National High Court Decision 2007Du005 (Law No. 30, 2007.30)

The propriety of the disposition imposing corporate tax by deeming the agreed compensation as gains; and

If the exercise of a claim does not legally restrict the exercise of a claim, it shall be included in the gross income for the pertinent business year as determined by the law, and even if the possibility of recovery is no longer available due to the debtor's insolvency, it shall be only the cause of disposal as bad debt at the time

The contents of the decision shall be the same as attached.

Article 15 (Scope of Gross Income)

Article 19 (Scope of Deductible Expenses)

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The Defendant’s disposition of imposition of KRW 418,560,110 of corporate tax for the business year 2004 against the Plaintiff on September 8, 2006 and KRW 20,667,710 of corporate tax for the business year 2005 shall be revoked.

1. Details of the disposition;

가. 원고는 2004. 2. 18. ○○건설산업 주식회사(이하 '○○건설'이라고만 한다)에게 인천 ○구 ○○동 ○○○-6 지상 지하2층, 지상15층 규모의 근린생활시설 및 아파트, 오피스텔 건물인 '인천 ○○팰리스'를 신출하는 공사(이하 '이 사건 공사'라 한다)를 총 공사대금 22,547,321,500원, 계약이행보증금은 총 공사대금의 10%로 약정하여 도급을 주었고, 주식회사 ○○빌(이하 '○○빌'이라고만 한다)은 위 공사도급계약에 따른 ○○건설의 계약이행을 보증하였다.

B. On March 2004, ○○ Construction was subject to the disposition of suspension of trading bills due to the shortage of funds around August 2004 while the instant construction was being carried out by subcontracting the civil works (hereinafter “the instant civil works”) during the instant construction to a limited-liability company ○○ Public Works (hereinafter “○○ Public”). The instant construction was also suspended due to the lack of funds.

C. Accordingly, on November 2004, the Plaintiff entered into an implementation agreement with ○○ Construction Guarantee Co., Ltd. to receive 1.3 billion won as contract performance guarantee from ○○ Construction Co., Ltd. until November 10, 2004. Pursuant to the above understanding agreement, ○○ Loans issued, around November 2004, by dividing the agreed amount of KRW 1.3 billion into one promissory note with face value of KRW 300 million and two promissory notes with face value of KRW 500 million with face value of KRW 300 million (hereinafter “instant promissory note”), and then delivered them to the Plaintiff and ○○ Public Co., Ltd. (hereinafter “instant promissory note”).

D. On September 6, 2006, the Defendant imposed corporate tax of 418,560,110 won on the Plaintiff on September 6, 2006 and corporate tax of 20,667,710 won for the business year of 2004, on the ground that the Plaintiff did not include 1.3 billion won in the corporate account book even though the Plaintiff received damages from ○○○ Fund (hereinafter “instant disposition”).

[Ground of recognition] Facts without dispute, Gap evidence 1 through 7, Gap evidence 9-1 through 3, Gap evidence 10, Eul evidence 1-1, 2, Eul evidence 4-1 through 7, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The Promissory Notes issued by ○○○○ was in de facto bankrupt at the time of the instant implementation agreement on November 2004. Therefore, even if the Plaintiff entered into a performance agreement with ○○○○○ on November 2004 and received a Promissory Notes totaling KRW 1.3 billion, it cannot be deemed that the amount of gross income under the Corporate Tax Act has been determined. Moreover, even if the said Promissory Notes should be included in gross income for the business year of 2004, the Plaintiff merely received only one Promissory Notes totaling KRW 500 million among the Three Promissory Notes issued by ○○○○○○○○, and the remaining Promissory Notes totaling KRW 800 million was received from ○○ public, and thus, the disposition of this case was unlawful by including the Plaintiff’s total face value of KRW 1.3 billion in gross income for the business year of 2004 and imposing corporate tax on the Plaintiff.

(b) Related statutes;

Article 15 (Scope of Gross Income)

Article 19 (Scope of Deductible Expenses)

Article 40 (Business Year of Profit and Loss in Corporate Tax Act)

Article 66 (Determination and Correction)

Article 71 (Business Year of Fiscal Year of Rent, etc. and Other Profits and Losses)

Article 36 (Business Year in which Other Profits and Losses accrue)

(c) Fact of recognition;

(1) On August 2004, the Plaintiff: (a) the contractor of the instant construction; (b) the Plaintiff entered into a provisional attachment and provisional disposition registration with respect to the land owned by ○○○-dong, Incheon, ○○○○-dong, ○○○○, etc. (hereinafter “land”); and (c) the Plaintiff entered into an implementation agreement with the Plaintiff on November 10, 2004, to implement the procedure for registration of cancellation of provisional attachment and provisional disposition with respect to the land owned by ○○-do, Incheon, ○○-dong, ○○-dong, etc. (hereinafter “instant implementation agreement”). (d) At the same time, the Plaintiff entered into an implementation agreement with the Plaintiff by November 10, 2004, to secure the contractual performance bond against ○○-do, a contractor of the instant construction.

(2) On the other hand, when the instant construction was interrupted due to the bankruptcy of ○○ Construction, the Plaintiff, the contractor, ○○ Construction, ○○○ Construction, ○○○ Construction, the guarantor of the instant construction, and ○ Public, the subcontractor of the portion of civil construction, entered into an agreement on November 8, 2004 with respect to the instant construction as follows.

(A) Since ○○ Construction performed the instant construction and waived its rights and duties as a defaulted construction company and suspended the construction. Thus, if the Plaintiff subsequently selected a third city construction and continues the instant construction, it will be awarded a contract to ○○ Public.

(B) The total construction cost of the instant earth and sand shall be KRW 1.2 billion. After the completion of construction work, the Plaintiff shall preferentially pay KRW 400 million out of the construction cost to ○○ public, and shall be paid KRW 400 million when the completion of the strashing slab bars of the objective building was completed, and the remainder of KRW 400 million shall be paid when the sale of the objective building reaches 50%. However, the determination of the price of the finishing construction of earth and sand may be made by mutual agreement between the third party objectively appropriate lines at the time of the selection of the third company (the remainder after excluding the 800 million amount of the dead price up to the present time).

(C) Pursuant to the instant implementation agreement, ○○ Construction’s Guarantee, ○○○ Construction’s Guarantee, paid KRW 1.3 billion to the Plaintiff on November 10, 2004, and if the Plaintiff fails to comply with the instant implementation agreement, the Plaintiff is exempted from the obligation to pay the remainder of KRW 800 million, excluding KRW 400,000,000,000,000.

(3) On November 8, 2004, for the payment of 1.3 billion won under the instant implementing agreement, ○○ Loans issued respectively a promissory note with a face value of 30 million won, 30 million won at the face value, 50 million won at the face value, 50 million won at the face value, 40 million won at the due date, 8 April 2005 at the due date, 50 million won at the face value on November 11, 2004 at the due date, 50 million won at the face value, and 30 million won at the due date on May 8, 2005 at the face value (hereinafter “instant Promissory Notes”) at the time of the instant implementing agreement, and the ○ public official, a creditor of the instant construction price, received the said three promissory Notes directly from ○○ around November 11, 2004, and delivered them to the Plaintiff.

(4) Since then, the Promissory Notes were settled normally on May 2005, and around that time, the Plaintiff confirmed that the Plaintiff received 1.3 billion won of the agreed amount under the instant implementation agreement with ○○ Bank, and implemented the procedure for the registration of provisional seizure and provisional disposition cancellation on May 19, 2005 with respect to the land owned by ○○ Bank.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 7, Gap evidence No. 9-1 through 3, Gap evidence No. 13, the purport of the whole pleadings

D. Determination

According to the provisions of Article 40(1) and (2) of the Corporate Tax Act, Article 71(4) of the Enforcement Decree of the same Act, and Article 36 of the Enforcement Rule of the same Act, the business year in which earnings and losses accrue shall be the business year which includes the date on which the profit and losses are finalized. In determining whether a corporate claim should be included in the gross income, if there is no limit on the punishment rate in the exercise of the claim in determining whether it should be included in the gross income, the right shall be established and shall be included in the gross income for the business year concerned. However, even if the creditor's insolvency, etc. has lost the possibility of collecting the claim, it shall be treated as bad debts when it is finalized as impossible to recover, and it shall not affect the time of accrual of the income from the claim.

On August 204, the Plaintiff’s default on ○○ Construction, which is the contractor of the instant construction, concluded an implementation agreement with the effect that the construction was to be paid 1.3 billion won on November 2004, 200, and ○○○○○○○ Construction’s loan issued a promissory note totaling KRW 1.3 billion on November 8, 2004 and November 11, 2004 for the payment of the said agreement. Under the Plaintiff’s understanding, the Plaintiff’s claim for the payment of KRW 1.3 billion was 1.3 billion on the premise that the Plaintiff’s bonds were not paid as construction price for the instant public works, and the remainder of the Promissory note 3 was delivered on May 2005 to the Plaintiff on the premise that the Plaintiff’s bonds were not paid for KRW 1.3 billion on the premise that the Plaintiff’s bonds were not paid for the execution of the said agreement and the issuance of the provisional disposition on ○○○○ Construction.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and it is so decided as per Disposition.