[1] In a case where Gap corporation acquired exchangeable bonds issued by Eul corporation as a person with a special relationship at an interest rate of 8% per annum, and the tax authority loaned money at an interest rate lower than the recognized interest rate and deemed that the tax burden was unjustly reduced, and the case holding that the judgment below erred by misapprehending the legal principles on the ground that it is difficult to conclude that Gap corporation's act of acquiring exchangeable bonds constitutes an object of wrongful calculation and calculation

[2] The meaning of "where there is clear evidence to acknowledge the suspicion of tax evasion" under Article 81-3 (2) of the former Framework Act on National Taxes, which stipulates that a reinvestigation is exceptionally permitted.

[1] In a case where Company A acquired exchangeable bonds issued by Company B, a person with a special relationship, at an interest rate of 8% per annum for the implementation of management rights agreements, and the tax authorities deemed that the tax burden has been unjustly reduced by lending money to a person with a special relationship at an interest rate lower than the recognized interest rate, the case holding that the judgment below erred by misapprehending the legal principles on the ground that it is difficult to conclude that Company A acquired exchangeable bonds at an interest rate lower than the reasonable interest rate notified by the Commissioner of the National Tax Service on the ground that it constitutes an object of unfair calculation as a loan of abnormal funds lacking economic rationality in light of sound social norms and commercial practices, since exchangeable bonds were granted a claim for exchange, and the publicly notified interest rate at an appraisal rate of bonds issued by the same credit rating company as Company B at the time of issuance of exchangeable bonds is lower than 73%, and the value of the claim for exchange was partially realized in the course of sale of exchangeable bonds.

[2] In light of the provisions and purport of Article 81-3(1) and (2) of the former Framework Act on National Taxes (amended by Act No. 8139, Dec. 30, 2006; hereinafter the same), the term “cases where there are evident data to prove the suspicion of tax evasion” under Article 81-3(2) of the former Framework Act on National Taxes refers to cases where the possibility of tax evasion is acknowledged to a considerable extent based on objective and rationality data.

[1] Articles 28(1)4(b) and 52 of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Articles 53(1) and 88(1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 19328, Feb. 9, 2006); / [2] Article 81-3(1) and (2) of the former Framework Act on National Taxes (Amended by Act No. 8139, Dec. 30, 2006; see current Article 81-4(2))

[2] Supreme Court Decision 2008Du10461 Decided December 23, 2010 (Gong2011Sang, 250) Supreme Court Decision 2010Du6083 Decided January 27, 201 (Gong2011Sang, 476)

Daesung Holdings Co., Ltd. (formerly: Daegu Urban Gas Co., Ltd.) (Attorneys Lee Im-soo et al., Counsel for the plaintiff-appellant)

North Daegu Tax Office (Attorney Kim Jin-kin, Counsel for the defendant-appellant)

Daegu High Court Decision 2009Nu2291 decided August 13, 2010

The judgment below is reversed, and the case is remanded to the Daegu High Court.

The grounds of appeal are examined.

1. As to the Plaintiff’s grounds of appeal Nos. 1 and 2

A. The judgment of the court below

In full view of the adopted evidence, the court below acknowledged the following facts: ① Nonparty 1, who is the founder of ○○ Group, died and a dispute over the management rights was issued; his heir divided ○○ Group through the board of directors, etc. on May 29, 2001, and agreed that Nonparty 2, who is the southnam, and Seoul Urban Gas Co., Ltd. (hereinafter “Seoul Urban Gas Co., Ltd.”) shall have management rights as to the company (hereinafter “the agreement in this case”); ② The Daesung Industries, which is the listed stocks owned by ○○ Group, agreed on June 7, 2001, to have management rights as to the company (hereinafter “Seoul Urban Gas Co., Ltd.”) (the Plaintiff’s share 5.4 billion won per annum, exchange interest rate, 1.3 billion won per annum, 300, 2000 won per share, and 3.4 billion won per share, which is the date of maturity of 206.6.27.

Based on these factual basis, the lower court determined that the acquisition price of the instant exchangeable bonds constitutes “the provisional payment, etc. paid without connection with the Plaintiff’s business,” under Article 28(1)4(b) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same), and Article 53(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328, Feb. 9, 2006; hereinafter the same), and thus, constitutes “the provisional payment, etc. paid without connection with the Plaintiff’s business,” and thus, should be excluded from deductible expenses, and further, since the Plaintiff’s lending of funds to Nonparty 4, the actual owner of the instant exchangeable bonds, to secure the management right of the Plaintiff, constitutes a wrongful calculation of 5% of the interest rate under Article 28(1)4(b) of the former Corporate Tax Act (amended by Presidential Decree No. 19328, Feb. 9, 2006).

B. Judgment of the Supreme Court

(1) The non-deductible part of the interest paid in excess of business expenses, etc.

Article 28(1)4(b) of the former Corporate Tax Act and Article 53(1) of the former Enforcement Decree of the Corporate Tax Act “provisional payments, etc. paid without business relations” include not only purely meaningful loans, but also loans equivalent to loans given to the nature of claims. The provisional payments include cases where interests are paid at an appropriate interest rate and the provisional payments are provided. Whether the provisional payments are related to the business should be objectively determined on the basis of the purpose of business, business contents, etc. of the relevant corporation (see Supreme Court Decisions 2005Du9415, Sept. 20, 2007; 2006Du1124, May 14, 2009, etc.).

Examining the reasoning of the judgment below in light of the above legal principles and records, we affirm this part of the judgment below as just, and there is no error in the misapprehension of legal principles as to provisional payment without office as otherwise alleged in the ground of appeal by the plaintiff.

(2) The inclusion of the interest rate recognized by the wrongful calculation panel in the gross income

However, we cannot accept this part of the judgment of the court below for the following reasons.

Article 52 of the former Corporate Tax Act (amended by Presidential Decree No. 1835, Dec. 13, 2007; Presidential Decree No. 18885, Dec. 13, 2007; Presidential Decree No. 18888, Feb. 19, 2007; Presidential Decree No. 18888, Feb. 19, 2008; Presidential Decree No. 18885, Feb. 29, 2008; Presidential Decree No. 20010, Feb. 28, 2008; Presidential Decree No. 20135, Feb. 19, 2008; Presidential Decree No. 2010, Feb. 22, 2008).

According to the evidence duly adopted by the court below, (i) exchangeable bonds are granted a right to claim an exchange with the stocks owned by the corporation that issued the bonds (hereinafter "right to claim an exchange"), and (ii) there is no difference between the interest rate of the instant exchangeable bonds and that of the bonds issued by the company at the time of the issuance of the exchangeable bonds, and 8% of the interest rate of the instant exchangeable bonds is 7.73%; and (iii) there is no difference between the interest rate of the instant exchangeable bonds and that of the bonds issued by the company at the time of the issuance of the exchangeable bonds, and (iv) the value of the right to claim an exchange is realized through the process of exercising the right to claim a sale or exchange of the exchangeable bonds, which is the real owner of the Plaintiff who is the real owner of the instant exchangeable bonds and Nonparty 2, who is the real owner of the company in conflict with the interests in the process of the management dispute between ○○ Group and the company.

Examining these facts in light of the legal principles as seen earlier, it is difficult to readily conclude that the Plaintiff’s acquisition of the instant exchangeable bonds at an interest rate lower than the current loan interest rate publicly notified by the Commissioner of the National Tax Service constitutes the unfair act and calculation of unfair profit as a low-rate loan of abnormal funds lacking economic rationality in light of sound social norms and commercial practices.

Nevertheless, the court below determined that the Plaintiff’s act of acquiring exchangeable bonds in this case constitutes an object of rejection of unfair calculation. In so determining, the court below erred by misapprehending the legal principles as to the wrongful calculation panel, thereby affecting the conclusion of the judgment. The Plaintiff’s ground of appeal pointing this out is with merit.

2. Plaintiff’s ground of appeal No. 3 and Defendant’s ground of appeal

A. Article 81-3(1) of the former Framework Act on National Taxes (amended by Act No. 8139, Dec. 30, 2006; hereinafter the same) provides that "tax officials shall conduct a tax investigation to the minimum extent necessary to ensure proper and fair taxation and shall not abuse their authority to investigate for any other purpose, etc." Paragraph (2) provides that "Where there are evident data to acknowledge a suspicion of tax evasion, where it is necessary to investigate the other party, or where there are errors in connection with two or more business years, or other similar cases prescribed by Presidential Decree, a re-investigation shall not be conducted for the same item of tax and the same business period." In light of such provision and purport, "where there is clear data to acknowledge a suspicion of tax evasion" as one of the cases where re-audit is exceptionally permitted under Article 81-3(2) of the former Framework Act on National Taxes means cases where it is acknowledged based on objective and reasonable evidence (see, e.g., Supreme Court Decision 200Du1368, Dec. 16, 2008).

B. Comprehensively taking account of the adopted evidence, the lower court found the following facts: (i) while conducting an integrated investigation into the corporate tax system for the business year 1999 from April 3, 2002 to May 15, 2002 with respect to the Plaintiff (hereinafter “first tax investigation”), there were several issues, including the process of acquiring exchangeable bonds in this case, even in relation to corporate tax during the business year 2001; (ii) on May 21, 2002, the Plaintiff’s assessment of the corporate tax base and tax amount for the business year 2001; and (iii) on the other hand, the head of the Seoul Regional Tax Office conducted a tax investigation into the ○ Group with respect to the change of stocks from October 27, 2005 to March 17, 2006, he reported the Plaintiff’s tax investigation into the corporate tax system for the business year 201 to 2004 (hereinafter “the second tax investigation”), and acknowledged the Plaintiff’s loan to the Defendant through the pertinent industry without any special relationship with the Plaintiff.

Based on such factual basis, even if the motive or opportunity for the first tax investigation and the second tax investigation are different, the second tax investigation conducted for the business year 2001 where the subject matter of investigation and the taxable period overlap falls under a reinvestigation. Furthermore, in light of the circumstances as stated in its reasoning, the court below determined that the Seoul Regional Tax Office's act of taking over exchangeable bonds from the large industry in the process and method such as the Plaintiff's acceptance of exchangeable bonds was unlawful since the Seoul Urban Gas imposed corporate tax on the ground that the act of taking over exchangeable bonds from the large industry lends funds to the specially related person at a low rate without relation to the Plaintiff's business because it cannot be deemed as "the case where there is clear evidence to prove the suspicion of tax evasion", and thus, the second tax investigation conducted for the business year 2001 does not fall under an exceptionally permissible reinvestigation.

C. However, the lower court’s determination that the second tax investigation for the business year 2001 was illegal on the ground that it did not constitute an exceptionally permissible reinvestigation is difficult to accept for the following reasons.

(6) According to the evidence duly adopted by the court below, (1) pursuant to Articles 107 and 109 of the Regulations on the Investigation of Stocks and Exchangeable Bonds (No. 1550, Dec. 20, 2003), the head of the competent regional tax office, etc. provides that the corporation subject to investigation shall be selected by reviewing in writing electronic data printed out by affiliated companies and non-affiliated corporations; (2) the statement of changes in stocks and investment shares submitted by the defendant (No. 28-4), the list of shareholders (No. 28-6), and the list of shareholders (No. 28-7) are related documents to “the selection of a corporation subject to investigation” as stated in the above regulations on the investigation of stocks and exchangeable bonds with the Seoul City Director of the competent regional tax office on the grounds that the Seoul City Tax Office had no special relation with the Seoul City Tax Office on May 31, 2005, which was 204, which was 2004.

Examining these facts in light of the legal principles as seen earlier, at the time of the first tax investigation, it was difficult to determine the legal nature of the acquisition price of the instant exchangeable bonds because the Plaintiff did not exercise the right to exchange or sell the instant exchangeable bonds at the time of the second tax investigation. However, at the time of the second tax investigation, the materials were reinforced to determine the legal nature of the acquisition price of the instant exchangeable bonds by confirming the fact that the Korea Cable, etc. in a special relationship with the Plaintiff exercised the right to exchange by transfer of the instant exchangeable bonds. Furthermore, the Seoul Regional Tax Office, who had already conducted the second tax investigation, conducted a tax investigation on the Seoul Urban Gas Tax Co., Ltd., which had already been acquired exchangeable bonds from the opposite industry in the circumstance and manner like the acquisition of the instant exchangeable bonds, and notified the head of the competent tax office of the fact that the Seoul Urban Gas was deemed to have lent funds at a low rate without connection with business affairs of the opposite industry with the above exchangeable bonds through the acquisition of the exchangeable bonds. Thus, the second tax investigation on the business year constituted an exception to the second tax investigation for the business year.

Nevertheless, the court below determined that the second tax investigation on the business year 2001 does not constitute an exceptionally permissible reinvestigation. In so doing, the court below erred by misapprehending the legal principles on the prohibition of reinvestigation, which affected the conclusion of the judgment. The defendant's ground of appeal pointing this out is with merit.

D. Meanwhile, the Plaintiff’s allegation in the grounds of appeal on this part is that the second tax investigation on the business year 2001 does not constitute a re-investigation exceptionally permitted, and thus, the tax investigation on the same issue in the business year 2002 or 2004, which was conducted on the premise that it is illegal. However, as seen above, the second tax investigation on the business year 2001 constitutes an exceptional re-audit, as well as the second tax investigation on the business year 2001 constitutes an illegal re-audit, and it cannot be deemed that the tax investigation on the business year 202 or 204 on the same issue is illegal immediately. Thus, the Plaintiff’s ground of appeal cannot be accepted.

3. Conclusion

Therefore, without examining the remaining grounds of appeal by the defendant, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Yang Chang-soo (Presiding Justice)