Cho High Court Decision 2010Du3234 ( October 10, 2011)

Since business activities have continuity and repetition, such business activities constitute business income.

Inasmuch as an independent business activity appears to have continuity and repetition in light of the content, activity period and scope, mode, transaction counterpart, and the number and scale of profit gained through a patent for invention, it is deemed that one independent business activity has continuity and repetition.

2011Guhap1525 Revocation of Disposition rejecting a request for correction

Nam

O Head of tax office

August 12, 2011

October 7, 2011

1. The plaintiff's claim is dismissed.

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

The Defendant’s revocation of each claim for correction against the Plaintiff on August 17, 2010 on each global income tax belonging to the year 2007, 2008, and 209.

1. Details of the disposition;

A. The Plaintiff received the loans related to the patent rights and trademark rights (hereinafter referred to as the "patent rights, etc. of this case") belonging to the year 2007 through 2009 with respect to natural teas used in the lodging room and the manufacturing methods thereof (hereinafter referred to as the "non-party company") from the company XX (hereinafter referred to as the "non-party company") and paid the comprehensive income tax by regarding them as business income.

B. On July 2, 2010, the Plaintiff filed a claim for correction with the Defendant to the effect that, as the key income was erroneously reported to the Defendant as business income, the excessive amount of tax should be refunded.

C. On August 17, 2010, the Defendant rejected the Plaintiff’s request for correction on the ground that the key income constituted business income, and that it cannot be seen as other income (hereinafter “instant disposition”).

D. The Plaintiff appealed and filed an appeal with the Tax Tribunal on September 28, 2010, but the Tax Tribunal dismissed the Plaintiff’s appeal on March 10, 201.

Facts without dispute over the basis of recognition, entry of Gap evidence 1 and 2 (including paper numbers; hereinafter the same shall apply), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

In order to become a business income under the Income Tax Act, it must fall under each subparagraph of Article 19 (1) of the Income Tax Act (amended by Act No. 9897 of Dec. 31, 2009; hereinafter the same shall apply), and it is required to continuously and repeatedly carry out production activities benefiting from income. However, the plaintiff only entered into a contract for the transfer of patent rights and trademark rights one time, and then repeatedly receives income pursuant to the terms and conditions of the contract. It is difficult to prove that no productive activities have been carried out to earn such income, it is difficult to provide proof of 80% of the amount of income paid from miscellaneous income to miscellaneous income as necessary expenses, and thus, it is necessary to respect the purpose of subparagraph 4 of Article 87 of the Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 21301 of Feb. 4, 2009; hereinafter the same shall apply). Therefore, the issue of the income tax law is transferred or leased to miscellaneous property rights under each subparagraph of Article 19 (1) of the Income Tax Act.

B. Relevant statutes

It is as shown in the attached Form.

(c) Fact of recognition;

(1) On August 1, 1998, the Plaintiff entered into a contract with the non-exclusive licensee to establish a non-exclusive license by transferring part of the non-party company “A” (hereinafter referred to as “the patent right and trademark right of this case, etc.”) of the natural tea used in the niversary solution and its manufacturing method (patent No. 18168), and the Plaintiff was paid 50 million won in total from August 31, 1998 to August 31, 2005 with the establishment fee for the patent exclusive license, and 00 million won in total from August 1, 1998 to September 30, 2003 to September 1930, 2003; 30% of the monthly sales from October 1, 2003 to September 19, 2018 to the end of 30% of the annual sales amount of the Plaintiff’s license from the end of 19.8% of the monthly sales amount.

3) In addition to the patent right of this case, the Plaintiff registered five different kinds of patent rights and transferred part of them to a third party. The current status is as follows.

4) According to the revised global income tax return that the Plaintiff submitted to the Defendant on May 31, 2010, the Plaintiff reported the amount of income related to the patent rights and trademark rights other than the patent rights in this case as business income under the name of the “OOOOE”, and submitted an estimated income statement, the content of which is to calculate necessary expenses pursuant to the application of simple security (73.6%).

Evidence Nos. 1, 2, and 3 of the grounds for recognition, and the purport of the whole pleadings

D. Determination

1) The key issue of this case is whether the issue income received by the Plaintiff from the non-party company constitutes business income, and whether it constitutes "money and valuables received in return for the transfer or lease of the right to the commercial property and the right to the trademark under Article 21 (1) 7 of the Income Tax Act, which are money and valuables received in return for the transfer or lease of the right to the commercial property and the right to the trademark."

2) "Money and valuables received in return for transfer or lease of industrial property rights, etc. as other income" under Article 21 (1) 7 of the Income Tax Act means only a case where the income acquired falls under temporary or contingent income other than business income, and even if the name of the acquired income falls under the price for a partial transfer of patent rights, etc., it shall be deemed business income as long as the business feasibility is recognized. Whether the pertinent income constitutes business income or other income is not attributable to the type, name, and appearance of the transaction entered into between the parties, but shall be evaluated according to the substance of the transaction, and then the relevant taxpayer who is a party to the transaction shall be determined according to social norms, taking into account whether the activity is for profit-making purposes and whether the activity is continuous and repeated to the extent that it can be seen as business activity (see Supreme Court Decision 200Du5203, Apr. 24, 2001).

3) In full view of the following circumstances as seen earlier, the Plaintiff’s activity itself was made for the purpose of raising the profit by taking account of the use of the Plaintiff’s income activities through the Plaintiff’s invention patent, its operating period and scope, mode, transaction counterpart, and the frequency and scale of obtaining the profit, and thus, it appears that the Plaintiff’s activity itself has the continuity and repetition to the extent that it can be seen as a single business activity independent of social norms. Therefore, the key income is determined to be “business income” as income generated from the “business service business” under Article 19(1)11 of the Income Tax Act in light of its substance.

① The Plaintiff granted an exclusive license for a long period of up to 20 years to the non-party company specialized in the production and sale of the instant patent right, etc., and received the amount from 3% to 8% of the relevant sales as monthly user fees, from 2007 to 2009, from 2 billion won to 2.6 billion won each year, and the Plaintiff registered its business with the name of "OOEs" and owned five kinds of patent rights other than the instant patent right, and reported and paid them as business income in the manner of transferring them to the third party. In light of the above, even if the Plaintiff entered into a contract for partial transfer of each patent right and trademark right on one occasion with the non-party company, it cannot be deemed that the Plaintiff had a temporary and contingent nature of the Plaintiff’s income activities, and it is understood that the Plaintiff had a continuous and repeated nature.

② Since the Plaintiff’s transaction of partially transferring or lending an industrial property right already acquired through his/her patent to another person is not based on the nature of the transaction, or on the premise of tangible and continuous production activities, it is difficult to deny the Plaintiff’s business nature on the ground that the Plaintiff’s business has such nature.

③ The Plaintiff asserts that, in cases where income derived from the transfer or lending of industrial property rights is deemed other income, 80% of the income amount can be uniformly recognized as necessary expenses pursuant to Article 87 subparag. 4 of the Enforcement Decree of the Income Tax Act, while, in cases where income is deemed business income, it is difficult to prove the past research expenses for acquiring industrial property rights, and thus, it would result in unfair outcomes. However, even if income related to industrial property rights is deemed business income, the pertinent industrial property right may include depreciation amount within a certain scope as intangible fixed assets under Article 62(2)2 of the Enforcement Decree of the Income Tax Act, and even if not, it is difficult to prove necessary expenses due to the application of the standard expense or the simple expense expense when calculating the income amount based on estimation, as the Plaintiff’s calculation of income amount,

4) Sub-committee

Therefore, the plaintiff's assertion on the premise that the issue income is other income is without merit.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.