In calculating gains on transfer pursuant to Article 97 (1) 2 of the former Income Tax Act and Article 163 (3) 2 of the former Enforcement Decree of the Income Tax Act, the meaning of "where a lawsuit is instituted after the acquisition of transferred assets, the costs of lawsuit and amount of reconciliation, etc. directly spent to secure ownership," and whether litigation costs or settlement costs, etc. disbursed to prevent the risk of loss of ownership arising from disputes over the implementation of contracts separately established without dispute over the validity of the acquisition of transferred assets, etc. (negative)

In calculating gains on transfer pursuant to Article 97(1)2 of the former Income Tax Act (amended by Act No. 9897 of Dec. 31, 2009) and Article 163(3)2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034 of Feb. 18, 2010), “the amount of litigation costs, compromise costs, etc. directly required to secure ownership in the event a dispute arises after acquiring a transferred asset” means litigation costs, compromise costs, etc. directly disbursed by the transferor in order to secure ownership of the transferred asset due to a dispute over the validity, etc. of the acquisition of the transferred asset after the transferor acquired the transferred asset. Accordingly, this does not include litigation costs or settlement costs, etc. spent to prevent the risk of loss of ownership caused by a dispute over the implementation of a contract separately established without dispute over the validity, etc. of the acquisition of the transferred asset.

Article 97 (1) 2 of the former Income Tax Act (Amended by Act No. 9897, Dec. 31, 2009); Article 163 (3) 2 of the former Enforcement Decree of the Income Tax Act (Amended by Presidential Decree No. 22034, Feb. 18, 2010)

Plaintiff

Head of Suwon Tax Office

Seoul High Court Decision 2012Nu2438 decided June 27, 2012

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

The grounds of appeal are examined.

In calculating gains on transfer pursuant to Article 97(1)2 of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009); Article 163(3)2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010; hereinafter the same) “the amount of litigation costs, reconciliation costs, etc. directly required to secure the ownership of the transferred asset, where a lawsuit is instituted after acquiring the transferred asset,” refers to the litigation costs, reconciliation costs, etc. directly disbursed by the transferor to secure the ownership of the transferred asset due to disputes over the validity, etc. of acquiring the transferred asset after acquiring the transferred asset. Accordingly, the litigation costs or settlement costs, etc. spent to prevent the risk of loss of ownership due to disputes over the implementation of a contract separately established without dispute over the validity of the transferred asset acquired shall not be included.

According to the reasoning of the judgment below and the record, the plaintiff entered into a sales contract with the non-party 1 to sell 1653 square meters of the land of this case which is created in the Korea Land and Housing Corporation on May 3, 2004 (hereinafter "the sales contract of this case"), and the non-party 1 received 120 million won of down payment and intermediate payment from the non-party 1. The non-party 1 issued promissory notes with the face value of 120 million won of the above down payment and delayed payment of the above down payment, and then prepared a notarial deed with the purport that the non-party 1 did not raise an objection even if he was subject to compulsory execution, and the plaintiff completed the registration of ownership transfer on May 31, 2004 under the name of the plaintiff, and completed the registration of ownership transfer on April 20, 2007 with the non-party 1 to the non-party 200 million won of the above real estate, and completed the registration of ownership transfer on the land of this case.

Examining the above facts in light of the legal principles as seen earlier, the above KRW 180 million paid by the Plaintiff to Nonparty 1 pursuant to the instant agreement is not the litigation costs or settlement costs incurred directly in order to secure ownership due to disputes over the validity, etc. of the Plaintiff’s acquisition of ownership of the instant real estate, which is transferred between the Plaintiff and Nonparty 1, but also the settlement costs incurred in order to prevent the risk of loss of ownership due to disputes over the implementation of the instant sales contract, which was established separately from the act of acquiring ownership. Therefore, it cannot be deemed as “the amount of litigation costs and settlement costs incurred directly in securing ownership in the event a dispute arises after acquiring the transferred assets” under Article 163(3)2 of the Enforcement Decree of the Income Tax Act.

Nevertheless, the lower court determined otherwise by misapprehending the legal doctrine under Article 163 (3) 2 of the former Enforcement Decree of the Income Tax Act concerning necessary expenses deducted from the transfer value, and thereby adversely affected the conclusion of the judgment, solely on the grounds that the Plaintiff was in the situation where Nonparty 1 was in which the Plaintiff would lose ownership of the land of this case during the auction procedure, the lower court determined that the said KRW 180 million constituted necessary expenses deducted from the transfer value, which is the settlement cost stipulated in Article 163 (3) 2 of the former Enforcement Decree of the Income Tax Act. In so determining, the lower court erred by misapprehending the legal doctrine under Article 163 (3) 2 of the former Enforcement Decree of the Income Tax Act concerning necessary expenses deducted from the transfer value in the

Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Yong-deok (Presiding Justice)