Cho High Court Decision 2015Du964 ( October 23, 2015)

Litigation costs relating to the increase of compensation shall not be deemed necessary expenses for transferred assets.

As Article 163 of the Enforcement Decree of the Income Tax Act was amended on February 3, 2015, the costs of lawsuit related to the increase of compensation fall under the necessary expenses of transferred assets, but if the costs of lawsuit are paid by the plaintiffs, the Act prior to the amendment does not fall under the necessary expenses of the real estate

Article 97 of the Income Tax Act and Article 163 of the Enforcement Decree of the Income Tax Act

2015Gudan5694 Disposition of revocation of the imposition of poppy income tax

KimA and 2

YThe director of the tax office

September 25, 2015

October 20, 2015

1. The plaintiffs' claims are dismissed.

2. The costs of lawsuit are assessed against the plaintiffs.

Cheong-gu Office

The Defendant’s disposition of imposition of capital gains tax for the year 2013 on November 4, 2014 against Plaintiff KimA, ○○○○○○, which was made to Plaintiff KimB, and against Plaintiff KimB, is revoked.

1. Details of the disposition;

A. The Plaintiffs owned real estate located in Seoul DD, and decided to accept the instant real estate in EE Housing Redevelopment and Improvement Project Association (hereinafter the instant association), and requested the instant association to compensate for losses incurred by curios and high-priced materials, etc., and the instant association did not accept the Plaintiffs’ request and filed a lawsuit against Plaintiff KimB against the instant association. On October 29, 2013, the said court affirmed the instant association’s compulsory adjustment decision (Seoul District Court Decision 2013M2530) that “The instant association paid KRW 00 to ○○○, 14,126,239, as compensation for the suspension of religious activities, etc. of religious activities by the religious circles of religious facilities, etc.” on October 29, 2013, the instant association was finalized by making a compulsory adjustment decision (Seoul District Court Decision 2013M4530, Seoul District Court Decision 2013Ma4530).

B. On February 28, 2014, the Plaintiffs reported capital gains tax including ○○○○○○, which was paid with respect to the instant lawsuit, as necessary expenses, after receiving the said money from the instant association in accordance with the said compulsory adjustment decision, and transferred the instant real estate.

C. On November 3, 2014, the Defendant: (a) deemed that the instant litigation costs were not directly required to secure ownership, etc. of the instant real estate as litigation costs for the increase of compensation; (b) thus, it did not constitute necessary expenses of transferred assets; and (c) rendered each disposition imposing capital gains tax for the imposition of ○○○○○○, Plaintiff KimB, and thisCC on November 3, 2014 (hereinafter “instant disposition”).

D. The Plaintiffs appealed and filed an appeal on January 28, 2015, but was dismissed on March 23, 2015.

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

The instant litigation costs fall under “court costs and settlement costs incurred directly in securing ownership, etc. in the assets against which dispute over acquisition exists” under Article 163(1)2 of the Income Tax Act, or “court costs and settlement costs incurred in securing ownership, in the event a dispute arises after acquiring the transferred assets,” and thus, should be included in necessary expenses. The instant disposition, which did not recognize the instant litigation costs as necessary expenses, is unlawful against the purport of Article 163(3)2-2 of the Enforcement Decree of the Income Tax Act, as amended on February 3, 2015, and thus, should be revoked.

B. Determination

Article 163 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 25193, Feb. 1, 2014) provides for necessary expenses of transferred assets. Article 163 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 25193, Feb. 1, 2014) provides that "the amount of the cost of lawsuit, reconciliation cost, etc. directly required to secure ownership of the assets disputed for acquisition" and Article 163 of the former Enforcement Decree of the Income Tax Act provides that "the cost of lawsuit, reconciliation cost,

First, it is clear that the plaintiffs paid the litigation costs of this case, not against the acquisition lawsuit, but against the subsequent litigation lawsuit. Thus, it is clear that the litigation costs of this case do not fall under subparagraph 1 (2) of the above Article.

Next, we examine whether the instant litigation costs fall under subparagraph 2 of Article 3 of the aforementioned Article. “The amount of litigation costs and reconciliation costs spent directly to secure ownership after acquiring the transferred assets” refers to the litigation costs or settlement costs spent directly by the transferor in order to secure the ownership of the transferred assets due to disputes over the validity of acquiring the transferred assets after acquiring the transferred assets. Therefore, the litigation costs or settlement costs incurred to prevent the risk of loss of ownership arising from disputes over the implementation of a contract separately established without dispute over the validity of acquiring the transferred assets, do not constitute compensation for the Plaintiffs in the process of accepting the instant real estate for the redevelopment project (see Supreme Court Decision 2012Du1619, Dec. 26, 2013).

Meanwhile, as alleged by the Plaintiffs, Article 163(3)2-2 of the Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 26067, Feb. 3, 2015) was newly established and “in cases where land, etc. is purchased by consultation or expropriated pursuant to the Act on Acquisition of and Compensation for Land, etc. for Public Works Projects or other Acts and subordinate statutes, the “amount excluding expenses included in necessary expenses in calculating the income amount of the year paid in relation to the increase of compensation,” but Article 2(2) of the Addenda of the Act provides that the amended provisions on capital gains tax shall apply from the first transfer after this Decree enters into force (amended by Presidential Decree No. 26067, Feb. 3, 2015). Under the principle of no taxation without the law, the interpretation of tax laws shall be interpreted as a legal interpretation in the absence of a taxation requirement or exemption requirement, and shall not be permitted to expand or analogical interpretation without reasonable grounds (see, e.g., Supreme Court Decision 2012Du1616, Dec. 21316, etc.

3. Conclusion

Therefore, the plaintiffs' claim of this case is dismissed as it is without merit, and it is so decided as per Disposition.