Plaintiff (Law Firm Rate, Attorneys O Jong-sik et al., Counsel for the plaintiff-appellant)

The Director of the National Tax Service

July 13, 2006

Daejeon District Court Decision 2005Guhap2355 Decided January 25, 2006

1.The judgment of the first instance shall be modified as follows:

A. Of the instant lawsuit, the part of the claim for revocation of the imposition of value-added tax amounting to KRW 9,300,000 for the first quarter of 204 is dismissed.

B. The claim for revocation of the imposition of penalty tax of KRW 117,180 against the value-added tax stated in the above paragraph is dismissed.

C. The Defendant’s imposition of KRW 9,300,000 on October 1, 2004 against the Plaintiff as value-added tax for the second period of 2004 and the imposition of KRW 113,196,030 on December 10 of the same year shall be revoked.

2. Of the total litigation costs, 95% is borne by the Defendant, and 5% is borne by the Plaintiff, respectively.

The decision of the first instance court shall be revoked. The defendant's disposition of imposition of value-added tax of KRW 9,300,000 and penalty tax of KRW 117,180 for the first term of September 6, 2004 against the plaintiff on September 6, 2004 shall be revoked, and the decision of the first instance court shall be as described in item (c) of Article 1.

1. Details of taxation; and

A. Of the real estate listed in the separate sheet (hereinafter in this case’s real estate), for the real estate listed in paragraphs (1) through (15), the ownership transfer registration was completed in the name of Nonparty 2 Co., Ltd. between 1993 and 1996, and on November 15, 2001, the ownership transfer registration was completed in the name of the Plaintiff, and on the real estate listed in paragraph (16), the ownership transfer registration was completed in the name of Nonparty 1 Co., Ltd. around 193, and on November 15, 2001, the ownership transfer registration was completed in the name of the Plaintiff.

B. On October 5, 2001, the Plaintiff registered his business with the name of the Defendant as the ○○ Unemployment, and registered his business with the intention of engaging in the real estate leasing business and the manufacturing of lighting equipment from September 17, 2001 by making the starting date of the business to be one of the real estate in this case.

C. However, the Defendant notified the Plaintiff of the payment of KRW 9,300,000 as the value-added tax for the first quarter of 2004 and did not pay it by the payment deadline. On September 6, 2004, the Defendant notified the Plaintiff of the payment of KRW 9,417,180 in total, including the said KRW 9,30,00,00 not paid to the Plaintiff and the additional tax of KRW 117,180 in good faith.

D. After that, the Defendant reported the voluntary closure of the real estate lease business on September 22, 2004, again imposed the Plaintiff the value-added tax of KRW 9,300,00 for the second period of October 1, 2004 on the Plaintiff, and the value-added tax of KRW 113,196,030 for the second period of value-added tax for the second period of October 1, 2004, and on December 10 of the same year, the value-added tax for each real estate of this case, remaining goods upon the Plaintiff’s closure of business pursuant to Article 6(4) of the Value-Added Tax Act, was supplied to the Plaintiff himself as much as the market value for each real estate of this case, and imposed the value-added tax of KRW 101,68,268,526 for the value-added tax for the supply value and penalty tax for the failure to report it, together with the value-added tax for the second period of value-added tax for the second period of value-added tax for the second period of KRW 10.

E. Accordingly, on November 24, 2004, the Plaintiff filed an objection with the Defendant regarding the value-added tax of the first period of the instant case, but was dismissed on December 27, 2004. On January 21, 2005, the National Tax Tribunal filed a national tax appeal seeking revocation of the disposition of imposition of the first period and second period of the instant value-added tax with the National Tax Tribunal on January 21, 2005, but was dismissed on June 20 of the said year.

[Reasons for Recognition] Facts without dispute, Gap evidence 16 to 20, Eul evidence 1-1, 2, Eul evidence 2 and 3, and the purport of the whole pleadings.

2. Determination as to the value-added tax for the first period of this case

A. Whether a lawsuit seeking revocation of imposition of value-added tax is legitimate

First of all, we examine the legitimacy of the part of the lawsuit of this case seeking revocation of the imposition disposition of the principal tax of value-added tax in 2004.

In general, in cases of a tax return method, the taxpayer is obligated to pay the amount of tax determined at the time of filing the tax base and amount of tax when the taxpayer returns the tax base and amount of tax, and thus, the taxpayer’s notification to pay the amount of tax identical to the reported matters without any correction is merely a collection disposition for collecting the amount of tax, and cannot be deemed a taxation subject to revocation litigation (see Supreme Court Decision 2003Du8180, Sept. 3, 2004).

However, the notice of payment issued by the Plaintiff on September 6, 2004, when the Plaintiff reported the first value-added tax amount on July 26, 2004, which was its filing deadline, until July 26, 2004, and the above tax amount was not paid by July 26, 2004, the Defendant notified the Defendant of the payment of the same tax amount as the reported details without any correction as to the above reported matters, and imposes KRW 117,180 as the penalty tax in bad faith. Thus, the part of the first value-added tax for the year 2004, which was the first value-added tax, is merely a collection disposition for the collection of the determined tax, and thus, it cannot be deemed that the above collection disposition is the subject of taxation

Therefore, the first part of value-added tax in 2004, which the Plaintiff sought revocation among the notice of September 6, 2004, does not constitute taxation, and thus, the lawsuit on this part is unlawful.

B. Whether the imposition of penalty tax is legitimate

Under the tax law, in order to facilitate the exercise of the right to impose taxes and the realization of tax claims, the taxpayer's intention or negligence is not considered as administrative sanctions imposed in accordance with the law if the taxpayer violates the duty to report and pay taxes under the law without justifiable grounds, and the land or mistake in the law shall not be deemed as a justifiable ground (see Supreme Court Decisions 2000Du1652, Feb. 8, 2002; 2003Du13632, Jan. 27, 2005, etc.).

However, as seen above, the principal tax for the first period of value-added tax in 2004 is taxes in accordance with the method of filing a return, and as seen earlier, the Plaintiff is obligated to pay the said amount of tax according to the said return. However, insofar as there is no reasonable ground to deem that the Plaintiff did not pay the said amount of value-added tax within the statutory deadline, it is legitimate to impose the Defendant’s penalty tax on the ground that the Plaintiff did not pay the said amount of value-added tax within the statutory deadline (25 days after the expiration of the taxable period).

3. Determination as to whether the imposition of value-added tax for the second period of this case is legitimate

A. The parties' assertion

(1) The plaintiff's assertion

The real owner of the instant real estate is Nonparty 1 and Nonparty 2, and the Plaintiff was merely a title truster, and thus, the Plaintiff’s lease of the instant real estate to Nonparty 1, Nonparty 2, and Nonparty 4, an affiliate company, such as these companies, is a transaction based on a false conspiracy or fictitious act and thus null and void that does not receive rent. The registration of the business regarding the real estate lease business made in the name of the Plaintiff was merely a form-oriented contract in order to support the above false conspiracy or fictitious act. Accordingly, the disposition imposing the value-added tax on the instant real estate that the Plaintiff deemed to have normally leased the instant real estate with Nonparty 1, Nonparty 2, and Nonparty 4, etc. was imposed on the real estate that was not accompanied by the actual transaction, and thus, is in violation of the principle of substantial taxation.

(2) The defendant's assertion

First, there is no evidence that the real owner of the real estate of this case is not the plaintiff but the non-party 1 corporation and the non-party 2 corporation during the period in which the plaintiff engaged in the real estate leasing business, and thus, the imposition of value-added tax for the second period is legitimate.

Secondly, even if the Plaintiff was not the actual owner of the instant real estate or the real owner of the real estate leasing business, the Defendant was entitled to the value-added tax on the premise that the Plaintiff had engaged in the instant real estate leasing business, and the Defendant believed the Plaintiff to pay the value-added tax and global income tax on the premise that the Plaintiff was operating the instant real estate leasing business, and was subject to the imposition of the value-added tax on the second period of the instant tax, the Defendant’s assertion that the Plaintiff was not liable to pay taxes on the grounds that the Plaintiff lent his own name to Nonparty 1 Co., Ltd. or to Nonparty 3, including Nonparty 1, etc., was against the principle of trust and good faith, since it was now difficult for Nonparty 1, etc. to have no real entity

(b) Relevant Acts;

【National Tax Basic Act

Article 14 (Real Taxation)

(1) If the ownership of income, profit, property, act or transaction subject to taxation is merely nominal and a person to whom such ownership belongs exists, the tax-related Acts shall apply to such person to whom such person actually belongs as a taxpayer.

(2) The provisions concerning the calculation of tax base in tax-related Acts shall apply according to the substance, notwithstanding the name or form of income, profit, property, act or transaction.

Article 15 (Good Faith and Fidelity) Any taxpayer shall perform his/her duties in good faith and sincerity. The same shall apply where a tax official performs his/her duties.

/ Value-Added Tax Act

Article 6 (Supply of Goods)

(1) The supply of goods shall be a delivery or transfer of goods pursuant to all contractual and legal grounds.

(2) Where an entrepreneur directly uses or consumes goods produced or acquired in connection with his/her own business, those prescribed by Presidential Decree shall be deemed the supply of goods.

(3) Where an entrepreneur uses or consumes goods which are produced or acquired in connection with his/her own business for personal purposes or for other purposes, or donates them to his/her customers or many unspecified persons, those goods prescribed by Presidential Decree shall be deemed the supply of goods.

(4) The remaining goods when an entrepreneur discontinues his business shall be deemed to be supplied to him. The same shall also apply to the case where a registration is made under the proviso of Article 5 (1) and the actual business does not commence.

(c) Fact of recognition;

(1) Details of the registration fee for transfer of ownership in the name of the Plaintiff on the instant real estate

(A) The non-party 1 corporation is a lighting machine manufacturer established around 1955, and around 1989, the non-party 2 corporation established around 1989 and the non-party 4 corporation established around 1995, the non-party 5 and the non-party 6, the non-party 1 corporation of Sri Lanka established in 1992. The actual manager of these affiliates, including the non-party 1 corporation, was the representative director and the largest shareholder of the non-party 1 corporation.

(B) The Plaintiff, as Nonparty 3’s wife, is serving as a professor specializing in art, university’s design and design from March 1, 1985 to March 1, 198.

(C) The real estate listed in paragraphs (1) through (15), which was owned by Nonparty 2 Co., Ltd., and the real estate listed in paragraph (16) which was owned by Nonparty 1 Co., Ltd., was used as both the factory site and factory building of Nonparty 1 Co., Ltd. and Nonparty 2, on the other hand, it was offered as a security to Choung Bank, which is the principal bank of Nonparty 1 Co., Ltd., but around June 2001, Cho Heung Bank sold its secured claim to △ Company in accordance with the government’s public funds recovery policy.

(D) Accordingly, Nonparty 3 purchased the pertinent collateral from △△ Limited. At the time of the ownership of the instant real estate, Nonparty 1 and Nonparty 2, whose composition procedure was in progress, agreed to entrust the instant real estate with the Plaintiff for the purpose of evading the result of compulsory execution on the instant real estate, by threatening the existing general creditors of the said company to proceed with compulsory execution on the instant real estate. Nonparty 3, externally, purchased the instant real estate from △ Limited Company and Nonparty 1 and Nonparty 2, and made the registration of ownership transfer on the instant real estate in the future of the Plaintiff, as described in Section 1. A of the above 1. by doing so, the Plaintiff acquired the instant collateral claim from the △ Limited Company, and purchased the instant real estate from Nonparty 1 and Nonparty 2, against the said claim for acquisition of the instant real estate and the claim for purchase price.

(E) On November 23, 2001, Nonparty 3 offered the instant real estate to △△ Mutual Savings and Finance Company as collateral, received a loan of 2.6 billion won from the Plaintiff’s name from the △△ Mutual Savings and Finance Company, and paid a total of 3.5 billion won to △△ Limited Company, and raised or borne all of the expenses incurred therein.

(2) Details of preparation of the lease agreement and tax disposition on the real estate of this case

(A) As such, although the registration of transfer of ownership on the instant real estate has been made under the Plaintiff’s name, the Plaintiff continued to use the said real estate as a factory site or building. As such, on October 5, 2001, the Plaintiff: (a) on November 20, 201, registered the business of leasing real estate; (b) on November 20, 201, the lease deposit amount of KRW 80 million; (c) monthly rent of KRW 8 million; (d) from November 20, 201 to November 19, 201; (e) between Nonparty 2 and Nonparty 4, the lease deposit of KRW 265 million; (e) from November 20, 201 to November 16, 201 to KRW 100,000; and (e) from November 20, 201 to December 14, 2001 to KRW 16,000,0000; and (e) between Nonparty 2 and Nonparty 14,014.

(B) On the other hand, Nonparty 1, Nonparty 2, and Nonparty 4, who was accounted for the payment of monthly rent to the Plaintiff (=8 million won + 20 million won + 3 million won) are merely paid as interest on the Plaintiff’s loan obligations to the △△ Mutual Saving and Finance Company, and there was no other fact that the Plaintiff paid security deposit, lease deposit, monthly rent, etc. to the Plaintiff.

(C) After this, the final return of value-added tax was filed in 2001 in the Plaintiff’s name, and the input tax amount of KRW 254,213,172 was deducted from the acquisition of the instant real estate, and 236,180,446 was refunded. Moreover, the value-added tax and global income tax on the lease transaction was reported and paid in the Plaintiff’s name until September 22, 2004, which was the report of voluntary closure of the real estate lease business. In fact, Nonparty 1 reported, paid, and refunded the taxes on the instant real estate.

(3) Civil and criminal judgment related to the ownership of the instant real estate

(A) On July 20, 198, the non-party 1 corporation, etc. was under restructuring from around February 2001 when it received the decision of composition from the Daejeon District Court's branch on July 20, 2001. Around October 2001, the non-party 7 corporation, a company specializing in restructuring, entered into a restructuring agreement with the non-party 7 corporation, and decided to repay the composition debt and terminate composition through capital increase with 15 billion won around February 26, 2002. The non-party 7 corporation requested the above loan of 15 billion won from the non-party 8 in the process of receiving the above loan from the non-party 7 corporation, which was actually owned by the non-party 1 and the non-party 2 corporation, and for which the ownership transfer registration was completed in the name of the plaintiff, was subject to criminal punishment due to the violation of the Act on the Aggravated Punishment, etc. of Specific Economic Crimes (Misappropriation).

(B) Meanwhile, the plaintiff filed a lawsuit against the non-party 1 corporation, non-party 2 corporation, and non-party 4 corporation seeking confirmation that there is no obligation to refund lease deposit and security deposit with respect to the real estate in this case between the plaintiff and the non-party 1 corporation, etc. on October 25, 2005. The plaintiff's lawsuit against the non-party 2 corporation was dismissed on the ground that the bankruptcy trustee was not the defendant. The plaintiff and the non-party 1 corporation and the non-party 4 corporation confirmed that "the non-party 1 corporation et al. continued to operate the factory in order to avoid doubt of the creditors about the fact that the non-party 1 corporation et al. had completed the registration of ownership on the real estate in this case, and concluded the lease contract and the contract to lease on June 22, 2004, which constitutes a false indication and thus becomes null and void, and thus the judgment below became final and conclusive."

[Ground of recognition] In the absence of dispute, Gap evidence 1, 2, 3-1 through 16, Gap evidence 4-8, Gap evidence 9-1, 2, 3, Gap evidence 10 through 13, Gap evidence 15, Gap evidence 22-1, 2, 3, and 23, non-party 3's testimony and the purport of the whole pleadings.

D. Determination

(1) Whether the substance over form principle violates the principle of substantial taxation

(A) Article 14(1) of the Framework Act on National Taxes specifies the principle of substantial taxation by stipulating that “If the ownership of the income, profit, property, act, or transaction subject to taxation is nominal and there is a separate person to whom such income, profit, act, or transaction belongs, the person to whom such income, profit, or transaction actually belongs shall be liable

(B) However, according to the above facts, the real estate of this case is transferred to the plaintiff in order to avoid compulsory execution by other general creditors due to the extinguishment of senior security right due to the extinguishment of confusion in the process of purchasing the collateral claims secured by the above real estate from △ LLC, and its actual owner is the non-party 1 corporation and the non-party 2 corporation. Although the non-party 1 corporation et al. had completed the registration of ownership transfer for the real estate of this case and completed the registration of ownership transfer to the plaintiff, it shall be deemed that the above lease contract and the right to lease on a deposit basis concluded for the purpose of avoiding the creditor's suspicion as to the continued operation of the factory is null and void as a false

(C) Therefore, even if the Plaintiff entered into business registration for the real estate leasing business with the instant real estate assets and entered into accounts as being paid KRW 31 million monthly from Nonparty 1 corporation, etc. on the pretext of monthly rent, this is merely a type of consignment of the instant real estate in the name of the Plaintiff and as a result of an invalid rental agreement, and in substance, Nonparty 1 corporation directly paid interest on loans to △△ Mutual Savings and Finance Company on the real estate leasing business with the Plaintiff. Thus, the imposition of value-added tax for the second period on the premise that the Plaintiff was paid a monthly rent as the actual rental business operator is in violation of the substance over form principle.

(2) Whether the assertion of the principle of substantial taxation is against the principle of good faith

(A) The application of the principle of trust and good faith in tax litigation can be divided into the application of the law related to the procedure law and the substantive law, and the application of the law related to the procedure law in tax litigation cannot be specifically divided into those in civil litigation. However, the application of the principle of trust and good faith with respect to the taxation substance law which strongly acts by the principle of trust and good faith shall be limited to the cases where it is recognized as necessary to protect specific trust even if the application of the principle of trust and good faith is restricted rather than the judicial principle under the principle of private autonomy. Furthermore, if a taxpayer commits an act against his past speech and behavior against the tax authority, it shall be subject to the imposition of penalties such as deprivation of benefits such as tax reduction and exemption under tax law, non-performance of report, non-performance of entry, and additional tax submission of materials, etc., and the tax authority shall exercise its superior authority under tax law such as having the right to investigate, and the burden of proof with regard to the legality of taxation is, as a matter of principle, the application of the principle of trust and good faith to the taxpayer should not be accepted.

(B) In the instant case, the Plaintiff has completed the registration of ownership transfer on the instant real estate and completed the registration of business registration on the real estate leasing business, and the Plaintiff and the non-party 1 corporation, etc. were in lease transaction between the Plaintiff and the Plaintiff, etc. on the account of the accounts following the tax treatment, and in the instant case, the Plaintiff has already asserted that it has no tax liability on the premise that it is not a nominal trust or a nominal trust,

However, in order to avoid compulsory execution by other general creditors, it is difficult to view the Plaintiff as having committed an act of serious distribution against the Defendant, even though it is separate from whether the Plaintiff may be punished as a crime of evading criminal compulsory execution in relation to the possession of real estate in the name of the Plaintiff and the registration of business regarding the real estate leasing business, or subject to sanctions under various tax laws, etc., with the intention of evading compulsory execution by threatening other general creditors, if the Plaintiff did not lend the name for the purpose of tax avoidance, or interfere with the right of on-site investigation by the Defendant who is the tax authority, which makes it impossible for the Plaintiff to exercise the tax and tax authority. Furthermore, under the principle of substantial taxation, the Defendant, who has the right of on-site investigation, is, in principle, obligated to investigate and taxation the substance of this case, and bears the burden of proving the legality of the taxation disposition. Thus, even if the Defendant did not exercise the right of on-site investigation and reported only the Plaintiff’s business registration and tax treatment accordingly, it cannot be said that there is no trust worth protecting the Plaintiff.

(C) Therefore, in the instant case where it is difficult to deem that the Plaintiff’s act of good faith constitutes extremely severe cases, or that it was infringed upon trust worth protecting the Defendant, the Plaintiff’s assertion of the principle of substantial taxation and denying its tax liability, unlike the tax treatment so far, cannot be said to be in violation of the principle of good faith by asserting the principle of substantial taxation.

(3) Sub-decisions

Ultimately, the imposition of value-added tax for the second period against the principle of substantial taxation is unlawful.

4. Conclusion

Therefore, the part of the lawsuit seeking revocation of the principal tax of the first imposition of value-added tax of this case is unlawful and dismissed, and the part seeking revocation of the second imposition of value-added tax of this case is dismissed as it is without merit. The part seeking revocation of the second imposition of value-added tax of this case shall be accepted as it is reasonable, and the judgment of the first instance court is unfair as it is so decided as per Disposition by the assent of the first instance court.

[Attachment Form Omission of Indication of Real Estate]

Judges Kim Chang-suk (Presiding Judge)