented the assessed investment company.
The Issue — Can "Goodwill" Be Added to Unlisted Shares?
Denial of wrongful calculation is a rule under which, where a transaction between related parties has improperly reduced the tax burden, tax is imposed on the basis of an objective "market value" rather than the transaction price. Because market value is hard to ascertain for unlisted shares, they are valued by applying the supplementary valuation method of the Inheritance Tax and Gift Tax Act. The goodwill added to net asset value refers to "an intangible property value enabling excess earnings beyond the ordinary earnings of companies in the same industry" (Supreme Court, Feb. 11, 1986, 85Nu592; Supreme Court, Apr. 12, 2002, 2000Du7766, among others). Yet articles 56 and 59 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act and article 17-3(1)6 of its Enforcement Rule provide that where net profit and loss over the most recent three years is abnormal and therefore does not represent normal future earning power, goodwill may not be valued on the basis of those results. Ultimately, then, the heart of the case was whether that subsidiary in fact possessed any "excess earning power" (goodwill).
How Changchun Helped
Changchun (attorneys Jaesun Yoon, Younghoon Jung and Jonghwa Kim) started from the essential definition of goodwill and proved with objective evidence that the subsidiary had no excess earning power. We showed point by point that ① the subsidiary had in substance discontinued its original business years earlier and was in the process of winding down its assets; ② its profits over the preceding three years were the product of temporary, incidental circumstances — shares it held had spiked briefly on an external factor (a political theme) and then fallen back sharply — which is precisely the "abnormal profit and loss" contemplated by article 17-3(1)6 of the Enforcement Rule and cannot represent normal future earning power; and ③ by the time of the transaction the company was already devoted to winding down its assets, and in fact ceased business and was liquidated within about two years, so that the income realized after the transaction date was likewise not from its original business but merely "liquidation income" arising from disposing of and winding down assets. This aligned squarely with the principles the Supreme Court has consistently applied (Supreme Court, Apr. 26, 2012, 2010Du26988; Supreme Court, Nov. 14, 2013, 2011Du31253; Supreme Court, Jan. 9, 2025, 2021Du53320, among others).
Conclusion
The court accepted Changchun's arguments, held that no goodwill could be recognized in the subsidiary and that the assessment was therefore unlawful, and Changchun prevailed in full, having the entire large assessment revoked.
Tax audits and assessments readily proceed according to a formal valuation formula, but the conclusion can change where the essential premise of that formula (here, excess earning power) is tested against the actual substance of the company's business. This result in a tax matter came from applying complex statutory valuation rules and Supreme Court precedent with precision. (Outcomes may differ depending on the facts of each matter.)