A Case Study of Tax Strategy：Unrealized Losses of Equity Method Investment Stocks
Asian Tax Journal Vol. 24 No. 4 (2023), pp. 9-30
Abstract
We analyze how Kolon transferred and then repurchased stocks using the equity method of Neoview Kolon, which reflected accumulated unrealized valuation losses as tax deductions in the spin－off process of Kolon Industries in 2009. On December 31, 2009, as the base date for the spin－off, Kolon spun off its manufacturing division to establish Kolon Industries, which took over with net assets of approximately KRW 732.5 billion. The total assets inherited were approximately KRW 2,522.5 billion, including KRW 8.6 billion worth of Neoview Kolon equity method investment stocks. Afterward, on January 13, 2010, Kolon Industries received approximately KRW 9 billion from Kolon and resold its equity method investments. Kolon Industries was expected to have recorded a profit on disposal of about KRW 400 million in its book but to have deducted the cumulative equity method loss of KRW 138.4 billion of Neoview Kolon for the tax reconciliation. As a result, the firm could benefit from a corporate tax reduction in 2010. In this regard, the tax authority, during the 2016 tax investigation, determined that the transaction had the purpose of tax avoidance and that it was a wash sale transaction in terms of economic substance. Thus, the tax authority judged that the inclusion of the equity method valuation loss reported by Kolon Industries in deductible expenses was unreasonable. As a result, a tax investigation penalty of approximately KRW 743 billion was imposed in 2016. However, Kolon Industries filed an appeal to the Tax Tribunal, and the imposition was canceled. This can be seen as an example of Kolon and Kolon Industries employing effective tax strategies to utilize unscheduled valuation losses within the corporate tax law. By examining tax penalty disclosures, precedents in the Tax Tribunal, and related disclosures of financial statements (e.g., audit reports, quarterly and semiannual review reports) from various angles, this case study contributes to the literature on corporate tax strategy. Particularly, this study, backed up with specific figures, presents both accounting and tax treatments of the spin－off and the equity method, providing a practical example useful for accounting educational purposes. Based on our methodology to analyze corporate tax strategies, this study calls for researchers’ attention to the tax accounting literature.
Keywords
- Conversion to holding company
- Spin－off
- Wash sale
- Tax penalty
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