Exclusive
Hankook & Company Honorary Chairman Cho Yang-rai Wins Lawsuit Against Daughter for Return of 33.3 Billion Won

[비즈한국] It has been confirmed that Cho Yang-rai, Honorary Chairman of Hankook & Company Group000240, recently won a lawsuit filed against his second daughter, Cho Hee-won, for the return of 33.3 billion won in unjust enrichment. Honorary Chairman Cho had previously paid gift taxes on behalf of Ms. Cho, but after tax authorities cancelled the gift tax assessment and issued a refund to Ms. Cho, he filed a lawsuit to recover the amount he had fronted. Previously, Honorary Chairman Cho’s three children—excluding his second son, Hankook & Company Chairman Cho Hyun-bum—had filed for the commencement of limited guardianship over their father, but the petition was definitively dismissed last year. It has been confirmed that this latest lawsuit was filed following that guardianship petition.

On April 17, the Seoul Central District Court ruled in the unjust enrichment lawsuit filed by Honorary Chairman Cho Yang-rai against Cho Hee-won that Ms. Cho must pay the Honorary Chairman 33,345,023,000 won plus interest. Previously, in January of last year, Honorary Chairman Cho filed the suit, claiming that Ms. Cho had received a tax refund from authorities for the gift tax he had paid on her behalf, but had failed to return the money to him. Ms. Cho appealed the first-instance ruling, which favored the Honorary Chairman, on the 30th of the same month.

This dispute originated from shares that Honorary Chairman Cho had gifted to Ms. Cho in the past. From September to December 1996, the Honorary Chairman gifted 253,200 shares of the former Hankook Tire (worth 8.25 billion won) to Ms. Cho. The arrangement was that the Honorary Chairman would pay the gift tax resulting from the stock transfer himself. In principle, the recipient of a gift bears the gift tax, but if the donor pays it on their behalf, that amount is also considered a gift, and additional gift tax is imposed. At the time of the initial stock transfer, there were no issues with the taxation.

Ms. Cho used dividends from the gifted shares to acquire more stock. With dividends generated from the former Hankook Tire shares gifted by the Honorary Chairman, she purchased 125,620 shares of the same company in April 2009. Subsequently, in September 2012, the former Hankook Tire was split into the holding company Hankook Tire Worldwide (now Hankook & Company) and Hankook Tire (now Hankook Tire & Technology161390). Ms. Cho acquired Hankook Tire shares equivalent to the shares she held, and in July 2013, she contributed them in kind to acquire 9,058,405 shares of Hankook Tire Worldwide.

The tax authorities viewed this series of stock acquisitions as originating from a "nominal trust" and imposed further gift taxes. The premise was that while the newly acquired shares were in Ms. Cho’s name, the real owner was Honorary Chairman Cho, and therefore, the acquisition should be treated as a gift. Following a tax audit of the Honorary Chairman’s family that began in July 2018, the Commissioner of the Seoul Regional Tax Office imposed a total of 182.1 billion won in gift taxes on Ms. Cho in May of the following year, applying regulations for gifts of nominally trusted property. As a joint and several taxpayer, the Honorary Chairman paid 32.7 billion won of that tax in installments by June 2020.

However, the gift tax imposed on the grounds of a nominal trust was soon cancelled. This followed a tax appeal filed by the two in August 2019 requesting the cancellation of the tax assessment. In October 2021, the Tax Tribunal decided to cancel 179.9 billion won of the previously imposed tax, considering that the gift tax on the shares used for the in-kind contribution had already been paid and that it was difficult to see any change in the value of the shares before and after the in-kind contribution. Consequently, Ms. Cho received a refund of the 33.3 billion won (including interest) in gift tax that the Honorary Chairman had paid on her behalf in November 2021.

Honorary Chairman Cho filed the lawsuit in January of last year, demanding the return of the refunded gift tax. His claim is that Ms. Cho gained an unfair profit by receiving a refund for the tax he had fronted without any contribution from her, and that he had suffered a loss equivalent to the refund amount. The Seoul Central District Court ruled in favor of the Honorary Chairman, stating, "It is reasonable to view that allowing the defendant, who did not pay the gift tax with her own assets, to ultimately retain such a benefit contradicts the principle of equity in relation to the plaintiff, who suffered the loss, and thus lacks a legal basis."

The court ruled, "As a beneficiary in bad faith, the defendant is obligated to return the benefit received to the plaintiff along with interest from the date of receipt, and to pay delay damages on that benefit." The court further ordered, "Unless there are special circumstances, the defendant has an obligation to pay the plaintiff 33,345,023,000 won as a return of unjust enrichment, with 5% annual interest as per the Civil Act from November 2021, when the money was received from the Banpo District Tax Office, until the service of the complaint on February 2024, and 12% annual interest thereafter as per the Act on Special Cases Concerning Expedition, etc. of Legal Proceedings until full payment is made."

Ms. Cho argued that the refunded gift tax was also a gift from the Honorary Chairman, but this was not accepted. The court rejected her claim, noting that a gift is a contract requiring the recipient's consent, and unlike Ms. Cho’s claims, there is no document evidencing such a contract. The court also took into account the fact that, despite the Honorary Chairman having gifted a significant amount of assets to Ms. Cho, the reason he specifically demanded the return of this tax refund appears to be because he had never intended for that tax payment to be a gift. Furthermore, Ms. Cho’s argument that the refund should be offset or deducted based on existing monetary claims was dismissed by the court for lack of grounds.

The largest shareholder of Hankook & Company, the holding company of Hankook & Company Group, is Chairman Cho Hyun-bum. In June 2020, the group’s founder, Honorary Chairman Cho Yang-rai, sold all his shares in Hankook & Company to his second son, Chairman Cho Hyun-bum, through an off-hours bulk trade. Chairman Cho rose to become the largest shareholder (42.03%), surpassing his older brother, former advisor Cho Hyun-sik (18.93% stake), his older sister Cho Hee-won (10.61%), and Cho Hee-kyung, Chair of the Hankook Tire Sharing Foundation (0.81%). As of May this year, Hankook & Company Group is the 27th largest business group in Korea (with 21.525 trillion won in fair assets), controlling 25 affiliates including the tire manufacturer Hankook Tire & Technology.

Family disputes began following the share transfer by Honorary Chairman Cho. In July 2020, shortly after the transfer, the eldest daughter (Chair of the Hankook Tire Sharing Foundation), the second daughter Cho Hee-won, and the eldest son (former advisor Cho Hyun-sik) filed for the commencement of limited guardianship over their father, claiming he lacked the mental capacity to handle his affairs. However, this petition was dismissed in the first instance in April 2022, in the appellate court in April last year, and in the final appeal in July of the same year. The mental evaluation conducted during the appellate proceedings concluded that the Honorary Chairman had no impairments in his intellectual or volitional capacities at the time.

This lawsuit for the return of unjust enrichment was filed during the appellate stage of the limited guardianship proceedings. In this lawsuit, Ms. Cho argued that because the Honorary Chairman had mental constraints making it difficult for him to make decisions, it was hard to view the lawsuit as being filed with his genuine intent and valid authorization. However, the court rejected Ms. Cho's argument, stating that based on evidence such as the application documents for the issuance of a seal registration certificate, the Honorary Chairman had legally entrusted the lawsuit to his legal representative.

Meanwhile, Chairman Cho Hyun-bum of Hankook & Company was sentenced to three years in prison by the Seoul Central District Court on the 29th of last month and was taken into court custody on charges of embezzlement and breach of trust under the Act on the Aggravated Punishment, etc. of Specific Economic Crimes. The court found him guilty of charges including privately lending 5 billion won of company funds to a company run by an acquaintance and some instances of personal use of corporate credit cards. It also found him guilty of causing financial loss to the company by having a driver exclusively serve his spouse, and for purchasing and leasing five vehicles under the company’s name for personal use.