Whether it constitutes necessary expenses for a real estate broker

The Plaintiff asserts to the effect that the necessary expenses should be deducted without considering the year to which it belongs due to the nature of real estate sales business that accrues after the payment of development expenses for a certain period of time. However, the former Income Tax Act permits the deduction of carried forward losses (referring to Article 45 of the former Income Tax Act). Thus, the Plaintiff cannot deduct necessary expenses without considering the principle of calculating profits and losses

Article 33 of the Income Tax Act [Non-Inclusion of Necessary Expenses]

2018Guhap609 Global Income and Revocation of Disposition

Ansan ○

00. Head of tax office

November 23, 2018

November 2011

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

On March 23, 2017, the part of the global income tax amounting to KRW 000 (including additional tax) of the global income tax for the year 201 that the Defendant paid to the Plaintiff on March 23, 201 is revoked.

1. Details of the disposition;

A. The Plaintiff (Before the opening of the name: A.A.) is an individual entrepreneur who runs real estate sales business, etc. in the name of “A.○ &C” from October 12, 2003.

B. On October 20, 2003, the Plaintiff acquired 000 m21,992 m20 m2,000 m2,00 m2,000 m2,00 m2,000 m2,000 m2 (hereinafter “land before subdivision”). On August 17, 2004, the Plaintiff completed the registration of ownership transfer on 330/20,02 m2 of the land before subdivision to BB. On December 1, 2004, the Plaintiff obtained authorization on an implementation plan for the creation of a main housing site for the land before subdivision from the head of Pyeongtaek-gu, ○○-gun, ○○, ○○,00 m2 (hereinafter “the land before subdivision”).

C. On August 1, 2011, the Plaintiff sold each of the Plaintiff’s shares (i.e., 19,692/20,022; hereinafter “instant shares”) of 410-29 Miscellaneous land and 3,188 Miscellaneous land of 410-31 Miscellaneous land of the same Ri, which was divided from the land before the division, to the headA, BB, and LCC on August 1, 201, and completed the registration of ownership transfer in their names. However, even at the time of the final return of global income tax for 2011, the Plaintiff did not report and pay the tax base and tax amount of the business income related to real estate sales, including the income accruing from the transfer of the instant shares.

D. On March 23, 2017, the Defendant: (a) deemed that the Plaintiff earned business income from the transfer of shares in this case; and (b) calculated the amount of real estate sales business income by calculating the standard expense rate of 8.3% (less than five years in land holding period) after deducting the purchase cost from the purchase price of KRW 2 billion to the principal expenses; and (c) imposed global income tax of 000 (including additional tax) on the Plaintiff for the year 201.

E. On April 11, 2017, the Plaintiff filed an objection against the aforementioned disposition. The Defendant, on May 26, 201, decided to apply the standard expense rate of 21% to the tax base and the amount of tax, and calculated the real estate sales business income as indicated in the following table by applying the standard expense rate of 21%, and then the amount of the tax imposed on the real estate sales business income was reduced to KRW 000 (hereinafter referred to as the “instant disposition”).

Classification

amount of gold

Grounds for calculation

Revenue amount

2,000,000,000

Sales proceeds

Major expenses (purchase costs)

813,526,846 won

Acquisition value of 3,430,000,000 x 4,930 square meters/21,992 square meters;

Registration Tax 199,02,800 x 4,930 m21,92 m22 m2

Standard expense rate

210,000,000

Standard expense rate: 21%

Since the person subject to double-entry bookkeeping is subject to 1/2 of standard expense rate.

Real estate sales business income;

976,473,154 won

F. The Plaintiff filed a request for examination of the instant disposition on August 4, 2017, but the Plaintiff’s request was dismissed on October 31, 2017.

Facts without any dispute over recognition, Gap's evidence 1 through 5, Eul's evidence 1 to 3, the whole purport of the pleading, and the whole purport of the pleading.

2. Related statutes;

Attached Form 1 shall be as listed in attached Table 1.

3. Whether the instant disposition is lawful

A. Summary of the plaintiff's assertion

1) The following expenses are confirmed as expenses incurred by the Plaintiff in relation to the acquisition and sale of shares in the instant case with evidentiary documents, etc. Accordingly, the payment of the Plaintiff’s business income shall not be calculated based on the estimation, and it shall be deducted from the necessary expenses (hereinafter “instant Chapter”).

A) As the purchase cost of the instant share, KRW 000,000, which the Defendant deducted, should be deducted.

B) The Plaintiff opened a road on a 4,366 square meters of land prior to the subdivision and sold the remainder in installments. Ultimately, the said road was donated to Pyeongtaek-gun. Since the said road site is a part that could not become the Plaintiff’s sales property from the beginning, the purchase price of the said road site and the amount equivalent to the instant share among the purchase price of the said road site and the registration tax shall be deducted.

C) Of the appraisal price of the cost of building a road under subsection (b) above, KRW 000 corresponding to the share of this case must be deducted.

D) Since the Plaintiff purchased the land before dividing it with the loan, the amount of KRW 000 with interest on the loan from 2008 to 2011 as well as KRW 000 with the property and comprehensive real estate holding tax during the holding period of the instant share should be deducted.

2) Of the purchase cost of the road land in paragraph (1)(b) above, the part corresponding to the instant share should be included in the principal cost (purchase cost) in the application of standard expense rate (hereinafter referred to as the “section 2”).

B. Determination as to the First Claim

1) Relevant legal principles

Article 80(3) of the former Income Tax Act (amended by Act No. 11611, Jan. 1, 2013; hereinafter the same) and Article 143(1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 24365, Feb. 15, 2013; hereinafter the same) provide that, in calculating the tax base, if no necessary account books and documentary evidence are available, the amount of income may be determined by estimation. In cases where the tax authority calculates necessary expenses by the method of estimation investigation, but the taxpayer claims necessary expenses more than this, the tax authority must prove the burden of proof to the taxpayer (see Supreme Court Decision 91Nu10909, Jul. 28, 1992).

(ii)in accordance with the method of the on-site investigation, expenses that may be deductible as necessary.

Of the expenses claimed by the Plaintiff, other expenses other than the expenses reverted to the portion belonging to the year 201, property tax and comprehensive real estate holding tax related to real estate trading among the expenses incurred by the Plaintiff for purchase of shares in this case, interest on loans required for the purchase of land before division, other expenses related to real estate holding tax and comprehensive real estate holding tax for the year 201 cannot be deducted as necessary expenses for calculating

A) The Plaintiff, as a real estate sales businessman, constitutes business income, rather than capital gains. As such, necessary expenses should also be deducted in accordance with the principle of calculating profits and losses for a period based on the method of calculating capital gains tax, rather than the method of calculating capital gains tax, and the principle of responding to profits and expenses. While disputing the purport that, considering the characteristics of real estate sales business that accrue after the payment of development costs for a certain period, necessary expenses should be deducted without considering the year to which they should belong, the former Income Tax Act permits the deduction of losses carried forward (referring to Article 45 of the former Income Tax Act), the Plaintiff as a real estate sales businessman cannot deduct necessary expenses without considering

B) The reason why the purchase cost (acquisition value, acquisition tax, and registration tax) of the instant share disbursed in 2003 was deducted from the total revenue amount of the Plaintiff’s real estate sales business that belonged to the year 2011 is that the said purchase cost was realized by selling in 2011, but the said purchase cost was constituted the acquisition cost of the instant share, which is inventory assets, but was realized by selling in 201. Therefore, the deduction of the purchase cost of the instant share cannot be deemed as a contradictory measure contrary

C) Although a parcel of land is bound to be incorporated into a certain road to be sold after being developed into a housing site, since the portion incorporated into a road is also an independent asset with economic value, such as being able to receive compensation for future expropriation, it is difficult to deem that the purchase cost of the said part of the road constitutes the acquisition cost of other land for sale. Article 97 of the former Income Tax Act, Article 79 of the Enforcement Rule of the former Income Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 265 of Feb. 28, 2012), etc. claimed by the Plaintiff as the ground for the deduction of the purchase cost of the land incorporated into a road, is related to necessary expenses (capital expenditure, facility cost, and improvement cost), etc. in the calculation of transfer margin.

D) Under Article 33(1) of the former Income Tax Act and Article 75(1) of the former Enforcement Decree of the Income Tax Act, interest paid on the loan required for the purchase, etc. of fixed assets for business purposes, i.e., interest on construction funds, shall be included in necessary expenses through depreciation after forming the acquisition cost of the relevant fixed assets. However, inasmuch as interest paid on the loan required for the purchase as inventory assets is excluded from the object of calculating the interest on construction funds, the interest paid on the loan required for the purchase shall be deducted from the interest accrued before the purchase (see Supreme Court Decision 2000Du10724, Apr. 25, 2003). However, in principle, this is merely a necessary expense for the pertinent year according to the principle of calculating the amount of profit and loss, and thus, it may be deducted as necessary expenses among the interest paid on the loan required for the purchase of the land before the division.

E) Property tax paid by the Plaintiff by holding assets related to real estate sales, such as the instant shares, and comprehensive real estate holding tax in 201 should also be deducted as necessary expenses, such as taxes and public charges related to the business.

3) Whether necessary expenses are acknowledged as more than the estimation by the on-site investigation

A) The facts that the necessary expenses recognized by the Defendant as the method of an estimated survey are KRW 000 (=major expenses + KRW 0000 + KRW 000 applied to standard expense rate) are as seen earlier.

B) However, according to the following facts or circumstances, each statement in Gap evidence Nos. 1, 12 through 15, and 21, which is acknowledged by comprehensively considering the purport of the entire pleadings, the purchase cost of the instant shares, the interest accrued for the year 2011 out of the loans used for the purchase of land before subdivision, the property tax and comprehensive real estate holding tax for the real estate holding tax for the year 201, the amount which can be recognized as belonging to the portion for the year 2011 (=800,118,402 + + KRW 90,801,711 + + KRW 15,94,500 + KRW 55,754,200).

(1) The purchase cost of the instant share is KRW 800,118,402, which is an amount corresponding to the instant share out of KRW 3,430,00,00 of the acquisition value of the land prior to partition and KRW 199,02,80 of the registration tax, KRW 800,118,402 ( KRW 3,430,000 + + KRW 199,022,80) ¡¿ 4,930 square meters x 21,92 square meters x 19,692/20,022).

(2) On October 1, 2003, the Plaintiff loaned a total of KRW 2.1 billion from one bank, including KRW 1.7 billion on October 1, 2003, KRW 300 million on October 17, 2003, KRW 100 million on October 20, 2003, and KRW 2.1 billion on October 20, 2003, the Plaintiff established a right to collateral security against the land before the split-off, and took out a loan of KRW 2.4 billion from Korea bank for purchase of land before split-off, and used part of each of the above loans as funds for purchase of land before split-off. Interest on each of the above loans provided by the Plaintiff in 2011 is a total of KRW 90,801, KRW 711 (= KRW 35,251, KRW 908 + KRW 5,549,803) as shown in attached Table 2.

(3) At the time of 2011, the Plaintiff owned 10,490.2 square meters of land located in the Gyeong-gun, in relation to real estate sales, and borne 15,94,550 won as property tax and local education tax.

(4) The Plaintiff shared KRW 55,754,200 with the comprehensive real estate holding tax (including special rural development tax) for the year 201 (the Plaintiff is also carrying on real estate holding business other than real estate holding business, and this seems to include assets not related to real estate selling business).

C) Therefore, the instant disposition is lawful, and the Plaintiff’s first proposal is without merit.

D. Determination as to the second proposal

1) Article 143(3)1 of the former Enforcement Decree of the Income Tax Act provides for a standard expense method that deducts "amount paid or payable by documentary evidence, such as the amount paid or payable by documentary evidence, wages of employees, etc. from the amount of income as a purchase cost or rent, and the amount calculated by multiplying the standard expense rate by the amount of income. In other words, according to the above method, business income is calculated according to the calculation method of "income amount - major expenses (purchase purchase cost + personnel expenses +) - standard expense (income amount x standard expense rate) - income

2) Estimated taxation is a method by which the tax authority determines the tax base by estimating necessary expenses, etc. for the pertinent taxable period based on indirect data. Therefore, it should be deemed that the purchase cost of inventory assets, which can be deducted from the purchase cost, among the major expenses according to the standard expense rate calculation method, can also be deducted from the purchase cost for the pertinent taxable period. Pursuant to Article 143(5) of the former Enforcement Decree of the Income Tax Act, Article 143(5) of the Enforcement Decree of the Income Tax Act provides that the scope of purchase cost and rent, etc. and the public notice of the type of documentary evidence (attached Table 1) [Attachment Table 1] paragraphs (1) and (3) (a) of [Attachment Table 1] shall also be the acquisition value of inventory assets, etc., which can be recognized as the cost for the pertinent taxable period (basic inventory £« the purchase cost

3) As seen in the foregoing 3. b. (b) and (c) above, the Plaintiff’s purchase cost for the land before subdivision that can be deducted from the purchase cost for the year 2011 is the purchase cost related to the instant share. The purchase cost for the portion of the land incorporated into the road among the land before subdivision cannot be deemed to constitute the acquisition cost of the instant share, and thus, the purchase cost for the portion of the land incorporated into the road cannot be deemed to constitute the purchase cost for the year 201. Thus, the purchase cost for the portion incorporated into the road cannot be included in the purchase cost that is deducted

Therefore, the plaintiff's second proposal to the effect that the above purchase cost is deducted from the major expenses is not reasonable.

4. Conclusion

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