Article 163(3)2-2 of the Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 26067, Feb. 3, 2015; hereinafter “the cost of lawsuit directly spent in connection with the increase of compensation, in cases where land, etc. is purchased by consultation or expropriated by consultation or expropriated,” etc., as one of the capital expenditure among necessary expenses, whether the cost of lawsuit, reconciliation costs, etc. directly spent in connection with the increase of compensation for purchase by consultation or expropriation of land, etc. is necessary expenses to be deducted from the transfer value when calculating gains

Article 97(1)2 of the former Income Tax Act (amended by Act No. 14389, Dec. 20, 2016; hereinafter the same) stipulates that “capital expenditure, etc. prescribed by Presidential Decree, etc., shall be one of the necessary expenses to be deducted from the transfer value when calculating gains from a resident.” According to delegation, Article 163(3)2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 26067, Feb. 3, 2015; hereinafter the same) provides that “capital expenditure, etc., if a lawsuit is instituted after the acquisition of a transferred asset, the amount calculated by subtracting the necessary expenses, such as the cost of lawsuit, reconciliation cost, etc. directly required to secure ownership, from the amount of income of each year paid.” However, Article 163(3)2 of the Enforcement Decree of the Income Tax Act, which was newly established by Presidential Decree No. 26067, Feb. 3, 2015, directly related to the acquisition of necessary expenses or public works, etc.

Capital gains tax is levied on the premise that the transfer of assets and income accrued therefrom accrue. To determine income from the transfer of assets, necessary expenses, etc. must be deducted from the price of transfer of assets, such as the acquisition, possession, and transfer of assets. Before the amendment of the Enforcement Decree of the said Act, necessary expenses to be deducted from the transfer value are stipulated as “where litigation is instituted after the acquisition of the transferred assets, the amount of litigation expenses, compromise expenses, etc. directly required to secure the ownership thereof.” However, if litigation is instituted after the acquisition of the transferred assets, the necessary expenses, etc. for holding the assets

A lawsuit related to the increase of compensation due to purchase by consultation or expropriation of land, etc. may be deemed as a lawsuit for the determination of the transfer value of land or for the increase thereof. The cost of lawsuit directly incurred in relation to the increase of compensation is the cost disbursed in order to increase the transfer value of land, etc.. In the said lawsuit. If the transfer value of land, etc. is based on the increased amount in the said lawsuit, and the cost of lawsuit incurred therefrom is not deducted from the necessary expenses, this does not coincide with the legislative intent imposing capital gains tax. In the event land, etc. is purchased by consultation or expropriated through the amendment of the above Enforcement Decree, the cost of lawsuit directly incurred in relation to the increase of compensation may be deemed as necessary expenses, and such conclusion shall be recognized even before the amendment of the Enforcement Decree. In light of the legislative intent of Article 97(1)2 of the former Income Tax Act and its Enforcement Decree, the legislative purport of the said Enforcement Decree, and the amendment of the above Enforcement Decree, etc., the cost of lawsuit, reconciliation, etc. directly incurred in connection with the purchase or expropriation of land

Article 97 (1) 2 of the former Income Tax Act (Amended by Act No. 14389, Dec. 20, 2016); Article 163 (3) 2 of the former Enforcement Decree of the Income Tax Act (Amended by Presidential Decree No. 26067, Feb. 3, 2015); Article 163 (3) 2-2 of the Enforcement Decree of the Income Tax Act

Plaintiff 1 and one other (Law Firm Amos, Attorneys Kang Dong-ho et al., Counsel for the plaintiff-appellant)

Head of Central Tax Office

Seoul High Court Decision 2016Nu577 decided October 6, 2016

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. Article 97(1)2 of the former Income Tax Act (amended by Act No. 14389, Dec. 20, 2016) provides for “capital expenditure, etc. prescribed by Presidential Decree as one of the necessary expenses to be deducted from the transfer value when calculating gains from transfer of a resident.” According to delegation, Article 163(3)2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 26067, Feb. 3, 2015; hereinafter the same) provides for “capital expenditure, etc.” as constituting “capital expenditure, etc.” under Article 163(3)2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 26067, Feb. 3, 2015; hereinafter the same shall apply) as “capital expenditure, etc.” in the calculation of the amount of income of each year paid by a resident, excluding the expenses included in necessary expenses in the calculation of the amount of income of each year.”

Capital gains tax is levied on the premise that the transfer of assets and income accrued therefrom accrue. To determine income from the transfer of assets, necessary expenses, etc. must be deducted from the price of transfer of assets, such as the acquisition, possession, and transfer of assets. Before the amendment of the Enforcement Decree of the said Act, necessary expenses to be deducted from the transfer value are stipulated as “where litigation is instituted after the acquisition of the transferred assets, the amount of litigation expenses, compromise expenses, etc. directly required to secure the ownership thereof.” However, if litigation is instituted after the acquisition of the transferred assets, the necessary expenses, etc. for holding the assets

A lawsuit related to the increase of compensation due to purchase by consultation or expropriation of land, etc. may be deemed as a lawsuit for the determination of the transfer value of land or for the increase thereof. The cost of lawsuit directly incurred in relation to the increase of compensation is the cost disbursed in order to increase the transfer value of land, etc.. In the said lawsuit. If the transfer value of land, etc. is based on the increased amount in the said lawsuit, and the cost of lawsuit incurred therefrom is not deducted from the necessary expenses, this does not coincide with the legislative intent imposing capital gains tax. In the event land, etc. is purchased by consultation or expropriated through the amendment of the above Enforcement Decree, the cost of lawsuit directly incurred in relation to the increase of compensation may be deemed as necessary expenses, and such conclusion shall be recognized even before the amendment of the Enforcement Decree. In light of the legislative intent of Article 97(1)2 of the former Income Tax Act and its Enforcement Decree, the legislative purport of the said Enforcement Decree, and the amendment of the above Enforcement Decree, etc., the cost of lawsuit, reconciliation, etc. directly incurred in connection with the purchase or expropriation of land

2. The reasoning of the lower judgment reveals the following facts.

A. Overcheon-si ( Address omitted) and two parcels of land (hereinafter “instant land”) were incorporated into the “project for expansion of parking lots within a development restriction zone” zone, which is owned by the Plaintiffs, which is a public work project. Plaintiff 1 and Plaintiff 2, June 13, 2008, respectively, signed a contract for purchase to sell each of the instant land to the “157,568,08 won and KRW 612,534,842 (the “187,351,302 won” of the judgment of the lower court and “581,989,716 won” of the said judgment, and reported and paid the transfer income tax for the said compensation after completing the registration of ownership transfer based on the date of registration of ownership transfer.

B. On July 31, 2009, the Plaintiffs, along with other land owners who responded to the consultation, received compensation calculated based on the conditions before the development restriction zone was cancelled due to mistake at the time of the consultation, and sought a return of the value around the Suwon District Court Nancheon-si, 2009Gahap5259, and filed a lawsuit seeking a return of unjust enrichment for the return of original properties (hereinafter “the instant lawsuit”). On February 16, 2012, the aforementioned court rendered a preliminary lawsuit claiming a return of unjust enrichment against the Plaintiffs (hereinafter “the instant lawsuit”). Since it is impossible to return part of the instant land to the Plaintiffs, from the market price of the instant land, the remaining balance (Plaintiff 1:187, 351, 302, Plaintiff 2:581, 987, 16) calculated the amount equivalent to the above part of the compensation already paid to the Plaintiffs, and at the same time, ordered the Plaintiffs to return the remainder of the registration of transfer of ownership from the aforementioned land.

C. Accordingly, on February 24, 2012, the Plaintiffs received the remaining amount with the provisional payment of the instant lawsuit from Sincheon-si, and on March 5, 2012, the Plaintiffs paid KRW 58,000,000 to the attorney-at-law appointed by the first instance court as the retainer and contingent contingent fee, and Plaintiff 2 paid KRW 182,00,000 (hereinafter “instant litigation costs”).

D. Thereafter, around March 2012, the Plaintiffs added the remaining balance to the transfer value, and filed a revised return of capital gains tax for the year 2008. On April 25, 2012, the Plaintiffs issued a request for rectification to the Defendant to the effect that “15,052,238 won out of the above transfer value and the special rural development tax for the Plaintiff 1, who deducted the litigation cost of this case from the necessary expenses, was refunded to the Defendant, and KRW 334,495 won from the transfer income tax for the year 2008, and KRW 46,758,772 from the transfer income tax for the year 2008, and KRW 1,039,084 from the special rural development tax for the special rural development tax for the year 208.” On June 25, 2012, the Defendant rejected the request for rectification on the ground that the litigation cost of this case

E. On the other hand, on April 8, 2014, the appellate court of the instant lawsuit rendered a decision in lieu of the conciliation that “Seocheon-si shall pay Plaintiff 1 KRW 269,97,726 and KRW 838,723,294 to Plaintiff 2” (Seoul High Court 2012Na30320), and the said decision was finalized at that time.

3. According to these factual relations, the compensation for the previous purchase by consultation may be deemed to have been increased as a result after the conciliation was concluded at the appellate court of the instant lawsuit. The relevant lawsuit in this case is identical with the lawsuit seeking the increase of compensation in cases where land, etc. is purchased by consultation pursuant to the Act on the Acquisition of Land, etc. for Public Works and the Compensation Therefor. Therefore, the relevant litigation cost in this case does not differ from the litigation cost directly required in relation to the increase of compensation for purchase, and this constitutes the expenses directly necessary for the acquisition of capital gains realized by the transfer of assets, and thus, should be deemed as necessary expenses of transferred assets.

Nevertheless, the lower court determined that the instant disposition was lawful solely on the ground that the instant litigation costs do not constitute necessary expenses under Article 97(1)3 of the former Income Tax Act and Article 163(5)1 of the former Enforcement Decree of the Income Tax Act. In so determining, the lower court erred by misapprehending the legal doctrine on necessary expenses of transferred assets, thereby adversely affecting the conclusion of the judgment. The allegation contained in the grounds

4. Therefore, without further proceeding to decide on the remaining grounds of appeal, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Poe-young (Presiding Justice)