Plaintiff

Head of North Daegu Tax Office

November 22, 2013

Daegu District Court Decision 2013Guhap743 Decided June 28, 2013

1. Of the judgment of the court of first instance, the part against the Defendant regarding KRW 18,456,390 of global income tax for the year 2007 shall be revoked, and the Plaintiff’s claim corresponding to the revoked part shall be dismissed.

2. The defendant's remaining appeal is dismissed.

3. The total costs of the lawsuit shall be five equal costs, one of which shall be borne by the plaintiff, and the remainder by the defendant respectively.

1. Purport of claim

The Defendant’s disposition of imposition of global income tax of KRW 18,456,390 for the year 2007, global income tax of KRW 22,409,400 for the year 2008, and global income tax of KRW 42,235,100 for the year 2009 is revoked.

2. Purport of appeal

The judgment of the first instance is revoked. All of the plaintiff's claims are dismissed.

1. Details of the disposition;

A. From January 31, 2007 to November 25, 2009, the Plaintiff lent KRW 5,307,400,000 (hereinafter “instant loan”) to Nonparty 1 (non-party in the judgment of the Supreme Court) who was working in the C&S Asset Management Department as of November 25, 2009.

B. From July 6, 2007 to November 17, 2009, the Plaintiff received a total of KRW 4,805,680,000 from Nonparty 1 on 55 occasions, as shown in attached Form 2.

C. In a lawsuit claiming the revocation of a loan or fraudulent act filed by the Plaintiff against Nonparty 1, etc. (Seoul District Court 2010Gahap22555), the above court rendered the following judgment (hereinafter “related judgment”) on January 12, 2011. Nonparty 2 appealed (Seoul High Court 201Na1584) and appealed (Supreme Court 201Da99634), and the final appeal (Supreme Court 201Da9634) was rendered on October 14, 201, and the final appeal was notified on January 27, 2013.

1. On May 19, 2010 to the Plaintiff, Nonparty 1 paid 5% interest per annum from December 15, 2010 to January 12, 2011 as to KRW 1,185,205,129 to the Plaintiff and KRW 887,805,129 among them, and KRW 297,40,000 to the Plaintiff; and KRW 5% per annum from January 15, 201 to the full payment date; and KRW 20% per annum from the following day to the full payment date; Nonparty 1 paid the Plaintiff the amount equivalent to KRW 861.5 square meters per annum and its ground (hereinafter “instant real estate”). On February 2, 201, Nonparty 2 revoked the sales contract concluded between Nonparty 1 and Nonparty 2 as of November 10, 209 to the Plaintiff’s claim for cancellation of the ownership transfer registration.

D. Based on the relevant judgment, the Defendant issued the initial disposition of correction and notification (hereinafter “instant interest income”) in total amount of KRW 841,531,653 ( KRW 154,324,050 in 207 + KRW 347,752,792 in 2008 + KRW 339,481,811 in 2009 + KRW 363,86,740 in global income tax on March 5, 2012 ( KRW 67,873,650 in 207 + KRW 156,112,330 in 208 + KRW 139,8760 in 209).

E. On June 11, 2012, the Plaintiff filed an objection with the Director of the Daegu Regional Tax Office that KRW 609,578,741 of the instant interest income belonged to the friendly and ten other members. On July 20, 2012, the Daegu Regional Tax Office decided to rectify the tax base and tax amount for the said interest income by the person to whom it reverts, following a reinvestigation of financial data, etc.

F. On September 14, 2012, the Defendant issued a re-audit and notification of the initial comprehensive income tax of 18,456,390 won for the year 2007, 22,409,400 won for the year 2008, and 42,235,100 won for the year 209 (hereinafter “instant disposition”).

G. Accordingly, the Plaintiff filed an appeal with the Tax Tribunal on November 15, 2012, and was dismissed on February 6, 2013.

【Ground of recognition】 The fact that there has been no dispute, Gap Nos. 1, 2, 7, 8, 9, and Eul No. 1 (including each number; hereinafter the same shall apply), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The parties' assertion

1) The plaintiff's assertion

On September 14, 2012, the Defendant notified the Plaintiff of the tax base and tax amount on each interest income accrued in 2007, 2008 and 2009, and thereby the Plaintiff’s global income tax liability became final and conclusive. However, Nonparty 1, the debtor of the instant loan, sold the instant real estate, which is one of his sole property, to Nonparty 2 at the time of November 10, 2009, was in excess of his/her obligation, and is missing at the end of November 2009. In addition, Nonparty 3 and 4 filed a lawsuit against Nonparty 1 seeking the cancellation of the ownership transfer registration of the instant real estate against Nonparty 1, etc., and was rendered a favorable judgment on May 28, 2010.

As above, prior to the Defendant’s correction and notification of the above tax base and amount of tax, the grounds for impossibility of collecting the instant loan claims occurred, and the entire amount recovered by the Plaintiff does not reach the leased principal. Thus, even if there were interest income actually recovered from Nonparty 1 in the taxable year prior to the occurrence of the grounds for impossibility of collection,

Therefore, the instant disposition made on a different premise is unlawful.

2) The defendant's assertion

① Since Nonparty 1 is confirmed to be missing or missing, it is not a missing or missing overseas departure, Nonparty 1’s loan claims of this case do not constitute “a claim which cannot be recovered due to the debtor’s bankruptcy, compulsory execution, etc.” under Article 55(2)2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010; hereinafter the same) as of the date of acquisition of interest income or the date of disposition of this case. Furthermore, since the lawsuit seeking revocation of fraudulent act was pending on the real estate of this case, Nonparty 1 was not finally confirmed to be insolvent, the loan claims of this case do not constitute “a claim which cannot be recovered due to the debtor’s bankruptcy, compulsory execution, etc.” as of the date of acquisition of interest income or the date of disposition of this case.

② The Plaintiff received interest from Nonparty 1 during the period from 2007 to 2009, and as at the time of the acquisition of the interest, the collection of the instant loan claim was not possible. Therefore, the occurrence of the cause for impossibility of collection cannot affect the duty to pay interest income already realized prior to such occurrence.

③ Considering the profit-making nature, continuity, repetition, transaction amount, and transaction period of the Plaintiff’s monetary transaction act, the Plaintiff constitutes a person engaged in the price business regardless of authorization or business registration, and thus, the interest income from the instant loan constitutes business income.

(b) Related statutes;

It is as shown in the attached Table related statutes.

(c) Fact of recognition;

1) On July 27, 2009, Nonparty 1 completed the registration of ownership transfer due to sale on June 29, 2009 with respect to the instant real estate, which was owned by the head, Nonparty 3 and 4, the mother, Nonparty 1. On November 27, 2009, Nonparty 2, a wife, completed the registration of ownership transfer due to sale on the 10th of that month. The instant real estate was the only real estate owned by Nonparty 1 at the time.

2) In the relevant judgment, the sales contract was revoked on the ground that the sales of the instant real estate, the sole real estate owned by Nonparty 1, in excess of debt, to Nonparty 2 constitutes a fraudulent act, and an order was issued to cancel the registration of transfer of ownership in the name of Nonparty 2.

3) On September 21, 2012, Nonparty 5 also filed a lawsuit claiming a loan against Nonparty 1 on the grounds that Nonparty 5 had not repaid money several occasions from October 2004 to November 2008, and sentenced that “Nonindicted 1 shall pay to Nonparty 5 310,000,000 won and interest calculated at the rate of 30% per annum from November 1, 2009 to the date of complete payment” (Seoul District Court 2012Gahap242).

4) On March 28, 2013, Nonparty 6 also filed a lawsuit claiming a loan against Nonparty 1 on the ground that he/she was unable to repay money several times from March 2003 to May 2008, and sentenced to the judgment that “Nonindicted 1 shall pay to Nonparty 6 the amount calculated at the rate of 20% per annum from January 10, 2013 to the date of full payment” (Seoul District Court 2012Gahap10908).

5) Around September 2011, multiple victims including the Plaintiff filed a complaint against Nonparty 1 as fraud (Seoul District Prosecutors’ Office 2012 type No. 9923). The case of the complaint was suspended due to Nonparty 1’s unknown whereabouts until now.

6) Meanwhile, on February 4, 2010, Nonparty 3 and 4, the former owner of the instant real estate, filed a lawsuit against Nonparty 1 and 2 seeking cancellation of the ownership transfer registration of the instant real estate (Seoul District Court Branch Branch Decision 2010Gahap485). On May 28, 2010, the judgment became final and conclusive around that time.

[Ground of recognition] The fact that there is no dispute, entry of Gap's 3 through 6, purport of whole pleading

D. Determination

1) Relevant legal principles

Article 39(1) of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009; hereinafter the same) provides that “the year to which the total amount of income and necessary expenses of a resident belong shall be the year in which the total amount of income and necessary expenses are determined.” Article 45 subparag. 9-2 of the former Enforcement Decree of the Income Tax Act, upon delegation of Article 39(4) of the former Income Tax Act, provides that “the date when the total amount of income and necessary expenses of a non-business loan are received shall be the date when the interest is paid pursuant to the agreement, or when the interest is paid before the date when the interest payment is made or when the principal is calculated in accordance with the provision of Article 51(7) of the former Income Tax Act, shall be the date on which the principal is paid.” Meanwhile, Article 51(7) of the former Enforcement Decree of the Income Tax Act provides that “in the calculation of the total amount of income of a non-business loan, the amount of the tax base and the amount recovered from the debtor or the amount recovered from the total amount of the bonds cannot be collected.”

The legislative purport of Article 45 subparag. 9-2 and Article 51(7) of the former Enforcement Decree of the Income Tax Act is to consider interest income paid in non-business loans as fixed, and thus be subject to income tax. However, even if interest was paid, if there are special circumstances to deem that it is objectively evident that it is impossible to realize the future interest income due to the debtor's bankruptcy, etc., the claim for the principal and interest of a loan becomes impossible to recover due to the debtor's failure to recover, etc., it would not be subject to income tax (see, e.g., Supreme Court Decision 2009Du13160, Sept. 8, 2011).

Therefore, Article 51(7) of the former Enforcement Decree of the Income Tax Act provides for the method of calculating the total amount of interest income in cases where all or part of the principal and interest on a loan is not recoverable because the credit at the time of the final return of the tax base or the determination or correction of the tax base and the amount of tax falls under the credit under Article 55(2)1 or 2, and the proviso of Article 45(9-2 provides for the receipt date of the interest income in cases where the interest excluded from the calculation of total amount of income pursuant to Article 51(7)

Therefore, in a case where the amount recovered by the time is less than the principal due to the occurrence of a certain reason that makes it impossible to recover the principal and interest of the loan before the determination or correction of the tax base and tax amount on interest income from non-business loan, even if there is an interest income actually recovered in the taxable year prior to the occurrence of such a cause not to recover (see Supreme Court Decision 2010Du9433, Jun. 28, 2012).

In addition, whether all or part of the loan principal and interest bonds have accrued shall not be determined on the basis of the time when interest was imported, but on the basis of the time when the tax base return or tax base and the amount of tax are determined or corrected. Whether the cause of impossibility of recovery arises should be determined objectively according to social norms by comprehensively taking into account the specific details of transactions, the circumstances thereafter, the debtor’s asset status, and payment capacity (see Supreme Court Decision 2013Du6718, Sept. 13, 2013).

2) Whether the part of global income tax for the year 2007 is lawful

As seen in the background of the above disposition, the Plaintiff lent KRW 400 million to three times from January 31, 2007 to March 2 of the same year (hereinafter “the first loan”). From July 6, 2007 to August 2 of the same year, the Plaintiff was paid KRW 570,00,000 on five occasions from July 6, 2007 to August 2 of the same year. There was no additional loan to Nonparty 1 in addition to the first loan until the repayment was made. As such, the Plaintiff already recovered the principal amount of KRW 40,000 for the first loan and obtained interest income of KRW 170,000.

Therefore, the Plaintiff’s global income tax portion (other than the above 170,000,000 won) for the year 2007 on the ground that the Plaintiff obtained the above interest income is justifiable. Therefore, the Plaintiff’s assertion based on the premise that there was an impossible cause to recover the portion of the first loan was without merit.

3) Whether each global income tax portion attributed to the year 2008 and 2009 is lawful

(A) the base point of time to determine whether an irrecoverable bond is an irrecoverable bond;

As seen in the above-related legal principles, whether all or part of the loan principal and interest claims have accrued shall not be determined on the basis of the time when interest was received, but shall be determined on the basis of the time when the tax base return or tax base and tax amount are determined or corrected.

Therefore, the defendant's assertion to the effect that the remaining loan claims excluding the first loan amount of KRW 400 million cannot be collected under Article 55 (2) 1 and 2 of the former Enforcement Decree of the Income Tax Act cannot be accepted because it has not been confirmed that the collection of the loan claims was impossible at the time of the collection of interest by each taxable year.

B) Whether it is objectively impossible to recover bonds

According to the above facts, the Plaintiff loaned KRW 4,907,400,000 (hereinafter “second loan”) in total from August 31, 2007 to November 25, 2009, as indicated in the attached Table 3’s table (the remaining part except the first loan as seen earlier among the instant loans). From February 29, 2008 to November 17, 2009, the Plaintiff was paid KRW 4,235,680,000 in total from February 29, 2008 to November 17, 2009. Thus, even if the paid amount was fully appropriated for the principal, the Plaintiff did not recover KRW 671,720,00 (4,907,400,000,00-4,235,680,000 out of the principal loan principal.

In addition, the following circumstances revealed by the above facts are as follows: ① Nonparty 1 is obligated to pay to the Plaintiff KRW 1,185,205,129 and delay damages therefor; otherwise, Nonparty 5 and 6 bears the obligation of KRW 415,500,000 ( principal amount and delay damages) as well as the obligation to pay to other creditors; ② Nonparty 1 had already been in excess of the obligation at the time of selling the instant real estate to Nonparty 2 on November 2009; ③ Nonparty 1 was sentenced to the revocation ruling of fraudulent act on the ground that there was no particular property other than the instant real estate; ③ The value of the instant real estate was merely 80,000 won (the purchase price set forth in the sales contract between Nonparty 1 and Nonparty 2); and ④ Nonparty 1 is not obligated to recover part of the principal amount of the instant real estate leased to Nonparty 5 and Nonparty 6 on the ground that it is obviously difficult to view that the real estate was in excess of the amount of KRW 271,700,00.

Therefore, the second loan portion is an irrecoverable claim under Article 55 (2) 1 of the former Enforcement Decree of the Income Tax Act.

C) Whether the case constitutes subject to interest income collected in the taxable year prior to the occurrence of impossibility of collection

The Defendant asserts to the effect that, as the number of transactions with the instant loan 62 occasions, each transaction should be deemed as a separate lending act. In the Daegu District Court 2010Gahap2255 case, a civil suit between the Plaintiff and Nonparty 1, the Daegu District Court decided that the Plaintiff’s outstanding principal amount was KRW 1,461,083,07 as of October 12, 2009, and that the portion on receipt of interest income with respect to the remainder of interest income except for this, constitutes a separate transaction that has already been recovered from interest income, the said interest income already received prior to the occurrence of the impossibility of collection constitutes a separate transaction that has already been recovered, even if there was no possibility of recovering the principal and interest of the claim thereafter, it

However, even if the collection amount is appropriated first in accordance with the provisions on appropriation of obligation, the existence of interest income under the Income Tax Act cannot be discussed regardless of the possibility of collecting the principal claim which is the source of income. Thus, there is a realization of interest income only if there is any remaining amount after deducting the principal from the collection amount (see Supreme Court Decision 97Nu10369 delivered on July 24, 1998, etc.).

However, with respect to the second loan, since the amount repaid by the Plaintiff during the transaction period from August 31, 2007 to November 25, 2009, as shown in the attached Table 3, is much less than the principal lent until the time, as to the second loan, there is no amount remaining after deducting the principal first from the respective collected amount. Thus, in light of the above legal principles, there is no interest income realized.

Therefore, the defendant's above assertion cannot be accepted.

D) Whether it constitutes business income

Whether the act of lending money constitutes a business under the Income Tax Act or not, which is a kind of interest income, shall be determined in light of ordinary social norms, in consideration of all the circumstances, such as the profit-making, continuity, return, existence of overcomingness, length of the transaction period, the amount of loans and the amount of interest, etc. (see Supreme Court Decision 2003Du14505 delivered on August 19, 2005, etc.).

According to the above facts, the plaintiff appears to have conducted the loan transaction in this case upon receiving a request from the non-party 1, a private village student, for the lending of investment funds, and there is no evidence to support that the plaintiff continued to engage in monetary transaction with many and unspecified persons. Thus, the circumstance of the defendant's assertion that the plaintiff's monetary lending cannot be viewed as a business activity to the extent that the plaintiff's monetary lending can be seen as a business activity, and there is no other evidence to support it, therefore, the defendant's assertion on this part

E) Sub-decision

Therefore, among the dispositions in this case, each of the global income tax belonging to the year 2008 and 2009 should be revoked as it is unlawful.

3. Conclusion

Therefore, the plaintiff's claim is accepted within the above scope of recognition, and the remaining claims are dismissed as it is without merit. Since the judgment of the court of first instance is unfair with a different conclusion, the part against the defendant regarding the global income tax for the year 2007 among the judgment of the court of first instance is revoked, and the plaintiff's claim corresponding to the revoked part is dismissed, and the defendant's remaining appeal is dismissed as it is without merit. It is so decided

[Attachment]

Judges Lee Jae-dae (Presiding Judge)