Seoul High Court 201Nu26277 (Law No. 10, 2012)

Where there are special circumstances that it is unreasonable to conduct a tax investigation over all items at the time of the initial tax investigation, it does not constitute a reinvestigation.

In the first tax investigation of the business year 200-2001, the investigation of the remaining items in the second tax investigation of the business year 2002 after correcting the provisional payment amount by a business office affecting the conclusion of the business year 2002, and in the second tax investigation of the business year 2002-205 is not deemed a reinvestigation in the case where "special circumstances" exist.

Supreme Court Decision 2012Du1424 Decided revocation of Disposition of Corporate Tax Imposition

AA Construction Corporation

Head of Yeongdeungpo Tax Office

Seoul High Court 201Nu26277 (Law No. 10, 2012)

2015.03.26

All appeals are dismissed.

The costs of appeal are assessed against each appellant.

The request for continuation of proceedings by the requester for proceedings is dismissed.

Expenses incurred in applying for a takeover of proceedings shall be borne by the requester for proceedings.

The grounds of appeal are examined.

1. Plaintiff’s ground of appeal

A. As to the grounds of appeal Nos. 1 and 3

(1) Article 15(1) of the former Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008; hereinafter the same) provides that "the amount of profit shall be the amount of profit generated from transactions which increase the net assets of the relevant corporation, except as otherwise provided for in this Act, with the exception of capital or financing and the amount of capital contribution." Meanwhile, Article 34(2) of the former Corporate Tax Act provides that "the amount of bonds which cannot be recovered due to the reasons prescribed by Presidential Decree, such as debtor's bankruptcy, etc. (hereinafter "deductible expenses") among bonds held by a domestic corporation shall be included in deductible expenses in calculating the income amount for the relevant business year." Article 62(1)8 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302 of Feb. 4, 2009; hereinafter the same) provides that "bonds which cannot be recovered due to the debtor's bankruptcy, compulsory execution, execution of punishment, discontinuance of business, death, disappearance, or missing."

In determining whether to include a claim under the Corporate Tax Act in gross income, if there is no legal limitation on the exercise of the claim, the right is once determined and included in gross income for the pertinent business year. Even if there is no possibility to recover the claim due to the debtor's insolvency, etc. thereafter, it can only be treated as bad debts when it becomes final and conclusive as impossible to recover, and it does not affect the time to vest in the income accrued from such claim (see, e.g., Supreme Court Decision 2005Du4755, Nov. 15, 2007). In addition, "claim which cannot be recovered due to the debtor's discontinuation of business" under Article 62 (1) 8 of the former Enforcement Decree of the Corporate Tax Act refers to the claim that becomes objectively final and conclusive due to the debtor's discontinuation of business during the business year (see, e.g., Supreme Court Decision 2006Du1098, Jul. 10, 2008).

(2) The lower court acknowledged the following facts: (a) the Plaintiff, as a guarantor of BB in 2002, deemed that ○○○○○○○○○○ (hereinafter “the instant bad debt”) obtained from the Plaintiff’s repayment of the loans to the financial institutions of BB in 2002, constituted a claim which could not be recovered due to the discontinuance of the BB’s business; and (b) included it in deductible expenses and reported corporate tax for the business year 2002; (c) on the ground that the instant bad debt did not meet the requirements for inclusion in deductible expenses under Article 34(2) of the former Corporate Tax Act, the lower court excluded the Plaintiff from deductible expenses and rendered a disposition imposing corporate tax for the business year 2002 against the Plaintiff on January 1, 2002.

Furthermore, on the premise that the claim for indemnity that the Plaintiff acquired as a result of the Plaintiff’s performance of the guaranteed obligation is included in the Plaintiff’s gross income, the lower court determined that the Defendant’s inclusion of the claim equivalent to the instant bad debt in deductible expenses is lawful on the ground that it is difficult to deem that the claim was objectively impossible to recover due to the discontinuation of the business by the BB as of December 31, 2002, on the ground that it was objectively impossible to recover the claim due to the discontinuation of the business of BB as of December 31, 2002, even though BB had continued to operate the instant hotel after December 31, 202 through management entrustment or equity investment, etc., and BB had sold 59.19% of the equity interest in the instant hotel until December 31, 202.

(3) Examining the records in light of the above provisions and legal principles, such determination by the court below is just, and there is no error in the misapprehension of legal principles as to whether the corporate bonds acquired by the corporation under the Corporate Tax Act are included in the calculation of earnings or the scope of the irrecoverable claims due to the discontinuation of business under Article 62 (1) 8 of the former Enforcement Decree

B. Regarding ground of appeal No. 2

(1) Article 81-4(2) of the former Framework Act on National Taxes (amended by Act No. 8830, Dec. 31, 2007; hereinafter the same) provides that "in case where there is clear evidence to prove a suspicion of tax evasion exists, where it is necessary to conduct an investigation on the other party of the transaction, or where there are errors in relation to the other party of the transaction for more than two business years, and other similar cases prescribed by the Presidential Decree, it shall not conduct a reinvestigation on the same item of taxation and the same taxable period," and Article 81-7(1) of the same Act provides that "one of the matters to be notified before commencing a tax investigation shall be one of the tax items to be investigated", the principle criteria

Inasmuch as the language and structure of the relevant provisions, and the same tax investigation repeated for the same tax item and taxable period may seriously infringe on taxpayers’ freedom of business and legal stability as well as may lead to the abuse of their right to tax investigation, it is necessary to prohibit, except in exceptional cases significantly contrary to the principle of fair taxation, and the legislative intent prohibiting re-audit includes the advancement of tax investigation technology. In full view of the fact that a tax official conducts a tax investigation over all items for a specific taxable period of a certain tax item, as well as conducting a tax investigation again for the same taxable period of a certain tax item, it constitutes a re-investigation prohibited under Article 81-4(2) of the former Framework Act on National Taxes, and that even if a tax official conducts a tax investigation for the same taxable period of a certain tax item, it does not change merely because it does not overlap with the content of a tax investigation by again conducting a tax investigation for only other items except for the specific items for which the initial tax official conducted a tax investigation. However, it is unreasonable to see Article 81-4(2)20 of the former Framework Act on National Taxes.

(2) According to the reasoning of the judgment below, ① the Seoul Director of the Seoul Regional Tax Office conducted a general tax investigation on the Plaintiff’s regular corporate tax for each business year from October 21, 200 to December 15, 2000 (hereinafter “the first tax investigation”) with respect to the Plaintiff’s regular corporate tax for each business year from October 21, 200 to December 15, 2001, and found that the Plaintiff delayed the collection of loan claims against AA Hungary and AAmera (hereinafter “non-corporate company”), which is a local subsidiary, and the claim for reimbursement due to the repayment of guaranteed debt, and the claim for reimbursement due to the repayment of guaranteed debt and related related company, ② The Seoul Regional Tax Office needs to verify whether the delay in collection of indemnity claims against the non-party company continues to exist in the connected business year, and to investigate whether the non-party company’s non-party company’s permanent corporate tax investigation continues to be imposed with respect to the non-deductible debt for each business year from 200 to 205 years to 2000 years, respectively.

In light of the fact that there is a delay in collection of claims, such as provisional payments unrelated to business, etc., it shall be subject to the recognition of the relevant business year, inclusion in the gross income, and inclusion in the gross income of borrowed money in the gross income, and such mistake requires correction of the other business year as it affects the other business years in which the delay in collection of claims continues, and thus, it is necessary to correct the error in other business years. If the same kind of error is repeated each business year in each business year, not only the investigation is limited, but also the taxpayer's burden according to the investigation is not simple, but also the tax authority is difficult to expect extension of collection of claims for compensation to the non-party company through an overall investigation of other business years on the ground that there is such reason. In light of the fact that the Seoul Regional Tax Office at the time of the first tax investigation, deeming that the delay in collection of claims for compensation to the non-party company at the time of the first tax investigation constitutes a provisional payment without business office, and thus, conducting the second tax investigation on the remaining items except for the items investigated at the time of the first tax investigation does not constitute a second tax investigation.

(3) Although the reasoning of the court below is somewhat inappropriate, it is just in its conclusion that the second tax investigation does not constitute a reinvestigation prohibited under Article 81-4(2) of the former Framework Act on National Taxes. In so doing, the court below did not err by misapprehending the legal principles on the scope of reinvestigation prohibited under Article 81-4(2) of the former Framework Act on National Taxes, as otherwise alleged in the grounds of appeal

2. As to the Defendant’s ground of appeal

A. Article 52(1) of the former Corporate Tax Act and Articles 88(1)6 and 89(3) of the former Enforcement Decree of the Corporate Tax Act provide that where a corporation is deemed to have unjustly reduced the tax burden on the corporation’s income by lending money without compensation to a person with a special relationship, the tax authority shall regard it as a wrongful calculation and include the interest rate recognized as a wrongful calculation in its gross income.

In a case where it is deemed that the delay in collection of claims for provisional payment or claims for indemnity equivalent thereto in its nature lacks economic rationality in light of sound social norms and commercial practice and reduces the tax burden unfairly, it shall be subject to the recognition of Article 52(1) of the former Corporate Tax Act and the inclusion in the calculation of earnings. However, in a case where the relevant corporation gives up claims for indemnity with respect to claims for indemnity, it should be premised on the existence of claims for indemnity in order for it to be recognized and included in the calculation of earnings. Thus, if the relevant corporation gives up claims for indemnity with respect to claims for indemnity, it shall be subject to the avoidance of wrongful calculation separate from the fact that the act of renunciation is subject to the imposition of gift tax, etc. on the specially related person, it shall be deemed that the said act cannot be conducted as well as inclusion in the calculation of earnings on the premise that the claims for indemnity are held (see, e.g., Supreme Court Decision 2

B. The lower court determined that the Defendant’s disposition imposing corporate tax for each business year from 200 to 205 against the Plaintiff on January 1, 2000, on the premise that the Plaintiff owned the above claim in each business year from 2003 to 2005 was unlawful, inasmuch as it deemed that the Plaintiff’s claim equivalent to the instant bad debt amount, which was deducted from the anticipated recovery amount, constitutes a claim which could not be recovered due to the discontinuation of the BBB’s business, and thus, can be seen as being the same as the waiver of recovery thereafter.

C. Examining the records in light of the above provisions and legal principles, such determination by the court below is just, and there is no error in the misapprehension of legal principles as to the recognition of Article 52(1) of the former Corporate Tax Act and the inclusion in the calculation of earnings, as alleged in the

3. As to a request for a takeover of proceedings

According to the records, the plaintiff can be found to have been declared bankrupt after the lapse of the period for appeal, but the court of final appeal may render a judgment dismissing the appeal without pleading without going through the taking-over procedure prescribed in the "Act on Debtor Rehabilitation and Bankruptcy" if it deems that the appeal is groundless based on the petition of appeal, statement of reasons for final appeal, written answer and other records of trial (see, e.g., Supreme Court Decision 2000Da44928, 44935, Jun. 26, 2001).

4. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against each appellant. The application to resume the proceedings is dismissed and the costs of appeal are assessed against the requester. It is so decided as per Disposition by the assent of all participating Justices on the bench.