Daesung Holdings Co., Ltd. (Attorney Jeong Byung-chul, Counsel for the defendant-appellant)

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

Daegu District Court Decision 2008Guhap1810 Decided October 28, 2009

July 2, 2010

1. All appeals filed by the plaintiff and the defendant are dismissed.

2. The costs of appeal shall be borne by each party.

1. Purport of claim

The disposition of imposition of corporate tax of KRW 1,742,751,460 for the business year 2001, corporate tax of KRW 1,59,566,420 for the business year 2001, corporate tax of KRW 1,59,566,420 for the business year 2002, corporate tax of KRW 765,349,120 for the business year 203, corporate tax of KRW 765,349,120 for the business year 203, and corporate tax of KRW 257,216,860 for the business year 204

2. Purport of appeal

Of the judgment of the court of first instance, the part against the plaintiff shall be revoked. The defendant's disposition of imposition of corporate tax of 1,59,566,420 won, corporate tax of 2002 as of August 16, 2006, corporate tax of 765,349,120 won, corporate tax of 203 as of June 1, 2006, and corporate tax of 257,216,860 won as of June 1, 2006 shall be revoked.

Defendant: The part against Defendant in the judgment of the first instance court shall be revoked, and the Plaintiff’s claim corresponding to the above revocation shall be dismissed.

1. Details of the disposition;

A. The director of the Seoul Regional Tax Office, from October 27, 2005 to March 17, 2006, conducted an investigation of changes in stocks with respect to the Daesung Industry Co., Ltd. (hereinafter “Mosung Industry”), based on the result that the Plaintiff took over exchangeable bonds issued by Daesung Industry on June 7, 2001 (hereinafter “exchange bonds”) at an annual interest rate of 8% per annum from October 27, 2005 to March 17, 2006, in order to acquire the Plaintiff’s stocks owned by Daesung Industrial Co., Ltd. (hereinafter “instant stocks”), deemed that the Plaintiff loaned funds without relation to the business to the specially related person, and at the same time leased funds to the person with a special relationship as deductible expenses, deemed that the Plaintiff was unfairly lower than the interest rate of 1,80,000,000 won, and notified the Defendant of the burden that it was unfairly lower than the interest rate of 1,851,000 won.

B. In accordance with the above taxation data notification, the Defendant respectively corrected and notified the Plaintiff, 2,155,235,480 won of corporate tax for 2001 business year, 1,679,447,360 of corporate tax for 2002 business year, 79,170,180 won of corporate tax for 2003 business year, and 257,216,860 of corporate tax for 204 business year.

C. As of August 16, 2006, the Defendant: (a) as of August 16, 2006, on the grounds of other reasons (2001 through 2003, the Defendant recognized the provisional payment of the time deposits, etc. offered as collateral for bank loans from the specially related corporation; (b) inclusion in gross income and inclusion in deductible expenses; (c) inclusion in deductible expenses exceeding the limit of the entertainment expenses for the business year from 202; (d) inclusion in deductible expenses excessively increased by recalculation of the limit of the entertainment expenses due to the omission of report on the amount of urban gas inspected as of the end of the business year from 2003; (b) inclusion in deductible expenses in deductible expenses for the business year from the end of the 2001 business year; (c) 160,907,025, corporate tax of 1,018, 287, 280, 203, corporate tax of 203, 830, 869, 2014, 2070,30,30.

D. The plaintiff appealed and filed an appeal with the Tax Tribunal on September 1, 2006, but the Tax Tribunal dismissed the appeal on April 25, 2008.

[Ground of recognition] Facts without dispute, Gap evidence 1-1 to 4, Gap evidence 2, Eul evidence 1-3, Eul evidence 4, Eul evidence 5-1 and Eul evidence 5-2, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. Summary of the parties' assertion

(1) The plaintiff's assertion

(A) The acquisition of the instant exchangeable bonds is a sale and purchase of stocks, and a monetary transaction that was given and taken at the time of acquiring the instant exchangeable bonds constitutes a consumption of money, and thus cannot be deemed a lending of funds that are not related to the corporation’s business. Therefore, the instant disposition based on the premise that it is unlawful.

(B) From April 2002 to May 2, 2002, the Daegu Regional Tax Office investigated the Plaintiff’s tax investigation of corporate tax for the business year of 1999 and investigated the acquisition of the instant exchangeable bonds for the business year of 201. On September 14, 2002, the above issues were re-examineed at the time of the audit and inspection by the Inspector General of the National Tax Service, and was recognized as legitimate. On September 2005, the Seoul Regional Tax Office investigated the acquisition of the instant exchangeable bonds and issued the instant disposition. Since this is a duplicate investigation of the same issue, the instant disposition based on such unlawful duplicate investigation is unlawful.

(2) The defendant's assertion

(A) The purchase of the instant exchangeable bonds issued by the Plaintiff, a special-purpose corporation, by the Plaintiff, constitutes an unlawful funding for Nonparty 4, the Plaintiff’s owner of the company, without connection with the Plaintiff’s business to secure the management right, and is subject to a wrongful calculation. Therefore, the instant disposition based on such premise is lawful.

(B) The investigation conducted by the Daegu regional tax office in 2002 conducted an integrated investigation into the corporate tax assessment against the Plaintiff for the business year of 1999. The Plaintiff did not conduct a tax investigation into the acquisition of the instant exchangeable bonds. The Seoul regional tax office imposed corporate tax on the Seoul Urban Gas Corporation (hereinafter “Seoul Urban Gas”) in 2003 on the issues of the instant case, and paid in full the corporate tax. around July 2004, 2004, ○○ Group’s share transfer investigation conducted a written review on the suspicion of tax evasion by acquiring the data on the acceptance of the instant exchangeable bonds from the Internet-related site and obtaining them on the Internet-related site. As a result of the share transfer investigation conducted by the Seoul regional tax office for the business year of 201 to 2004, it is not a disposition of double investigation in violation of the principle of prohibition of double investigation.

(b) Related statutes;

It is as shown in the attached Form.

C. Facts of recognition

(1) On May 29, 2001, when the non-party 1, who is the founder of the ○○ Group, died, the ○○ Group agreed on May 29, 2001 that the ○○ Group will take charge of Non-party 2, the son of the non-party 1, the son of the Seoul Urban Gas Department, and the non-party 3, the son of the son, and the plaintiff 4, the son, respectively. According to the share swap principle entered into upon the above agreement, the non-party 2 should sell the plaintiff’s shares to the non-party 4 or the corporation under the jurisdiction of the non-party 4.

(2) On June 7, 2001, the Daesung Industry issued the instant exchangeable bonds (17,700 won per share for Korea Stock Exchange) with the face value of KRW 54 billion (30,000 per share exchange value of KRW 30,000 x 18 million) of the Plaintiff’s ordinary share (62.9% of the total number of issued shares) and the face value of KRW 1:1 of the Plaintiff, a listed corporation of the Korea Stock Exchange, as follows, and the Plaintiff acquired them.

- The name of bonds: Non-Guaranteed Private Offering Exchange Bonds No. 31 of the Large Industry

- Total face value: 54 billion won

- Total value: 54 billion won;

- Interest rate: 8% per annum;

- Method of payment of interest: Payment every three months.

- Stocks to be exchanged: Plaintiff’s registered general stocks 1.8 million shares

- The due date: June 7, 2004

- Exchange value: 30,000 won/1 note

-Request period for exchange: from the day following the payment date of the bonds to the day on which maturity is three business days;

- A depository institution of stocks to be exchanged: Korea Securities Depository

(3) On June 26, 2001, the Plaintiff: (a) issued non-guaranteed bonds with non-guaranteed interest coupons (issuance amount: KRW 500 million; interest rate: KRW 60 billion; period: three years); and (b) raised operating funds by public offering.

(4) On December 28, 2002, the Plaintiff transferred 770,000 won (the acquisition price of KRW 23.1 billion) among the instant exchangeable bonds to the Korea Cable TV Broadcasting Co., Ltd., the Plaintiff and its specially related parties, in the amount of KRW 2.4 billion, KRW 100,000 (the acquisition price of KRW 3.1 billion) to the employee stock ownership association on March 10, 2003, KRW 3.1 billion, and June 2, 2004, KRW 9.3 billion (the acquisition price of KRW 27.9 billion) to the principal corporation, etc. on June 2, 2004, and the said transferee converted the instant exchangeable bonds into shares (the acquisition price of KRW 31,122 won per share).

(5) On June 7, 2001, the Daesung Industries, which held 1,840,816 shares of the Seoul Urban Gas, issued exchangeable bonds with the exchange price of 25,000 won per share (16,600 won per day) as common shares of the Seoul Urban Gas. The Seoul Urban Gas acquired the above exchangeable bonds in full. On November 2003, the Seoul Urban Gas was corrected and notified of corporate tax and paid in full on the ground that it was a loan not related to the business of the related corporation.

(6) During the period from April 3, 2002 to May 15, 2002, the Daegu Regional Tax Office investigated the Plaintiff’s tax integration investigation on the Plaintiff’s business year 199 business year (hereinafter “the first tax investigation”). With respect to the acquisition of the instant exchangeable bonds, the Daegu Regional Tax Office also investigated the acquisition transaction of the instant exchangeable bonds for the business year 2001. With respect to the acquisition of the instant exchangeable bonds, the tax base and the amount of corporate tax for the business year 2001 was resolved on May 21, 2002. On September 2, 2002, 2002, the Daegu Regional Tax Office’s auditor of the Daegu Regional Tax Office requested the Plaintiff, while conducting a tax investigation on the Plaintiff’s stocks for the business year from October 27, 2005 to March 17, 2006.

[Reasons for Recognition] Each entry in Gap's evidence, Gap's evidence 3, 4, 10 to 13, Eul's evidence 6 to 24 (including each number), and the purport of the whole pleadings

D. Determination

(1) As to the assertion that the act does not constitute a wrongful calculation father

(A) In light of the legislative intent of Article 28(1)4(b) of the Corporate Tax Act and Article 53(1) of the Enforcement Decree of the Corporate Tax Act, the “provisional payment” which is the object of non-deductible expenses of interest under the above provision includes not only pure meaning loans, but also loans equivalent to the nature of bonds, and also where provisional payment is provided upon receiving interest at a reasonable rate from a person with a special relationship. Whether the provisional payment is related to the business of the pertinent corporation should be objectively determined on the basis of the purpose of business or business contents of the pertinent corporation (see Supreme Court Decision 2002Du11479, Feb. 13, 2004). On the other hand, the method of wrongful calculation means an act that reduces or excludes the tax burden incurred when a taxpayer takes an ordinary transaction form, such as bypassing the right of taxation, or by any other abnormal transaction form, and the purpose of Article 52(1)2 of the Corporate Tax Act, which is objectively recognized that the taxpayer had a special relationship with the corporation under Article 8(1) of the Corporate Tax Act, should be determined on the economic rationality.

(B) Comprehensively taking into account the following circumstances, i.e., the Plaintiff’s acquisition of exchangeable bonds after acquiring the instant exchangeable bonds on June 7, 201, and without exchanging them with its stocks. From December 28, 2002 to June 2, 2004, Nonparty 4 controlled by the Plaintiff’s private company, Korea Cable TV match Co., Ltd., Ltd., which violated the regulations on the management rights of the Plaintiff’s acquisition of the instant exchangeable bonds with a view to acquiring stocks in the process of coordinating the management rights, but it appears that the Plaintiff’s acquisition of the instant exchangeable bonds with a view to acquiring the instant exchange bonds with a view to 17,700 won as of the date of issuance of the instant exchangeable bonds, and that it is difficult to view that the Plaintiff’s acquisition of the instant exchangeable bonds with a special interest rate of 30,000 won and less than the annual interest rate of 40% under the conditions that the Plaintiff acquired the instant exchangeable bonds with a special interest rate of 59% less than that of the Plaintiff’s special interest rate of the instant bonds.

(C) Therefore, it is legitimate that the Defendant rendered the instant disposition by deeming that the Plaintiff acquired exchangeable bonds in this case as lending funds without relation to the business of the Daesung Industry, which is a person with a special relationship, to be legitimate, and the Plaintiff’s assertion on this part is without merit.

(2) As to the assertion of violation of the principle of prohibition of duplicate investigation

(A) Whether it constitutes a duplicate tax investigation

1) The term "tax investigation" means an act of asking questions to taxpayers, etc. according to the needs of their duties by exercising the right of questioning and questioning stipulated in each tax law, and investigating related documents, books, and other things or ordering them to submit them. The legislative intent of the principle of prohibition of double tax investigation stipulated in Article 81-3 of the Framework Act on National Taxes, Article 63-2 of the Enforcement Decree of the same Act, and Article 13 of the Regulations on the Handling of Investigation Affairs is not only to infringe upon taxpayers' freedom of business, privacy, but also to prevent arbitrary tax investigation by tax authorities from abusing their authority.

Therefore, in full view of the relevant provisions, double tax investigations are not allowed unless they fall under exceptional causes prescribed in Article 81-3(2) of the Framework Act on National Taxes and each subparagraph of Article 63-2 of the Enforcement Decree of the same Act. However, local confirmation of local business trip and confirmation for the handling of tax evasion information, such as data on suspicion, disguised processing data, duties that can be processed only by simple fact confirmation without undergoing a tax investigation among data on criminal investigation derivatives, duties that can be processed only by simple fact confirmation without undergoing a tax investigation, confirmation of taxpayer's customers or transaction partners conducted in the course of a tax investigation, information on tax evasion information, taxation data, etc. does not fall under the investigation to be prohibited in accordance with the principle

2) As to the instant case, comprehensively taking account of the following circumstances, such as the above facts acknowledged and the evidence mentioned above, and the overall purport of arguments as to Gap evidence Nos. 14 through 16, the following circumstances, i.e., (i) although the period of investigation of the first tax investigation was 199 business years, there was an investigation of all the matters within five years, the exclusion period of imposition of the tax when the tax investigation was conducted during the tax investigation, but ordinarily, there was an investigation of the plaintiff's overall matters for the business years from 1997 to 2001, and as a result, there was a decision of tax amount as to the issues by each business year; (ii) the plaintiff submitted evidence as to the necessity for acquiring the exchangeable bonds of this case and the assessment of price at the request of the auditor of the Daegu regional tax office around September 2002, but did not take any measures after the second tax investigation; and (iii) in light of the fact that the Seoul regional tax office at the time of the second tax investigation submitted data such as the acceptance contract, board minutes, etc.

(B) Whether Article 81-4(2)3 of the Framework Act on National Taxes constitutes “the case where a mistake relating to two or more business years exists”

1) If it is interpreted that the same error with respect to the same case includes cases where there are errors related to the same two or more business years repeatedly in each business year, the principle of prohibition of double-tax investigations to prevent arbitrary abuse by the tax authorities and to promote legal stability can be mitigated. Thus, if the first tax investigation was conducted on the errors that continuously occurred in each business year and received a decision that the return of the tax base and tax amount was appropriate as a result of the second tax investigation conducted thereafter, it would be consistent with the legislative intent of the strict interpretation that even if the error was discovered as a result of the second tax investigation conducted thereafter, the determination or correction of the tax amount should no longer be made. Furthermore, it is reasonable to interpret that “where there were errors related to the two or more business years” means a case where the errors that occurred in relation to the two or more business years are indivisible, and that the tax adjustment for one business year affects the other business year’s tax adjustment.

2) Even if the Seoul Regional Tax Office found that the acquisition of the instant exchangeable bonds constitutes loans unrelated to business in the course of conducting the second tax investigation against the Plaintiff on the “201 business year or 2004 business year” which is the period subject to the investigation, the second tax investigation cannot be conducted in duplicate for the period of “2001 business year” which is the period subject to the first tax investigation, as long as the interest paid, non-deductible, recognition of non-deductible, and tax adjustment arising from the inclusion of earnings can be divided by business year. Thus, the second tax investigation does not constitute an exception under the above provision.

(C) Whether there is an obvious material to prove a suspicion of tax evasion under Article 81-4(2)1 of the Framework Act on National Taxes

The term "where there is clear evidence that there is a suspicion of tax evasion" means the case where there is an existing tax investigation prior to the implementation of a double tax investigation with obvious evidence of tax evasion that is sufficient to justify the overlapping tax investigation. However, it is difficult to recognize that the statement of evidence No. 28-4 in the evidence No. 28-2 of the evidence No. 13-1 of the certificate No. 13-2 of the certificate No. 13-2 of the certificate No. 13-2 of the certificate No. 13-2 of the certificate No. 13-2 of the certificate No. 13-2 of the certificate No. 13-3 of the certificate No. 13-3 of the certificate No. 13-3 of the certificate No. 13-3 of the certificate No. 13-3 of the certificate No. 13-2 of the certificate No. 2 of the transfer of exchangeable bonds and the information No. 13-3 of the certificate No. 13-2 of the certificate No.

(D) Whether a disposition based on a tax investigation that violates the principle of prohibition of duplicate investigation is legitimate

1) In light of the fact that the principle of prohibition of duplicate investigation aims to ensure taxpayers' rights in the procedural aspect through the prevention of a taxpayer's business freedom and privacy infringement and prior control over arbitrary tax investigation, taxation based on a tax investigation that violates the principle of prohibition of duplicate investigation is illegal (see Supreme Court Decision 2004Du12070, Jun. 2, 2006).

2) Therefore, the Plaintiff’s assertion that the second tax investigation constitutes a duplicate tax investigation prohibited under Article 81-4(2) of the Framework Act on National Taxes and Article 63-2 of the Enforcement Decree of the same Act is justifiable within the scope of “2001 business year” where the tax items and the period of the first tax investigation overlap among the second tax investigation.

3. Conclusion

The plaintiff's claim of this case is justified within the above scope of recognition, and the remaining claims are dismissed as it is without merit, and the judgment of the court of first instance is just in this conclusion, and the plaintiff and the defendant's appeal are dismissed as they are without merit. It is so decided as per Disposition.

[Attachment]

Judges Kim Chang-chul (Presiding Judge) Kim Jong-ho