Seoul Administrative Court 2010Guhap39977 ( October 29, 2011)

Cho High Court Decision 2008Du3751 (Law No. 25, 2010)

The total amount of transfer time is included in the calculation of non-profit business with proper purpose business expenses.

The purport of the provision that where a school foundation transfers assets belonging to the accounts for profit-making business to the accounts for profit-making business, it shall be deemed to have been paid for the non-profit business, is that even if it is transferred on the premise that it should be used for the proper purpose business, it shall be the same as paid for the proper

2011Nu17297 Revocation of Disposition of Corporate Tax Imposition

AAA New School of School Foundation

Head of Seodaemun Tax Office

Seoul Administrative Court Decision 2010Guhap39977 decided April 29, 2011

October 5, 2011

November 30, 2011

1. The defendant's appeal is dismissed.

2. The costs of appeal shall be borne by the Defendant.

The Defendant’s disposition of imposition of KRW 3,368,259, and140, imposed on the Plaintiff on September 1, 2008, from March 1, 2005 to February 28, 2006, shall be revoked.

Purport of appeal

The judgment of the first instance shall be revoked.

The claim is dismissed.

1. Details of disposition;

After completing the registration of transfer of ownership on November 16, 2005, on January 25, 2006, the Plaintiff, a school foundation, sold OOO 1, 8,624 (hereinafter referred to as 'original assets') to AA Construction Co., Ltd. (hereinafter referred to as 'the purchase price 26,035,196, and 382) and filed a report on the closure of real estate rental business with the competent authority on January 25, 2006. The Plaintiff, upon closing a profit-making business, notified the Plaintiff of the tax investigation for 26,581,575, and 134 (hereinafter referred to as 'the transferred funds') including the above purchase price at the end of 205 business year (i.e., - February 28, 2006) to the total non-profit business account, and adjusted the amount of income to 305,005,000,000 won and 305,0505,05,05,05,05.

(1) Underreporting profits from the disposal of fixed assets shall be included in earnings of 1,233,376, and 624 won.

(2) Non-taxation of 10, 349, 280, and 000 won which have been calculated as special benefits by voluntarily identifying land value.

③ Non-Inclusion in deductible expenses of 20,671,550, and 290 won (hereinafter “non-Inclusion in deductible expenses of this case”) among the funds transferred in this case

Of the transfer funds in this case, non-deductibles are excluded from deductible expenses for the remainder of 20,671,550,290 won (the transfer funds in this case - 5,910,024,844 won) under the premise that it is merely 5,910,024, and 844 won used for the permanent purpose business. However, under Article 29(2) and (1) of the former Corporate Tax Act (amended by Act No. 8141, Dec. 30, 2006; hereinafter the same shall apply) with respect to the specific adjustment, the Defendant determined to include the limit of reserve funds for proper purpose business to be appropriated in the business year 2005, 9,646, 210,052 won (the statutory limit of -169,35364,582 won), 19, 1050 won, 250, 25305, 259, 2539.7

[Ground of recognition] Facts without dispute, Gap 1-4 evidence, Eul 1-7 and 11 evidence, the whole purport of the pleading

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The Plaintiff transferred the instant transfer funds to the nonprofit business account, which belongs to the profit-making business account following the closure of the profit-making business, to the nonprofit business account, which is immediately disbursed to the proper purpose business at the time of transfer in accordance with the special provisions prescribed by Article 76(4) of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Ministry of Finance and Economy No. 11497, Mar. 14, 2006; hereinafter the same shall apply). According to Article 29(1) and (2) of the former Corporate Tax Act, if a nonprofit domestic corporation appropriates the proper purpose business as deductible expenses, it shall be included in deductible expenses within the statutory limit, and even if it is immediately disbursed to the proper purpose business without including the proper purpose business reserve funds, it shall also be included in deductible expenses within the statutory limit. Therefore, the fact that the instant transfer funds are transferred to the nonprofit business in itself should be included in deductible expenses within the statutory limit. The Defendant’s portion of the instant transfer funds, which was not unfairly used for the purpose of unfair use of deductible expenses, has no legal grounds.

(b) relevant statutes;

Attachment 'Related Acts and subordinate statutes' shall be as shown.

(c) Fact of recognition;

On August 29, 2005, the Plaintiff was originally permitted to dispose of the basic property for bad faith (leased building): 23.8 billion won, etc. during the business year 2005, the Plaintiff appropriated 23,676,654,784 won as the reserve fund for proper purpose business, but it was no longer possible to maintain the accounts for profit-making business due to closure of the business, the Plaintiff returned the reserve fund at the time of settlement of accounts, and then appropriated the transfer fund for bad purpose business as the item of "transfer for bad purpose business". On December 22, 2006, the Plaintiff decided to resume a profit-making business (real estate rental business) on December 18, 2006, and the Plaintiff concluded a new agreement on December 22, 2006, 200-00 large scale 94, 000 large scale 200,000 large scale 23.75 billion won and 400,000,00 won, and the remainder of the construction project price as 203.7.3.7.4 billion won.

[Ground of recognition] Facts without dispute, entry B in the evidence No. 8-10, the whole purport of pleading

D. Determination

1) The Corporate Tax Act separates a profit-making corporation into a non-profit corporation and imposes corporate tax on all income without sources, but imposes tax on a non-profit corporation only on income arising from a specific source under each subparagraph of Article 3(2) of the Corporate Tax Act (hereinafter referred to as "profit-making business"). The revenue arising from the disposal of fixed assets (Article 113) is included in the "rental business (Article 1)" and the "income arising from the disposal of fixed assets (Article 5)". Article 113 of the Corporate Tax Act requires a non-profit corporation to keep separate accounting as belonging to profit-making business and non-profit business (Article 7(3) of the former Enforcement Rule of the Corporate Tax Act) in order to impose tax on income generated from profit-making business (Article 3(2) of the Enforcement Rule of the Corporate Tax Act). However, it is necessary to recognize the transfer of assets to a non-profit corporation (Article 7(2) of the former Enforcement Rule of the Corporate Tax Act).

2) As long as non-profit corporations run a profit-making business and engage in competition with both profit-making corporations, it may result in unfair results. Thus, even non-profit corporations, taxation on income from profit-making business is inevitable. Meanwhile, Article 19(2) of the former Corporate Tax Act provides that the scope of losses recognized under the Corporate Tax Act refers to ordinary losses or expenses generally recognized or directly related to profit-making business in connection with the business of the corporation. Assets transferred to a profit-making business from the accounts for profit-making business cannot be recognized as losses because they are not directly related to profit-making business, not directly related to profit-making business. It is a principle that a non-profit corporation can spend the income for a profit-making business only after the corporate tax is imposed (in excess of this, the amount of capital should be returned). However, if a non-profit corporation operates a profit-making business with income from profit-making business and can be used for non-profit business only for taxable income, some of the financial resources to be used for public-profit business, such as education, social welfare, and medical treatment, are more likely to prevent the performance of the proper purpose business.

3) The Plaintiff, a school foundation established pursuant to the Private School Act, sold previous assets provided to real estate rental business at the time of settling accounts for the business year 2005, and closed a profit-making business, and transferred the instant transfer funds to a non-profit business account. Article 76(4) of the former Enforcement Rule of the Corporate Tax Act provides that a school foundation shall pay the entire amount of the transfer funds to a non-profit business if it transfers assets belonging to the profit-making business accounts to a non-profit business. As the Plaintiff did not have the balance of the reserve funds for essential business appropriated until the business year 2004, the Plaintiff would be deemed to have spent for the proper purpose business, regardless of whether it was actually used for the proper purpose business pursuant to Article 29(2) of the former Corporate Tax Act, and is subject to the provisions of paragraph (1) (legal limit) concerning the inclusion of the transfer funds in deductible expenses in the reserve funds for essential business to be appropriated in the business year 2005. Of the transfer funds in this case, the transfer funds in this case is unlawful for 16,935,36,5, and 281,37.

4) The Defendant asserts that: (a) the Plaintiff’s transfer of the instant transfer funds to the non-profit business accounts, which belong to the profit-making business accounts, to the non-profit business accounts, is merely a nominal transaction with the wind that temporarily closes a profit-making business in the process of replacing assets to be provided for a profit-making business; (b) the purpose of legislation under Article 29(1) and (2) of the former Corporate Tax Act is to grant tax preferential benefits to a non-profit corporation on the premise that the income generated from the profit-making business accounts is to be used for the purpose of a profit-making business in fact; (c) the Plaintiff was granted a license for the initial disposal of assets, which are fundamental property for profit-making on the condition that it would be used for the purpose of a profit-making business; and (d) there was a fact that the actual use of funds was expected to be used for profit-making business from the beginning; (d) however, considering the public nature and peculiarity of education, it is difficult to accept the assertion that the school juristic person transferred assets to the non-profit business accounts as collateral in light of the purport of permission.

5) It seems unfair to exempt part of the funds from corporate tax even though the Plaintiff used them for profit-making business in most of the funds in this case. However, the problem is as follows. Article 29(4)4 of the former Corporate Tax Act provides that if the funds for profit-making business including the funds for profit-making business are not used for the proper purpose business within five years after the end of the business year in which the funds for profit-making business are included in deductible expenses, the reserves already established shall be included in deductible expenses for profit-making business under the former Corporate Tax Act to be included in deductible expenses only if the funds for profit-making business are not used for the proper purpose business within five years after the end of the business year in which the funds for profit-making business are not actually used for profit-making business (the purpose of this provision is to prevent the inclusion of reserves for profit-making business under the former Corporate Tax Act, which is a non-profit business for profit-making business). However, it is difficult for the State to unilaterally include the funds for profit-making business under the latter part of Article 29(4)4) of the former Corporate Tax Act to be included in deductible expenses for profit-making business.

6) Of the instant non-Inclusion in deductible expenses, the part of KRW 11,025,339,738 on the ground of unfair use within the statutory limit is unlawful. The amount of tax calculated again on the basis of the inclusion in deductible expenses shall be the amount of tax as shown in the attached Form.

3. Conclusion

The appeal is dismissed.