In a case where Gap corporation imposed penalty surcharges on the ground that it violated Article 3 of the Act on the Registration of Real Estate under Actual Titleholder’s Name on the fact of title trust by completing the registration of transfer of ownership in the name of a company’s executive officer, the case holding that the imposition of penalty surcharges without considering all the grounds for reduction of penalty surcharges under the proviso to Article 3-2 of the Enforcement Decree of the Act on

In a case where Gap corporation imposed penalty surcharges on the facts of title trust by completing the registration of transfer of ownership in the name of its executive officer Eul, on the ground that it violated Article 3 of the Act on the Registration of Real Estate under Actual Titleholder’s Name (hereinafter “Real Estate Real Name Act”), the case holding that Gap corporation’s imposition of penalty surcharges on Gap corporation without considering the following grounds: (a) it cannot be deemed that there was a purpose of tax evasion in light of the fact that there was no limitation on the qualifications for bidding at the time of bidding; and (b) it is difficult to view Gap corporation as a title trust for the purpose of avoiding direct restriction on the acquisition of land due to no limitation on the qualifications for bidding; and (c) even if the title trust was made with the intent of evading a lower evaluation under the detailed criteria for government-funded construction project or seeking economic benefits by avoiding a lower evaluation in the calculation of execution capacity, it does not constitute “the purpose of avoiding statutory restrictions” under the Real Estate Real Name Act, and thus,

Articles 3(1) and 5(1) of the Act on the Registration of Real Estate under Actual Titleholder’s Name; Article 3-2 of the Enforcement Decree of the Act on the Registration of Real Estate under Actual Titleholder’s Name;

Seodaemun General Construction Co., Ltd. (Law Firm Cheongn Law, Attorneys Kim Sejong-le et al., Counsel for the plaintiff-appellant)

The head of Gangseo-gu Busan Metropolitan Government (Law Firm Jeong, Attorney Kim Jin-soo, Counsel for defendant-appellant)

Busan District Court Decision 2013Guhap407 Decided September 6, 2013

February 26, 2014

1. The defendant's appeal is dismissed.

2. The costs of appeal shall be borne by the Defendant.

1. Purport of claim

The Defendant’s imposition of a penalty surcharge of KRW 399,534,00 against the Plaintiff on August 14, 2012 shall be revoked.

2. Purport of appeal

The judgment of the first instance is revoked. The plaintiff's claim is dismissed.

1. Details of the disposition;

A. On June 8, 2005, the Plaintiff borrowed the name of Nonparty 1 as a regular manager of the company, and was awarded a successful bid of approximately 1175.1 square meters (hereinafter “instant land”) owned by the Busan Metropolitan City Fisheries Cooperatives, Gangseo-gu, Busan, and subsequently completed the registration of ownership transfer under the name of Nonparty 1 on July 12, 2005.

B. On July 6, 2007, Nonparty 2, the representative director of the Plaintiff, and Nonparty 1, the title trustee, violated the Act on the Registration of Real Estate under Actual Titleholder’s Name (hereinafter “Real Estate Real Name Act”) with the above title trust at the Busan District Court on July 6, 2007, and was notified of a summary order of KRW 20 million and KRW 10 million.

C. After that, on August 14, 2012, the Defendant imposed a penalty surcharge of KRW 39,534,00 [the amount of penalty surcharge of KRW 1,175 square meters x officially assessed land price of KRW 1,360,00 x 25% (=10% below the assessed real estate value of KRW 3 billion + more than 2 years more than 15%) on the Plaintiff on August 14, 2012 (hereinafter “instant disposition”) without applying the relevant mitigation provisions, on the grounds that the Plaintiff violated Article 3 of the Real Estate Real Name Act and there is no reason to reduce the penalty surcharge.

[Ground for Recognition] Unsatisfy, entry of Gap1 to 8

2. Whether the disposition is lawful;

A. The parties' assertion

1) The plaintiff's assertion

It is true that the Plaintiff trusted the instant land to Nonparty 1. However, in the event that the Plaintiff acquired the instant land in the name of the Plaintiff, the land purchase price should be raised through the funds held in possession and the loans from financial institutions, and thus the Plaintiff’s financial position becomes worse. Accordingly, the Plaintiff merely led to the title trust in order to prevent the external deterioration of the company’s management status, and there was no “the purpose of evading taxes or evading restrictions under the laws and regulations,” such as the proviso to Article 3-2 of the Enforcement Decree of the Real Estate Real Name Act, and thus, the instant disposition that did not reach this point is unlawful

2) The defendant's assertion

The Plaintiff borrowed Nonparty 1’s name in order to avoid the limitation on participation in the bidding of the instant land. In addition, if the Plaintiff obtained a loan while purchasing the instant land, the financial condition becomes worse due to the decline in real capital, and thus, undergo a lower evaluation from the detailed criteria for qualification examination for local government facility construction as stipulated in Article 42(2) of the Enforcement Decree of the Act on Contracts to Which the State is a Party, Article 63 of the Local Finance Act, and thus, it is impossible to obtain a successful bid for government-funded construction due to the decline in execution capacity assessment as stipulated in the Framework Act on the Construction Industry and the Enforcement Rule of the same Act. As such, the Plaintiff was title trust for the purpose of evading restrictions pursuant to

B. Relevant statutes

4. Act on the Registration of Real Estate under Actual Titleholder's Name

Article 3 (Obligation to Register Name of Person with Actual Right, etc.)

(1) No one shall register any real right to real estate under the name of the title trustee according to the title trust agreement.

Article 5 (Penalty Surcharge)

(1) A penalty surcharge shall be imposed on any of the following persons within the limit of an amount equivalent to 30/100 of the value of the relevant real estate:

1. A title truster who violates Article 3 (1);

(3) Criteria for imposing penalty surcharges under paragraph (1) shall be prescribed by Presidential Decree in consideration of the real estate value under paragraph (2) (hereinafter referred to as "real estate appraised value"), the period of violating Article 3, whether taxes are evaded or the restrictions under Acts and subordinate statutes are violated, etc.

m. Enforcement Decree of the Act on the Registration of Real Estate under Actual Titleholder's Name

Article 3-2 (Standards for Imposition of Penalty Surcharge on Title Trustr, etc.)

The standards for imposing penalty surcharges under Article 5 (3) of the Act shall be as shown in the attached Table: Provided, That where it is not for the purpose of evading taxes or avoiding the restrictions pursuant to the Acts and subordinate statutes, 50/100 may be reduced.

[Attachment] Criteria for Imposition of Penalty Surcharges (Relation to Articles 3-2, 4-2, and 8)

The amount of penalty surcharge shall be calculated by multiplying the imposition rate of penalty surcharge by the appraised value of the real estate, summing up the imposition rate of penalty surcharge under subparagraphs 1 and 2.

1. Imposition rate of penalty surcharges based on the appraised value of real estate;

The imposition rate of penalty surcharges on the attached real estate contained in the main sentence shall be 50 million won below 50 million won below 50 million won, but more than 10% more than 3 billion won but not more than 15% below 3 billion won;

2. Imposition rate of penalty surcharges based on the expiration period of the violation of duty;

The imposition rate of penalty surcharges for the period of the violation of the duty to vote contained in the main sentence shall not exceed one year, but more than 5% but not more than 10% but not more than 2 years, but not more than 15%

C. Determination

1) Article 3(1) of the Real Estate Real Name Act provides that “No person shall register any real right to real estate in the name of the title trustee according to the title trust agreement.” Article 5(1) of the same Act provides that any title truster who violates the provisions of Article 3(1) shall impose a penalty within the limit of an amount equivalent to 30/100 of the value of the relevant real estate. In addition, the proviso of Article 3-2 of the Enforcement Decree of the same Act provides that a penalty may be mitigated by 50/100 of the penalty if it is not for the purpose of evading taxes or avoiding restrictions under the Acts and subordinate statutes.

However, since the proviso of Article 3-2 of the Enforcement Decree of the Act on the Registration of Real Estate under Actual Titleholder’s Name is clearly a provision for discretionary mitigation, if the imposing authority imposes a penalty surcharge in full without considering the grounds for mitigation even if the above grounds for mitigation exist, it cannot be readily concluded as unlawful. However, if the imposing authority did not consider the above grounds for mitigation at all despite the existence of the above grounds for mitigation, or did not reduce the remaining penalty surcharge that did not constitute the grounds for mitigation, the imposition of the penalty surcharge is an illegal disposition that deviates from or abused by discretionary authority (see Supreme Court Decision 2005Du3257, Sept. 15, 200

2) Based on the above legal principles, the following facts are recognized in addition to the respective entries and arguments in Gap 14, 15, 16, Eul 11 and 12, and Eul 14-2, based on the aforementioned legal principles.

A) In the event that the Plaintiff is awarded the instant land under its own name, it is necessary to procure the successful bid price by mobilization of funds and loans, and in such a case, it is anticipated that the Plaintiff would suffer disadvantages in the bidding process of government-funded construction due to the aggravation of the index of financial soundness following the increase of loans and thus, the Plaintiff was awarded the instant land under the name of Nonparty 1 and completed the registration of ownership transfer in its name. There was no limitation to requirements for bid qualifications, such as holding certain assets

B) After having been punished for violating the Real Estate Real Name Act, the Plaintiff completed the registration of ownership transfer in his/her own name after having transferred the instant land name on May 19, 2008. The Plaintiff paid all relevant taxes, such as acquisition tax, etc. imposed in the process of restoring ownership in its successful bid and its own name.

C) At the time of title trust, the Plaintiff owned a large number of real estate, including the instant land at the time of the instant title trust, and the details thereof were examined. ① The instant land (successful bid price of KRW 2.86 billion or the publicly announced price of KRW 1,457,124,00) or the publicly announced price of KRW 2006 is KRW 1,457,124,00), ② Busan Shipping Daegu ( Address 2 omitted), KRW 930 (Value 28,625,942 of the land portion, KRW 33,100,251 of the value of the building portion), ③ The Ulsan-gu ( Address 3 omitted), Ulsan-gun, Seoul Special Metropolitan City ( Address 1,248,580,930, May 15, 2007).

3) If the facts are as above, it is difficult to view that the Plaintiff was a title trust for the purpose of avoiding direct restriction on the acquisition of land because there was no restriction on the qualification for bidding at the time of bidding. In view of Article 11 of the former Gross Real Estate Tax Act (amended by Act No. 7836 of Dec. 31, 2005), “The comprehensive real estate holding tax on land shall be imposed on the land located in Korea by dividing the general aggregate taxation under Article 182(1)1 of the Local Tax Act (hereinafter “general aggregate taxation”) and the special aggregate taxation under Article 182(1)2 of the same Act (hereinafter “special aggregate taxation”), and Article 13(1) of the same Act provides that “The tax base of the comprehensive aggregate taxation on the land, which is a general aggregate taxation, shall not be deemed to have been more than KRW 300 million after deducting the property tax base of the land, which is the aggregate amount of the property tax base of the land subject to the general aggregate taxation,” and thus, the tax base of the land in excess of KRW 74700 billion.7 billion.

4) Furthermore, Article 1 of the Real Estate Real Name Act provides for the registration of ownership of real estate and other real rights under the name of the actual right holder so that they can coincide with the substantive legal relationship, thereby contributing to the sound development of the national economy by preventing speculation that abuse the real estate registration system, tax evasion, evasion of laws, etc., and promoting normalization of real estate transactions and stabilization of real estate prices. The previous Act provides for the imposition of a penalty surcharge equivalent to 30/100 of the appraised value of real estate uniformly without considering the type and period of compulsory violations under the same Act and the previous Act and subordinate statutes, which violates the principle of excessive prohibition and the principle of equality (see, e.g., Constitutional Court Order 9Hun-Ga18, May 31, 2001). Thus, the current provision of mitigation has been established, and the penalty surcharge under the Real Estate Real Name Act is imposed and collected to compel title truster to perform the obligation of real estate under title trust, and thus, it does not fall under the scope of imposing a penalty surcharge directly or indirectly under the Act and subordinate statutes that it does not constitute a violation of the Act.

Ultimately, as alleged by the Defendant, the Plaintiff’s title trust with the intent to avoid a lower evaluation under the detailed criteria for the examination of the government-funded construction work or avoid a lower evaluation in calculating the execution capacity, does not constitute “the purpose of evading legal restrictions” under the Real Estate Real Name Act.

5) Therefore, even though there are grounds for reduction of penalty surcharges under the proviso of Article 3-2 of the Enforcement Decree of the Real Estate Real Name Act to the Plaintiff, the instant disposition that occurred without considering the grounds for reduction at all should be revoked as unlawful.

3. Conclusion

If so, the plaintiff's claim shall be accepted with due reasons, and the judgment of the court of first instance is just in conclusion, and the defendant's appeal is dismissed as it is without merit. It is so decided as per Disposition.

Judges Gunam-su (Presiding Judge)